SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
AT&T CORP.
--------------------------------------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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PRELIMINARY DRAFT DATED FEBRUARY 11, 2002, SUBJECT TO COMPLETION
[COMCAST LOGO] [AT&T LOGO]
A MERGER PROPOSAL -- YOUR VOTE IS VERY IMPORTANT
Comcast and AT&T have agreed to combine Comcast and AT&T's broadband
business. As a result, AT&T shareholders will have shares of both AT&T and the
new corporation -- AT&T Comcast. We are proposing the transaction because we
believe the combination of Comcast and AT&T Broadband will create the world's
premier broadband communications company. The new corporation will be named AT&T
Comcast Corporation and will be headquartered in Philadelphia.
When the transaction is completed,
- Comcast shareholders will receive one share of a corresponding class of
AT&T Comcast common stock in exchange for each Comcast share they own;
and
- AT&T shareholders will receive a number of shares of AT&T Comcast common
stock determined pursuant to a formula described in this joint proxy
statement/prospectus for each AT&T share they own. If the AT&T exchange
ratio were determined as of the date of this joint proxy
statement/prospectus, each AT&T shareholder would receive approximately
of a share of AT&T Comcast common stock for each of their AT&T
shares. AT&T shareholders will also continue to hold their shares of AT&T
common stock.
Upon completion of the transaction,
- AT&T shareholders will own [ ]% of AT&T Comcast's economic interest
and, depending upon which of two alternative capital structures described
in this joint proxy statement/prospectus is implemented, either [ ]%
or [ ]% of AT&T Comcast's voting power.
- Comcast shareholders will own [ ]% of AT&T Comcast's economic
interest and, depending upon which of two alternative capital structures
described in this joint proxy statement/prospectus is implemented, either
[ ]% or [ ]% of AT&T Comcast's voting power.
- Sural LLC, which is controlled by Brian L. Roberts, President of Comcast,
and today holds approximately 86.7% of Comcast's voting power, will hold
approximately [ ]% of AT&T Comcast's voting power upon completion of
the transaction.
THE BOARDS OF DIRECTORS OF BOTH COMCAST AND AT&T HAVE UNANIMOUSLY APPROVED
THE TRANSACTION AND RECOMMEND THAT THEIR RESPECTIVE SHAREHOLDERS VOTE FOR THE
PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED BY THE MERGER AGREEMENT. SURAL LLC HAS AGREED TO VOTE IN FAVOR OF
THE TRANSACTION THEREBY ASSURING APPROVAL OF THE TRANSACTION BY THE COMCAST
SHAREHOLDERS.
In addition to the merger proposal, holders of Comcast common stock are
also being asked to consider a proposal that is referred to in this joint proxy
statement/prospectus as the preferred structure proposal. The outcome of the
vote on this proposal will determine which of the two alternative capital
structures described in this joint proxy statement/prospectus is implemented
upon completion of the transaction.
THE COMCAST BOARD OF DIRECTORS RECOMMENDS THAT THE COMCAST SHAREHOLDERS
VOTE FOR THE PREFERRED STRUCTURE PROPOSAL.
In addition to the merger proposal, the election of directors and other
matters to be considered at the AT&T annual meeting, AT&T shareholders are also
being asked to consider a proposal to create a tracking stock that is intended
to reflect the financial performance and economic value of the AT&T Consumer
Services business and related benefit plan proposals.
If AT&T shareholders approve the proposal to create an AT&T Consumer
Services Group tracking stock, AT&T plans to distribute some or all of the
shares of AT&T Consumer Services Group tracking stock to its common shareholders
as a dividend later this year. AT&T could, however, decide not to proceed with
the proposal, or could proceed at a time or in a manner different from its
current intentions.
THE AT&T BOARD OF DIRECTORS RECOMMENDS THAT THE AT&T SHAREHOLDERS VOTE FOR
THE PROPOSAL TO CREATE AN AT&T CONSUMER SERVICES GROUP TRACKING STOCK.
Information about all the proposals is contained in this joint proxy
statement/prospectus. We urge you to read this joint proxy statement/prospectus,
including the section describing risk factors that begins on page [I-29].
Brian L. Roberts C. Michael Armstrong
President Chairman and Chief Executive Officer
Comcast Corporation AT&T Corp.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED IN
CONNECTION WITH THE TRANSACTION OR DETERMINED IF THIS JOINT PROXY
STATEMENT/PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
This joint proxy statement/prospectus is dated [ ], 2002, and is
first being mailed to shareholders of Comcast and AT&T on or about [ ],
2002.
AT&T CORP.
32 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10013-2412
---------------------
NOTICE OF ANNUAL MEETING OF AT&T SHAREHOLDERS
TO BE HELD ON , , 2002
---------------------
The 117th annual meeting of shareholders of AT&T Corp. will be held at
a.m., local time, on , , 2002, at ,
for the following purposes:
- to elect directors for the ensuing year;
- to ratify the appointment of auditors to examine AT&T's accounts for the
year 2002;
- to approve and adopt the merger agreement between AT&T Corp., AT&T
Broadband Corp., Comcast Corporation and the other parties thereto,
whereby AT&T Broadband, a new holding company that consists of our
broadband businesses, will be spun off and combined with Comcast in a new
Pennsylvania corporation called "AT&T Comcast Corporation," and the
transactions contemplated by the merger agreement, including the AT&T
Broadband spin-off;
- to approve and adopt an amendment to AT&T's charter to authorize the
creation of AT&T Consumer Services Group tracking stock;
- to approve a new incentive plan to enable AT&T to grant incentive awards
based on shares of AT&T Consumer Services Group tracking stock;
- to approve an amendment to AT&T's employee stock purchase plan to permit
the issuance of AT&T Consumer Services Group tracking stock under the
plan; and
- to act upon such other matters as may properly come before the AT&T
annual meeting or any adjournment or postponement thereof.
We describe these items of business more fully in the accompanying joint
proxy statement/prospectus.
Only holders of record of AT&T common stock at the close of business on
, 2002 are entitled to notice of, and to vote at, the annual meeting
or any adjournment or postponement thereof.
BY ORDER OF THE BOARD OF DIRECTORS
MARILYN J. WASSER
Vice President -- Law and Secretary
New York, New York
, 2002
WE URGE YOU TO VOTE BY TELEPHONE OR VIA THE INTERNET, OR TO COMPLETE, DATE
AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE POSTAGE-PAID ENVELOPE
PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON. YOU
CAN WITHDRAW YOUR PROXY, OR CHANGE YOUR VOTE AT ANY TIME BEFORE IT IS VOTED. YOU
CAN DO THIS BY EXECUTING A LATER-DATED PROXY, BY VOTING BY BALLOT AT THE ANNUAL
MEETING, BY TELEPHONE OR VIA THE INTERNET, OR BY FILING AN INSTRUMENT OF
REVOCATION WITH THE INSPECTORS OF ELECTION IN CARE OF OUR VICE PRESIDENT -- LAW
AND SECRETARY AT THE ABOVE ADDRESS.
TABLE OF CONTENTS
CHAPTER ONE -- SUMMARY AND OVERVIEW
OF THE TRANSACTIONS.............. I-1
QUESTIONS AND ANSWERS ABOUT THE
TRANSACTIONS.................. I-1
QUESTIONS AND ANSWERS ABOUT AT&T
CONSUMER SERVICES GROUP
TRACKING STOCK................ I-5
SUMMARY.......................... I-7
THE AT&T COMCAST TRANSACTION..... I-9
AT&T CONSUMER SERVICES GROUP
TRACKING STOCK................ I-19
RISK FACTORS..................... I-29
CHAPTER TWO -- THE AT&T COMCAST
TRANSACTION...................... II-1
General....................... II-1
Background of the AT&T Comcast
Transaction................. II-1
Comcast's Reasons for the AT&T
Comcast Transaction......... II-8
Comcast's Preferred Structure
Proposal.................... II-10
AT&T's Reasons for the AT&T
Comcast Transaction......... II-11
Material Federal Income Tax
Consequences................ II-13
Regulatory Matters............ II-16
Appraisal Rights.............. II-18
Federal Securities Laws
Consequences; Stock Transfer
Restriction Agreements...... II-18
Accounting Treatment.......... II-18
CHAPTER THREE -- FINANCIAL
INFORMATION RELATING TO THE AT&T
COMCAST TRANSACTION.............. III-1
CHAPTER FOUR -- OPINIONS OF
FINANCIAL ADVISORS............... IV-1
OPINIONS OF COMCAST'S FINANCIAL
ADVISORS...................... IV-1
OPINIONS OF AT&T'S FINANCIAL
ADVISORS...................... IV-12
CHAPTER FIVE -- DESCRIPTION OF THE
AT&T COMCAST TRANSACTION
AGREEMENTS....................... V-1
THE MERGER AGREEMENT............. V-1
THE SEPARATION AND DISTRIBUTION
AGREEMENT..................... V-14
THE SUPPORT AGREEMENT............ V-18
THE EXCHANGE AGREEMENT........... V-21
THE TAX SHARING AGREEMENT........ V-23
THE ANCILLARY AGREEMENTS......... V-24
CHAPTER SIX -- AT&T CORP.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........ VI-1
CHAPTER SEVEN -- AT&T BROADBAND
GROUP............................ VII-1
DESCRIPTION OF AT&T BROADBAND
GROUP......................... VII-1
AT&T BROADBAND GROUP MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......... VII-23
CHAPTER EIGHT -- DESCRIPTION OF
GOVERNANCE ARRANGEMENTS FOLLOWING
THE AT&T COMCAST TRANSACTION..... VIII-1
CHAPTER NINE -- EMPLOYEE BENEFITS
MATTERS.......................... IX-1
INTERESTS OF DIRECTORS AND
OFFICERS IN THE AT&T COMCAST
TRANSACTION................... IX-1
OTHER BENEFITS MATTERS........... IX-6
CHAPTER TEN -- AT&T CONSUMER
SERVICES GROUP TRACKING STOCK.... X-1
THE CONSUMER SERVICES CHARTER
AMENDMENT PROPOSAL............ X-1
REASONS FOR AT&T CONSUMER
SERVICES GROUP TRACKING
STOCK......................... X-10
DESCRIPTION OF AT&T CONSUMER
SERVICES GROUP................ X-12
AT&T CONSUMER SERVICES GROUP..... X-24
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS.................... X-24
RELATIONSHIP BETWEEN THE AT&T
GROUPS........................ X-35
i
THE INCENTIVE PLAN PROPOSAL............... X-42
THE EMPLOYEE STOCK PURCHASE PLAN
PROPOSAL............................... X-46
CHAPTER ELEVEN -- DESCRIPTION OF AT&T
BUSINESS SERVICES GROUP................... XI-1
CHAPTER TWELVE -- INFORMATION ABOUT THE
COMCAST SPECIAL MEETING AND VOTING........ XII-1
CHAPTER THIRTEEN -- INFORMATION ABOUT THE
AT&T ANNUAL MEETING AND VOTING............ XIII-1
CHAPTER FOURTEEN -- CERTAIN LEGAL
INFORMATION............................... XIV-1
COMPARISON OF AT&T, COMCAST AND AT&T
COMCAST SHAREHOLDER RIGHTS............. XIV-1
Summary of Material Differences Between
the Current Rights of AT&T
Shareholders and the Rights Those
Shareholders Will Have as AT&T
Comcast Shareholders Following the
Completion of the Transaction........ XIV-1
Summary of Material Differences Between
the Current Rights of Comcast
Shareholders and the Rights Those
Shareholders Will Have as AT&T
Comcast Shareholders Following the
Completion of the Transaction........ XIV-6
DESCRIPTION OF AT&T COMCAST CAPITAL
STOCK.................................. XIV-10
Authorized Capital Stock............... XIV-10
AT&T Comcast Class A Common Stock...... XIV-10
AT&T Comcast Class B Common Stock...... XIV-11
AT&T Comcast Class A Special Common
Stock................................ XIV-12
AT&T Comcast Class C Common Stock...... XIV-13
AT&T Comcast Preferred Stock........... XIV-13
Dividend Rights........................ XIV-13
Rights Upon Liquidation................ XIV-14
Transfer Agent and Registrar........... XIV-14
Stock Exchange Listings................ XIV-14
DESCRIPTION OF AT&T COMCAST SHAREHOLDER
RIGHTS PLAN............................ XIV-15
INFORMATION REGARDING FORWARD-LOOKING
STATEMENTS............................. XIV-17
LEGAL MATTERS............................. XIV-17
EXPERTS................................... XIV-17
CHAPTER FIFTEEN -- ADDITIONAL INFORMATION
FOR SHAREHOLDERS.......................... XV-1
FUTURE SHAREHOLDER PROPOSALS.............. XV-1
WHERE YOU CAN FIND MORE INFORMATION....... XV-1
ANNEXES
Annex A Agreement and Plan of Merger
Annex B Separation and Distribution
Agreement
Annex C Form of AT&T Comcast Charter
(Preferred Structure)
Annex D Term Sheet for AT&T Comcast
Charter (Alternative Structure)
Annex E Form of Comcast Charter Amendment
Annex F Form of AT&T Comcast Bylaws
Annex G Opinion of Morgan Stanley & Co.
Incorporated
Annex H Opinion of J.P. Morgan
Securities, Inc.
Annex I Opinion of Merrill Lynch, Pierce,
Fenner & Smith, Incorporated
Annex J Opinion of Credit Suisse First
Boston Corporation
Annex K Opinion of Goldman, Sachs & Co.
Annex L Index to Financial Statements
Annex M Form of Certificate of Amendment
of the Certificate of
Incorporation of AT&T Corp.
Annex N Form of Amendment of the Bylaws
of AT&T Corp.
Annex O AT&T Corp. Board of Directors
Policy Statement Regarding AT&T
Groups Tracking Stock Matters
ii
CHAPTER ONE
SUMMARY AND OVERVIEW OF THE TRANSACTIONS
QUESTIONS AND ANSWERS ABOUT THE TRANSACTIONS
Q: When and where will the meetings of shareholders take place?
A: The Comcast special meeting will take place on [ ], 2002 in
Philadelphia, Pennsylvania. The AT&T annual meeting will take place on
[ ], 2002 in [ ]. The address of your meeting is
specified in the notice for your meeting.
Q: What proposals am I being asked to vote upon and what vote is required to
approve each proposal?
A: If you are a Comcast shareholder, you are being asked to vote upon the
following proposals:
- Approval and adoption of the merger agreement and the transactions
contemplated by the merger agreement. This proposal, which is referred to
in this document as the "Comcast transaction proposal," requires the
affirmative vote of a majority of the votes cast by holders of shares of
Comcast Class A common stock and Comcast Class B common stock, voting
together as a single class. Each holder of Comcast Class B common stock is
entitled to 15 votes per share, and each holder of Comcast Class A common
stock is entitled to one vote per share. Approval of this proposal is
assured because Sural LLC, which holds approximately 86.7% of the combined
voting power of the Comcast stock, has agreed to vote its shares in favor
of the AT&T Comcast transaction. Any shares of Comcast Class A common
stock not voted (whether by abstention, broker non-vote or otherwise) have
no impact on the vote.
- Approval and adoption of an amendment to the Comcast charter to allow the
implementation of the Preferred Structure. This proposal, which is
referred to in this document as the "preferred structure proposal,"
requires the affirmative vote of a majority of the votes cast by holders
of shares of Comcast Class A common stock, voting as a single class, and
holders of shares of Comcast Class A common stock and Comcast Class B
common stock, voting together as a single class. Each holder of Comcast
Class B common stock is entitled to 15 votes per share, and each holder of
Comcast Class A common stock is entitled to one vote per share. If holders
of Comcast Class A common stock, voting as a single class, approve this
proposal, implementation of the AT&T Comcast capital structure referred to
in this document as the "Preferred Structure" will be assured because
Sural LLC has indicated that it will vote in favor of the proposal,
thereby assuring approval by holders of Comcast Class A common stock and
Comcast Class B common stock, voting together as a single class. Any
shares of Comcast Class A common stock not voted (whether by abstention,
broker non-vote or otherwise) have no impact on the vote.
- Shareholder proposals. Approval of any shareholder proposal requires the
affirmative vote of a majority of the votes cast by holders of shares of
Comcast Class A common stock and Comcast Class B common stock, voting
together as a single class. Each holder of Comcast Class B common stock is
entitled to 15 votes per share, and each holder of Comcast Class A common
stock is entitled to one vote per share. Any shares of Comcast Class A
common stock not voted (whether by abstention, broker non-vote or
otherwise) have no impact on the vote. As of the date of this document,
Comcast is not aware of any shareholder proposal to be voted on at the
Comcast special meeting.
If you are an AT&T shareholder, you are being asked to vote upon the
following proposals:
- Approval and adoption of the merger agreement and the transactions
contemplated by the merger agreement, including the AT&T Broadband
spin-off. This proposal, which is referred to in this document as the
"AT&T transaction proposal," requires the affirmative vote of a
I-1
majority of outstanding shares of AT&T common stock. Any shares of AT&T
common stock not voted (whether by abstention, broker non-vote or
otherwise) have the effect of a vote against the AT&T transaction
proposal.
- Approval and adoption of an amendment to AT&T's charter to authorize the
creation of AT&T Consumer Services Group tracking stock. This proposal,
which is referred to in this document as the "Consumer Services charter
amendment proposal," requires the affirmative vote of a majority of
outstanding shares of AT&T common stock. Any shares of AT&T common stock
not voted (whether by abstention, broker non-vote or otherwise) have the
effect of a vote against the Consumer Services charter amendment proposal.
- Approval of a new incentive plan to enable AT&T to grant incentive awards
based on shares of AT&T Consumer Services Group tracking stock. This
proposal, which is referred to in this document as the "incentive plan
proposal," requires the affirmative vote of a majority of the votes cast
by holders of AT&T common stock. Any shares of AT&T common stock not voted
(whether by abstention, broker non-vote or otherwise) have no impact on
the vote.
- Approval of an amendment to AT&T's employee stock purchase plan to permit
the issuance of AT&T Consumer Services Group tracking stock under the
plan. This proposal, which is referred to in this document as the
"employee stock purchase plan proposal," requires the affirmative vote of
a majority of the votes cast by holders of AT&T common stock. Any shares
of AT&T common stock not voted (whether by abstention, broker non-vote or
otherwise) have no impact on the vote.
- Election of directors. The nominees who receive the most votes of
holders of AT&T common stock will be elected. Any shares of AT&T common
stock not voted (whether by abstention or otherwise) have no impact on the
vote. If you are an AT&T shareholder and you do not wish your shares to be
voted for a particular nominee, you may identify the exceptions in the
designated space provided on the proxy card or, if you are voting by
telephone or the Internet, follow the system instructions.
- Ratification of independent auditors. This proposal requires the
affirmative vote of a majority of the votes cast by holders of AT&T common
stock. Any shares of AT&T common stock not voted (whether by abstention or
otherwise) have no impact on the vote. If the shareholders do not ratify
this amendment, other independent auditors will be considered by the AT&T
Board upon recommendation of the AT&T Audit Committee.
- Shareholder proposals. Approval of any shareholder proposal requires the
affirmative vote of a majority of the votes cast by holders of AT&T common
stock. Any shares of AT&T common stock not voted (whether by abstention or
otherwise) have no impact on the vote.
Q: What if I return my proxy but do not mark it to show how I am voting?
A: If your proxy card is signed and returned without specifying your choices,
the shares will be voted as recommended by your board of directors.
Q: What do I need to do now?
A: After carefully reading and considering the information contained in this
document, please respond by completing, signing and dating your proxy card
or voting instructions and returning it in the enclosed postage paid
envelope, or, if available, by submitting your proxy or voting instructions
by telephone or through the Internet, as soon as possible so that your
shares may be represented at your meeting.
Registered shareholders and most beneficial holders that hold shares through
a bank or broker may vote by telephone or via the Internet. If one of the
options of voting by telephone or via the Internet is available to you, we
strongly encourage you to use it because it is faster and less costly.
Registered shareholders of Comcast can vote by telephone by calling
1-800-[ ] or via the Internet at http://[ ].
I-2
Registered shareholders of AT&T can vote by telephone by calling
1-800-273-1174 or via the Internet at http://att.proxyvoting.com. If you are
a beneficial holder of Comcast common stock or AT&T common stock that holds
shares through a bank or broker, you will receive separate voting
instructions on the form you receive from the bank or broker.
Q: If I am a holder of Comcast Class A Special common stock, do I have the
right to vote on the AT&T Comcast transaction?
A: No. Except as required by applicable law, holders of Comcast Class A Special
common stock do not have any voting rights. As required by applicable law,
Comcast has forwarded this document to you to notify you of the AT&T Comcast
transaction.
Q: Can I change my vote after I have delivered my proxy?
A: Yes. You can change your vote at any time before your proxy is voted at your
meeting. You can do this in one of three ways.
- First, you can revoke your proxy.
- Second, you can submit a new proxy with a later date. If you choose either
of these two methods, you must submit your notice of revocation or your
new proxy to the secretary of Comcast or AT&T, as appropriate, before your
meeting. If your shares are held in an account at a brokerage firm or
bank, you should contact your brokerage firm or bank to change your vote.
- Third, you can attend your meeting and vote in person.
You may change your vote by submitting a new vote by telephone or via the
Internet regardless of whether you submitted your earlier proxy by mail,
telephone or via the Internet.
Q: If my shares are held in an account in a brokerage firm or bank, will my
broker vote my shares for me?
A: If you are a Comcast shareholder and you do not provide your broker with
instructions on how to vote your brokerage account shares, your broker will
not be permitted to vote them. You should therefore be sure to provide your
broker with instructions on how to vote your shares.
If you are an AT&T shareholder and you do not provide your broker with
instructions on how to vote your shares with respect to a specific proposal,
your broker will not be permitted to vote them with respect to the AT&T
transaction proposal, the Consumer Services charter amendment proposal, the
incentive plan proposal or the employee stock purchase plan proposal but
will be permitted to vote them with respect to the election of directors,
the ratification of auditors and other matters that may come before the AT&T
annual meeting.
If you are an AT&T shareholder and you do not give voting instructions to
your broker, you will, in effect, be voting against the AT&T transaction
proposal and the Consumer Services charter amendment proposal.
PLEASE CHECK THE VOTING FORM USED BY YOUR BROKER TO SEE IF IT OFFERS
TELEPHONE OR INTERNET VOTING.
Q: Will I receive dividends on my AT&T Comcast shares?
A: AT&T Comcast does not currently intend to pay dividends on its common stock.
Q: Should I send in my stock certificates now?
A: No. If you are a Comcast shareholder, after the AT&T Comcast transaction is
completed you will receive written instructions from the exchange agent on
how to exchange your Comcast stock certificates for AT&T Comcast stock
certificates.
If you are an AT&T shareholder, after the AT&T Comcast transaction is
completed you will not need to exchange any stock certificates in order to
receive your AT&T Comcast shares. In addition, you will continue to hold
your AT&T shares in their current electronic or certificate form, which
after the AT&T Comcast transaction will represent an interest in AT&T's
communications businesses.
PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES WITH YOUR PROXY.
I-3
Q: When do you expect to complete the AT&T Comcast transaction?
A: We expect to complete the AT&T Comcast transaction by the end of 2002.
Q: Is approval of the Consumer Services charter amendment proposal linked to
the AT&T Comcast transaction?
A: No. The AT&T Comcast transaction is completely separate from the Consumer
Services charter amendment proposal. Approval of one is not a prerequisite
or a condition to the other.
Q: Who can help answer my questions?
A: If you have any questions about the AT&T Comcast transaction or how to
submit your proxy, or if you need additional copies of this document, the
enclosed proxy card or voting instructions, you should contact:
- if you are a Comcast shareholder:
Comcast Corporation
Investor Relations
1500 Market Street
Philadelphia, Pennsylvania 19102-2148
Telephone: 1-800-___-____
e-mail: _____________________________
- if you are an AT&T shareholder:
AT&T Corp.
Proxy Information Center
____________________________________
____________________________________
Telephone: 1-800-___-____
e-mail: _____________________________
I-4
QUESTIONS AND ANSWERS ABOUT
AT&T CONSUMER SERVICES GROUP TRACKING STOCK
Q: What is the purpose of AT&T Consumer Services Group tracking stock?
A: Approval and issuance of AT&T Consumer Services Group tracking stock will
allow AT&T to offer two separate investment vehicles within AT&T -- existing
AT&T common stock plus a new tracking stock intended to track the
performance of AT&T's Consumer Services business.
Q: What is a tracking stock and how does it work?
A: A tracking stock is a separate class or series of a company's common stock
that is intended to reflect the financial performance and economic value of
a group of assets or a specific business unit, division, subsidiary or
equity investment of the company. You should note that:
- Holders of a tracking stock of AT&T are shareholders of AT&T and not of
the underlying business or subsidiary. Thus, holders of AT&T Consumer
Services Group tracking stock will have no direct interest in the assets,
subsidiaries or businesses whose performance AT&T Consumer Services Group
tracking stock is intended to reflect.
- AT&T intends the terms of its tracking stock to link the economic value
of the tracking stock to the performance of the tracked business rather
than to the performance of AT&T as a whole. However, there may not always
be a linkage between the market value of tracking stock and the financial
performance and economic value of the tracked business.
- The market value of tracking stock may be adversely affected not only by
factors that adversely affect the tracked business, but also by factors
that adversely affect AT&T generally.
Q: Will AT&T Consumer Services Group tracking stock be intended to reflect 100%
of the value and performance of AT&T's Consumer Services business?
A: AT&T currently intends to distribute all of the AT&T Consumer Services Group
tracking stock. However, if AT&T determines to distribute less than all
these shares, AT&T intends the remaining portion of the value and
performance of AT&T Consumer Services Group to be reflected in AT&T common
stock. We refer to the portion that AT&T intends to reflect in AT&T common
stock as AT&T's "retained portion" of the value of AT&T Consumer Services
Group.
Q: If I continue to hold all my shares of AT&T common stock, what will I
receive as a result of all the transactions?
A: If you continue to hold your shares of AT&T common stock and shares of AT&T
securities that you receive as dividends on your AT&T common stock, and AT&T
completes the AT&T Comcast transaction and the distribution of AT&T Consumer
Services Group tracking stock as it plans, you will end up with shares of:
- Common stock of AT&T Corp. These will be your existing shares of AT&T
common stock.
- AT&T Consumer Services Group tracking stock of AT&T Corp. You will
receive shares of AT&T Consumer Services Group tracking stock as a
dividend on your existing shares of AT&T common stock.
- Common stock of AT&T Comcast Corporation. As part of the AT&T Comcast
transaction, AT&T will declare a dividend on shares of AT&T common stock,
New York Stock Exchange, or NYSE, symbol "T," in the form of shares of
AT&T Broadband Corp. common stock. Since AT&T Broadband Corp. immediately
will be merged with a subsidiary of AT&T Comcast, in the AT&T Comcast
transaction, you will not actually receive these shares but instead you
will receive shares of AT&T Comcast common stock.
I-5
You will not receive a dividend of shares of AT&T Broadband Corp. common
stock on shares of AT&T Consumer Services Group tracking stock.
Q: Why is AT&T proposing a tracking stock rather than splitting off AT&T's
Consumer Services business into a separate company?
A: AT&T is proposing a tracking stock to allow AT&T to offer a more specific,
targeted investment vehicle for investors while at the same time maintaining
the benefits of keeping both AT&T's Business Services business and AT&T's
Consumer Services businesses together in a larger, integrated company.
Following the issuance of AT&T Consumer Services Group tracking stock, if
the AT&T Comcast transaction is completed, AT&T common stock will
effectively act as tracking stock for AT&T Business Services Group plus any
retained portion of the AT&T Consumer Services Group.
Q: Will AT&T issue fractional shares of AT&T Consumer Services Group tracking
stock?
A: No. AT&T expects that it will issue cash in lieu of any fractional shares of
AT&T Consumer Services Group tracking stock, including with respect to
shares held in AT&T's Dividend Reinvestment Plan.
Q: Is approval or completion of any AT&T proposal a condition to any of the
other AT&T proposals?
A: You may vote on each AT&T proposal separately, and AT&T may implement any
AT&T proposal that receives AT&T shareholder approval, whether or not it
receives approval for or implements any other AT&T proposal. However, AT&T
will not implement the Incentive Plan proposal or the Employee Stock
Purchase Plan proposal if AT&T Consumer Services Group tracking stock is not
issued.
Q: If AT&T shareholders approve all the AT&T proposals, will AT&T definitely
implement them all?
A: No. There are a number of conditions to the AT&T Comcast transaction other
than AT&T shareholder approval, including regulatory approvals. Similarly,
there are a number of factors that could cause the AT&T Board to decide not
to proceed with the distribution of AT&T Consumer Services Group tracking
stock as well, such as future market conditions, financial performance or
superior alternatives that may arise. Other events or circumstances,
including litigation, could occur that affect the timing or terms of the
proposed transactions or AT&T's ability to complete the proposed
transactions.
The Consumer Services charter amendment proposal gives the AT&T Board the
authority to amend AT&T's charter to create AT&T Consumer Services Group
tracking stock. The proposed Consumer Services charter amendment, however,
does not mandate that the AT&T Board use this power or specify the manner in
which AT&T may issue AT&T Consumer Services Group tracking stock. Rather,
AT&T Consumer Services Group tracking stock will be a new class of AT&T
common stock that the AT&T Board may issue from time to time as it
determines appropriate, up to the total number of authorized shares and
subject to stock exchange rules with respect to shareholder approval of
share issuances.
AT&T does not plan to seek new shareholder approval for any change that the
AT&T Board may approve in the timing or manner of issuing AT&T Consumer
Services Group tracking stock.
I-6
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To better understand
the AT&T Comcast transaction, you should read this entire document carefully, as
well as those additional documents to which we refer you. See "Additional
Information for Shareholders -- Where You Can Find More Information."
THE COMPANIES
COMCAST CORPORATION
1500 Market Street
Philadelphia, Pennsylvania 19102-2148
(215) 665-1700
http://www.comcast.com
Comcast is a Pennsylvania corporation incorporated in 1969. Comcast is
involved in three principal lines of business:
- Cable -- through the development, management and operation of broadband
communications networks,
- Commerce -- through QVC, its electronic retailing subsidiary, and
- Content -- through its consolidated subsidiaries Comcast Spectacor,
Comcast SportsNet, Comcast SportsNet Mid-Atlantic, Comcast Sports
Southeast, E! Entertainment Television, The Golf Channel and Outdoor Life
Network, and through its other programming investments.
Comcast currently is the third largest cable operator in the United States,
and has deployed digital cable applications and high-speed Internet service to
the vast majority of its cable communications systems to expand the products
available on its broadband communications networks.
Comcast's consolidated cable operations served approximately 8.5 million
subscribers and passed approximately 13.9 million homes as of December 31, 2001.
Through QVC, Comcast markets a wide variety of products directly to
consumers, primarily on merchandise-focused television programs. As of December
31, 2001, QVC was available, on a full and part-time basis, to approximately
82.1 million homes in the United States, approximately 9.5 million homes in the
United Kingdom, approximately 23.6 million homes in Germany and approximately
3.6 million homes in Japan.
AT&T CORP.
32 Avenue of the Americas
New York, New York 10013-2412
(212) 387-5400
http://www.att.com
AT&T is a New York corporation incorporated in 1885. AT&T currently
consists primarily of AT&T Broadband Group, AT&T Consumer Services Group and
AT&T Business Services Group. These AT&T groups are not separate companies, but,
rather, are parts of AT&T. The transactions proposed in this document would:
- separate and spin off AT&T Broadband into a separate company that
immediately would be merged into and become a part of AT&T Comcast, and
- establish a tracking stock for the AT&T Consumer Services Group.
AT&T BROADBAND GROUP
AT&T Broadband Group is one of the nation's largest broadband
communications businesses, providing cable television, high-speed cable Internet
services and communications services over one of the most extensive broadband
networks in the country. At or for the nine months ended September 30, 2001,
AT&T Broadband Group:
- owned and operated cable systems aggregating approximately 13.75 million
analog video subscribers;
- had approximately $7.8 billion in combined revenue;
- had approximately $2.8 billion in net loss;
- had debt of approximately $23.3 billion; and
- had investments in companies, joint ventures and partnerships, including
Time Warner Entertainment Company, L.P., Insight Midwest, L.P. and Texas
Cable Partners, L.P.
I-7
AT&T CONSUMER SERVICES GROUP
AT&T Consumer Services Group is the leading provider of domestic and
international long distance service to residential consumers in the United
States. AT&T Consumer Services Group provides a broad range of communications
services to consumers, including:
- inbound and outbound domestic and international long distance;
- transaction-based long distance services, such as operator-assisted
calling services and prepaid phone cards;
- local calling offers through an unbundled network elements platform; and
- dial-up Internet service through AT&T WorldNet Service.
AT&T Consumer Services Group provides these services individually and in
combination with other services. At or for the nine months ended September 30,
2001, the AT&T Consumer Services Group had:
- approximately 60 million customer relationships;
- approximately $11.6 billion in combined revenue;
- approximately $2.2 billion in combined net income; and
- debt of approximately $1.5 billion.
AT&T BUSINESS SERVICES GROUP
AT&T Business Services Group is one of the nation's largest business
services communications providers, providing a variety of global communications
services to over 4 million customers, including large domestic and multinational
businesses, small- and medium-sized businesses, and government agencies. AT&T
Business Services Group operates one of the largest telecommunications networks
in the United States and, through AT&T Global Network Services and other
investments and affiliates, provides an array of services and customized
solutions in 60 countries and 850 cities worldwide.
AT&T Business Services Group provides a broad range of communications
services and customized solutions, including:
- long distance, international and toll-free voice services;
- local services, including private line, local data and special access
services;
- data and internet protocol, or IP, services, including frame relay and
asynchronous transfer mode, or ATM;
- managed networking services and outsourcing solutions; and
- wholesale transport services.
AT&T Business Services Group also includes a number of joint ventures and
investments, including AT&T Latin America Corp. and AT&T Canada Inc.
The table below sets forth the approximate percentage of consolidated
revenue, net income, assets and indebtedness of AT&T, giving effect to the
split-offs of the AT&T Wireless Group and the Liberty Media Group, that were
attributable to each of AT&T Broadband Group, AT&T Consumer Services Group and
AT&T excluding AT&T Broadband Group at or for the year ended December 31, 2000
and at or for the nine months ended September 30, 2001. In the future, these
percentages will vary with the relative performance of the different AT&T
groups. In addition, the actual debt levels of each of the AT&T groups in the
future will depend on a variety of other factors, including the progress AT&T
makes on its various debt reduction activities. The table also should be read in
the context of the financial and other information set forth in this document.
I-8
AT OR FOR NINE MONTHS ENDED
AT OR FOR YEAR ENDED DECEMBER 31, 2000 SEPTEMBER 30, 2001*
---------------------------------------- ----------------------------------
% OF % OF NET % OF % OF % OF % OF NET % OF % OF
AT&T AT&T AT&T AT&T AT&T AT&T AT&T AT&T
REVENUE INCOME* ASSETS** DEBT REVENUE LOSS* ASSETS DEBT
-------- --------- --------- ----- ------- -------- ------ ----
AT&T Broadband Group........... 15.2% (129.9)% 56.7% 43.8% 19.4% 54.8% 65.1% 48.0%
AT&T Consumer Services Group... 34.0% 99.5% 1.7% 6.2% 29.1% (41.1)% 1.8% 3.1%
AT&T Corp. (excluding AT&T
Broadband Group)***.......... 85.0% 193.9% 26.7% 56.2% 81.1% (6.0)% 34.9% 52.0%
---------------
* Based on net income/(loss) from continuing operations before cumulative
effect of accounting change.
** Based on assets from continuing operations.
*** Includes AT&T Business Services Group and AT&T Consumer Services Group and
excludes Liberty Media Group and AT&T Wireless Services Group.
AT&T COMCAST CORPORATION
1500 Market Street
Philadelphia, Pennsylvania 19102-2148
(215) 665-1700
AT&T Comcast is a newly formed Pennsylvania corporation that has not, to
date, conducted any activities other than those incident to its formation, the
matters contemplated by the merger agreement and the preparation of this
document. Upon completion of the AT&T Comcast transaction, Comcast and AT&T
Broadband will each become a wholly owned subsidiary of AT&T Comcast. The
business of AT&T Comcast will be the combined businesses currently conducted by
Comcast and the AT&T Broadband Group.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE (SEE PAGE [XIV-17])
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. In some cases, you can
identify those so-called "forward-looking statements" by words such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue," or the negative of those words and other
comparable words. Comcast, AT&T and AT&T Comcast wish to take advantage of the
"safe harbor" provided for by the Private Securities Litigation Reform Act of
1995 and you are cautioned that actual events or results may differ materially
from the expectations expressed in such forward-looking statements as a result
of various factors, including those described on page [XIV-17], including risks
and uncertainties, many of which are beyond our control.
THE AT&T COMCAST TRANSACTION
REASONS FOR THE AT&T COMCAST TRANSACTION (SEE PAGE [II-8])
Comcast and AT&T believe that the combined strengths of Comcast and AT&T's
broadband business will enable them to create the world's premier broadband
communications company. The transaction will combine the companies' extensive
broadband communications networks, technologically advanced broadband delivery
systems and managerial expertise to build a business that Comcast and AT&T
expect will create substantial long-term value for the shareholders of both
companies. Comcast and AT&T believe that AT&T Comcast will grow the broadband
business with more efficiency to create stronger operating and financial results
than either company could achieve on its own.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS (SEE PAGE [II-8])
To Comcast Shareholders: The Comcast Board believes that the AT&T Comcast
transaction, including the Comcast merger (as described below in this summary
under "The Structure of the AT&T Comcast Transaction"), is fair to you and in
your best interest, and unanimously voted to approve the merger agreement and
the transactions contemplated by the merger agreement, and unanimously
recommends that you vote FOR the approval and
I-9
adoption of the merger agreement and the transactions contemplated by the merger
agreement.
The Comcast Board believes that the preferred structure proposal (as
described below in this summary under "Preferred Structure Proposal") is in your
best interest and unanimously recommends that you vote FOR the preferred
structure proposal.
To AT&T Shareholders: The AT&T Board believes that the AT&T Comcast
transaction, including the separation, the AT&T Broadband spin-off and the AT&T
Broadband merger (in each case, as described below in this summary under "The
Structure of the AT&T Comcast Transaction"), is fair to you and in your best
interest and unanimously voted to approve the merger agreement and the
transactions contemplated by the merger agreement and unanimously recommends
that you vote FOR the approval and adoption of the merger agreement and the
transactions contemplated by the merger agreement.
OPINIONS OF FINANCIAL ADVISORS (SEE PAGE [IV-1])
Opinions of Comcast's Financial Advisors. In deciding to approve the
transaction, the Comcast Board considered opinions of three of its financial
advisors, Morgan Stanley & Co. Incorporated, J.P. Morgan Securities Inc. and
Merrill Lynch, Pierce, Fenner & Smith, Incorporated, each dated December 19,
2001, to the effect that as of that date, the conversion ratios in the Comcast
merger applicable to the holders of Comcast common stock, in the aggregate, were
fair, from a financial point of view, to the Comcast shareholders, taken
together. The full text of these opinions are attached as Annexes G, H and I to
this document. Comcast urges its shareholders to read each of these opinions in
its entirety for a description of the procedures followed, assumptions made,
matters considered and limitations on the review undertaken. THESE OPINIONS ARE
ADDRESSED TO THE COMCAST BOARD AND DO NOT CONSTITUTE A RECOMMENDATION TO ANY
SHAREHOLDER AS TO ANY MATTER RELATING TO THE MERGERS OR ANY RELATED
TRANSACTIONS.
Opinions of AT&T's Financial Advisors. In connection with the proposed
mergers, AT&T's financial advisors, Credit Suisse First Boston Corporation and
Goldman, Sachs & Co., each has delivered a written opinion to the AT&T Board as
to the fairness as of the date of the opinion, from a financial point of view,
of the AT&T Broadband exchange ratio provided for in the AT&T Broadband merger
to the holders of AT&T Broadband common stock immediately prior to the mergers,
other than Comcast and its affiliates. The full text of the separate written
opinions of Credit Suisse First Boston Corporation and Goldman, Sachs & Co.,
each dated December 19, 2001, are attached to this document as Annexes J and K,
respectively. AT&T urges its shareholders to read each opinion carefully in its
entirety for a description of the procedures followed, assumptions made, matters
considered and limitations on the review undertaken. THESE OPINIONS ARE
ADDRESSED TO THE AT&T BOARD AND DO NOT CONSTITUTE A RECOMMENDATION TO ANY
SHAREHOLDER AS TO ANY MATTER RELATING TO THE MERGERS OR ANY RELATED
TRANSACTIONS.
THE STRUCTURE OF THE AT&T COMCAST TRANSACTION
The AT&T Comcast transaction will occur in several steps and will be
subject to the satisfaction or (to the extent permissible) waiver of the
conditions specified below in this summary under "Conditions to the Completion
of the AT&T Comcast Transaction." It is expected that all of these steps will
occur on the closing date for the mergers. With the consent of Comcast, which
will not be unreasonably withheld, AT&T may effect the separation and spin-off
described below prior to the closing date for the mergers.
THE SEPARATION
AT&T will assign and transfer to AT&T Broadband, a newly formed holding
company for AT&T's broadband business, all of the assets of AT&T's broadband
business (as reflected in the AT&T Broadband Group balance sheet dated as of
December 31, 2000 or as otherwise specified in the separation and distribution
agreement between AT&T and AT&T Broadband) that are not at such time assets of
AT&T Broadband or an AT&T Broadband subsidiary.
At the same time, AT&T Broadband will assume all of the liabilities of
AT&T's broadband business (as reflected in the AT&T Broadband Group balance
sheet dated as of December 31, 2000 or as otherwise specified in the separation
I-10
and distribution agreement between AT&T and AT&T Broadband) that are not at such
time liabilities of AT&T Broadband or an AT&T Broadband subsidiary.
THE SPIN-OFF
Following the separation, AT&T will spin off AT&T Broadband to its
shareholders by distributing one share of AT&T Broadband common stock to each
holder of record of a share of AT&T common stock as of the close of business on
the record date for the AT&T Broadband spin-off, which we refer to as the "AT&T
Broadband spin-off."
THE MERGERS
Immediately following the AT&T Broadband spin-off, AT&T Broadband will
merge with AT&T Broadband Acquisition Corp., a newly formed, wholly owned
subsidiary of AT&T Comcast, with AT&T Broadband continuing as the surviving
corporation.
In the AT&T Broadband merger, AT&T Broadband shareholders will receive the
merger consideration described below in this summary under "What AT&T Broadband
Shareholders Will Receive in the AT&T Broadband Merger."
At approximately the same time as the AT&T Broadband merger, Comcast will
merge with Comcast Acquisition Corp., a newly formed, wholly owned subsidiary of
AT&T Comcast, with Comcast continuing as the surviving corporation.
In the Comcast merger, Comcast shareholders will receive the merger
consideration described below in this summary under "What Comcast Shareholders
Will Receive in the Comcast Merger."
AT&T COMCAST
After the mergers, Comcast and AT&T Broadband will each be a wholly owned
subsidiary of AT&T Comcast and the former shareholders of Comcast and AT&T
Broadband will be shareholders of AT&T Comcast. After completion of the AT&T
Comcast transaction, AT&T Comcast will have one of the two capital structures
described below in this summary under "Capital Structures."
CAPITAL STRUCTURES (SEE PAGE [V-1])
AT&T Comcast will have one of two capital structures upon completion of the
AT&T Comcast transaction: one that is referred to in this document as the
"Preferred Structure" that will be implemented if holders of Comcast Class A
common stock, voting as a single class, and holders of Comcast Class A common
stock and Comcast Class B common stock, voting together as a single class,
approve the preferred structure proposal described below in this summary under
"Preferred Structure Proposal" or another that is referred to in this document
as the "Alternative Structure" that will be implemented if they do not.
PREFERRED STRUCTURE
If holders of Comcast Class A common stock, voting as a single class, and
holders of Comcast Class A common stock and Comcast Class B common stock, voting
together as a single class, approve the preferred structure proposal, AT&T
Comcast's capital structure upon completion of the AT&T Comcast transaction will
be as follows:
- Class B common stock -- will in the aggregate have 33 1/3% of the
combined voting power of the AT&T Comcast stock (regardless of the number
of shares of any other class of AT&T Comcast stock that may be
outstanding at any time),
- Class A common stock -- initially will in the aggregate have 66 2/3% of
the combined voting power of the AT&T Comcast stock, and
- Class A Special common stock -- will be non-voting.
If the number of outstanding shares of AT&T Comcast Class B common stock
outstanding upon completion of the AT&T Comcast transaction is reduced for any
reason (e.g., by repurchase or conversion) below the number of shares
outstanding at the completion of the AT&T Comcast transaction, the aggregate
voting power of AT&T Comcast Class B common stock will be proportionately
reduced and, unless another class of AT&T Comcast voting stock exists at the
time, the aggregate voting power of AT&T Comcast Class A common stock will be
proportionately increased.
I-11
Unlike AT&T Comcast Class B common stock which, except as described in the
preceding paragraph, has a nondilutable voting interest, the percentage of the
combined voting power of AT&T Comcast stock held by AT&T Comcast Class A common
stock upon completion of the AT&T Comcast transaction could be diluted by the
issuance of a new class of AT&T Comcast voting stock.
ALTERNATIVE STRUCTURE
If holders of Comcast Class A common stock, voting as a single class, or
holders of Comcast Class A common stock and Comcast Class B common stock, voting
together as a single class, do not approve the preferred structure proposal,
AT&T Comcast's capital structure upon completion of the AT&T Comcast transaction
will be as follows:
- Class B common stock -- will in the aggregate have 33 1/3% of the
combined voting power of AT&T Comcast stock (regardless of the number of
shares of any other class of AT&T Comcast stock other than AT&T Comcast
Class A common stock that may be outstanding at any time),
- Class A common stock -- will in the aggregate have 5.14% of the combined
voting power of AT&T Comcast stock (regardless of the number of shares of
any other class of AT&T Comcast stock other than AT&T Comcast Class B
common stock that may be outstanding at any time),
- Class A Special common stock -- will be non-voting, and
- Class C common stock -- initially will in the aggregate have
approximately 61 53/100% of the combined voting power of AT&T Comcast
stock.
If the number of outstanding shares of AT&T Comcast Class A common stock or
AT&T Comcast Class B common stock outstanding upon completion of the AT&T
Comcast transaction is reduced for any reason (e.g., by repurchase, or in the
case of AT&T Comcast Class B common stock only, conversion) below the number of
shares outstanding at the completion of the AT&T Comcast transaction, the
aggregate voting power of the applicable class of AT&T Comcast common stock will
be proportionately reduced and, unless another class of AT&T Comcast voting
stock exists at the time, the aggregate voting power of AT&T Comcast Class C
common stock will be proportionately increased. If additional shares of AT&T
Comcast Class A common stock or AT&T Comcast Class B common stock are issued in
disproportionate amounts after the completion of the AT&T Comcast transaction,
the relative voting percentages of those two classes of AT&T Comcast common
stock will change (based on the principle that each share of AT&T Comcast Class
B common stock will be entitled to 15 times the vote of each share of AT&T
Comcast Class A common stock) but the combined voting percentage of those two
classes of stock will remain constant at approximately 38 47/100% (except to the
extent there has been a reduction in the voting power of either class of AT&T
Comcast common stock as described in the preceding sentence).
Unlike AT&T Comcast Class A common stock and AT&T Comcast Class B common
stock, which, except as described in the preceding paragraph, have a
nondilutable voting interest, the percentage of the combined voting power of
AT&T Comcast stock held by AT&T Comcast Class C common stock upon completion of
the AT&T Comcast transaction could be diluted by the issuance of a new class of
AT&T Comcast voting stock.
WHAT COMCAST SHAREHOLDERS WILL RECEIVE IN THE COMCAST MERGER (SEE PAGE [V-1])
Comcast shareholders will receive one share of the corresponding class of
AT&T Comcast common stock in exchange for each of their shares of Comcast common
stock.
Upon completion of the AT&T Comcast transaction, assuming no shares of AT&T
Comcast common stock are issued as described in this summary under "Potential
Additional Payments," Comcast shareholders will own
- [ ]% of AT&T Comcast's economic interest; and
- if the Preferred Structure is implemented, [ ]% of AT&T Comcast's
voting power or, if the Alternative Structure is
I-12
implemented, [ ]% of AT&T Comcast's voting power.
Upon completion of the AT&T Comcast transaction, regardless of which
capital structure is implemented and whether or not any shares of AT&T Comcast
common stock are issued as described below in this summary under "Potential
Additional Payments," Sural LLC, which is controlled by Brian L. Roberts,
President of Comcast, and currently holds approximately 86.7% of Comcast's
voting power, will hold approximately 33 1/3% of AT&T Comcast's voting power,
including all of the outstanding AT&T Comcast Class B common stock.
WHAT AT&T BROADBAND SHAREHOLDERS WILL RECEIVE IN THE AT&T BROADBAND MERGER (SEE
PAGE [V-3])
In the AT&T Broadband spin-off, each holder of AT&T common stock, NYSE
symbol "T," will receive one share of AT&T Broadband common stock for each of
such holder's shares of such AT&T common stock. AT&T Consumer Services Group
tracking stock will not entitle holders thereof to receive any shares of AT&T
Broadband common stock in the AT&T Broadband spin-off.
The precise number of shares of AT&T Comcast common stock that each holder
of AT&T Broadband common stock will receive in the AT&T Broadband merger will
depend upon the number of shares of AT&T Broadband common stock outstanding (not
including any shares issued in the QUIPS exchange transaction) and the value of
the employee stock options and stock appreciation rights held by current AT&T
Broadband employees and former AT&T employees, in each case at the time the AT&T
Comcast transaction is completed.
If the AT&T Broadband exchange ratio were determined as of the date of this
joint proxy statement/prospectus, assuming no shares of AT&T Comcast common
stock are issued as described in this summary under "Potential Additional
Payments," AT&T Broadband shareholders would receive for each of their shares of
AT&T Broadband common stock:
- if the Preferred Structure is implemented, approximately of a share
of AT&T Comcast Class A common stock or
- if the Alternative Structure is implemented, approximately of a
share of AT&T Comcast Class C common stock.
Upon completion of the AT&T Comcast transaction, assuming no shares of AT&T
Comcast common stock are issued as described in this summary under "Potential
Additional Payments," AT&T shareholders will own approximately
- [ ]% of AT&T Comcast's economic interest; and
- if the Preferred Structure is implemented, [ ]% of AT&T Comcast's
voting power or, if the Alternative Structure is implemented, [ ]% of
AT&T Comcast's voting power.
AT&T Comcast will not issue any fractional shares in the AT&T Broadband
merger. AT&T Broadband shareholders will receive a check in the amount of the
net proceeds from the sale of their fractional shares in the market.
POTENTIAL ADDITIONAL PAYMENTS (SEE PAGE [V-2])
AT&T Comcast may be required to issue additional shares of AT&T Comcast
common stock to AT&T Broadband shareholders if the per share value of AT&T
Comcast common stock issued to AT&T Broadband shareholders in the AT&T Broadband
merger is less than the per share value of the AT&T Comcast Class A Special
common stock at or shortly after completion of the AT&T Comcast transaction.
PREFERRED STRUCTURE PROPOSAL (SEE PAGE [II-10])
In addition to the Comcast transaction proposal, Comcast is also seeking
the approval by its shareholders of an amendment to the Comcast charter that
will allow the implementation of the Preferred Structure. The preferred
structure proposal will be approved if holders of a majority of the votes cast
by the holders of Comcast Class A common stock, voting as a single class, and
holders of Comcast Class A common stock and Comcast Class B common stock, voting
together as a single class, vote in favor of adoption of the Comcast charter
amendment. Each holder of Comcast Class B common stock is entitled to 15 votes
per share, and each holder of Comcast Class A common stock is entitled to one
vote per share. As of the record date, (1) Comcast
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directors and executive officers and their affiliates owned approximately
[ ]% of the outstanding shares of Comcast Class A common stock, representing
approximately [ ]% of the combined voting power of Comcast stock, and (2)
Sural LLC, which is controlled by Brian L. Roberts, President of Comcast, owned
all outstanding shares of Comcast Class B common stock, representing
approximately 86.6% of the combined voting power of Comcast stock. If holders of
the Comcast Class A common stock, voting as a single class, approve the
preferred structure proposal, the Preferred Structure will be implemented upon
completion of the AT&T Comcast transaction because Sural LLC has indicated that
it will vote in favor of the preferred structure proposal, thereby assuring
approval of the proposal by holders of Comcast Class A common stock and Comcast
Class B common stock, voting together as a single class.
APPROVAL OF THE COMCAST TRANSACTION PROPOSAL IS NOT CONDITIONED ON APPROVAL
OF THE PREFERRED STRUCTURE PROPOSAL.
SUPPORT AGREEMENT (SEE PAGE [V-18])
Sural LLC, which is controlled by Brian L. Roberts, President of Comcast,
and as of the record date owned approximately 86.7% of the combined voting power
of Comcast common stock, has entered into a support agreement with, among
others, AT&T pursuant to which it has agreed to vote its shares of Comcast
common stock in favor of the AT&T Comcast transaction. Sural's vote in favor of
the AT&T Comcast transaction will be sufficient to approve the AT&T Comcast
transaction without the vote of any other Comcast shareholder.
Sural has also agreed in the support agreement to restrictions on its
ability to transfer its shares of AT&T Comcast common stock that survive until
the tenth anniversary of the completion of the AT&T Comcast transaction.
AT&T COMCAST BOARD AND MANAGEMENT FOLLOWING THE AT&T COMCAST TRANSACTION (SEE
PAGE [VIII-1])
Upon completion of the AT&T Comcast transaction, the AT&T Comcast Board
will consist of 12 members, at least seven of whom will be independent
directors. Comcast and AT&T will each designate five of the initial members of
the AT&T Comcast Board from among its existing Board members and will jointly
designate the two remaining initial members of the AT&T Comcast Board, each of
whom will be an independent director. Except for certain pre-approved designees,
the individuals designated by Comcast and AT&T will be mutually agreed by
Comcast and AT&T. If the AT&T Comcast Board decides to establish an executive
committee, Ralph J. Roberts, Chairman of the Board of Comcast, will be its
chairman.
Upon completion of the transaction, C. Michael Armstrong, Chairman of the
Board and Chief Executive Officer of AT&T, will become Chairman of the Board of
AT&T Comcast and Brian L. Roberts, President of Comcast, will become Chief
Executive Officer and President of AT&T Comcast. The other members of senior
management of AT&T Comcast upon completion of the AT&T Comcast transaction will
be selected by Brian L. Roberts in consultation with C. Michael Armstrong.
TREATMENT OF AT&T BROADBAND STOCK OPTIONS AND OTHER AT&T BROADBAND EQUITY-BASED
AWARDS IN THE AT&T COMCAST TRANSACTION(SEE PAGE [V-5])
In the AT&T Broadband spin-off, AT&T stock options and other AT&T
equity-based awards will be converted to AT&T Broadband stock options and AT&T
Broadband equity-based awards, adjusted AT&T stock options and adjusted AT&T
equity-based awards, or a combination of both, depending on the holder of the
award. For a description of the conversion of AT&T stock options and AT&T
equity-based awards in the AT&T Broadband spin-off see page [IX-3].
Upon completion of the AT&T Comcast transaction, each outstanding AT&T
Broadband stock option will be converted into an option to acquire shares of the
class of AT&T Comcast common stock that is included in the Standard & Poor's 500
Index. This class of stock is referred to in this document as the "AT&T Comcast
Indexed Stock." The number of shares subject to the option and the exercise
price will be subject to customary adjustments necessary to maintain the
intrinsic value of the awards immediately before and after the AT&T Comcast
transaction (with
I-14
appropriate adjustments in the case of former employees).
As of completion of the AT&T Comcast transaction, each AT&T Broadband stock
option held by current AT&T Broadband employees (including AT&T employees who
become AT&T Broadband employees in the AT&T Broadband spin-off) will have vested
and will remain exercisable for the remainder of its original term (except for
AT&T Broadband stock options held by any AT&T executive officer who has waived
rights to vesting of certain equity awards as a result of the AT&T Comcast
transaction).
Shares of AT&T Broadband restricted stock will also vest (except for awards
held by any AT&T executive officer who has waived rights to vesting of certain
equity awards as a result of the AT&T Comcast transaction) and be converted into
the right to receive AT&T Comcast common stock on the terms and conditions
applicable to AT&T Broadband shareholders described above in this summary under
"What AT&T Broadband Shareholders Will Receive in the AT&T Broadband Merger."
All other awards based on shares of AT&T Broadband common stock will be
converted into equivalent awards based on shares of AT&T Comcast Indexed Stock,
subject to customary adjustments necessary to maintain the fair market value of
the awards immediately before and after the AT&T Comcast transaction.
As of completion of the AT&T Comcast transaction, each other equity-based
award (based on AT&T or AT&T Broadband common stock) held by current and former
AT&T Broadband employees (including AT&T employees who become AT&T Broadband
employees in the AT&T Broadband spin-off) will have vested (except for awards
held by any AT&T executive officer who has waived rights to vesting of certain
equity awards as a result of the AT&T Comcast transaction).
TREATMENT OF COMCAST STOCK OPTIONS AND OTHER COMCAST EQUITY-BASED AWARDS (SEE
PAGE [V-6])
Upon completion of the AT&T Comcast transaction, each outstanding Comcast
stock option will be converted into an option to acquire shares of AT&T Comcast
Indexed Stock. The number of shares subject to the option and the exercise price
will be subject to customary adjustments necessary to maintain the intrinsic
value of the awards immediately before and after the AT&T Comcast transaction.
Shares of Comcast restricted stock will be converted into the right to
receive AT&T Comcast common stock on the terms and conditions applicable to
Comcast shareholders described above in this summary under "What Comcast
Shareholders Will Receive in the Comcast Merger." All other awards based on
shares of Comcast Class A Special common stock will be converted into equivalent
awards based on AT&T Comcast Indexed Stock, subject to customary adjustments
necessary to maintain the fair market value of the awards immediately before and
after the AT&T Comcast transaction.
INTERESTS OF DIRECTORS AND OFFICERS IN THE AT&T COMCAST TRANSACTION (SEE PAGE
[IX-1])
When considering our Boards' recommendations that you vote in favor of the
AT&T Comcast transaction, you should be aware that a number of our directors and
officers have interests in the AT&T Comcast transaction that are different from,
or in addition to, yours. These interests include the potential for positions as
directors or executive officers of AT&T Comcast, funding of benefits in trust,
employment agreements with AT&T Comcast, acceleration of vesting of AT&T
Broadband stock options and other equity-based awards as a result of the AT&T
Comcast transaction (except for awards held by any AT&T executive officer who
has waived rights to vesting of certain equity awards as a result of the AT&T
Comcast transaction), and the right to continued indemnification and insurance
coverage by AT&T Comcast for acts or omissions occurring prior to the AT&T
Comcast transaction.
CONDITIONS TO THE COMPLETION OF THE AT&T COMCAST TRANSACTION (SEE PAGE [V-10]
AND PAGE [V-16])
The completion of the AT&T Comcast transaction is subject to the
satisfaction or waiver (to the extent permissible) of several conditions,
including:
- approval by AT&T shareholders and Comcast shareholders;
- expiration or termination of the applicable waiting period under the
Hart-Scott-
I-15
Rodino Antitrust Improvements Act of 1976, as amended;
- the absence of any law, regulation or order prohibiting the completion of
the transaction;
- receipt of all required regulatory approvals other than those the failure
of which to be obtained would not reasonably be expected to have a
material adverse effect on either Comcast or AT&T Broadband Group;
- accuracy of the representations and warranties of the other party,
including with respect to the absence of a material adverse effect;
- receipt and continuing effectiveness of an Internal Revenue Service
ruling or rulings (or an opinion from tax counsel acceptable to Comcast
and AT&T) to the effect that, for U.S. federal income tax purposes, the
AT&T Broadband spin-off will be tax-free to AT&T and its shareholders,
the mergers will not cause the AT&T Broadband spin-off to fail to be
qualified as a tax-free transaction, and the AT&T Broadband spin-off will
not cause the distribution by AT&T of the common stock of AT&T Wireless
Services, Inc. or of Liberty Media Corporation to fail to qualify as
tax-free transactions;
- receipt by each party of an opinion of its counsel to the effect that the
combination of AT&T Broadband and Comcast will qualify as a tax-free
transaction for U.S. federal income tax purposes;
- performance by Sural LLC in all material respects of its obligations
under the support agreement; and
- receipt of appropriate note consents, or the defeasance, purchase or
acquisition of indebtedness, in respect of at least 90% in aggregate
principal amount of the securities issued under the AT&T indenture, dated
as of September 7, 1990, and outstanding as of December 19, 2001.
TERMINATION RIGHTS (SEE PAGE [V-12])
The merger agreement may be terminated by mutual agreement of Comcast and
AT&T.
The merger agreement may be terminated by Comcast or AT&T if:
- the AT&T or Comcast shareholders fail to approve the transaction;
- the AT&T Comcast transaction is not completed by March 1, 2003;
- the other party breaches the merger agreement such that the related
closing conditions cannot be satisfied by March 1, 2003; or
- any material law or regulation makes completion of the AT&T Comcast
transaction illegal or a permanent injunction prohibiting completion of
the AT&T Comcast transaction is entered.
In addition, AT&T may terminate the merger agreement if, as permitted by
the merger agreement, the closing date for the AT&T Comcast transaction is
delayed because the QUIPS exchange transaction described below in this summary
under "Microsoft Arrangement" does not occur; provided that AT&T may terminate
the merger agreement pursuant to this provision only (1) on two business days'
notice delivered to Comcast between 30 and 45 days after the commencement of the
delay; and (2) if prior to the effectiveness of the termination Comcast does not
agree to close the AT&T Comcast transaction within 60 days of the commencement
of the delay.
In addition, Comcast may terminate the merger agreement if:
- the AT&T Board withdraws or modifies, in a manner adverse to Comcast, its
recommendation of the AT&T Comcast transaction; or
- AT&T willfully and materially breaches its obligations described below in
this summary under "Duty to Recommend the AT&T Comcast Transaction" or
"No Solicitation of Competing Transactions."
TERMINATION FEES (SEE PAGE [V-12])
AT&T will pay Comcast a termination fee in the amount of $1.5 billion in
cash if the merger agreement is terminated because:
- the AT&T Board withdraws or modifies, in a manner adverse to Comcast, its
I-16
recommendation of the AT&T Comcast transaction; or
- AT&T willfully and materially breaches its obligations described below in
this summary under "Duty to Recommend the AT&T Comcast Transaction" or
"No Solicitation of Competing Transactions."
In addition, if a competing acquisition proposal made by a third party was
pending at the time of the AT&T meeting, within one year of the AT&T meeting,
AT&T enters into an agreement relating to an alternative material transaction,
and the merger agreement is terminated because the AT&T shareholders fail to
approve the AT&T Comcast transaction at the AT&T meeting, AT&T will pay Comcast
a $1.5 billion termination fee in cash.
Comcast will pay AT&T a $1.5 billion termination fee in cash if the merger
agreement is terminated because the Comcast Board withdraws or modifies, in a
manner adverse to AT&T, its recommendation of the AT&T Comcast transaction or if
Comcast shareholders fail to approve the AT&T Comcast transaction. See "Support
Agreement" above in this summary.
DUTY TO RECOMMEND THE AT&T COMCAST TRANSACTION (SEE PAGE [V-7])
The AT&T Board has recommended that the AT&T shareholders approve the AT&T
Comcast transaction. The AT&T Board is permitted to withdraw or modify, in a
manner adverse to Comcast, its recommendation of the AT&T Comcast transaction if
the AT&T Board determines in good faith that it must take such action to comply
with its fiduciary duties under applicable law and provides Comcast with two
business days' prior written notice. AT&T does not have the right to terminate
the merger agreement to accept a superior acquisition proposal for its broadband
business and subject to applicable law must submit the AT&T Comcast transaction
to AT&T shareholders at the AT&T annual meeting.
NO SOLICITATION OF COMPETING TRANSACTIONS (SEE PAGE [V-7])
AT&T is generally prohibited from soliciting or encouraging, among other
specific acquisition proposals, acquisition proposals from third parties that
would reasonably be expected to be inconsistent in any material respect with the
AT&T Comcast transaction or materially delay, impede or adversely affect the
AT&T Comcast transaction. AT&T is also prohibited from providing nonpublic
information to or engaging in negotiations with any third party that has made or
is known by AT&T to be considering making an acquisition proposal of the type
described in the previous sentence.
However, AT&T may furnish nonpublic information and engage in negotiations
with a third party that has made an unsolicited acquisition proposal if the AT&T
Board determines in good faith that such acquisition proposal would reasonably
be expected to lead to a proposal that would be more favorable to AT&T
shareholders than the AT&T Comcast transaction and that it must take such action
to comply with its fiduciary duties under applicable law.
MICROSOFT ARRANGEMENT (SEE PAGE [V-21])
Comcast, AT&T and AT&T Comcast have entered into an exchange agreement with
Microsoft Corporation pursuant to which at the time of the AT&T Broadband
spin-off Microsoft will exchange $5 billion of quarterly income preferred
securities, or QUIPS, issued by AT&T Finance Trust I, an AT&T subsidiary, for a
number of shares of AT&T Broadband common stock that will be converted into 115
million shares of AT&T Comcast common stock in the AT&T Broadband merger. Based
on the number of shares of Comcast and AT&T common stock outstanding as of the
date of this document, upon completion of the transaction, an affiliate of
Microsoft will hold approximately [ ]% of the combined voting power of AT&T
Comcast stock.
If the QUIPS exchange transaction is completed, AT&T Comcast has agreed in
the exchange agreement that it will not discriminate against Microsoft with
respect to the provision of high-speed Internet services over AT&T Comcast cable
systems.
REGULATORY MATTERS (SEE PAGE [II-16])
Under U.S. antitrust laws, Comcast and AT&T may not complete the AT&T
Comcast transaction until Comcast and AT&T notify the Antitrust Division of the
United States Department of Justice and the Federal Trade
I-17
Commission of the AT&T Comcast transaction by filing the necessary report forms
and until a required waiting period has ended. Comcast and AT&T have filed the
required information and materials to notify the U.S. Department of Justice and
the Federal Trade Commission of the transaction.
Under federal communications law and local franchise requirements, Comcast
and AT&T must also obtain the approval of the Federal Communications Commission,
or FCC, and a number of state and local authorities in connection with the AT&T
Comcast transaction.
Comcast and AT&T have agreed to use their best efforts to obtain all
regulatory approvals that are necessary or advisable in connection with the AT&T
Comcast transaction. In addition, Comcast and AT&T have also agreed to take all
actions necessary to obtain termination of the applicable waiting periods under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 relating to the AT&T
Comcast transaction and to obtain all consents of the FCC required to complete
the AT&T Comcast transaction.
There can be no assurances that Comcast and AT&T will obtain all regulatory
approvals necessary to complete the AT&T Comcast transaction or that the
granting of these approvals will not involve the imposition of conditions on the
completion of the AT&T Comcast transaction or require changes to the terms of
the AT&T Comcast transaction.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE [II-13])
Comcast and AT&T have structured the AT&T Broadband spin-off so that AT&T,
AT&T Broadband and the holders of AT&T common stock who receive shares of AT&T
Broadband common stock in the AT&T Broadband spin-off will not recognize gain or
loss for U.S. federal income tax purposes in connection with the AT&T Broadband
spin-off. Comcast and AT&T have structured the mergers so that AT&T Broadband,
Comcast and their respective shareholders who exchange their shares for shares
of AT&T Comcast common stock in the mergers will not recognize gain or loss for
U.S. federal income tax purposes in connection with the mergers, except for gain
or loss with respect to cash received instead of fractional shares.
MARKET PRICE INFORMATION (SEE PAGE [I-28])
Comcast Class A common stock and Comcast Class A Special common stock are
listed on The Nasdaq Stock Market under the symbols "CMCSA" and "CMCSK,"
respectively. AT&T common stock is primarily listed on the New York Stock
Exchange under the symbol "T."
On July 6, 2001, the last full trading day before Comcast publicly
announced its proposal to AT&T to acquire AT&T's broadband business, Comcast
Class A common stock and Comcast Class A Special common stock closed at $41.85
and $42.08, respectively, and AT&T common stock closed at $16.65 (as adjusted to
reflect the AT&T Wireless Services spin-off). On December 19, 2001, the last
full trading day before the public announcement of the AT&T Comcast transaction,
Comcast Class A common stock and Comcast Class A Special common stock closed at
$38.09 and $38.07, respectively, and AT&T common stock closed at $16.80. On
[ ], 2002, the last full trading day before the date of this document, Comcast
Class A common stock and Comcast Class A Special common stock closed at $[ ]
and $[ ], respectively, and AT&T common stock closed at $[ ].
STOCK EXCHANGE LISTINGS (SEE PAGE [XIV-14])
The shares of AT&T Comcast Class A common stock, AT&T Comcast Class A
Special common stock and, if the Alternative Structure is implemented, the
shares of AT&T Comcast Class C common stock, issued in the mergers will be
quoted on The Nasdaq Stock Market under the ticker symbols "CMCSA," "CMCSK" and,
if applicable, "CMCSJ," respectively.
APPRAISAL RIGHTS (SEE PAGE [II-18])
Holders of Comcast Class A common stock and Comcast Class A Special common
stock are not entitled to appraisal rights in connection with the AT&T Comcast
transaction. Holders of AT&T common stock are not entitled to appraisal rights
in connection with the AT&T Comcast transaction.
I-18
AT&T CONSUMER SERVICES GROUP TRACKING STOCK
THE CONSUMER SERVICES CHARTER AMENDMENT PROPOSAL
AT&T shareholders are being asked to approve an amendment to the AT&T
charter to authorize AT&T to create a new class of AT&T common stock -- AT&T
Consumer Services Group tracking stock -- and certain related benefit plan
proposals. The Consumer Services charter amendment proposal requires the
affirmative vote of the holders of a majority of the outstanding shares of AT&T
common stock.
AT&T Consumer Services Group tracking stock is intended to reflect the
separate performance of AT&T Consumer Services Group, which includes the assets
and liabilities shown in the combined balance sheets of AT&T Consumer Services
Group. AT&T will include within AT&T Consumer Services Group all net income or
net losses generated by the assets that comprise AT&T Consumer Services Group
and all net proceeds from any disposition of these assets.
TERMS OF AT&T CONSUMER SERVICES GROUP TRACKING STOCK
The proposed Consumer Services charter amendment would authorize AT&T to
issue up to [ ] shares of AT&T Consumer Services Group tracking stock.
We describe some of the most significant terms of AT&T Consumer Services Group
tracking stock below, but we include a more detailed description of AT&T
Consumer Services Group tracking stock later in this document.
Voting Rights. Holders of AT&T Consumer Services Group tracking stock
initially will be entitled to [ ] of a vote per share. Except as
required by law or by any special voting rights of any other class or series of
AT&T stock, holders of shares of AT&T Consumer Services Group tracking stock
will vote together with all other AT&T shareholders on matters presented to AT&T
shareholders.
Dividends. Holders of AT&T Consumer Services Group tracking stock will be
entitled to dividends only to the extent declared by the AT&T Board. AT&T's
charter will define an available dividend amount with respect to AT&T Consumer
Services Group tracking stock. The available dividend amount is designed to be
equivalent to the amount that would legally be available for the payment of
dividends by AT&T Consumer Services Group if it were a separate legal entity.
Dividends on AT&T Consumer Services Group tracking stock may only be paid
up to the applicable available dividend amount and also will be subject to the
legal capacity of AT&T as a whole to pay dividends. Subject to these
limitations, and to the discretion of the AT&T Board, AT&T currently expects to
pay dividends on AT&T Consumer Services Group tracking stock equal in the
aggregate to two-thirds of the aggregate annual dividend AT&T currently pays on
AT&T common stock, and to pay dividends on AT&T common stock equal to one-third
of the aggregate annual current dividend.
Redemption. AT&T may (or, in some cases, is required to) redeem shares of
AT&T Consumer Services Group tracking stock under a number of circumstances:
- At any time, AT&T may redeem shares of AT&T Consumer Services Group
tracking stock for a comparable tracking stock of any company that owns
substantially all the assets and liabilities allocated to AT&T Consumer
Services Group at that time without the payment of any premium.
- At any time, AT&T may redeem the shares of AT&T Consumer Services Group
tracking stock for shares of AT&T common stock having a market value
equal to [ ]% of the market value of AT&T Consumer Services
Group tracking stock.
- At any time, AT&T may redeem shares of AT&T Consumer Services Group
tracking stock for shares of one or more subsidiaries that hold all
material assets and liabilities allocated to AT&T Consumer Services
Group, so long as the redemption is tax free to shareholders. This would
result in a split-off of AT&T Consumer Services Group.
- With some exceptions, in the event of certain dispositions of all or
substantially all the assets of AT&T Consumer
I-19
Services Group, AT&T is generally required to redeem shares of AT&T
Consumer Services Group tracking stock for (1) shares of AT&T common
stock or (2) cash and/or property in an amount equal to the net proceeds
of the disposition that are allocable to AT&T Consumer Services Group
tracking stock.
Liquidation. In the event of a liquidation of AT&T, holders of AT&T
Consumer Services Group tracking stock and AT&T common stock will be entitled to
share in the funds available for distribution to AT&T common shareholders in
proportion to the relative market capitalization of the outstanding shares of
each class of AT&T stock.
ISSUANCE OF AT&T CONSUMER SERVICES GROUP TRACKING STOCK
If AT&T shareholders approve the creation of AT&T Consumer Services Group
tracking stock, AT&T currently intends to distribute shares of AT&T Consumer
Services Group tracking stock as a dividend to holders of AT&T common stock
later this year. AT&T currently expects that the shares of AT&T Consumer
Services Group tracking stock AT&T issues as a dividend to existing AT&T
shareholders will be intended to reflect all of the financial performance and
economic value of AT&T Consumer Services Group. However, if these shares of AT&T
Consumer Services Group tracking stock only reflect a portion, the remaining
portion will be AT&T's retained portion of the financial performance and
economic value of AT&T Consumer Services Group, which would be reflected in AT&T
common stock. NOTWITHSTANDING AT&T'S CURRENT PLANS, THE AT&T BOARD COULD DECIDE
TO ISSUE THESE SHARES OF AT&T CONSUMER SERVICES GROUP TRACKING STOCK IN A
DIFFERENT MANNER OR AT A DIFFERENT TIME, OR COULD DECIDE NOT TO CREATE OR ISSUE
SHARES OF AT&T CONSUMER SERVICES GROUP TRACKING STOCK AT ALL, IF THE AT&T BOARD
DECIDES THAT A CHANGE IN AT&T'S PLANS IS APPROPRIATE. Approval of the Consumer
Services charter amendment proposal will give the AT&T Board wide discretion on
how to implement the Consumer Services charter amendment proposal. If you do not
want to give the AT&T Board this authority with respect to implementing the
Consumer Services charter amendment proposal, you should not vote for that
proposal.
Following the issuance of AT&T Consumer Services Group tracking stock, if
the AT&T Comcast transaction is completed, AT&T common stock will be intended to
reflect only the financial performance and economic value of AT&T Business
Services Group, together with AT&T's retained portion, if any, of the value of
AT&T Consumer Services Group.
AT&T expects to list AT&T Consumer Services Group tracking stock on a
national securities exchange or quotation system.
REASONS FOR AT&T CONSUMER SERVICES GROUP TRACKING STOCK
AT&T believes that issuance of AT&T Consumer Services Group tracking stock
will improve shareholder value by creating separate investment vehicles. AT&T
believes that AT&T Consumer Services Group tracking stock will:
- allow AT&T shareholders to view more clearly the performance of each of
AT&T Consumer Services Group and AT&T Business Services Group, and to
evaluate each of AT&T Consumer Services Group's and AT&T Business
Services Group's results against those of its competitors, and
- enable AT&T shareholders and other investors to invest in the securities
that fit their needs and investment profiles without the requirement of
simultaneously investing in other businesses, and permit the creation of
more effective management incentive and retention programs.
For additional reasons for, and more detail on the reasons for, AT&T
Consumer Services Group tracking stock, see "AT&T Consumer Services Group
Tracking Stock -- Reasons for AT&T Consumer Services Group Tracking Stock" on
page .
U.S. FEDERAL INCOME TAX CONSIDERATIONS
AT&T expects the distribution of AT&T Consumer Services Group tracking
stock to holders of AT&T common stock to be tax free to AT&T and to the holders
of AT&T common stock.
I-20
SELECTED FINANCIAL DATA OF COMCAST CORPORATION
The following summary consolidated financial data is derived from Comcast's
audited consolidated financial statements and Comcast's unaudited interim
consolidated financial statements. You should read the financial data presented
below in conjunction with the consolidated financial statements, accompanying
notes and management's discussion and analysis of results of operations and
financial condition of Comcast, which are incorporated by reference into this
prospectus.
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues......................... $ 6,850.1 $ 5,811.0 $ 8,218.6 $ 6,529.2 $ 5,419.0 $ 4,700.4 $ 3,813.8
Operating income (loss).......... (412.0) (46.8) (161.0) 664.0 557.1 466.6 465.9
Income (loss) from continuing
operations before extraordinary
items and cumulative effect of
accounting change.............. 546.6 1,261.5 2,045.1 780.9 1,007.7 (182.9) (6.4)
Gain (loss) from discontinued
operations(1).................. 335.8 (31.4) (25.6) (46.1)
Cumulative effect of accounting
change......................... 384.5
Extraordinary items.............. (1.5) (18.5) (23.6) (51.0) (4.2) (30.2) (1.0)
Net income (loss)................ 929.6 1,243.0 2,021.5 1,065.7 972.1 (238.7) (53.5)
BASIC EARNINGS (LOSS) FOR COMMON
STOCKHOLDERS PER COMMON
SHARE(2):
Income (loss) from continuing
operations before extraordinary
items and cumulative effect of
accounting change.............. $ .58 $ 1.40 $ 2.27 $ 1.00 $ 1.34 $ (.29) $ (.01)
Gain (loss) from discontinued
operations(1).................. .45 (.04) (.04) (.10)
Cumulative effect of accounting
change......................... .40
Extraordinary items.............. (.02) (.03) (.07) (.01) (.04)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................ $ .98 $ 1.38 $ 2.24 $ 1.38 $ 1.29 $ (.37) $ (.11)
========= ========= ========= ========= ========= ========= =========
DILUTED EARNINGS (LOSS) FOR
COMMON STOCKHOLDERS PER COMMON
SHARE(2):
Income (loss) from continuing
operations before extraordinary
items and cumulative effect of
accounting change.............. $ .56 $ 1.34 $ 2.16 $ .95 $ 1.25 $ (.29) $ (.01)
Gain (loss) from discontinued
operations(1).................. .41 (.03) (.04) (.10)
Cumulative effect of accounting
change......................... .40
Extraordinary items.............. (.02) (.03) (.06) (.01) (.04)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................ $ .96 $ 1.32 $ 2.13 $ 1.30 $ 1.21 $ (.37) $ (.11)
========= ========= ========= ========= ========= ========= =========
Cash dividends declared per
common share(2)................ $ .0467 $ .0467 $ .0467
I-21
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets..................... $38,781.4 $35,031.6 $35,744.5 $28,685.6 $14,710.5 $11,234.3 $10,660.4
Working capital (deficit)........ (804.7) 133.3 1,102.2 4,226.3 2,497.0 13.6 (12.6)
Long-term debt(3)................ 11,494.8 8,611.4 10,517.4 8,707.2 5,464.2 5,334.1 5,998.3
Total debt(3).................... 12,049.2 9,923.9 10,811.3 9,224.7 5,577.7 5,466.4 6,225.9
Stockholders' equity............. 14,838.8 14,622.3 14,086.4 10,341.3 3,815.3 1,646.5 551.6
Debt ratio(4).................... 44.8% 40.4% 43.4% 47.1% 59.4% 76.9% 91.9%
SUPPLEMENTARY FINANCIAL DATA:
Operating income before
depreciation and
amortization(5)................ $ 2,047.1 $ 1,795.4 $ 2,470.3 $ 1,880.0 $ 1,496.7 $ 1,293.1 $ 1,047.0
Net cash provided by (used in)(6)
Operating activities........... 1,254.7 814.7 1,219.3 1,249.4 1,067.7 844.6 644.5
Financing activities........... 1,213.4 (1,103.2) (271.4) 1,341.4 809.2 283.9 (88.0)
Investing activities........... (2,461.2) (57.8) (1,218.6) (2,539.3) (1,415.3) (1,045.8) (749.5)
Capital expenditures............. 1,691.2 1,056.0 1,636.8 893.8 898.9 795.5 554.4
---------------
(1) In July 1999, Comcast sold Comcast Cellular Corporation to SBC
Communications, Inc. Comcast Cellular is presented as a discontinued
operation for all periods presented.
(2) Adjusted for Comcast's two-for-one stock split in the form of a 100% stock
dividend in May 1999.
(3) Includes a $666.0 million adjustment to carrying value at December 31, 1999.
(4) Debt ratio reflects debt from continuing operations as a percent of capital
(debt plus stockholders' equity).
(5) Operating income before depreciation and amortization is commonly referred
to in Comcast's business as "operating cash flow." Operating cash flow is a
measure of a company's ability to generate cash to service its obligations,
including debt service obligations, and to finance capital and other
expenditures. In part due to the capital intensive nature of Comcast's
businesses and the resulting significant level of non-cash depreciation and
amortization expense, operating cash flow is frequently used as one of the
bases for comparing businesses in Comcast's industries, although Comcast's
measure of operating cash flow may not be comparable to similarly titled
measures of other companies. Operating cash flow is the primary basis used
by Comcast's management to measure the operating performance of its
businesses. Operating cash flow does not purport to represent net income or
net cash provided by operating activities, as those terms are defined under
generally accepted accounting principles, and should not be considered as an
alternative to those measurements as an indicator of Comcast's performance.
(6) This represents net cash provided by (used in) operating activities,
financing activities and investing activities as presented in Comcast's
consolidated statement of cash flows.
I-22
SELECTED FINANCIAL DATA OF AT&T CORP. AND SUBSIDIARIES
The consolidated income statement data below for the three years ended
December 31, 2000, and the consolidated balance sheet data at December 31, 2000
and 1999, were derived from audited consolidated financial statements. The
remaining data was derived from AT&T's unaudited consolidated financial
statements.
FOR THE NINE MONTHS
ENDED SEPT. 30, FOR THE YEARS ENDED DECEMBER 31,
------------------- ----------------------------------------------------
2001 2000 2000(1) 1999(2) 1998 1997 1996
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
RESULTS OF OPERATIONS AND EARNINGS
PER SHARE:
Revenue............................ $ 39,964 $ 41,623 $ 55,533 $ 54,973 $ 47,817 $ 46,910 $ 46,442
Operating income................... 3,543 8,394 4,228 11,458 7,632 6,835 8,341
(Loss) income from continuing
operations before cumulative
effect of accounting change...... (5,451) 7,581 4,133 3,861 5,052 4,088 5,064
(LOSS) INCOME FROM CONTINUING
OPERATIONS BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE:
AT&T Common Stock Group:
(Loss) income.................... (2,740) 4,616 2,645 5,883 5,052 4,088 5,064
(Loss) earnings per basic
share.......................... (0.94) 1.35 0.76 1.91 1.89 1.53 1.92
(Loss) earnings per diluted
share.......................... (0.94) 1.34 0.75 1.87 1.87 1.53 1.92
Dividends declared per share..... 0.1125 0.66 0.6975 0.88 0.88 0.88 0.88
Liberty Media Group(3):
(Loss) income.................... (2,711) 2,965 1,488 (2,022) -- -- --
(Loss) earnings per basic and
diluted share.................. (1.05) 1.15 0.58 (0.80) -- -- --
ASSETS AND CAPITAL:
Property, plant and equipment,
net.............................. $ 40,748 $ 41,269 $ 33,366 $ 21,780 $ 19,177 $ 16,871
Total assets -- continuing
operations....................... 160,049 207,136 146,094 40,134 41,029 38,229
Total assets....................... 160,049 234,360 163,457 54,185 55,797 52,265
Long-term debt..................... 30,007 33,089 23,214 5,555 7,840 8,861
Total debt......................... 48,456 64,927 35,694 6,638 11,895 11,334
Mandatorily redeemable preferred
securities....................... 2,376 2,380 1,626 -- -- --
Shareowners' equity................ 52,198 103,198 78,927 25,522 23,678 21,092
Debt ratio(4)...................... 45.1% 57.2% 54.3% 36.7% 57.2% 61.6%
Gross capital expenditures......... 5,993 10,462 11,194 6,871 6,065 5,263
---------------
(1) AT&T Common Stock Group continuing operations results exclude Liberty Media
Group (LMG). In addition, on June 15, 2000, AT&T completed the acquisition
of MediaOne Group, Inc.
(2) In connection with the March 9, 1999, merger with Tele-Communications,
Inc., AT&T issued a separate tracking stock for LMG. LMG was accounted for
as an equity investment prior to its split-off on August 10, 2001.
(3) LMG earnings per share amounts and stock prices have been restated to
reflect the June 2000 two-for-one stock split. No dividends have been
declared for LMG tracking stock.
(4) Debt ratio reflects debt from continuing operations as a percent of total
capital (debt plus equity, excluding LMG and AT&T Wireless Group). For
purposes of this calculation, equity includes convertible quarterly trust
preferred securities as well as redeemable preferred stock of subsidiary.
I-23
SELECTED FINANCIAL DATA OF AT&T BROADBAND GROUP
Presented in the table below is selected historical financial data of AT&T
Broadband Group. AT&T Broadband Group is an integrated business of AT&T and not
a stand-alone entity. AT&T Broadband Group represents the assets, liabilities
and businesses that AT&T will assign and transfer to AT&T Broadband Corp., a
newly formed holding company for AT&T's broadband business, in connection with
the AT&T Comcast transaction. AT&T Broadband Group consists primarily of the
assets, liabilities and business of AT&T Broadband, LLC (formerly TCI), acquired
by AT&T on March 9, 1999 in the TCI merger, and MediaOne Group, Inc., acquired
by AT&T on June 15, 2000 in the MediaOne acquisition.
The following information was derived from the unaudited combined financial
statements of AT&T Broadband Group at and for each of the nine months ended
September 30, 2001 and 2000 and the audited combined financial statements for
the year ended December 31, 2000 and the ten months ended December 31, 1999.
The financial data presented below is not necessarily comparable from
period to period as a result of several transactions, including the acquisition
and dispositions of cable systems, primarily the TCI and MediaOne acquisitions.
For this and other reasons, you should read the selected historical financial
data provided below in conjunction with the combined financial statements and
accompanying notes beginning on page and the discussion under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page .
TEN MONTHS
NINE MONTHS ENDED YEAR ENDED ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
------------------- ------------ ------------
2001 2000 2000(1) 1999(2)
-------- -------- ------------ ------------
(UNAUDITED)
(DOLLARS IN MILLIONS)
INCOME STATEMENT DATA:
Revenue..................................................... $ 7,756 $ 5,766 $ 8,445 $ 5,080
Operating loss.............................................. (3,567) (1,132) (8,656) (1,177)
Losses from continuing operations........................... (2,988) (1,306) (5,370) (2,200)
BALANCE SHEET DATA:
Total assets................................................ $104,261 $127,669 $117,534 $58,228
Total debt.................................................. $ 23,274 $ 28,000 $ 28,420 $14,900
Minority interest........................................... $ 3,319 $ 8,594 $ 4,421 $ 2,327
Company-Obligated Convertible Quarterly Income Preferred
Securities................................................ $ 4,718 $ 4,708 $ 4,710 $ 4,700
---------------
(1) Effective June 15, 2000, AT&T acquired MediaOne Group, Inc. which is
attributed to AT&T Broadband Group. The acquisition was accounted for under
the purchase method of accounting.
(2) Effective March 1, 1999, AT&T acquired TCI which is attributed to AT&T
Broadband Group as discussed above. The acquisition was accounted for under
the purchase method of accounting.
I-24
SELECTED PRO FORMA FINANCIAL DATA
This information is only a summary and you should read it together with the
financial information we included elsewhere in this proxy statement.
AT&T COMCAST
The following unaudited pro forma combined condensed financial data set
forth below for AT&T Comcast gives effect to the AT&T Comcast transaction, as if
such transaction had been completed on January 1, 2000 for income statement
purposes and at September 30, 2001 for balance sheet purposes. The unaudited
selected pro forma financial data does not necessarily represent what AT&T
Comcast's financial position or results of operations would have been had the
AT&T Comcast transaction occurred on such dates.
We have included detailed unaudited pro forma combined condensed financial
statements in Chapter 3 of this document.
SUMMARY PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(Unaudited)
(Dollars in Millions, Except Per Share Amounts)
AT OR FOR THE
NINE MONTHS ENDED FOR THE YEAR
SEPTEMBER 30, ENDED DECEMBER 31,
----------------- ------------------
2001 2000
----------------- ------------------
INCOME STATEMENT DATA:
Revenue.................................................... $ 14,509.4 $17,923.5
Operating loss............................................. (2,540.1) (6,680.2)
Loss for common stockholders before extraordinary items and
cumulative effect of accounting change................... (1,813.8) (1,104.0)
Weighted average AT&T Comcast common shares................ 2,248.0 2,189.4
Loss per AT&T Comcast common share......................... (0.81) (0.50)
BALANCE SHEET DATA:
Total assets............................................... $141,200.9
Long-term debt............................................. 30,573.5
Total stockholders' equity................................. 62,098.4
I-25
SELECTED PRO FORMA FINANCIAL DATA
AT&T
The unaudited pro forma combined condensed financial data set forth below
for AT&T give effect to:
- the Liberty Media Group distribution
- the AT&T Broadband Group distribution
as if such events had been completed on January 1, 1999 for income statement
purposes, and at September 30, 2001 for balance sheet purposes. The unaudited
selected pro forma financial information does not necessarily represent what
AT&T's financial position or results of operations would have been had the AT&T
Broadband distribution or the Liberty Media Group distribution occurred on such
dates.
We have included detailed unaudited pro forma financial statements in Annex
L at the end of this document.
SUMMARY PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(Unaudited)
(Dollars in Millions, Except Per Share Amounts)
AT AND FOR THE AT AND FOR THE YEARS
NINE MONTHS ENDED ENDED DECEMBER 31,
SEPTEMBER 30, ---------------------
2001 2000 1999
----------------- --------- ---------
INCOME STATEMENT DATA:
Revenue.................................................. $32,391 $47,204 $49,925
Operating income......................................... 7,110 12,884 12,635
(Loss) income from continuing operations -- attributable
to AT&T common stock group............................. (2,646) 3,903 3,450
Weighted average AT&T common shares -- basic............. 3,717 3,526 3,115
(Loss) earnings per AT&T common share -- basic........... (0.71) 1.11 1.11
Weighted average AT&T common shares -- diluted........... 3,717 3,545 3,152
(Loss) earnings per AT&T common share -- diluted......... (0.71) 1.10 1.09
Cash dividends declared per AT&T common share............ $0.1125 $0.6975 $ 0.88
BALANCE SHEET DATA:
Total assets............................................. $55,831
Long-term debt........................................... 12,595
Total shareowners' equity................................ 8,517
I-26
UNAUDITED COMPARATIVE PER SHARE DATA
In the table below, we provide you with historical per share information
for Comcast, pro forma per share information for AT&T Comcast and historical and
pro forma equivalent per share information for AT&T Broadband Group as of and
for the nine months ended September 30, 2001 and as of and for the year ended
December 31, 2000. We have assumed, for purposes of the AT&T Comcast pro forma
financial information, that the AT&T Comcast transaction had been completed on
January 1, 2000 for income statement purposes, and that the AT&T Comcast
transaction had been completed on September 30, 2001 for balance sheet purposes.
In addition, the AT&T Comcast pro forma income statement information for the
year ended December 31, 2000 assumes the AT&T and Media One merger occurred on
January 1, 2000. Comcast did not pay dividends during the nine months ended
September 30, 2001 or during the year ended December 31, 2000; therefore no
historical or pro forma equivalent per share information is presented.
At September 30, 2001 and December 31, 2000, AT&T Broadband Group did not
have any shares outstanding as it represents an integrated business of AT&T. As
a step in the AT&T Comcast transaction, AT&T will spin off AT&T Broadband to its
shareholders by distributing one share of AT&T Broadband stock for each share of
AT&T common stock, NYSE symbol "T," outstanding. The following comparative per
share information assumes that 3,536 million shares were outstanding for all
periods which represents the number of shares of AT&T common stock, NYSE symbol
"T," outstanding on September 30, 2001. This also assumes that the AT&T shares
held by Comcast are included in the number of shares of AT&T common stock
outstanding.
The AT&T Broadband Group pro forma equivalent per share data presents AT&T
Comcast pro forma per share data multiplied by an exchange ratio of 0.34, which
represents the approximate AT&T Broadband exchange ratio calculated as if
determined as of the date of the execution of the merger agreement, assuming the
AT&T shares held by Comcast are included in the number of shares of AT&T common
stock outstanding. Assuming Comcast retains its AT&T shares and converts them
into exchangeable preferred stock of AT&T as contemplated by the merger
agreement, the exchange ratio would be approximately 0.35 as of the date of the
execution of the merger agreement.
It is important that when you read this information, you read it along with
the financial statements and accompanying notes of Comcast, AT&T and AT&T
Broadband Group included elsewhere in this document. You should not rely on the
unaudited pro forma financial information as an indication of the results of
operations or financial position that would have been achieved if the AT&T
Comcast transaction or the Media One merger had taken place on the dates
indicated or of the results of operations or financial position of AT&T Comcast
after the completion of the AT&T Comcast transaction.
AT&T BROADBAND
COMCAST AT&T COMCAST AT&T BROADBAND GROUP PRO FORMA
HISTORICAL PRO FORMA GROUP HISTORICAL EQUIVALENT
---------- ------------ ---------------- ---------------
Book Value per common share:
September 30, 2001.................. $ 15.70 $ 27.67 $12.27 $ 9.41
December 31, 2000................... $ 15.00 -- 12.25 --
Net income (loss) before extraordinary
items and cumulative effect of
accounting change per common
share -- basic:
For the nine months ended September
30, 2001......................... $ 0.58 $ (0.81) $(0.85) $(0.28)
For the year ended December 31,
2000............................. 2.27 (0.50) (1.52) (0.17)
Net income (loss) before extraordinary
items and cumulative effect of
accounting change per common
share -- diluted:
For the nine months ended September
30, 2001......................... $ 0.56 $ (0.81) $(0.85) $(0.28)
For the year ended December 31,
2000............................. 2.16 (0.50) (1.52) (0.17)
I-27
COMPARATIVE MARKET PRICE INFORMATION
Shares of Comcast Class A Special common stock are listed on The Nasdaq
Stock Market under the symbol "CMCSK" and shares of Comcast Class A common stock
are listed on The Nasdaq Stock Market under the symbol "CMCSA." The Comcast
Class B common stock is not publicly traded. AT&T Broadband Group has been an
integrated business of AT&T and its common stock is not publicly traded. AT&T
Broadband Group did not pay any dividends on its capital stock during the
periods indicated in the table below. The following table sets forth, for the
periods indicated, the high and low sales prices paid per share of Comcast Class
A Special common stock and Comcast Class A common stock, as furnished by The
Nasdaq Stock Market, and dividends paid on such classes of common stock (as
adjusted for Comcast's two-for-one stock split in the form of a 100% stock
dividend in May 1999). For current price information, you should consult
publicly available sources.
COMCAST CLASS A SPECIAL COMCAST CLASS A
COMMON STOCK COMMON STOCK
--------------------------- ---------------------------
DIVIDENDS DIVIDENDS
CALENDAR PERIOD HIGH LOW PAID HIGH LOW PAID
--------------- ------ ------ --------- ------ ------ ---------
1998
Fourth Quarter....................... $29.50 $20.28 $.0117 $28.94 $20.13 $.0117
1999
First Quarter........................ $38.56 $29.63 $.0117 $37.34 $28.94 $.0117
Second Quarter....................... 42.00 29.44 39.69 28.38
Third Quarter........................ 41.56 32.63 38.56 29.44
Fourth Quarter....................... 56.50 35.69 53.13 32.06
2000
First Quarter........................ $54.56 $38.31 $51.44 $36.25
Second Quarter....................... 44.19 29.75 41.75 29.75
Third Quarter........................ 41.06 31.06 40.69 30.75
Fourth Quarter....................... 43.94 34.00 43.94 33.88
2001
First Quarter........................ $45.88 $38.69 $45.25 $38.06
Second Quarter....................... 45.50 39.50 44.75 38.88
Third Quarter........................ 43.30 32.51 42.70 32.79
Fourth Quarter....................... 40.18 35.19 40.06 34.95
2002
First Quarter (Through February
[ ]).............................
The following table sets forth the high and low sales prices per share of
Comcast Class A Special common stock and Comcast Class A common stock, as
furnished by The Nasdaq Stock Market, on July 6, 2001, the last full trading day
before Comcast publicly announced its proposal to AT&T to acquire AT&T's
broadband business, on December 19, 2001, the last full trading day prior to the
public announcement of the AT&T Comcast transaction, and on [ ],
2002, the last trading day for which this information could be calculated prior
to the date of this document:
COMCAST CLASS A
SPECIAL COMMON COMCAST CLASS A
STOCK COMMON STOCK
--------------- ---------------
HIGH LOW HIGH LOW
------ ------ ------ ------
July 6, 2000............................................... $42.79 $42.08 $42.09 $41.46
December 19, 2001.......................................... 39.15 37.75 39.13 37.80
[ ], 2002.......................................
I-28
RISK FACTORS
RISK FACTORS RELATING TO THE AT&T COMCAST TRANSACTION
In addition to the other information contained in or incorporated by
reference in this document, you should carefully consider the following risk
factors in deciding whether to vote for approval and adoption of the merger
agreement and the transactions contemplated by the merger agreement.
Merger Consideration Subject to Adjustment Only in Limited
Circumstances. Upon completion of the mergers, all shares of Comcast common
stock and AT&T Broadband common stock will be converted into shares of AT&T
Comcast common stock. Except as described in the next paragraph, the exchange
ratios applicable to the mergers are fixed, and the per share number of shares
of AT&T Comcast common stock to be issued to Comcast shareholders in the Comcast
merger and to AT&T Broadband shareholders in the AT&T Broadband merger will not
be adjusted to reflect the economic performance of either Comcast or AT&T
Broadband between the date of the execution of the merger agreement and the
completion of the mergers. Accordingly, a Comcast shareholder or AT&T Broadband
shareholder will not receive any additional shares of AT&T Comcast common stock
in the mergers if the economic performance of its company improves relative to
the economic performance of the other company between the date of the execution
of the merger agreement and the completion of the mergers.
AT&T Comcast will issue up to 1.235 billion shares of AT&T Comcast common
stock to holders of AT&T Broadband common stock in the AT&T Broadband merger
(excluding 115 million shares to be issued to an affiliate of Microsoft in the
QUIPS exchange transaction). The number of shares of AT&T Comcast common stock
that AT&T Comcast will issue in the AT&T Broadband merger to each holder of AT&T
Broadband common stock in exchange for each of such holder's shares of AT&T
Broadband common stock (the "AT&T Broadband exchange ratio") will be calculated
pursuant to the formula included in "Description of the AT&T Comcast Transaction
Agreements -- The Merger Agreement -- Calculation of the AT&T Broadband Exchange
Ratio." If the AT&T Broadband exchange ratio were determined as of the date of
this document, the AT&T Broadband exchange ratio would be approximately ____.
However, since the AT&T Broadband exchange ratio is calculated by reference to
the number of shares of AT&T Broadband common stock that is outstanding at the
completion of the AT&T Comcast transaction and the cost to AT&T Comcast of
assuming certain stock options and stock appreciation rights that are held by
employees of AT&T Broadband and former employees of AT&T and AT&T Broadband, the
exchange ratio will change if any of these variables change between the date of
this document and the date on which the AT&T Broadband merger occurs.
Accordingly, holders of AT&T Broadband common stock may receive less than
approximately ____ of a share of AT&T Comcast common stock in exchange for each
of their shares of AT&T Broadband common stock in the AT&T Broadband merger.
AT&T Comcast May Fail to Realize the Anticipated Benefits of the AT&T
Comcast Transaction. The AT&T Comcast transaction will combine two companies
that have previously operated separately. Comcast and AT&T Broadband expect to
realize cost savings and other financial and operating benefits as a result of
the AT&T Comcast transaction. However, Comcast and AT&T Broadband cannot predict
with certainty when these cost savings and benefits will occur, or the extent to
which they actually will be achieved. There are a large number of systems that
must be integrated, including management information, purchasing, accounting and
finance, sales, billing, payroll and benefits and regulatory compliance. The
integration of Comcast and AT&T Broadband will also require substantial
attention from management. The diversion of management attention and any
difficulties associated with integrating Comcast and AT&T Broadband could have a
material adverse effect on AT&T Comcast's operating results and on the value of
AT&T Comcast common stock.
Regulatory Agencies May Impose Conditions on Approvals Relating to the
Mergers. Before the AT&T Comcast transaction may be completed, various
approvals must be obtained from, or notifications submitted to, among others,
the Antitrust Division of the U.S. Department of Justice, the Federal Trade
Commission, the FCC and numerous state and local authorities. These governmental
entities may attempt to condition their approval of the AT&T Comcast
transaction, or of the transfer to AT&T Comcast of
I-29
licenses and other entitlements, on the imposition of certain conditions that
could have a material adverse effect on AT&T Comcast's operating results and on
the value of AT&T Comcast common stock.
Comcast and AT&T have agreed to use their best efforts to obtain all
regulatory approvals that are necessary or advisable in connection with the AT&T
Comcast transaction. In addition, Comcast and AT&T have also agreed to take all
actions necessary to obtain termination of the applicable waiting periods under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 relating to the AT&T
Comcast transaction and to obtain all consents of the FCC required to complete
the AT&T Comcast transaction.
AT&T Comcast Will Have to Abide by Restrictions to Preserve the Tax
Treatment of the AT&T Comcast Transaction. Because of the limitations imposed
by Section 355(e) of the Internal Revenue Code of 1986, as amended, or the
"Code," and by the separation and distribution agreement, the ability of AT&T
Comcast and AT&T Broadband to engage in certain acquisitions, redeem stock or
issue equity securities will be limited for a period of 25 months following the
AT&T Broadband spin-off. See "Description of the AT&T Comcast Transaction
Agreements -- The Separation and Distribution Agreement -- Post-Spin-off
Transactions." These restrictions may limit the ability of AT&T Comcast to
engage in certain business transactions that otherwise might be advantageous to
AT&T Comcast shareholders.
AT&T Comcast and its Subsidiaries May Have Difficulty Obtaining Financing
on Satisfactory Terms. To complete the AT&T Comcast transaction, Comcast will
seek to arrange financing to repay any indebtedness owed by AT&T Broadband and
its subsidiaries to AT&T and its subsidiaries and to provide appropriate cash
reserves to fund the operations of AT&T Broadband and its subsidiaries after the
completion of the AT&T Comcast transaction. As of September 30, 2001, the amount
of indebtedness owed by AT&T Broadband to AT&T was $5.39 billion. Absent
additional deleveraging activities, it is expected that this figure will grow to
fund AT&T Broadband capital expenditures, operations, and third party debt
maturities and redemptions through completion of the AT&T Comcast transaction.
In addition, AT&T Comcast and its subsidiaries will require financing to
refinance certain debt securities of AT&T Broadband and its subsidiaries after
the completion of the AT&T Comcast transaction. See "Description of the AT&T
Comcast Transaction Agreements -- The Merger Agreement -- Covenants -- Interim
Finance Committee." The amount of the required financing may significantly
increase in the event that the QUIPS exchange transaction does not occur and
Microsoft does not consent to the transfer of the QUIPS to AT&T Broadband. See
"Description of the AT&T Comcast Transaction Agreements -- The Merger
Agreement -- Covenants -- QUIPS Failure."
Comcast or AT&T Comcast or their subsidiaries, including AT&T Broadband,
may have difficulty obtaining the financing described in the preceding paragraph
on terms that are acceptable to it, if at all. If Comcast or AT&T Comcast or
their subsidiaries fail to obtain the necessary financing, such failure could
have a material adverse effect on the business and financial condition of AT&T
Comcast and its subsidiaries. If Comcast or AT&T Comcast or their subsidiaries
are unable to obtain the necessary financing, they may be forced to consider
other alternatives to raise the necessary funds, including sales of assets.
AT&T Comcast and its Subsidiaries May Not Obtain Investment-Grade Credit
Ratings. After completion of the AT&T Comcast transaction, AT&T Comcast and its
subsidiaries will have a significant amount of debt and debt-like obligations.
Although this amount will be reduced by $5 billion if the QUIPS exchange
transaction occurs, the credit ratings of AT&T Comcast and its subsidiaries
after completion of the AT&T Comcast transaction may be lower than the existing
credit ratings of Comcast, AT&T's principal broadband subsidiaries and their
respective subsidiaries. In addition, it is possible that neither AT&T Comcast
nor any of its subsidiaries that issue debt may obtain an investment-grade
credit rating. The likelihood of lower or non-investment-grade credit ratings
for AT&T Comcast and its subsidiaries after completion of the AT&T Comcast
transaction will be increased if the QUIPS exchange transaction, which is not a
condition to the completion of the AT&T Comcast transaction, does not occur.
Differences in credit ratings would affect the interest rates charged on
financings, as well as the amounts of indebtedness, types of financing
structures and debt markets that may be available to AT&T Comcast and
I-30
its subsidiaries. In addition, the failure of certain subsidiaries of AT&T
Comcast to maintain certain credit ratings during the period that is 90 days
before and after the completion of the AT&T Comcast transaction could trigger
put rights on the part of holders of up to $5.3 billion of debt as of the date
of this document, which would require AT&T Comcast to obtain additional
financing. Accordingly, a downgrade in the existing credit ratings of Comcast,
AT&T's principal broadband subsidiaries and their respective subsidiaries or the
failure of AT&T Comcast and its subsidiaries to obtain investment-grade credit
ratings, in each case upon completion of the AT&T Comcast transaction, could
have a material adverse effect on AT&T Comcast's operating results and on the
value of AT&T Comcast common stock.
The Voting Power of AT&T Comcast's Principal Shareholder May Discourage
Third Party Acquisitions of AT&T Comcast at a Premium. After completion of the
AT&T Comcast transaction, Brian L. Roberts will have significant control over
the operations of AT&T Comcast through his control of Sural LLC, which as a
result of its ownership of all outstanding shares of AT&T Comcast Class B common
stock, will hold a nondilutable 33 1/3% of the combined voting power of AT&T
Comcast stock and will also have separate approval rights over certain material
transactions involving AT&T Comcast. See "Certain Legal
Information -- Description of AT&T Comcast Capital Stock -- AT&T Comcast Class B
Common Stock." In addition, upon completion of the AT&T Comcast transaction,
Brian L. Roberts will be the CEO and President of AT&T Comcast and will,
together with the Chairman of the Board of AT&T Comcast, comprise the Office of
the Chairman, AT&T Comcast's principal executive deliberative body. The extent
of Brian L. Roberts's control over AT&T Comcast may have the effect of
discouraging offers to acquire AT&T Comcast and may preclude holders of AT&T
Comcast common stock from receiving any premium above market price for their
shares that may be offered in connection with any attempt to acquire control of
AT&T Comcast.
The Historical Financial Information of AT&T Broadband Group After the AT&T
Broadband Spin-off May Not Be Representative of its Results Without the Other
AT&T Businesses and Therefore Is Not a Reliable Indicator of Its Historical or
Future Results. AT&T Broadband Group is currently a fully integrated business
unit of AT&T; consequently, the financial information of AT&T Broadband Group
included in this document has been derived from the consolidated financial
statements and accounting records of AT&T and reflects certain assumptions and
allocations. The financial position, results of operations and cash flows of
AT&T Broadband Group without the other AT&T businesses could differ from those
that would have resulted had AT&T Broadband Group operated with the other AT&T
businesses.
Shares of AT&T Comcast Issued in the AT&T Broadband Merger May Not Be
Included in the Standard & Poor's 500 Index. In the merger agreement, each of
AT&T, Comcast and AT&T Comcast agreed to use its reasonable best efforts to have
the shares issued to holders of AT&T Broadband common stock in the AT&T
Broadband merger included in the Standard & Poor's 500 Index. However, the
decision as to whether or not these securities are included in the index will be
made by Standard & Poor's, Inc. and they may decide not to include them. If
these securities are not included in that index, there could be downward
pressure on the trading prices of those securities. Although in some cases AT&T
Comcast will issue additional shares to former shareholders of AT&T Broadband if
there is a trading disparity between the shares issued to former shareholders of
Comcast and shares issued in the AT&T Broadband merger, the number of shares
AT&T Comcast is required to issue is limited and is calculated as of a set time
and as a result may not adequately compensate shareholders for any downward
price pressure resulting from the failure of these securities to be included in
that index. For more information, see "Description of the Transaction
Agreements -- The Merger Agreement -- Merger Consideration -- Potential
Additional Payments."
Atypical Governance Arrangements. In connection with the AT&T Comcast
transaction, AT&T Comcast will implement a number of governance arrangements
that are atypical for a large, publicly held corporation. A number of these
arrangements relate to the election of the AT&T Comcast Board. The term of the
AT&T Comcast Board upon completion of the AT&T Comcast transaction will not
expire until the 2005 annual meeting of AT&T Comcast shareholders. Since AT&T
Comcast shareholders will not have the right to call special meetings of
shareholders or act by written consent and AT&T Comcast
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directors will be able to be removed only for cause, AT&T Comcast shareholders
will not be able to replace the initial AT&T Comcast Board members prior to that
meeting. After the 2005 annual meeting of AT&T Comcast shareholders, AT&T
Comcast directors will be elected annually. Even then, however, it will be
difficult for an AT&T Comcast shareholder (other than Sural LLC or a successor
entity controlled by Brian L. Roberts) to elect a slate of directors of its own
choosing to the AT&T Comcast Board. Brian L. Roberts, through his control of
Sural LLC or a successor entity, will hold a 33 1/3% nondilutable voting
interest in AT&T Comcast stock. In addition, AT&T Comcast will adopt a
shareholder rights plan upon completion of the AT&T Comcast transaction that
will prevent any holder of AT&T Comcast stock (other than any holder of AT&T
Comcast Class B common stock or any of such holder's affiliates) from acquiring
AT&T Comcast stock representing more than 10% of AT&T Comcast's voting power
without the approval of the AT&T Comcast Board.
In addition to the governance arrangements relating to the AT&T Comcast
Board, Comcast and AT&T have agreed to a number of governance arrangements which
will make it difficult to replace the senior management of AT&T Comcast. Upon
completion of the AT&T Comcast transaction, C. Michael Armstrong, Chairman of
the Board and CEO of AT&T, will be the Chairman of the Board of AT&T Comcast and
Brian L. Roberts, President of Comcast, will be the CEO and President of AT&T
Comcast. After the 2005 annual meeting of AT&T Comcast shareholders, Brian L.
Roberts will also be the Chairman of the Board of AT&T Comcast. Prior to the
fifth anniversary of the 2005 annual meeting of AT&T Comcast shareholders,
unless Brian L. Roberts ceases to be Chairman of the Board or CEO of AT&T
Comcast prior to such time, the Chairman of the Board and CEO of AT&T Comcast
will be able to be removed only with the approval of at least 75% of the entire
AT&T Comcast Board. This supermajority removal requirement will make it unlikely
that C. Michael Armstrong or Brian L. Roberts will be removed from their
management positions.
For a more detailed description of these and other AT&T Comcast governance
arrangements that will be in effect upon completion of the AT&T Comcast
transaction, see "Description of Governance Arrangements Following the AT&T
Comcast Transaction."
Directors of Comcast and AT&T Have Potential Conflicts of Interest. A
number of directors of Comcast and AT&T who recommend that you vote in favor of
the AT&T Comcast transaction have interests in the AT&T Comcast transaction that
are different from, or in addition to, yours. These interests include the
potential for positions as directors or executive officers of AT&T Comcast,
funding of benefits in trust, employment agreements with AT&T Comcast,
acceleration of vesting of AT&T Broadband equity awards as a result of the AT&T
Comcast transaction and the right to continued indemnification and insurance
coverage by AT&T Comcast for acts or omissions occurring prior to the AT&T
Comcast transaction. These interests may have influenced these directors in
making their recommendation that you vote in favor of the AT&T Comcast
transaction. For a description of these interests, see "Employee Benefits
Matters -- Interests of Directors and Officers in the AT&T Comcast Transaction."
New Trading Market. As AT&T and Comcast complete the AT&T Comcast
transaction, shares of AT&T Comcast common stock will begin trading publicly for
the first time. Until an orderly trading market for AT&T Comcast common stock
develops, and after that time as well, there may be significant fluctuations in
price.
Dividends. AT&T shareholders have historically received quarterly
dividends from AT&T. AT&T Comcast does not currently intend to pay dividends
after completion of the AT&T Comcast transaction.
Additional Risk Factors. For a description of additional risk factors, see
"The AT&T Comcast Transaction -- Comcast's Reasons for the AT&T Comcast
Transaction" and "The AT&T Comcast Transaction -- AT&T's Reasons for the AT&T
Comcast Transaction."
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RISK FACTORS FOR AT&T RELATING TO THE AT&T COMCAST TRANSACTION, INCLUDING THE
PROPOSED AT&T BROADBAND SPIN-OFF
Holders of shares of AT&T common stock should also consider the following
risk factors in deciding whether to vote for approval and adoption of the merger
agreement and the transactions contemplated by the merger agreement, including
the AT&T Broadband spin-off.
The AT&T Broadband Spin-off May Materially Adversely Impact AT&T's
Competitive Position. If the AT&T Comcast transaction is completed, AT&T and
AT&T Comcast will compete in some markets. Competition between AT&T's and AT&T
Comcast's business units in overlapping markets, including consumer markets
where cable, telephone and digital subscriber lines, or DSL, solutions may be
available at the same time, could result in material downward price pressure on
product or service offerings which could materially adversely impact the
companies. In addition, any incremental costs associated with operating as
separate entities may materially adversely affect the different businesses and
companies and their competitive positions. Synergies resulting from cooperation
and joint ownership among AT&T's businesses may be lost due to the proposed
transactions.
AT&T Will Have to Abide By Potentially Significant Restrictions to Preserve
the Tax Treatment of the AT&T Comcast Transaction. Because of the restrictions
imposed by Section 355(e) of the Code and by the separation and distribution
agreement, the ability of AT&T to engage in certain acquisitions, redeem stock
or issue equity securities will be limited for a period of 25 months following
the AT&T Broadband spin-off. These restrictions may limit the ability of AT&T to
engage in certain business transactions that otherwise might be advantageous to
AT&T shareholders.
The AT&T Comcast Transaction is Conditioned on AT&T Obtaining Consents
Under a Substantial Amount of Indebtedness, Which May Involve Material Costs and
May Be Difficult to Complete. The AT&T Comcast transaction is conditioned on
AT&T's obtaining Note Consents (as described below), or having defeased,
purchased or acquired debt, in respect of series representing at least 90% in
aggregate principal amount of the securities issued under the AT&T indenture,
dated September 7, 1990, and outstanding as of December 19, 2001. At December
19, 2001, there was approximately $12.7 billion in aggregate principal amount
which was subject to this condition. "Note Consent" means, with respect to any
series of securities issued under the indenture, the consent to the transactions
contemplated by the separation and distribution agreement of the holders of at
least a majority in aggregate principal amount of such series to the AT&T
Broadband spin-off under a substantial portion of AT&T's long-term indebtedness.
AT&T may seek to obtain these consents through a variety of measures. Although
AT&T Comcast has agreed to bear a portion of the related costs, the consent
process and any related transaction may result in increased costs for, and
additional covenants imposed upon, AT&T. In addition, the consent process itself
involves a number of uncertainties and AT&T may not be able to complete it on a
timely basis on commercially reasonable terms.
If the AT&T Comcast Transaction is Completed, AT&T Will Need to Obtain
Financing on a Stand-Alone Basis. Following the AT&T Comcast transaction, AT&T
will have to raise financing with the support of a reduced pool of less
diversified assets, and AT&T may not be able to secure adequate debt or equity
financing on desirable terms. The cost to AT&T of financing without AT&T
Broadband Group may be materially higher than the cost of financing with AT&T
Broadband Group as part of AT&T.
AT&T's current long-term/short-term debt ratings are A-3/P-2 by Moody's,
BBB+/A-2 by Standard & Poor's, and A-/F-2 by Fitch. All long-term ratings are
under further review for further downgrade. The short-term ratings are not under
review. The credit rating of AT&T following the AT&T Comcast transaction may be
different than the historical ratings of AT&T and different from what it would
be without the AT&T Comcast transaction. Differences in credit ratings affect
the interest rate charged on financings, as well as the amounts of indebtedness,
types of financing structures and debt markets that may be available to AT&T
following the AT&T Comcast transaction. AT&T may not be able to raise the
capital it requires on favorable terms following the AT&T Comcast transaction.
I-33
The Historical Financial Information of AT&T Excluding AT&T Broadband Group
May Not Be Representative of its Results Without AT&T Broadband Group and
therefore is Not a Reliable Indicator of its Historical or Future Results. AT&T
currently includes AT&T Broadband Group as a fully integrated business unit of
AT&T; consequently the financial information of AT&T without AT&T Broadband
Group included in this document has been derived from the consolidated financial
statements and accounting records of AT&T and reflects certain assumptions and
allocations. The financial position, results of operations and cash flows of
AT&T without AT&T Broadband Group could differ from those that would have
resulted had AT&T operated without AT&T Broadband Group or as an entity
independent of AT&T Broadband Group.
AT&T Could Incur Material U.S. Federal Income Tax Liabilities in Connection
with the AT&T Comcast Transaction. AT&T may incur material U.S. federal income
tax liabilities as a result of certain issuances of shares or change of control
transactions with respect to AT&T Comcast, Liberty Media Corporation or AT&T
Wireless Services, Inc. Under Section 355(e) of the Code, a split-off/spin-off
that is otherwise tax free may be taxable to the distributing company (i.e.,
AT&T) if, as a result of certain transactions occurring generally within a
two-year period after the split-off/spin-off, non-historic shareholders acquire
50% or more of the distributing company or the spun-off company. It is possible
that transactions with respect to AT&T could cause all three split-offs or
spin-offs to be taxable to AT&T.
Under separate intercompany agreements between AT&T and each of Liberty
Media Corporation, AT&T Wireless and AT&T Broadband Corp., AT&T generally will
be entitled to indemnification from the spun-off company for any tax liability
that results from the split-off or spin-off failing to qualify as a tax-free
transaction, unless, in the case of AT&T Wireless and AT&T Comcast, the tax
liability was caused by post split-off or spin-off transactions with respect to
the stock or assets of AT&T. AT&T Comcast's indemnification obligation is
generally limited to 50% of any tax liability that results from the split-off or
spin-off failing to qualify as tax free, unless such liability was caused by a
post split-off or spin-off transaction with respect to the stock or assets of
AT&T Comcast.
If one or more of the split-offs or spin-offs were taxable to AT&T and AT&T
were not indemnified for this tax liability, the liability could have a material
adverse effect on AT&T. To the extent AT&T is entitled to an indemnity with
respect to the tax liability, AT&T would be required to collect the claim on an
unsecured basis.
The Total Value of the Securities Following the AT&T Comcast Transaction
Might be Less Than the Value of AT&T Common Stock Without the Transaction. If
AT&T completes the AT&T Comcast transaction, holders of AT&T common stock that
do not dispose of those shares of AT&T common stock eventually will own a new
security -- shares of AT&T Comcast -- in addition to their shares of AT&T common
stock. The aggregate value of the shares of AT&T Comcast and of the shares of
AT&T common stock securities could be less than what the value of AT&T common
stock would have been if the AT&T Comcast transaction were not completed. The
trading price of AT&T common stock may decline as a result of the AT&T Comcast
transaction or as a result of other factors.
As AT&T completes the AT&T Comcast transaction, shares of AT&T Comcast will
begin trading publicly for the first time. Until orderly trading markets develop
for each of these new securities, and after that time as well, there may be
significant fluctuations in price.
RISK FACTORS RELATING TO THE BUSINESS OF AT&T COMCAST
Actual Financial Position and Results of Operations of AT&T Comcast May
Differ Significantly and Adversely From the Pro Forma Amounts Reflected in this
Document. Assuming completion of the AT&T Comcast transaction, the actual
financial position and results of operations of AT&T Comcast may differ, perhaps
significantly and adversely, from the pro forma amounts reflected in the AT&T
Comcast Corporation Unaudited Pro Forma Combined Condensed Financial Statements
included in this document due to a variety of factors, including access to
additional information, changes in value not currently identified and changes in
operating results between the date of the pro forma financial data and the date
on which the AT&T Comcast transaction is completed.
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In addition, in many cases each of Comcast and AT&T Broadband Group has
long-term agreements, in some cases with the same counterparties, for the same
services and products, such as programming, billing services and interactive
programming guides. Comcast and AT&T Broadband Group cannot disclose the terms
of many of these contracts to each other because of confidentiality provisions
included in these contracts or other legal restrictions. For this and other
reasons, it is not clear, in the use of certain services and products, whether
after completion of the AT&T Comcast transaction each of the existing agreements
will continue to apply only to the operations to which they have historically
applied or whether instead one of the two contracts will apply to the operations
of both companies and the other contract will be terminated. Since these
contracts often differ significantly in their terms, resolution of these
contractual issues could cause the actual financial position and results of
operations of AT&T Comcast to differ significantly and adversely from the pro
forma amounts reflected in the AT&T Comcast Corporation Unaudited Pro Forma
Combined Condensed Financial Statements included in this document.
Programming Costs Are Increasing and AT&T Comcast May Not Have the Ability
to Pass These Increases on to Its Customers, Which Would Materially Adversely
Affect Its Cash Flow and Operating Margins. Programming costs are expected to
be AT&T Comcast's largest single expense item. In recent years, the cable and
satellite video industries have experienced a rapid increase in the cost of
programming, particularly sports programming. This increase is expected to
continue, and AT&T Comcast may not be able to pass programming cost increases on
to its customers. The inability to pass these programming cost increases on to
its customers would have a material adverse impact on its cash flow and
operating margins. In addition, as AT&T Comcast upgrades the channel capacity of
its systems and adds programming to its basic, expanded basic and digital
programming tiers, AT&T Comcast may face increased programming costs, which, in
conjunction with the additional market constraints on its ability to pass
programming costs on to its customers, may reduce operating margins.
AT&T Comcast also will be subject to increasing financial and other demands
by broadcasters to obtain the required consent for the transmission of broadcast
programming to its subscribers. Comcast and AT&T cannot predict the financial
impact of these negotiations or the effect on AT&T Comcast's subscribers should
AT&T Comcast be required to stop offering this programming.
AT&T Comcast Will Face a Wide Range of Competition in Areas Served by its
Cable Systems, Which Could Adversely Affect its Future Results of
Operations. AT&T Comcast's cable communications systems will compete with a
number of different sources which provide news, information and entertainment
programming to consumers. AT&T Comcast will compete directly with program
distributors and other companies that use satellites, build competing cable
systems in the same communities AT&T Comcast will serve or otherwise provide
programming and other communications services to AT&T Comcast's subscribers and
potential subscribers. In addition, federal law now allows local telephone
companies to provide directly to subscribers a wide variety of services that are
competitive with cable communications services. Some local telephone companies
provide, or have announced plans to provide, video services within and outside
their telephone service areas through a variety of methods, including broadband
cable networks, satellite program distribution and wireless transmission
facilities.
Additionally, AT&T Comcast will be subject to competition from
telecommunications providers and ISPs in connection with offerings of new and
advanced services, including telecommunications and Internet services. This
competition may materially adversely affect AT&T Comcast's business and
operations in the future.
AT&T Comcast Will Have Substantial Capital Requirements. AT&T Comcast
expects that its capital expenditures will exceed, perhaps significantly, its
net cash provided by operations, which may require it to obtain additional
financing. Failure to obtain necessary financing could have a material adverse
effect on AT&T Comcast.
Comcast and AT&T anticipate that AT&T Comcast will upgrade a significant
portion of its broadband systems over the coming years and make other capital
investments, including with respect to its advanced services. AT&T Comcast is
expected to incur substantial capital expenditures in future years. The actual
amount of the funds required for capital expenditures may vary materially from
management's
I-35
estimate. The majority of these amounts is expected to be used to acquire
equipment (such as set-top boxes, cable modems and telephone equipment) and to
pay for installation costs for additional video and advanced services customers.
In addition, capital is expected to be used to upgrade and rebuild network
systems to expand bandwidth capacity and add two-way capability so that it may
offer advanced services. There can be no assurance that these amounts will be
sufficient to accomplish the planned system upgrades, equipment acquisitions and
expansion.
Comcast and AT&T Broadband Group also have commitments under certain of
their franchise agreements with local franchising authorities to upgrade and
rebuild certain network systems. These commitments may require capital
expenditures in order to avoid default and/or penalties.
Historically, AT&T Broadband Group's capital expenditures have
significantly exceeded its net cash provided by operations. For the year ended
December 31, 2000 and the nine months ended September 30, 2001, AT&T Broadband
Group's capital expenditures exceeded its net cash provided by operations by
$3.6 billion and $3.3 billion, respectively. In addition, for the year ended
December 31, 2000 and the nine months ended September 30, 2001, Comcast's
capital expenditures exceeded its net cash provided by operating activities by
$418 million and $437 million, respectively.
After completion of the AT&T Comcast transaction, AT&T and Comcast expect
that for some period of time AT&T Comcast's capital expenditures will exceed,
perhaps significantly, its net cash provided by operating activities. This may
require AT&T Comcast to obtain additional financing. AT&T Comcast may not be
able to obtain or to obtain on favorable terms the capital necessary to fund the
substantial capital expenditures described above that are required by its
strategy and business plan. A failure to obtain necessary capital or to obtain
necessary capital on favorable terms could have a material adverse effect on
AT&T Comcast and result in the delay, change or abandonment of AT&T Comcast's
development or expansion plans.
Entities that Will Be Included in AT&T Comcast Are Subject to Long-Term
Exclusive Agreements that May Limit Their Future Operating Flexibility and
Materially Adversely Affect AT&T Comcast's Financial Results. Entities
currently attributed to AT&T Broadband Group, and which will be subsidiaries of
AT&T Comcast, may be subject to long-term agreements relating to significant
aspects of AT&T Broadband Group's operations, including long-term agreements for
video programming, audio programming, electronic program guides, billing and
other services. For example, TCI Communications, Inc. and Satellite Services,
Inc., both affiliates of TCI, are parties to an affiliation term sheet with
Starz Encore Group, an affiliate of Liberty Media Group, which extends to 2022
and provides for a fixed price payment (subject to adjustment for various
factors, including inflation) and may require AT&T Broadband to pay two-thirds
of Starz Encore Group's programming costs above levels designated in the term
sheet. Satellite Services, Inc. also entered into a ten-year agreement with TV
Guide in January 1999 for interactive program guide services, which designates
TV Guide Interactive as the interactive programming guide for AT&T Broadband
systems. Furthermore, a subsidiary of AT&T Broadband is party to an agreement
that does not expire until December 31, 2012 under which it purchases certain
billing services from an unaffiliated third party. The price, terms and
conditions of the Starz Encore term sheet, the TV Guide agreement and the
billing agreement may not reflect the current market and if one or more of these
arrangements continue to apply to AT&T Broadband after completion of the AT&T
Comcast transaction, they may materially adversely impact the financial
performance of AT&T Comcast.
By letter dated May 29, 2001, AT&T Broadband Group disputed the
enforceability of the excess programming pass through provisions of the Starz
Encore term sheet and questioned the validity of the term sheet as a whole. AT&T
Broadband Group also has raised certain issues concerning the uncertainty of the
provisions of the term sheet and the contractual interpretation and application
of certain of its provisions to, among other things, the acquisition and
disposition of cable systems. In July 2001, Starz Encore Group filed suit
seeking payment of the 2001 excess programming costs and a declaration that the
term sheet is a binding and enforceable contract. In October 2001, AT&T
Broadband Group and Starz Encore Group agreed to stay the litigation until
August 31, 2002 to allow the parties time to continue negotiations toward a
potential business resolution of this dispute. The Court granted the stay on
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October 30, 2001. The terms of the stay order allow either party to petition the
Court to lift the stay after April 30, 2002 and to proceed with the litigation.
AT&T Comcast Will Be Subject to Regulation by Federal, State and Local
Governments. The federal, state and local governments extensively regulate the
cable communications industry. Comcast and AT&T expect that court actions and
regulatory proceedings will refine the rights and obligations of various
parties, including the government, under the Communications Act of 1934, as
amended. The results of these judicial and administrative proceedings may
materially affect AT&T Comcast's business operations. Local authorities grant
Comcast and AT&T Broadband franchises that permit them to operate their cable
systems. AT&T Comcast will have to renew or renegotiate these franchises from
time to time. Local franchising authorities often demand concessions or other
commitments as a condition to renewal or transfer, which concessions or other
commitments could be costly to obtain.
AT&T Comcast Will Be Subject to Additional Regulatory Burdens in Connection
With the Provision of Telecommunications Services, Which Could Cause It to Incur
Additional Costs. AT&T Comcast will be subject to risks associated with the
regulation of its telecommunications services by the FCC and state public
utilities commissions, or PUCs. Telecommunications companies, including
companies that have the ability to offer telephone services over the Internet,
generally are subject to significant regulation. This regulation could
materially adversely affect AT&T Comcast's business operations.
AT&T Comcast's Competition May Increase Because of Technological Advances
and New Regulatory Requirements, Which Could Adversely Affect its Future Results
of Operations. Over the past several years, a number of companies, including
telephone companies and Internet Service Providers, commonly known as ISPs, have
asked local, state and federal government authorities to mandate that cable
communications operators provide capacity on their broadband infrastructure so
that these companies and others may deliver Internet and other interactive
television services directly to customers over these cable facilities. Some
cable operators, including Comcast and AT&T Broadband, have initiated litigation
challenging municipal efforts to unilaterally impose so-called "open access"
requirements. The few court decisions dealing with this issue have been
inconsistent. The FCC recently initiated a regulatory proceeding to consider
"open access" and related regulatory issues, and in connection with its review
of the AOL-Time Warner merger, imposed, together with the Federal Trade
Commission, "open access," technical performance and other requirements related
to the merged company's Internet and Instant Messaging platforms. Whether the
policy framework reflected in these agencies' merger reviews will be imposed on
an industry-wide basis or in connection with the AT&T Comcast transaction is
uncertain. In addition, numerous companies, including telephone companies, have
introduced Digital Subscriber Line technology, known as DSL, which will allow
Internet access to subscribers at data transmission speeds equal to or greater
than that of modems over conventional telephone lines.
Comcast and AT&T expect other advances in communications technology, as
well as changes in the marketplace and the regulatory and legislative
environment, to occur in the future. Other new technologies and services may
develop and may compete with services that cable communications systems offer.
The success of these ongoing and future developments could have a negative
impact on AT&T Comcast's business and operations.
AT&T Comcast, Through AT&T Broadband, Will Have Substantial Economic
Interests in Joint Ventures in Which It Will Have Limited Management
Rights. AT&T Broadband Group is a partner in several large joint ventures, such
as Time Warner Entertainment, Texas Cable Partners and Kansas City Cable
Partners, in which it has a substantial economic interest but does not have
substantial control with regard to management policies or the selection of
management. These joint ventures may be managed in a manner contrary to the best
interests of AT&T Comcast, and the value of AT&T Comcast's investment, through
AT&T Broadband, in these joint ventures may be affected by management policies
that are determined without input from AT&T Comcast or over the objections of
AT&T Comcast.
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RISK FACTOR RELATING TO AT&T'S CREDIT RATING
The AT&T Comcast transaction, if implemented as proposed, would result in a
substantial reduction in AT&T's overall debt level. Nevertheless, the AT&T
Comcast transaction may not be completed and, even if it is completed, AT&T will
continue to have substantial indebtedness. As a result, AT&T shareholders should
consider the following additional risk.
The Financial Condition and Prospects of AT&T and the AT&T Groups May be
Materially Adversely Affected by Further Ratings Downgrades. In the fall of
2001, all of AT&T's long-term debt ratings were reduced and remain under review
for further downgrade. AT&T's current long-term ratings are A3 by Moody's, BBB+
by Standard & Poor's, and A- by Fitch. In addition, all three of AT&T's
short-term debt ratings were reduced in the fall of 2001, but are not under
further review. These ratings are currently P-2 by Moody's, A-2 by Standard and
Poor's, and F-2 by Fitch. Further ratings actions could occur at any time. As a
result, the cost of any new financings may be higher. Ratings downgrades by
Moody's and Standard & Poor's on the $10 billion AT&T global notes issued
November 2001 would also trigger an increase in the interest rate (by 25 basis
points for each rating notch downgraded) on these notes. Furthermore, with
additional ratings downgrades, AT&T may not have access to the commercial paper
market sufficient to satisfy its short-term borrowing needs. If necessary, AT&T
could access its short-term credit facilities which currently expire in December
2002 or increase its borrowings under its securitization program.
In addition, AT&T's $10 billion global offering includes provisions that
would allow investors to require AT&T to repurchase the notes under certain
conditions. These conditions include a maximum adjusted debt to EBITDA ratio
(adjusted) for pro forma AT&T excluding AT&T Broadband Group of no more than
2.75 times at specified times and a minimum rating of these notes of no lower
than Baa3 from Moody's and BBB- from Standard and Poor's. If the ratings are
Baa3 or BBB-, the minimum rating requirement will be satisfied if the ratings
are not under review for downgrade or on CreditWatch with negative implications,
respectively. If AT&T is required to repurchase the notes, it may not be able to
obtain sufficient financing in the timeframe required. In addition, such
replacement financing may be more costly or have additional covenants than
current debt.
To the extent that the combined outstanding short-term borrowings under the
bank credit facilities and AT&T's commercial paper program were to exceed the
market capacity for such borrowings at the expiration of the bank credit
facilities, AT&T's continued liquidity would depend upon its ability to reduce
such short-term debt through a combination of capital market borrowings, asset
sales, operational cash generation, capital expenditure reduction and other
means. AT&T's ability to achieve such objectives is subject to a risk of
execution and such execution could materially impact AT&T's operational results.
In addition, the cost of any capital market financing could be significantly in
excess of AT&T's historical financing costs. Also, AT&T could suffer negative
banking, investor, and public relations repercussions if AT&T were to draw upon
the bank facilities, which are intended to serve as a back-up source of
liquidity only. Such impacts could cause further deterioration in AT&T's cost of
and access to capital.
RISK FACTORS RELATING TO AT&T CONSUMER SERVICES GROUP TRACKING STOCK
Holders of shares of AT&T common stock should consider the following risk
factors in deciding whether to vote for approval of the AT&T Consumer Services
Group tracking stock proposal.
The Market Price of AT&T Consumer Services Group Tracking Stock May Not
Reflect the Financial Performance and Economic Value of AT&T Consumer Services
Group as Intended and May Not Effectively Track the Separate Performance of AT&T
Consumer Services Group. The market price of AT&T Consumer Services Group
tracking stock may not in fact reflect the financial performance and economic
value of AT&T Consumer Services Group as intended. Holders of AT&T Consumer
Services Group tracking stock will continue to be common shareholders of AT&T,
and, as such, will be subject to all risks associated with an investment in AT&T
and all of its businesses, assets and liabilities. The performance of AT&T as a
whole may affect the market price of AT&T Consumer Services Group tracking stock
or the market price could more independently reflect the performance of the
business of
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AT&T Consumer Services Group. Investors may discount the value of AT&T Consumer
Services Group tracking stock because it is part of a common enterprise with the
rest of the operations of AT&T rather than a stand-alone entity.
The Combined Market Prices of AT&T Common Stock and AT&T Consumer Services
Group Tracking Stock May Not Equal or Exceed the Market Price of AT&T Common
Stock Before the Distribution of AT&T Consumer Services Group Tracking Stock,
and No Market Currently Exists for AT&T Consumer Services Group Tracking Stock.
Investors may not assign values to AT&T common stock or AT&T Consumer Services
Group tracking stock based on the reported financial results and prospects of
the AT&T groups or the dividend policies established by the AT&T Board with
respect to that class of AT&T common stock.
Because there has been no prior market for AT&T Consumer Services Group
tracking stock, there can be no assurances as to how AT&T Consumer Services
Group tracking stock will trade or if an active market for AT&T Consumer
Services Group tracking stock will be maintained. In addition, AT&T does not
expect that shares of AT&T Consumer Services Group tracking stock will be
included in the Standard & Poor's 500 Index. The failure to be included in that
index could have an adverse effect on the market price of the shares. In
addition, AT&T cannot predict the market impact of some of the terms of AT&T
Consumer Services Group tracking stock, such as:
- the relative voting rights of AT&T common stock and AT&T Consumer
Services Group tracking stock, and
- the discretion of the AT&T Board to make determinations affecting AT&T
Consumer Services Group tracking stock.
The AT&T Board Has the Flexibility to Treat AT&T Consumer Services Group
Tracking Stock a Number of Different Ways in the Event of a Future Merger or
Other Transaction Involving AT&T; the AT&T Board is Under No Obligation to
Select the Alternative that will Treat Holders Most Favorably.
The terms of AT&T Consumer Services Group tracking stock provide the AT&T
Board considerable flexibility in the event of a future merger or other
transaction involving AT&T. For example, depending on the circumstances, the
AT&T Board could
- exercise its right to redeem the shares of AT&T Consumer Services Group
tracking stock for shares of AT&T common stock at a % premium;
- roll over the shares of AT&T Consumer Services Group tracking stock into
a comparable tracking stock of a new entity;
- redeem the shares of AT&T Consumer Services Group tracking stock in
connection with a tax-free spin-off of AT&T Consumer Services Group; or
- redeem all or a portion of the shares of AT&T Consumer Services Group
tracking stock in exchange for the net after-tax proceeds of a
disposition of AT&T Consumer Services Group.
The holders of the shares of AT&T Consumer Services Group tracking stock
could receive consideration with very different values under each of the
alternatives. It is also possible that a particular alternative may not be
available in connection with a specific transaction. For example, AT&T may not
be able to structure a spin-off of AT&T Consumer Services Group on a tax-free
basis at a particular time.
In selecting an alternative, the AT&T Board will make its determination
based on what is in the best interests of all shareholders of AT&T as a whole.
The AT&T Board has no duty to select the alternative that will result in the
best economic treatment for holders of the shares of AT&T Consumer Services
Group tracking stock. For example, the selection of an alternative may depend on
whether it is advisable for AT&T to dispose of AT&T Consumer Services Group in
connection with a particular transaction. The terms of AT&T Consumer Services
Group tracking stock provide that to the extent permitted by law neither the
holders of the shares of AT&T Consumer Services Group tracking stock nor the
holders of any
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other class of common stock of AT&T will have any claim based on which
alternative the AT&T Board selects.
The Complex Nature of the Terms of AT&T Consumer Services Group Tracking
Stock, or Confusion in the Marketplace About What a Tracking Stock is, Could
Materially Adversely Affect the Market Prices of AT&T Consumer Services Group
Tracking Stock. Tracking stocks, like AT&T Consumer Services Group tracking
stock, are more complex than traditional common stock, and are not directly or
entirely comparable to common stock of companies that have been spun off by
their parent companies. The complex nature of the terms of AT&T Consumer
Services Group tracking stock, and the potential difficulties investors may have
in understanding these terms, may materially adversely affect the market price
of AT&T Consumer Services Group tracking stock. Examples of these terms include:
- the discretion of the AT&T Board to make determinations affecting AT&T
Consumer Services Group tracking stock,
- AT&T's rights in the event of a proposed spin-off or disposition of
substantially all the assets of AT&T Consumer Services Group,
- the ability of AT&T to roll AT&T Consumer Services Group tracking stock
over into a tracking stock of a new entity in the event of a merger or
other business combination, or
- the ability of AT&T to convert shares of AT&T Consumer Services Group
tracking stock into shares of AT&T common stock.
Confusion in the marketplace about what a tracking stock is and what it is
intended to represent, and/or investors' reluctance to invest in tracking
stocks, also could materially adversely affect the market price of AT&T Consumer
Services Group tracking stock.
Holders of AT&T Common Stock and AT&T Consumer Services Group Tracking
Stock will be Shareholders of One Company and, Therefore, Financial Impacts on
One AT&T Group Could Affect the Other AT&T Group. Holders of AT&T common stock
and AT&T Consumer Services Group tracking stock all will be common shareholders
of AT&T. As such, they will be subject to various risks associated with an
investment in a single company and all of AT&T's businesses, assets and
liabilities. Financial effects arising from one AT&T group that affect AT&T's
consolidated results of operations or financial condition could, if significant,
affect the combined results of operations or financial position of the other
AT&T group or the market price of the class of common shares relating to the
other AT&T group.
In addition, if AT&T or any of its subsidiaries were to incur significant
indebtedness on behalf of an AT&T group, including indebtedness incurred or
assumed in connection with an acquisition or investment, it could affect the
credit rating of AT&T and its subsidiaries. This, in turn, could increase the
borrowing costs of the other AT&T group and AT&T as a whole. Net losses of
either AT&T group and dividends or distributions on shares of any class of
common or preferred stock will reduce the funds of AT&T legally available for
payment of future dividends on each of AT&T common stock and AT&T Consumer
Services Group tracking stock. For these reasons, you should read AT&T's
consolidated financial information together with the financial information of
AT&T Consumer Services Group.
Holders of AT&T Consumer Services Group Tracking Stock will have Limited
Separate Shareholder Rights, and will have No Additional Rights Specific to AT&T
Consumer Services Group, Including Direct Voting Rights. Holders of AT&T
Consumer Services Group tracking stock will not have any direct voting rights in
AT&T Consumer Services Group, except to the extent required under AT&T's charter
or by New York law. AT&T will not hold separate meetings for holders of AT&T
Consumer Services Group tracking stock. When a vote is taken on any matter as to
which all of AT&T's common shares are voting together as one class, any class or
series of AT&T's common shares that is entitled to more than the number of votes
required to approve the matter being voted upon will be in a position to control
the outcome of the vote on that matter.
Each share of AT&T common stock has one vote per share. Each share of AT&T
Consumer Services Group tracking stock will have [ ] of a vote per share.
I-40
Holders of AT&T Consumer Services Group Tracking Stock May Have Potentially
Diverging Interests from Holders of Other Classes of AT&T Capital Stock. The
existence of separate classes of AT&T common stock could give rise to occasions
when the interests of the holders of AT&T common stock and holders of AT&T
Consumer Services Group tracking stock diverge, conflict or appear to diverge or
conflict. Examples include determinations by the AT&T Board to:
- set priorities for use of capital and debt capacity, including by loaning
the cash flow of AT&T Consumer Services Group to AT&T Business Services
Group, making it currently unavailable to support the growth and
operations of AT&T Consumer Services Group,
- pay or omit the payments of dividends on AT&T common stock or AT&T
Consumer Services Group tracking stock,
- approve dispositions of assets attributed to either AT&T group,
- formulate public policy positions for AT&T,
- establish material commercial relationships between the AT&T groups, and
- make operational, financial and purchasing decisions with respect to one
AT&T group that could be considered to be detrimental to the other AT&T
group.
- take positions on public policy or regulatory matters that benefit one
AT&T group more than the other AT&T group or that have disproportionate
impacts on the individual groups.
A Decision by the AT&T Board to Dispose of Assets Attributed to AT&T
Consumer Services Group Could have a Material Adverse Impact on the Trading
Price of AT&T Consumer Services Group Tracking Stock. Assuming AT&T Consumer
Services Group's assets at the applicable time continue to represent less than
substantially all of the assets of AT&T as a whole, the AT&T Board could, in its
sole discretion and without shareholder approval, approve sales and other
dispositions of all or any portion of the assets of AT&T Consumer Services
Group.
In the event of a disposition of all or substantially all of the properties
and assets attributed to AT&T Consumer Services Group, generally defined as 80%
or more of the fair value of AT&T Consumer Services Group, with several
exceptions, AT&T will be required under AT&T's charter to:
- convert each outstanding share of the affected tracking stock into shares
of AT&T common stock at a [ ]% premium, or
- distribute cash and/or securities, other than AT&T common stock, or other
property equal to the fair value of the net after-tax proceeds from that
disposition allocable to AT&T Consumer Services Group tracking stock, or
- take a combination of the actions described in the preceding bullet
points.
If a disposition of this type occurs, since holders may only receive an amount
determined by reference to net after-tax proceeds, the disposition could have a
material adverse impact on AT&T Consumer Services Group tracking stock.
The AT&T Board is not required to select the option that would result in
the distribution with the highest value to the holders of AT&T Consumer Services
Group tracking stock.
In addition, under New York law, the AT&T Board could decline to dispose of
AT&T Consumer Services Group assets, even if a majority of the holders of AT&T
Consumer Services Group tracking stock request this disposition.
AT&T May Make Operational and Financial Decisions that Benefit One AT&T
Group More than the Other AT&T Group. The AT&T Board could, in its sole
discretion, from time to time, make operational
I-41
and financial decisions or implement policies that affect disproportionately the
businesses of either AT&T group. These decisions could include:
- allocation of financing opportunities in the public markets or the
refinancing of existing indebtedness,
- allocation of business opportunities, resources and personnel,
- loans or other transfers of funds from one group to the other,
- transfers of services or assets between the AT&T groups and other
inter-group transactions, and
- purchasing decisions
that, in each case, may be suitable for one or both of the AT&T groups. Any of
these decisions may benefit one AT&T group more than the other AT&T group. For
example, the decision to obtain funds for one AT&T group may materially
adversely affect the ability of the other AT&T group to obtain funds sufficient
to implement its growth strategies or may increase the cost of those funds.
In addition, AT&T Consumer Services Group is subject to AT&T's existing
agreements or arrangements with third parties. These agreements or arrangements
currently may benefit both AT&T groups, as in the case of purchasing
arrangements, or may have the effect of limiting or impairing the AT&T groups'
respective business opportunities.
All of these decisions will be made by the AT&T Board in its good faith
business judgment, and in accordance with procedures and policies adopted by the
AT&T Board from time to time, including the AT&T Groups policy statement
described under "AT&T Consumer Services Group Tracking Stock -- Relationship
between the AT&T Groups -- The AT&T Groups Policy Statement."
The AT&T Board will have the Ability to Control Loans and Asset Transfers
Between the AT&T Groups. The AT&T Board may decide to transfer funds or other
assets between AT&T groups. Transfers of assets among the AT&T groups that the
AT&T Board designates as an equity contribution or repayment will result in a
change in AT&T's retained portion of the value of AT&T Consumer Services Group.
Any change in the retained portion of the value of AT&T Consumer Services Group
would be determined by reference to the then-current market value of AT&T
Consumer Services Group tracking stock as determined by the AT&T Board. This
increase or decrease, however, could occur at a time when AT&T Consumer Services
Group tracking stock is considered undervalued or overvalued.
Under the AT&T Groups policy statement, the AT&T groups may make loans to
each other at interest rates and on terms and conditions substantially
equivalent to the interest rates and terms and conditions that the AT&T groups
would be able to obtain from third parties without the benefit of support or
guarantee by AT&T. The actual rates of interest charged or paid by either of the
AT&T groups in the future is uncertain and will depend on a variety of factors,
including the credit profile of the AT&T group and market conditions. As a
result, future interest rates charged or paid by either of the AT&T groups may
materially exceed those reflected in the financial statements included elsewhere
in this document.
The AT&T Board May Change the AT&T Groups Policy Statement or Bylaw
Amendment Related to the AT&T Groups Without Shareholder Approval. The AT&T
Board intends to adopt the AT&T Groups policy statement described in this
document to govern the relationship between AT&T groups and to amend AT&T's
bylaws to create the AT&T Groups capital stock committee that will oversee the
interaction between the AT&T groups. The AT&T Board may supplement, modify,
suspend or rescind the policies set forth in the AT&T Groups policy statement or
related bylaw amendment, or make additions or exceptions to them, in the sole
discretion of the AT&T Board, without approval of AT&T shareholders, although
there is no present intention to do so. The AT&T Board would make any of these
determinations, including any decision that would have disparate impacts upon
holders of AT&T common stock and AT&T Consumer Services Group tracking stock, in
a manner consistent with its fiduciary duties to AT&T and all of its common
shareholders. See "-- The fiduciary duties of the AT&T Board to more than one
class of common stock are not clear under New York law" for more information
regarding the AT&T
I-42
Board's fiduciary duties to AT&T shareholders. See "AT&T Consumer Services Group
Tracking Stock -- Relationship between the AT&T Groups" for a description of the
AT&T Groups policy statement and bylaw amendment.
It Will Likely Not be Possible for a Third Party to Acquire AT&T Consumer
Services Group Without AT&T's Consent. If AT&T Consumer Services Group were an
independent entity, any person interested in acquiring that entity without
negotiation with AT&T Consumer Services Group's management could seek control of
the outstanding stock of that entity by means of a tender offer or proxy
contest. Although the Consumer Services charter amendment will create a new
class of AT&T common stock that is intended to reflect the separate financial
performance and economic value of AT&T Consumer Services Group, a person
interested in acquiring only AT&T Consumer Services Group without negotiation
with AT&T's management still would be required to seek control of the voting
power represented by all of the outstanding capital stock of AT&T entitled to
vote on that acquisition, including shares of AT&T common stock. As a result,
this may discourage potential interested bidders from seeking to acquire AT&T
Consumer Services Group. See "-- Holders of AT&T Consumer Services Group
tracking stock will have limited separate shareholder rights, and will have no
additional rights specific to AT&T Consumer Services Group, including direct
voting rights" for more information on the rights of holders of AT&T Consumer
Services tracking stock. This inability of third parties directly to acquire
control of AT&T Consumer Services Group may materially adversely affect the
market price of AT&T Consumer Services Group tracking stock.
There will be No Board of Directors or Committee that Owes Any Separate
Fiduciary Duties to Holders of AT&T Consumer Services Group Tracking Stock,
Apart From Those Owed to AT&T Shareholders Generally. Each of the AT&T Board
and the AT&T Groups capital stock committee owes fiduciary duties to AT&T and
AT&T shareholders as a whole. AT&T Consumer Services Group will not have a
separate board of directors to represent solely the interests of the holders of
AT&T Consumer Services Group tracking stock. Consequently, there is no separate
board of directors or committee that owes any separate duties to the holders of
AT&T Consumer Services Group tracking stock.
The Fiduciary Duties of the AT&T Board to More Than One Class of Common
Stock Are Not Clear Under New York Law. Although AT&T is not aware of any legal
precedent under New York law involving the fiduciary duties of directors of
corporations having two or more classes of common stock, or separate classes or
series of capital stock, principles of Delaware law established in cases
involving differing treatment of two classes of capital stock or two groups of
holders of the same class of capital stock provide that a board of directors
owes an equal duty to all shareholders, regardless of class or series, and does
not have separate or additional duties to either group of shareholders. Under
these principles of Delaware law and the related principle known as the
"business judgment rule," absent abuse of discretion, a good faith business
decision made by a disinterested and adequately informed board of directors, or
a committee of the board of directors, with respect to any matter having
disparate impacts upon holders of AT&T common stock or AT&T Consumer Services
Group tracking stock would be a defense to any challenge to a determination made
by or on behalf of the holders of any class of AT&T common shares. Nevertheless,
a New York court hearing a case involving this type of a challenge may decide to
apply principles of New York law different from the principles of Delaware law
discussed above, or may develop new principles of law, in order to decide that
case. Any future shareholder litigation over the meaning or application of the
terms of AT&T Consumer Services Group tracking stock or the AT&T Board's
policies may be costly and time consuming to AT&T and AT&T Consumer Services
Group.
Changes in the Tax Law or in the Interpretation of Current Tax Law May
Result in Redemption of AT&T Consumer Services Group Tracking Stock or May
Prevent AT&T From Issuing Further Shares of AT&T Consumer Services Group
Tracking Stock. From time to time, there have been legislative and
administrative proposals that, if effective, would have resulted in the
imposition of corporate level or shareholder level tax upon the issuance of
tracking stock. As of the date of this document, no proposals of this type are
outstanding.
I-43
If there are adverse tax consequences associated with the issuance of AT&T
Consumer Services Group tracking stock, it is possible that AT&T would cease
issuing additional shares of AT&T Consumer Services Group tracking stock. This
could affect the value of shares of AT&T Consumer Services Group tracking stock
then outstanding.
AT&T May Optionally Redeem AT&T Consumer Services Group Tracking
Stock. The AT&T Board may, at any time, redeem all outstanding shares of AT&T
Consumer Services Group tracking stock for shares of AT&T common stock at a
[ ]% premium. AT&T could decide to redeem AT&T Consumer Services Group
tracking stock at a time when any or all AT&T common stock and AT&T Consumer
Services Group tracking stock may be considered to be overvalued or undervalued.
In addition, a redemption at any premium would preclude holders of both AT&T
common stock and the redeemed AT&T Consumer Services Group tracking stock from
retaining their investment in a security intended to reflect separately the
financial performance and economic value of the relevant AT&T group. It also
would give holders of the redeemed AT&T Consumer Services Group tracking stock
an amount of consideration that may differ from the amount of consideration a
third-party buyer pays or would pay for all or substantially all of the assets
of the respective AT&T group. For further details, see "AT&T Consumer Services
Group Tracking Stock -- The Consumer Services Charter Amendment
Proposal -- Consumer Services Group Tracking Stock Amendment."
AT&T Has the Right to Require the Exchange of AT&T Consumer Services Group
Tracking Stock for Tracking Stock of Another Entity. In the event of a
disposition or other transfer by AT&T of all of the properties and assets of
AT&T Consumer Services Group (whether or not involving a merger or other
business combination involving AT&T as a whole), the Consumer Services charter
amendment generally allows AT&T to redeem all outstanding shares of AT&T
Consumer Services Group tracking stock, without paying a premium, in exchange
for a new tracking stock of the entity that owns substantially all of the assets
and liabilities of AT&T Consumer Services Group.
If the AT&T Board elected to roll the tracking stock over in connection
with a merger or other business combination, the holders of AT&T Consumer
Services Group tracking stock would not share in any premium received by holders
of AT&T common stock and the holders of AT&T common stock would not share in any
premium received by holders of AT&T Consumer Services Group tracking stock.
In the event of this redemption, the voting rights of the new tracking
stock will be set based on the ratio, over a fixed measurement period, of the
initial trading prices of the new tracking stock to the trading prices of the
common stock of the entity of which the new tracking stock is a part.
This new entity may have different businesses and a different capital
structure and be subject to different risks than AT&T generally. Holders of the
new tracking stock will become equity holders of this new entity and become
subject to risks affecting this new entity generally. Additionally, adverse
fluctuations in market valuations at and after the time of issuance of the new
tracking stock could materially adversely affect the relative voting power of
the new tracking stock with respect to the voting power of this new entity as a
whole.
The AT&T Board May Redeem AT&T Consumer Services Group Tracking Stock in
Exchange for Stock of One or More Qualifying Subsidiaries of AT&T. AT&T's
charter amendment proposal provides that AT&T may, at any time, redeem all
outstanding shares of AT&T Consumer Services Group tracking stock in exchange
for shares of common stock of a subsidiary of AT&T that holds all of the assets
and liabilities of AT&T Consumer Services Group. This type of redemption must be
tax free to the holders of AT&T Consumer Services Group tracking stock, except
with respect to any cash in lieu of fractional shares. For more information, see
"AT&T Consumer Services Group Tracking Stock -- The Consumer Services Charter
Amendment Proposal -- Terms of the Consumer Services Group Tracking Stock
Amendment -- Redemption."
Future Sales of AT&T Consumer Services Group Tracking Stock and AT&T Common
Stock Could Materially Adversely Affect Their Respective Market Prices and the
Ability to Raise Capital in the Future. Sales of substantial amounts of AT&T
Consumer Services Group tracking stock and AT&T common stock
I-44
in the public market could hurt the market price of each of those securities.
These sales also could hurt AT&T's ability to raise capital in the future. Any
shares of AT&T Consumer Services tracking stock that AT&T distributes to holders
of AT&T common stock will be freely tradable without restriction under the
Securities Act of 1933, as amended, by persons other than "affiliates" of AT&T,
as defined under the Securities Act. Any sales of substantial amounts of AT&T
Consumer Services Group tracking stock or AT&T common stock in the public
market, or the perception that those sales might occur, could materially
adversely affect the respective market prices of AT&T Consumer Services tracking
stock or AT&T common stock, as applicable.
Shareholder approval will not be solicited by AT&T for the issuance of
authorized but unissued shares of AT&T Consumer Services Group tracking stock or
AT&T common stock, unless these approvals are deemed advisable by the AT&T Board
or are required by applicable law, regulation or stock exchange listing
requirements. The issuance of those shares could dilute the value of shares of
AT&T Consumer Services Group tracking stock or AT&T common stock, as the case
may be.
AT&T Expects to Split its Current Dividend Among AT&T Common Stock and AT&T
Consumer Services Group Tracking Stock. Following any issuance of AT&T Consumer
Services Group tracking stock, AT&T currently expects that one-third of the
current dividend payable on AT&T common stock will be allocated to AT&T common
stock and that two-thirds will be allocated to AT&T Consumer Services Group
tracking stock. The declaration of dividends by AT&T and the amount of those
dividends will, however, be in the discretion of the AT&T Board, and will depend
upon each of the AT&T group's financial performance, the dividend policies and
capital structures of comparable companies, each of the AT&T group's ongoing
capital needs, and AT&T's results of operations, financial condition, cash
requirements and future prospects, and other factors deemed relevant by the AT&T
Board. Payment of dividends also may be restricted by loan agreements,
indentures and other transactions that AT&T enters into from time to time.
In addition, the dividend amount that AT&T Consumer Services Group tracking
stock may pay to shareowners depends on, among other factors, the cash
generation ability of AT&T Consumer Services Group. Based on the risks of a
decline in the long distance industry and successful entry into growth
opportunities such as DSL, there is a possibility that AT&T Consumer Services
Group would not generate sufficient cash flow in the future to pay the expected
dividend. This could have an adverse affect on the AT&T Consumer Services Group
tracking stock market price and debt levels.
If AT&T is Liquidated, Amounts Distributed to Holders of Each Class of AT&T
Common Stock May Not Reflect the Value of the Assets Attributed to the AT&T
Groups. Under AT&T's charter, AT&T would determine the liquidation rights of
the holders of the respective classes of AT&T common stock in accordance with
each AT&T group's respective market capitalization at the time of liquidation.
However, the relative market capitalization of each AT&T group may not correctly
reflect the value of the net assets remaining and attributed to the AT&T groups
after satisfaction of outstanding liabilities.
AT&T Consumer Services Group Tracking Stock May Not be Issued as Planned or
At All. The Consumer Services charter amendment proposal gives AT&T the
authority to create AT&T Consumer Services Group tracking stock. The proposed
Consumer Services Charter amendment, however, does not mandate the manner in
which AT&T may issue AT&T Consumer Services Group tracking stock or require that
AT&T issue any of these shares at all. Rather, AT&T Consumer Services Group
tracking stock will be a new class of AT&T common stock that the AT&T Board may
issue from time to time as it determines appropriate, up to the total number of
authorized shares and subject to stock exchange rules with respect to
shareholder approval of share issuances. AT&T does not plan to seek new
shareholder approval for any change that the AT&T Board may approve in the
timing or manner of issuing shares of AT&T Consumer Services Group tracking
stock. If you do not want to give the AT&T Board this broad authority with
respect to the Consumer Services charter amendment proposal, you should not vote
for the Consumer Services charter amendment proposal.
I-45
If the Consumer Services charter amendment proposal is approved the AT&T
Board may issue shares of AT&T Consumer Services Group tracking stock regardless
of whether the AT&T Comcast transaction is approved or completed.
RISK FACTORS RELATING TO AT&T CONSUMER SERVICES GROUP AND AT&T BUSINESS SERVICES
GROUP
AT&T Consumer Services Group and AT&T Business Services Group Expect There
to be a Continued Decline in the Long Distance Industry. Historically, prices
for voice communications have fallen because of competition, the introduction of
more efficient networks and advanced technology, product substitution, excess
capacity and deregulation. AT&T Consumer Services Group and AT&T Business
Services Group expect these trends to continue, and each of AT&T Consumer
Services Group and AT&T Business Services Group may need to reduce its prices in
the future to remain competitive. In addition, AT&T Consumer Services Group and
AT&T Business Services Group do not expect that they will be able to achieve
increased traffic volumes in the near future to sustain their current revenue
levels. The extent to which each of AT&T Consumer Services Group's and AT&T
Business Services Group's business, financial condition, results of operations
and cash flow could be materially adversely affected will depend on the pace at
which these industry-wide changes continue and its ability to create new and
innovative services to differentiate its offerings, enhance customer retention,
and retain or grow market share.
AT&T Consumer Services Group and AT&T Business Services Group Face
Substantial Competition that May Materially Adversely Impact Both Market Share
and Margins. Each of AT&T Consumer Services Group and AT&T Business Services
Group currently faces significant competition, and AT&T expects the level of
competition to continue to increase. Some of the potential materially adverse
consequences of this competition include the following:
- market share loss;
- possibility that customers shift to less profitable, lower margin
services;
- need to initiate or respond to price cuts in order to retain market
share;
- difficulties in AT&T Consumer Services Group's and AT&T Business Services
Group's ability to grow new businesses, introduce new services
successfully or execute on their business plan; and
- inability to purchase fairly priced access services.
As a result of competitive factors, AT&T Consumer Services Group and AT&T
Business Services Group believe it is unlikely that they will sustain existing
price or margin levels.
AT&T Consumer Services Group and AT&T Business Services Group Face
Competition from a Variety of Sources.
- Competition from new entrants into long distance, including regional
phone companies. AT&T Consumer Services Group and AT&T Business Services
Group traditionally have competed with other long distance carriers. In
recent years, AT&T Consumer Services Group and AT&T Business Services
Group have begun to compete with incumbent local exchange carriers, which
historically have dominated local telecommunications, and with other
competitive local exchange carriers for the provision of long distance
services.
Some regional phone companies, such as Verizon Communications Inc. and
SBC Communications Inc., already have been permitted to offer long
distance services in some states within their regions. AT&T expects that
the regional phone companies will seek to enter all states in their
regions and eventually will be given permission to offer long distance
services within their regions.
The incumbent local exchange carriers presently have numerous advantages as
a result of their historic monopoly control over local exchanges.
- Competition from facilities-based companies, including regional phone
companies. AT&T Consumer Services Group and AT&T Business Services Group
also face the risk of increasing
I-46
competition from entities that own their own access facilities,
particularly the regional phone companies, which have access facilities
across vast regions of the United States with the ability to control cost,
cycle time and functionality for most end-to-end services in their
regions. These entities can preserve large market share and high margins
on access services as they enter new markets, including long distance and
end-to-end services. This places them in superior position vis-a-vis AT&T
Consumer Services Group and AT&T Business Services Group and other
competitors that must purchase such high-margin access services.
- Competition from lower-cost or less-leveraged providers. The cost
structure of AT&T Consumer Services Group and AT&T Business Services
Group also affects their competitiveness. Each faces the risk that it
will not be able to maintain a competitive cost structure if newer
technologies favor newer competitors that do not have legacy
infrastructure and as technology substitution continues. The ability of
each of AT&T Consumer Services Group and AT&T Business Services Group to
make critical investments to improve cost structure also may be impaired
by its current debt obligations.
- Competition as a result of technological change. AT&T Consumer Services
Group and AT&T Business Services Group also may be subject to additional
competitive pressures from the development of new technologies and the
increased availability of domestic and international transmission
capacity. The telecommunications industry is in a period of rapid
technological evolution, marked by the introduction of new product and
service offerings and increasing satellite, wireless, fiber optic and
coaxial cable transmission capacity for services similar to those
provided by AT&T Consumer Services Group and AT&T Business Services
Group. AT&T cannot predict which of many possible future product and
service offerings will be important to maintain its competitive position,
or what expenditures will be required to develop and provide these
products and services. In particular, the rapid expansion of usage of
wireless services has led and is expected to lead to an overall decline
in traffic volume on traditional wireline networks.
- Competition as a result of excess capacity. Each of AT&T Consumer
Services Group and AT&T Business Services Group faces competition as a
result of excess capacity resulting from substantial network build out by
competitors that had access to inexpensive capital.
- Strength of competitors. Some of AT&T Consumer Services Group's and AT&T
Business Services Group's existing and potential competitors have
financial, personnel and other resources significantly greater than those
of AT&T Consumer Services Group and AT&T Business Services Group.
The Regulatory and Legislative Environment Creates Challenges for AT&T
Consumer Services Group and AT&T Business Services Group. Each of AT&T Consumer
Services Group and AT&T Business Services Group faces risks relating to
regulations and legislation. These risks include:
- difficulty of effective entry into local markets due to noncompetitive
pricing and to regional phone company operational issues that do not
permit rapid large-scale customer changes from regional phone companies
to new service providers,
- new head-on competition as regional phone companies begin to enter the
long distance business, and
- emergence of few facilities-based competitors to regional phone
companies, and the absence of any significant alternate source of supply
for most access and local services.
This dependency on supply materially adversely impacts each of AT&T
Consumer Services Group's and AT&T Business Services Group's cost structure, and
ability to create and market desirable and competitive end-to-end products for
customers.
In addition, regional phone companies will be entering the long distance
business while they still control substantially all the access facilities in
their regions. This will likely result in an increased level of
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competition for long distance or end-to-end services as the services offered by
regional phone companies expand.
Each of AT&T Consumer Services Group and AT&T Business Services Group May
Substantially Increase its Debt Level in the Future, Which Could Subject it to
Various Restrictions and Higher Interest Costs and Decrease its Cash Flow and
Earnings. Each of AT&T Consumer Services Group and AT&T Business Services Group
may substantially increase its debt level in the future, which could subject it
to various restrictions and higher interest costs and decrease its cash flow and
earnings. It also may be difficult for AT&T Consumer Services Group and AT&T
Business Services Group to obtain all the financing they need to fund their
businesses and growth strategies on desirable terms. The amount of debt required
in the future will depend upon the performance revenue and margin of each of
AT&T Consumer Services Group and AT&T Business Services Group, which, in turn,
may be materially adversely affected by competitive and other pressures. Any
agreements governing indebtedness obtained by AT&T Consumer Services Group or
AT&T Business Services Group may contain financial and other covenants that
could impair AT&T Consumer Services Group's or AT&T Business Services Group's
flexibility and restrict its ability to pursue growth opportunities.
AT&T expects to explore and evaluate the relative advantages and
disadvantages of various funding mechanisms for AT&T. These alternatives may
include a bank credit line, commercial paper and other forms of public and
private debt financing. The decision on debt composition is dependent on, among
other things, the business and financial plans of AT&T and the market conditions
at the time of financing.
The Actual Amount of Funds Necessary to Implement Each of AT&T Consumer
Services Group's and AT&T Business Services Group's Strategy and Business Plan
May Materially Exceed Current Estimates, which Could have a Material Adverse
Effect on its Financial Condition and Results of Operations. The actual amount
of funds necessary to implement each of AT&T Consumer Services Group's and AT&T
Business Services Group's strategy and business plan may materially exceed AT&T
Consumer Services Group's and AT&T Business Services Group's current estimates
in the event of various factors, including:
- competitive downward pressures on revenues and margins,
- departures from AT&T Consumer Services Group's and AT&T Business Services
Group's respective current business plans,
- regulatory developments,
- unforeseen competitive developments,
- technological and other risks,
- unanticipated expenses,
- unforeseen delays and cost overruns, and
- engineering design changes.
If actual costs do materially exceed AT&T Consumer Services Group's and/or
AT&T Business Services Group's current estimates for these or other reasons,
this would have a material adverse effect on AT&T Consumer Services Group's
and/or AT&T Business Services Group's financial condition and results of
operations.
AT&T Business Services Group's Build-Out of its Next-Generation IP Backbone
Network Involves Substantial Capital Requirements and Substantial Capital
Expenditures. AT&T Business Services Group's business plan will require
substantial capital expenditures in connection with its build out of its
end-to-end IP connectivity network, including both the next-generation IP
backbone as well as dedicated IP customer connectivity and hosting facilities.
AT&T Business Services Group may not be able to obtain sufficient capital or to
obtain sufficient capital on favorable terms. This failure to obtain capital
would have a material adverse effect on AT&T Business Services Group, and result
in the delay, change or abandonment of its development or expansion plans.
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AT&T Consumer Services Group's Potential Growth in its AT&T WorldNet High
Speed Service Combining Voice and Data Services Utilizing DSL Technology,
Involves Technological and Regulatory Hurdles and Requires Substantial Capital
Expenditures. AT&T Consumer Services Group's business plan will require
substantial capital expenditures in connection with its expansion into providing
voice and data services through DSL technology. The development of voice and
data services through DSL technology involves uncertainty relating to potential
technological hurdles, regulatory and legislative requirements and unforeseen
costs. AT&T Consumer Services Group historically has not had to incur these
capital expenditures, and it may not be able to obtain sufficient capital on
favorable terms or at all. A failure to obtain capital could have a material
adverse effect on AT&T Consumer Services Group, and result in the delay, change
or abandonment of its development or expansion plans.
Substantially All of the Telephone Calls Made by Each of AT&T Consumer
Services Group's and AT&T Business Services Group's Customers are Connected
Using Other Companies' Networks, Including Those of Competitors. AT&T Consumer
Services Group principally is a long distance voice telecommunications company.
AT&T Consumer Services Group does not own or operate any primary transmission
facilities. Accordingly, it must route domestic and international calls made by
its customers over transmission facilities obtained from AT&T Business Services
Group. AT&T Business Services Group provides long distance and, to a limited
extent, local telecommunications over its own transmission facilities. Because
AT&T Business Services Group's network does not extend to homes, both AT&T
Consumer Services Group and AT&T Business Services Group must route calls
through a local telephone company to reach AT&T Business Services Group's
transmission facilities and, ultimately, to reach their final destinations.
In the United States, the providers of local telephone service generally
are the incumbent local exchange carriers, including the regional phone
companies. The permitted pricing of local transmission facilities that AT&T
Consumer Services Group and AT&T Business Services Group lease in the United
States is subject to legal uncertainties. In view of the proceedings pending
before the courts and regulatory authorities, there can be no assurance that the
prices and other conditions established in each state will provide for effective
local service entry and competition or provide AT&T Consumer Services Group with
new market opportunities. The effect of the most recent court decisions is to
increase the risks, costs, difficulties and uncertainty of entering local
markets through using the incumbent local exchange carriers' facilities and
services.
AT&T Consumer Services Group Must Rely on AT&T Business Services Group's
Ability to Maintain, Upgrade and Reduce Costs Associated with the Core Network,
Which May Lead to Additional Costs. AT&T Consumer Services Group currently is
dependent upon AT&T Business Services Group for leased line capacity, data
communications facilities, traffic termination services and physical space for
offices and equipment. Although AT&T Consumer Services Group expects to enter
into a service agreement with AT&T Business Services Group for it to provide
these services, if AT&T Business Services Group becomes unable to provide its
current level of services to AT&T Consumer Services Group during the term of the
service agreement or thereafter, AT&T Consumer Services Group may not be able to
find replacement service providers on a timely basis.
Failure to Develop Future Business Opportunities May have a Material
Adverse Effect on AT&T Consumer Services Group's Growth Potential. AT&T
Consumer Services Group intends to pursue growth opportunities in providing
services through DSL technology, which involve new services for which there are
only limited proven markets. In addition, the ability to deploy and deliver
these services relies, in many instances, on new and unproven technology. AT&T
Consumer Services Group's DSL technology may not perform as expected and AT&T
Consumer Services Group may not be able to successfully develop new enabling
systems to effectively and economically deliver these services. In addition,
these opportunities require substantial capital outlays to deploy on a large
scale. This capital may not be available to support these services. Furthermore,
each of these opportunities entails additional operational risks. For example,
the delivery of these services requires AT&T Consumer Services Group to provide
installation and maintenance services, which services AT&T Consumer Services
Group has never provided previously. This will require AT&T Consumer Services
Group to hire, employ, train and equip technicians to provide
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installation and repair in each market served, or rely on subcontractors to
perform these services. AT&T Consumer Services Group may not be able to hire and
train sufficient numbers of qualified employees or subcontract these services,
or do so on economically attractive terms. These services may not be successful
when they are in place and customers may not purchase the services offered. If
these services are not successful or costs associated with implementation and
completion of the rollout of these services materially exceed those currently
estimated by AT&T Consumer Services Group, AT&T Consumer Services Group's
financial condition and prospects could be materially adversely affected.
AT&T and British Telecommunications, plc, or BT, Have Agreed to Unwind
their Concert Global Joint Venture, Which May Adversely Affect AT&T Consumer
Services Group and AT&T Business Services Group. On October 16, 2001, AT&T and
BT announced that they had reached binding agreements to unwind their global
joint venture called Concert. The dissolution of Concert will be complicated,
involve a large number of steps and require the receipt of certain regulatory
approvals. There can be no assurance that it will be completed in the time
frames that AT&T currently expects or at all. In addition, the dissolution of
Concert may lead to unsatisfactory, noncompetitive or disrupted service to
Concert's multinational customers and there can be no assurance that AT&T
Business Services will be able to regain and retain its former multinational
customers that it assigned to Concert when the venture was formed. The
dissolution of Concert may have a material adverse effect on AT&T, AT&T Business
Services and on AT&T Business Services' ability to provide services
internationally and to multinational customers.
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CHAPTER TWO
THE AT&T COMCAST TRANSACTION
GENERAL
The Comcast Board is using this document to solicit proxies from the
holders of Comcast common stock for use at the Comcast special meeting. The AT&T
Board is also using this document to solicit proxies from the holders of AT&T
common stock for use at the AT&T annual meeting.
COMCAST PROPOSALS
At the Comcast special meeting, holders of Comcast Class A common stock and
Comcast Class B common stock will be asked to vote upon a proposal to approve
and adopt the merger agreement and the transactions contemplated by the merger
agreement. This proposal is referred to in this document as the "Comcast
transaction proposal."
At the Comcast special meeting, holders of Comcast Class A common stock,
voting as a single class, and holders of Comcast Class A common stock and
Comcast Class B common stock, voting together as a single class, will also be
asked to vote upon a proposal to adopt an amendment to the Comcast charter that
will allow implementation of the Preferred Structure. See "Description of the
AT&T Comcast Transaction Agreements -- The Merger Agreement -- Merger
Consideration -- The Preferred Structure." This proposal is referred to in this
document as the "preferred structure proposal."
APPROVAL OF THE COMCAST TRANSACTION PROPOSAL IS NOT CONDITIONED ON APPROVAL
OF THE PREFERRED STRUCTURE PROPOSAL.
AT&T PROPOSALS
At the AT&T annual meeting, holders of AT&T common stock will be asked to
vote upon a proposal to approve and adopt the merger agreement and the
transactions contemplated by the merger agreement. This proposal is referred to
in this document as the "AT&T transaction proposal."
At the AT&T annual meeting, holders of AT&T common stock will also be asked
to vote separately on a proposal to approve and adopt an amendment to the AT&T
charter creating a tracking stock that is intended to reflect the financial
performance and economic value of the AT&T Consumer Services business. See "AT&T
Consumer Services Group Tracking Stock -- The Consumer Services Charter
Amendment Proposal." This proposal is referred to in this document as the
"Consumer Services charter amendment proposal." AT&T shareholders will also be
asked to vote on benefit proposals related to the Consumer Services charter
amendment proposal. These proposals are referred to in this document as the
"incentive plan proposal" and the "employee stock purchase plan proposal."
Additionally, AT&T shareholders will also be asked to vote upon the election of
directors and other matters that properly come before the AT&T annual meeting.
See "Information about the AT&T Annual Meeting and Voting."
BACKGROUND OF THE AT&T COMCAST TRANSACTION
On October 25, 2000, AT&T announced, among other things, that it intended
to create and issue a tracking stock intended to reflect the financial
performance and economic value of AT&T Broadband and, thereafter, to separate
AT&T Broadband from AT&T so that, ultimately, AT&T Broadband would be a
standalone, publicly traded company. AT&T also announced that it intended to
create and issue a tracking stock intended to reflect the financial performance
and economic value of AT&T Consumer Services Group. In addition, AT&T announced
that it intended to separate AT&T's wireless services business from AT&T.
In December 2000 and in early 2001, C. Michael Armstrong, Chairman and
Chief Executive Officer of AT&T, and Charles Noski, Chief Financial Officer of
AT&T, received telephone calls from Ralph J. Roberts, Chairman of the Board of
Comcast, and from Brian L. Roberts, President of Comcast, in which the Roberts
expressed interest in initiating discussions with respect to the possible
combination of Comcast and AT&T Broadband. In January 2001, Messrs. Armstrong
and Noski met with the Roberts at the
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Roberts' request. At this meeting, Mr. Armstrong told the Roberts that AT&T was
concentrating on key restructuring and operating matters at that time and was
not interested in engaging in discussions with respect to a combination.
On May 11, 2001, AT&T publicly filed preliminary proxy materials with
respect to a proposed special shareholders meeting at which AT&T planned to ask
shareholders to vote on (1) the creation of tracking stocks intended to reflect
the financial performance and economic value of AT&T Broadband and AT&T Consumer
Services Group, respectively, and (2) the separation of AT&T Broadband from the
rest of AT&T. In late May 2001, Brian Roberts again made inquiries regarding
AT&T's willingness to explore the possibility of a combination of Comcast and
AT&T Broadband. At Mr. Roberts' request, on June 6, 2001, Mr. Noski had dinner
with Mr. Roberts to discuss the potential for such a transaction. Mr. Roberts
and Mr. Noski discussed, among other things, how such a combination might be
structured, governed and valued. On June 17, 2001, Mr. Roberts and Mr. Noski had
another dinner meeting at which they had further discussions regarding the
possibility of a combination.
At a meeting on June 20, 2001, Mr. Noski reported to the AT&T Board on
these discussions with Mr. Roberts. At that meeting, the AT&T Board decided that
the discussions should not continue unless Comcast signed a confidentiality
letter containing customary standstill provisions. The AT&T Board also believed
that, if discussions were to continue, they should be with the understanding
that voting power in the combined company should follow economic interest more
closely than in the case of Comcast. Following the meeting, Charles Noski
conveyed the AT&T Board's views to Brian Roberts in a telephone call.
At a special meeting of the Comcast Board held on June 25, 2001, Comcast
management updated the directors on the status of the discussions with AT&T
concerning a potential AT&T Broadband transaction. The Comcast Board and
management discussed at length possible strategies to effect an AT&T Broadband
transaction, including the possibility of making an unsolicited offer for AT&T
Broadband. At the conclusion of this discussion, the Comcast Board determined
that it was not prepared to proceed with discussions on the terms outlined by
AT&T.
On July 3, 2001, AT&T filed revised preliminary proxy material indicating
that it intended to hold its special meeting of shareholders in September 2001
to vote on the creation of the AT&T Broadband tracking stock and the subsequent
separation of AT&T and AT&T Broadband.
On July 6, 2001, at a special meeting of the Comcast Board, Comcast
management informed the Comcast directors of AT&T's timetable for the creation
of the AT&T Broadband tracking stock and the separation of AT&T Broadband from
AT&T. Comcast management noted that mailing of the proxy materials to AT&T
shareholders for the September meeting could commence as early as late July.
Comcast management also reviewed with the Comcast Board the terms of an offer it
proposed to make to AT&T. After a lengthy discussion of the terms of the offer
and related matters, including the timeframe in which an outcome would be
determined and possible responses from AT&T, the Comcast Board unanimously
authorized Comcast management to proceed with the offer.
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On July 8, 2001, Ralph J. Roberts and Brian L. Roberts sent the following
letter to Mr. Armstrong:
July 8, 2001
Mr. C. Michael Armstrong
Chairman and CEO
AT&T Corp.
32 Avenue of the Americas
New York, NY 10013
Dear Mike:
Over many months of discussions we have shared a vision that AT&T Broadband
and Comcast should be combined to create the world's leader in broadband
communications. We believed those discussions were progressing towards a
tax-free transaction that would dramatically accelerate your own plan to
separate the broadband company. It is unfortunate that we were not able to
agree on a basis for continuing our dialogue. Accordingly, we submit this
offer to you for consideration by your Board before a proxy statement
relating to your broadband tracking stock proposal is sent to your
shareholders later this month.
Under our proposal Comcast would issue 1.0525 billion shares with a value
of $44.5 billion based on Friday's closing price and assume $13.5 billion
in debt for your core broadband business, which is composed of your 13.5
million cable subscribers as well as your joint venture interests. In
addition, we are prepared to acquire your interests in TWE, Cablevision and
Rainbow by assuming more debt and issuing more equity to reflect their
values. Under our proposal your shareholders would own a majority of the
economic and voting interests of the combined company in a transaction that
would be tax-free to AT&T and all shareholders.
Our proposal values your core broadband business at $58 billion, which
represents 30x both 2000 EBITDA and annualized first quarter 2001 EBITDA.
AT&T shareholders would receive Comcast shares valued at $12.60 per AT&T
share based on Friday's closing price, while retaining complete ownership
of AT&T's historical communications business that according to published
reports has a value approaching $70 billion on a standalone basis. This
combined value is dramatically higher than your current market value per
share of $16.80 after giving effect to the spin-off of AT&T Wireless.
Your shareholders would receive significantly more value through a
combination with Comcast than through your planned restructuring. Not only
does our proposal avoid the market risks, costs and uncertainties inherent
in the planned broadband IPO, it values your business at a significant
premium to your potential public market valuation. At 30x AT&T Broadband's
annualized first quarter 2001 EBITDA, our offer far exceeds the trading
multiple of any publicly traded broadband company. Put another way, our
proposal delivers a very substantial premium over published reports of the
estimated value of your broadband business.
After combining our broadband businesses, your shareholders will retain a
majority of the future appreciation resulting from substantial combination
benefits. Upon full integration of our broadband businesses, we expect the
combination benefits will amount to at least $1.25 billion annually. This
benefit could eventually increase to between $2.6 and $2.8 billion annually
as we work together to raise the level of your margins. None of these
figures take account of any new content, internet or other value creating
opportunities. As a result of these combination benefits, merging our
broadband companies will clearly be value accretive to both groups of
shareholders.
Given the strength of Comcast's balance sheet we are confident that the new
company would have an investment grade debt rating, a view which is shared
by our financial advisors, Morgan Stanley, JP Morgan and Merrill Lynch.
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We understand that there were concerns within AT&T about Comcast's voting
structure. As you know, multi-class structures are common in our industry
and have not affected stock trading values. Our Class A Special shares have
outperformed the cable composite index, the S&P 500 and The Nasdaq Stock
Market in each of the last one, three, five, seven and ten year periods. We
are confident that your shareholders would welcome our currency. In fact,
38 of your 50 largest institutional shareholders also have significant
investments in Comcast.
Our proposal is subject to the negotiation of a definitive merger
agreement. We are prepared to deliver a draft merger agreement as soon as
you wish. We are confident that the combination does not present any
significant regulatory issues.
In light of the significance of this proposal to both your shareholders and
ours, we are publicly releasing the text of this letter.
We hope that you will work with us to make this vision a reality.
Respectfully submitted,
Ralph J. Roberts Brian L. Roberts
Chairman of the Board President
On July 10, 2001, the AT&T Board met by telephone and was briefed by AT&T's
management and advisors with respect to the letter from Comcast and reviewed
with AT&T's legal advisors the AT&T Board's legal duties. On July 18, 2001, the
AT&T Board voted unanimously to reject Comcast's proposal to acquire AT&T
Broadband. After careful review, and based in part on the advice of its
financial advisors, Credit Suisse First Boston Corporation and Goldman, Sachs &
Co., the AT&T Board determined that Comcast's proposal did not reflect the full
value of AT&T Broadband. The AT&T Board also continued to be concerned by the
corporate governance issues arising from Comcast's multi-tier voting structure.
The AT&T Board directed AT&T management to explore financial and strategic
alternatives relating to AT&T Broadband, including the previously announced
restructuring plans, with the goal of providing the greatest long-term value to
shareholders. In addition, the AT&T Board decided to delay finalizing and
mailing to shareholders the proxy materials that AT&T had previously filed.
Thereafter, representatives of AT&T had preliminary discussions with
representatives of a number of third parties who had expressed interest in a
transaction with or an investment in AT&T or AT&T Broadband. AT&T informed each
of the parties that it would not be willing to discuss valuation or commence due
diligence activities until the other party entered into a customary
confidentiality agreement. AT&T's proposed confidentiality agreement included
provisions prohibiting interested parties from holding discussions with each
other with respect to a combination with AT&T Broadband without AT&T's consent.
AT&T's discussions with third parties included discussions with
representatives of Comcast. Because Comcast objected to signing AT&T's proposed
confidentiality agreement, however, these discussions initially did not include
any valuation discussions nor did the parties commence due diligence.
On September 17, 2001, Charles Noski and Brian L. Roberts and certain
representatives of their respective financial and legal advisors met in
Philadelphia. At this meeting, Mr. Roberts indicated that Comcast would be
willing to negotiate certain aspects of its proposed governance structure for a
combined Comcast-AT&T Broadband. He also indicated that Comcast would be willing
to enter into a confidentiality agreement containing restrictions on Comcast's
ability to talk to other parties regarding a potential combination with AT&T
Broadband, so long as AT&T was willing to indicate that Comcast's governance
position would not preclude a transaction with Comcast.
At meetings held on September 20 and 22, 2001, AT&T's management and
financial and legal advisors reviewed with the AT&T Board the status of
discussions with various parties and the strategic
II-4
alternatives available to AT&T with respect to AT&T Broadband. Following this
review, the AT&T Board instructed AT&T's management and advisors to continue to
explore and develop financial and strategic alternatives relating to AT&T
Broadband. The AT&T Board authorized management to indicate to Comcast that
governance would not preclude a transaction with Comcast if the terms of the
transaction as a whole were sufficiently attractive. The AT&T Board also
authorized AT&T's management and advisors to seek formal proposals from
interested parties.
From August through October 2001, the Comcast Board met several times to
receive reports from its management on the status of Comcast's proposal to
acquire AT&T Broadband. After one of these briefings at a special meeting of the
Comcast Board held on September 26, 2001, Comcast's legal advisors reviewed the
terms of the confidentiality agreement that Comcast and AT&T had negotiated and
explained the restrictions imposed by the agreement on Comcast's ability to talk
to third parties. After a lengthy discussion of the terms of the confidentiality
agreement and related matters, the Comcast Board unanimously authorized
management to enter into the confidentiality agreement, to commence due
diligence on AT&T Broadband and to continue negotiations with AT&T regarding an
AT&T Broadband transaction.
On September 28, 2001, AT&T and Comcast entered into a confidentiality
agreement with respect to a possible transaction involving AT&T Broadband.
Thereafter, AT&T and Comcast commenced the exchange of confidential information
and other due diligence activities. Representatives of AT&T also continued
discussions and due diligence activities with other interested parties,
including parties interested in making an investment in AT&T Broadband. In
addition, AT&T's legal advisors sent first drafts of a proposed merger agreement
and separation and distribution agreement to parties that had executed a
confidentiality agreement.
On October 23 and 24, 2001, letters seeking formal proposals were sent on
AT&T's behalf to three parties, one of which was Comcast, that had expressed
interest in a possible combination with AT&T Broadband and had executed
confidentiality agreements. Each letter stated that the party should submit its
proposal to the attention of AT&T's legal advisor no later than November 30,
2001, and set forth procedures for submitting the proposal and for conducting
due diligence. The letter also stated that the proposal should include a copy of
the merger agreement marked to show any proposed changes, and that the proposal
should have full board approval. In addition, the letter encouraged parties to
discuss any financial or legal issues with AT&T's financial and legal advisors
prior to submitting a proposal. Also on October 23, 2001, AT&T appointed William
T. Schleyer president and chief executive officer of AT&T Broadband, and
appointed two other new senior executives of AT&T Broadband. AT&T stated that
the appointments were part of an effort to strengthen and enhance AT&T
Broadband's senior management team as AT&T continued to evaluate strategic and
financial alternatives for AT&T Broadband.
During the ensuing period, AT&T and its advisors conducted further
discussions and due diligence activities with each of the parties. These
included discussions relating to potential synergies and strategies (including
telephony strategy) for a combined company, as well as discussions with respect
to the draft merger agreement and other draft transaction documents,
particularly the separation and distribution agreement and the other
intercompany agreements. AT&T and its advisors also discussed with each of the
parties the governance structure proposed for the combined company. In addition,
during this period, AT&T continued to have discussions with other parties
interested in making only an investment in AT&T Broadband.
Over the course of the discussions between Comcast and AT&T Broadband,
Comcast agreed that the voting power of the Class B shares held by the Roberts
family would be limited to one-third of the voting power of the combined
company, and that the initial board of the combined company would be comprised
of five members of the current Comcast board, five members of the current AT&T
Board to be mutually agreed (including Mr. Armstrong as Chairman), and two new
independent directors to be selected mutually. The Roberts family agreed that,
for five years, it would not sell its Class B shares except to certain permitted
transferees or in a transaction that offered the same per share consideration to
all
II-5
shareholders and that was approved or accepted by holders of a majority of the
shares held by shareholders other than the Roberts family.
From September through November 2001, Comcast held talks from time to time
with Microsoft Corporation concerning an arrangement whereby Microsoft would
exchange AT&T preferred securities held by it that are referred to in this
document as "QUIPS" in an aggregate principal amount of $5 billion for equity in
AT&T Comcast. The purpose of these discussions was to negotiate what is referred
to in this document as the "QUIPS exchange transaction," in order to reduce the
amount of fixed obligations AT&T Comcast would have upon completion of an AT&T
Broadband transaction. Also, during October and November 2001 Brian L. Roberts
and C. Michael Armstrong had a series of meetings to discuss matters relating to
the strategy and management of the combined company.
On November 26, 2001, at a special meeting of the Comcast Board, management
updated the Board on the status of negotiations concerning an AT&T Broadband
transaction and on the extensive due diligence that Comcast and its financial
and legal advisors had conducted. At that meeting, management also described its
efforts to prepare a revised offer for AT&T Broadband for submission to AT&T on
November 30, 2001. The Comcast Board heard a presentation from Comcast's legal
advisor concerning the auction process initiated by AT&T and the fiduciary
duties of the Comcast directors and a presentation from Comcast's financial
advisors concerning the terms of Comcast's revised proposal. Thereafter, the
Comcast Board unanimously authorized management to continue negotiations with
AT&T concerning an AT&T Broadband transaction.
On November 27, 2001, a letter was sent on AT&T's behalf to each of the
three parties informing them that the deadline for submission of proposals had
been extended to December 3, 2001.
On the morning of December 3, 2001, at a special meeting of the Comcast
Board, management reviewed with the directors the terms of its revised offer to
acquire AT&T Broadband, including the amount of equity to be issued to AT&T
shareholders, the amount of debt to be assumed by AT&T Broadband and the
governance arrangements to be implemented for the combined company upon
completion of an AT&T Broadband transaction. Management also reviewed with the
directors the final terms of the QUIPS Exchange that had been negotiated with
Microsoft. After discussion, the Comcast Board unanimously authorized management
to submit the revised offer on the terms and conditions described at that
meeting and to enter into the exchange agreement with Microsoft relating to the
QUIPS exchange transaction. Shortly after that meeting, Comcast and Microsoft
executed the exchange agreement.
Later on December 3, 2001, each of the three parties submitted a proposal,
including proposed agreements, with respect to a combination with AT&T
Broadband. Over the course of the next several days, AT&T's management and its
financial and legal advisors reviewed the proposals and had discussions with
representatives of each of the parties. At the AT&T Board's direction, AT&T's
management and its advisors sought to clarify aspects of the proposals, as well
as to negotiate various provisions of the proposed agreements.
At meetings held on December 7 and 8, 2001, AT&T's management and financial
and legal advisors reviewed and discussed with the AT&T Board each of the
proposals, as well as other alternatives available to AT&T. These alternatives
included proceeding with the separation of AT&T Broadband without any
combination with another party, or retaining AT&T Broadband as part of AT&T.
AT&T's legal advisors also reviewed again with the AT&T Board the legal
standards applicable to their consideration of the proposals. The AT&T Board
concluded that none of the proposals as presented was sufficiently attractive to
accept, nor were the proposed agreements with any of the parties at a stage to
be executed immediately. The AT&T Board also concluded, however, that each of
the three proposals and sets of agreements might be capable of being improved
sufficiently to be acceptable to the AT&T Board. In light of these conclusions,
the AT&T Board directed AT&T's management and advisors to seek to improve the
terms of the proposals, and reach agreements that were ready to be executed, in
advance of the AT&T Board's regularly scheduled meeting to be held on December
19, 2001.
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On December 8 and 9, 2001, representatives of AT&T informed each of the
three parties of the AT&T Board's decisions. The AT&T representatives proposed
meetings and discussions with representatives of each of the parties over the
next week with the goal of reaching revised proposals and final agreements no
later than December 16, 2001. In these meetings and discussions, in accordance
with the AT&T Board's instructions, AT&T's representatives requested that each
of the parties increase the amount of equity in the combined company that AT&T
shareholders would receive, and to agree on an allocation of assets and
liabilities between AT&T and AT&T Broadband consistent with the allocations
proposed by AT&T.
On December 15, 2001, the Comcast Board met to consider a recommendation by
management that Comcast increase its offer for AT&T Broadband. At that meeting,
management updated the Comcast directors on the status of the negotiations with
AT&T concerning the AT&T Broadband transaction. Comcast's legal advisor then
reviewed with the Comcast Board in detail the terms of the merger agreement and
the other transaction agreements that had been negotiated with AT&T as well as
the fiduciary duties of the Comcast directors. Also at that meeting, Comcast's
financial advisors made a presentation concerning certain financial aspects of
Comcast's proposal for AT&T Broadband. Thereafter, the Comcast Board unanimously
authorized management to increase Comcast's bid for AT&T Broadband.
On December 16, 2001, each of the three parties submitted revised
proposals, in each case increasing the equity amount offered to AT&T
shareholders and the amount of liabilities that the combined company would
assume. Over the next three days, representatives of AT&T had further
discussions with representatives of each of the three parties in an effort to
finalize the proposed agreements and to encourage each of the parties to make
sure that it had presented its best and final proposal. In the course of these
discussions with representatives of AT&T, all three parties made final
improvements to their proposals.
On the morning of December 19, 2001, the Comcast Board met to consider a
recommendation by management that Comcast increase the equity component of its
offer for AT&T Broadband. At that meeting, Comcast's legal advisor provided the
Board with an update on the status of the negotiations with AT&T. Comcast's
financial advisors indicated that they would be in a position to provide the
Board with opinions to the effect that the price proposed to be paid in the AT&T
Broadband transaction would be fair to Comcast's shareholders. After discussion,
the Comcast Board unanimously authorized Comcast management to increase its bid
for AT&T Broadband and to enter into an AT&T Broadband transaction on the terms
previously described to the Comcast Board.
At the AT&T Board meeting on December 19, 2001, AT&T's management and
financial and legal advisors reviewed and discussed with the AT&T Board the
final proposals from each of the parties, and again reviewed the other
alternatives available to AT&T and AT&T's legal advisors again reviewed the
legal standards applicable to the AT&T Board's decisions. AT&T's management and
advisors also reviewed with the AT&T Board the risks, including regulatory
risks, execution risks and certainty of completion, of each of the proposals and
alternatives. Based on this review, the AT&T Board concluded that the Comcast
proposal offered greater value and certainty than the other two proposals, as
well as greater value and certainty than the other available alternatives. The
AT&T Board noted favorably that the Roberts family had agreed to limit the
voting power of Class B shares to 33 1/3%.
However, in reviewing the agreement of the Roberts family not to sell its
Class B shares except to certain permitted transferees or in a transaction that
offered the same per share consideration to all shareholders and that was
approved or accepted by holders of a majority of the shares held by shareholders
other than the Roberts family, the AT&T Board determined that this protection
should be extended from five years to ten years. The AT&T Board directed
management to request that the Roberts family agree to this extension. Messrs.
Armstrong and Noski telephoned Brian Roberts to ask that the Roberts family
agree to the extension. After considering the issue, Mr. Roberts called Mr.
Armstrong back to inform him that the family would agree. The AT&T Board voted
unanimously to approve the Comcast proposal and the agreements reflecting that
proposal. Following the meeting, AT&T and Comcast executed the merger
II-7
agreement, AT&T and AT&T Broadband executed the separation and distribution
agreement, and AT&T, Comcast and Mr. Roberts executed the support agreement.
COMCAST'S REASONS FOR THE AT&T COMCAST TRANSACTION
At a special meeting held on December 19, 2001, the Comcast Board
unanimously determined that the AT&T Comcast transaction, including the Comcast
merger, is fair to and in the best interests of Comcast shareholders. The
Comcast Board recommends that holders of Comcast common stock vote FOR approval
and adoption of the merger agreement and the transactions contemplated by the
merger agreement. In the course of determining that the AT&T Comcast
transaction, including the Comcast merger, is fair to and in the best interests
of Comcast shareholders, the Comcast Board consulted with management, as well as
its legal and financial advisors, and considered the following primary factors:
- Creating an Unrivaled Broadband Network. Comcast believes that the
combination of Comcast with AT&T Broadband will create a network of
unrivaled scale and scope, uniquely situated to realize the vision of
broadband. On a pro forma basis, the combined network will have 22
million subscribers with 38 million homes passed, the leading presence in
eight of the ten largest U.S. cable marketing areas and a major presence
in 17 of the 20 largest cable marketing areas, and a physical plant that
is 80% upgraded to 550 MHZ and 67% upgraded to 750 MHZ. Comcast expects
these strengths will permit the combined company to lead the industry in
the development of new broadband services, such as video-on-demand,
interactive television and telephony.
- Synergies. Building on the strength of the combined network, Comcast
expects the combined company to achieve operating synergies approaching
$1-2 billion annually by 2005. Comcast expects to achieve these synergies
through elimination of corporate overhead and reduced operating costs and
the adoption of best practices from the two companies. In addition,
Comcast expects to achieve additional synergies through increased
advertising revenues, the development of new revenue-producing products
and programming assets and the expansion of broadband telephony.
- Potential for Earnings Growth. Comcast believes the combined company
will offer an opportunity for earnings growth as the AT&T Broadband
systems are brought up to industry-standard margins. Comcast has a track
record of maintaining earnings before interest, taxes, depreciation and
amortization, or EBITDA, margins even as lower margin systems are
integrated. By combining the best management of Comcast and AT&T
Broadband, Comcast expects to accelerate the growth in EBITDA margins
that AT&T Broadband has begun.
- Fairness Opinions. Morgan Stanley & Co. Incorporated, J.P. Morgan
Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated,
financial advisors to Comcast, each rendered an opinion dated December
19, 2001 to the effect that as of that date and based upon and subject to
the assumptions, qualifications and limitations set forth therein, the
conversion ratios in the Comcast merger applicable to the holders of
Comcast common stock, in the aggregate, were fair, from a financial point
of view, to the Comcast shareholders, taken together. The fairness
opinions of Morgan Stanley & Co. Incorporated, J.P. Morgan Securities
Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated are included
as Annexes G, H and I, respectively, to this document and should be read
in their entireties. The Comcast Board believes that these opinions
support the Comcast Board's conclusion that the AT&T Comcast transaction,
including the Comcast merger, is fair to and in the best interests of
Comcast shareholders.
- Tax-Free Transaction. Comcast expects that the Comcast merger will be
tax-free for U.S. federal income tax purposes to Comcast shareholders.
- Terms of the AT&T Comcast Transaction Agreements. The Comcast Board
considered the terms and conditions of the merger agreement, including
the conditions to closing, the termination fees payable under certain
circumstances and the restrictions imposed on the conduct of business of
AT&T Broadband and Comcast in the period prior to closing. The Comcast
Board took particular note of the provisions of the merger agreement
which do not permit AT&T to terminate the merger
II-8
agreement to accept a superior acquisition proposal or if the AT&T Board
changes its recommendation of the transaction in a manner adverse to
Comcast, and which, subject to applicable law, require AT&T to submit the
transaction for a vote of the AT&T shareholders at the AT&T meeting. The
Comcast Board also considered the terms and conditions of the other
transaction agreements described or referred to in this document.
- Governance. The Comcast Board considered the fact that Brian L. Roberts
will initially be the Chief Executive Officer and President of AT&T
Comcast and will, along with C. Michael Armstrong, comprise the Office of
the Chairman, AT&T Comcast's principal executive deliberative body. The
Comcast Board also considered the fact that Brian L. Roberts will, in
consultation with C. Michael Armstrong, select the initial executive
officers of the combined company.
- Structure of the AT&T Comcast Transaction. The Comcast Board considered
that the transaction is structured as a spin-off and merger of AT&T
Broadband with a subsidiary of AT&T Comcast instead of a spin-off of
AT&T's communications business and merger of AT&T (which would under such
a structure consist primarily of AT&T's broadband business) with a
subsidiary of AT&T Comcast. Comcast believes that the structure of the
AT&T Comcast transaction reduces the potential exposure of the combined
company to historic AT&T liabilities that are not attributable to AT&T's
broadband business. In addition, Comcast believes that the structure of
the AT&T Comcast transaction reduces the potential exposure of the
combined company to contractual liabilities of AT&T's communications
business.
The Comcast Board also considered potential adverse consequences and
negative factors, primarily consisting of the following, but concluded that the
positive factors outweighed these negative factors:
- Risk Factors. The Comcast Board considered the risks described under
"Summary and Overview of the Transactions -- Risk Factors relating to the
AT&T Comcast Transaction" and "Summary and Overview of the
Transactions -- Risk Factors relating to the Business of AT&T Comcast."
- Increased Debt Level. AT&T has allocated a significant portion of AT&T's
consolidated debt to AT&T Broadband. As a result of this allocation, AT&T
Comcast will be more leveraged than Comcast has historically been. The
Comcast Board believes that the financial strength of the combined
company and the deleveraging opportunities that will be available
following completion of the mergers will enable AT&T Comcast to support
and reduce this debt level.
- Potential Additional Payments. The Comcast Board considered provisions
of the merger agreement that may require Comcast to increase the amount
of AT&T Comcast common stock to be issued to AT&T Broadband shareholders
in the AT&T Broadband merger. In particular, the Comcast Board noted that
(1) the aggregate number of shares of AT&T Comcast common stock to be
issued to holders of AT&T Broadband common stock may be increased by up
to 3% if the AT&T Comcast common stock issued to holders of AT&T
Broadband common stock is not included in the Standard & Poor's 500 Index
and there is a per share disparity between the average trading price of
such class of stock and AT&T Comcast Class A Special common stock, in
each case shortly after completion of the mergers, and (2) the aggregate
number of shares of AT&T Comcast common stock to be issued to holders of
AT&T Broadband common stock may also be increased, without limit, to the
extent that such shares do not represent more than 50% of the total value
of AT&T Comcast common stock that will be outstanding upon completion of
the mergers.
In addition, the Comcast Board was aware of the interests of certain of its
directors and officers described under "Employee Benefits Matters -- Interests
of Directors and Officers in the AT&T Comcast Transaction."
Due to the variety of factors and the quality and amount of information
considered, the Comcast Board did not find it practicable to and did not make
specific assessments of, quantify or assign relative weights to the specific
factors considered in reaching its determination to approve the merger agreement
and the transactions contemplated by the merger agreement. Instead, the Comcast
Board made its
II-9
determination after consideration of all factors taken together. In addition,
individual members of the Comcast Board may have given different weight to
different factors.
COMCAST'S PREFERRED STRUCTURE PROPOSAL
Background. The Comcast charter provides that if in a transaction like the
Comcast merger the holders of the Comcast Class A common stock, the Comcast
Class B common stock and the Comcast Class A Special common stock do not receive
the same consideration for each of their shares of Comcast common stock (i.e.,
the same amount of cash or the same number of shares of each class of stock
issued in the transaction in proportion to the number of shares of Comcast
common stock held by them, respectively, without regard to class), the holders
of each class of Comcast common stock must receive "mirror" securities (i.e.,
shares of a class of stock having substantially equivalent rights as the
applicable class of Comcast stock). It is unclear that the shares of AT&T
Comcast Class A common stock to be issued to holders of the Comcast Class A
common stock in the Comcast merger under the Preferred Structure qualify as
"mirror" securities because the per share voting rights of the Class A common
stock relative to the per share voting rights of the Class B common stock will
decrease. Consequently, Comcast has decided to seek the approval of the holders
of the Comcast Class A common stock, voting as a single class, and holders of
Comcast Class A common stock and Comcast Class B common stock, voting together
as a single class, to the adoption of an amendment to the Comcast charter that
expressly permits implementation of the Preferred Structure. If approved, the
Comcast charter amendment would be effected immediately prior to the Comcast
merger. This proposal is referred to in this document as the "preferred
structure proposal." If the AT&T Comcast transaction does not occur, the Comcast
charter amendment will not be effected, even if the preferred structure proposal
is approved. A copy of the Comcast charter amendment that would be filed prior
to completion of the transaction if the preferred structure proposal is approved
is attached as Annex E to this document.
Recommendation. The Comcast Board has unanimously determined that the
Preferred Structure is in the best interests of the holders of the Comcast Class
A common stock. The Comcast Board recommends that holders of Comcast common
stock vote FOR the adoption of the Comcast charter amendment described above. If
the holders of Comcast Class A common stock, voting as a single class, and
holders of Comcast Class A common stock and Comcast Class B common stock, voting
together as a single class, approve the preferred structure proposal, the
Preferred Structure will be implemented upon completion of the transaction. See
"Description of the AT&T Comcast Transaction Agreements -- The Merger
Agreement -- Merger Consideration -- Preferred Structure." If holders of Comcast
Class A common stock, voting as a single class, or holders of Comcast Class A
common stock and Comcast Class B common stock, voting together as a single
class, do not approve the preferred structure proposal, the Alternative
Structure will be implemented upon completion of the transaction. See
"Description of the AT&T Comcast Transaction Agreements -- The Merger
Agreement -- Merger Consideration -- Alternative Structure."
Reason. In the course of determining that the Preferred Structure is in
the best interests of the holders of Comcast Class A common stock, the Comcast
Board consulted with management, as well as its financial and legal advisors.
After taking into account their advice, the Comcast Board decided to recommend
approval of the preferred structure proposal based on its belief that the
holders of Comcast Class A common stock will benefit from owning shares in an
extremely liquid class of stock. If the Preferred Structure is implemented and
the QUIPS exchange transaction occurs, upon completion of the AT&T Comcast
transaction, there will be approximately 1.372 billion outstanding shares of
AT&T Comcast Class A common stock. By contrast, if the Alternative Structure is
implemented and regardless of whether or not the QUIPS exchange transaction
occurs, upon completion of the AT&T Comcast transaction, there will only be
approximately 22 million outstanding shares of AT&T Comcast Class A common
stock. While holders of AT&T Comcast Class A common stock, together with holders
of AT&T Comcast Class B common stock, will have specific approval rights over
numerous corporate actions under the Alternative Structure that they will not
have under the Preferred Structure, holders of AT&T Comcast Class B common stock
will control these approval rights because holders of AT&T Comcast Class B
II-10
common stock will hold approximately 86.7% of the votes entitled to be cast on
such matters. In addition, Comcast does not believe that the increased per share
voting power of AT&T Comcast Class A common stock under the Alternative
Structure relative to the per share voting power of the AT&T Comcast Class A
common stock under the Preferred Structure outweighs the advantage of the
greater liquidity that the AT&T Comcast Class A common stock will have under the
Preferred Structure relative to the Alternative Structure. See "Certain Legal
Information -- Description of AT&T Comcast Capital Stock -- AT&T Comcast Class A
Common Stock -- Voting Rights."
AT&T'S REASONS FOR THE AT&T COMCAST TRANSACTION
At a meeting held on December 19, 2001, the AT&T Board unanimously
determined that the AT&T Comcast transaction, including the separation, the AT&T
Broadband spin-off and the AT&T Broadband merger, is fair to and in the best
interests of AT&T shareholders. The AT&T Board recommends that holders of AT&T
common stock vote FOR approval and adoption of the merger agreement and the
transactions contemplated by the merger agreement. In the course of determining
that the AT&T Comcast transaction, including the separation, the AT&T Broadband
spin-off and the AT&T Broadband merger, is fair to and in the best interests of
AT&T shareholders, the AT&T Board consulted with management, as well as its
legal and financial advisors, and considered the following primary factors:
- Valuation. The AT&T Board believes that the AT&T Broadband exchange
ratio provides AT&T shareholders with an attractive valuation for their
interest in AT&T Broadband and offers superior and more certain value
than the alternatives that were available to AT&T. These alternatives
included other combination proposals with respect to AT&T Broadband,
continuing with the separation of AT&T Broadband without any combination
and retaining AT&T Broadband as part of AT&T.
- Strength of Combined Company. AT&T believes that the combination of AT&T
Broadband with Comcast will create a leading entertainment,
communications and information company, passing more than 38 million
homes with more than 22 million subscribers. The combined company will
have a presence in 41 states and will be the leader in eight of the ten
largest U.S. cable marketing areas and a major presence in 17 of the 20
largest cable marketing areas. AT&T believes that the combined company
will be a leader in advanced services, well positioned for developing and
bringing to market new and innovative products and services for
consumers. The scale of the combined company is expected to accelerate
broadband deployment in areas such as telephony, video on demand, home
networking and interactive television. AT&T Comcast is also expected to
be able to take advantage of significant cost and revenue synergies. By
virtue of their large equity interest (approximately [ ]% in the
aggregate), AT&T shareholders will have a significant opportunity to
participate in the future performance of the combined company.
- Telephony Strategy. AT&T Comcast is expected to be able to take
advantage of AT&T Broadband's cable telephony expertise in order to
develop telephony opportunities and increase revenues from telephony
service offerings. The AT&T Board believes that the opportunity to
utilize AT&T Comcast's extensive facilities should enhance the growth
opportunities of the combined company.
- Benefits of Separating AT&T Broadband. The AT&T Board continues to
believe that the separation of AT&T Broadband from the communications
services businesses of AT&T provides benefits to both businesses. The
separation is expected to give the broadband and communications services
businesses greater financial and operating strength to help realize
growth opportunities, reduce the complexity inherent in managing an
integrated enterprise of broadband and communications businesses, allow
the businesses to create more effective management incentive and
retention programs and allow for more focused investment opportunities
than those presented by a diversified AT&T. The AT&T Board believes that
the AT&T Broadband merger will only enhance these benefits by creating a
better and stronger broadband business.
II-11
- Improvement of Financial Position of AT&T. AT&T has been pursuing a
course of activities designed to reduce its debt levels. The AT&T Board
believes that the allocation of a significant portion of AT&T's
consolidated debt to AT&T Broadband, followed by the combination of AT&T
Broadband with Comcast, will improve AT&T's financial position. AT&T
believes that the combined AT&T Comcast will have greater financial
strength and ability to support the debt allocated to AT&T Broadband and
to engage in further debt reduction activities than an independent AT&T
Broadband, and that the communications services business will have a
strong capital position following the separation of AT&T Broadband,
putting it in a better position to take advantage of opportunities in the
future.
- Opinions of Financial Advisors. Credit Suisse First Boston and Goldman
Sachs, financial advisors to AT&T, rendered to the AT&T Board separate
written opinions, each dated December 19, 2001, to the effect that, as of
that date and based on and subject to the matters described in its
opinion, the AT&T Broadband exchange ratio was fair, from a financial
point of view, to the holders of AT&T Broadband common stock immediately
prior to the mergers, other than Comcast and its affiliates. The opinions
of Credit Suisse First Boston and Goldman Sachs are attached as Annexes J
and K, respectively, to this document and should be carefully read in
their entireties.
- Tax-Free Transaction. AT&T expects the AT&T Comcast transaction,
including the separation, the AT&T Broadband spin-off and the AT&T
Broadband merger, to be tax-free for U.S. federal income tax purposes to
AT&T's shareholders.
- Other Agreement Terms. The AT&T Board considered the other terms and
conditions of the merger agreement, the separation and distribution
agreement and the related agreements, which are summarized in this
document. The AT&T Board took particular note of the provision that AT&T
and Comcast will seek to have the class of AT&T Comcast common stock
which the shareholders of AT&T will receive in the AT&T Broadband merger
included in the Standard & Poor's 500 Index. If the class is not
included, the shareholders of AT&T will receive in the AT&T Broadband
merger additional shares of the same class of AT&T Comcast common stock
(up to an additional 3%) if the shares they receive in the AT&T Broadband
merger trade below the AT&T Comcast Class A Special shares during a
specified measurement period following the closing of the AT&T Broadband
merger.
The AT&T Board also considered potential adverse consequences and negative
factors, primarily consisting of the following, but concluded that the positive
factors outweighed these negative factors:
- Risk Factors. The AT&T Board considered the risks described under
"Summary and Overview of the Transactions -- Risk Factors."
- Governance of AT&T Comcast. Upon completion of the AT&T Comcast
transaction, the voting power of the Roberts family will remain
disproportionate to the Roberts family's economic interest. Under either
of the two capital structures that could be implemented upon completion
of the AT&T Comcast transaction, the Roberts family and its transferees
will hold 33 1/3% of the voting power of AT&T Comcast through their
ownership of shares of AT&T Comcast Class B common stock representing
less than 1.5% of the economic interest in the combined company. In
addition, this voting interest will not be diluted by future issuances of
shares of any other class of AT&T Comcast stock.
- Difficulty in Execution. A significant degree of difficulty and
management distraction is inherent in the process of separating AT&T
Broadband from AT&T and integrating AT&T Broadband and Comcast. In
addition, there is a risk that cost efficiencies and benefits sought in
the AT&T Broadband merger might not be fully achieved or that achieving
these benefits may take longer than expected.
- Share Trading Prices. There is no assurance as to the trading prices of
the shares of AT&T Comcast or AT&T following completion of the AT&T
Broadband spin-off and mergers. In addition, while AT&T and Comcast will
seek to have the class of AT&T Comcast common stock which the
II-12
shareholders of AT&T will receive in the AT&T Broadband merger included
in the Standard & Poor's 500 Index, there is no assurance that the
companies will be successful in achieving this inclusion. If the class of
AT&T Comcast common stock issuable in the AT&T Broadband merger is not
included in the index, this may adversely affect their trading price. In
this event, while AT&T shareholders will receive additional shares of the
same class of AT&T Comcast common stock to the extent the shares they
receive in the AT&T Broadband merger trade below the AT&T Comcast Class A
Special shares during a specified measurement period following the
closing of the mergers, this protection is limited to 3%.
- Alternative Transactions Not Permitted. The provisions of the merger
agreement do not permit AT&T to terminate the merger agreement for an
alternative transaction involving AT&T Broadband, although AT&T is
permitted to conduct negotiations with third parties under limited
circumstances, and the merger agreement requires AT&T to pay a $1.5
billion fee to Comcast in the event the merger agreement is terminated
under specified circumstances.
- AT&T's Lack of Diversification and Reduced Size. The lack of
diversification and reduced size of AT&T following the separation of AT&T
Broadband could affect its ability to achieve economies of scale, could
create capital and size constraints that did not previously exist, could
create increased costs due to decreasing purchasing power and could limit
its ability to obtain financing.
- Potential Volatility of Earnings and Stock Prices. As more focused
companies, the earnings of each of AT&T and AT&T Comcast will be more
closely tied to its particular performance and as a result their
securities could be subject to greater volatility.
In addition, the AT&T Board was aware of the interests of certain of its
directors and officers described under "Employee Benefits Matters -- Interests
of Directors and Officers in the AT&T Comcast Transaction."
Due to the variety of factors and the quality and amount of information
considered, the AT&T Board did not find it practicable to and did not make
specific assessments of, quantify or assign relative weights to the specific
factors considered in reaching its determination to approve the merger agreement
and the transactions contemplated by the merger agreement. Instead, the AT&T
Board made its determination after consideration of all factors taken together.
In addition, individual members of the AT&T Board may have given different
weight to different factors.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following summary discusses the material U.S. federal income tax
consequences of the separation, the AT&T Broadband spin-off and the mergers to
United States Holders of AT&T common stock, AT&T Broadband common stock and
Comcast common stock. This discussion is based on the Code, the Treasury
Regulations promulgated thereunder, judicial opinions, published positions of
the Internal Revenue Service, and all other applicable authorities as of the
date of this document, all of which are subject to change (possibly with
retroactive effect).
As used in this document, the term "United States Holder" means:
- a citizen or resident of the United States;
- a corporation, or other entity taxable as a corporation for U.S. federal
income tax purposes, created or organized in or under the laws of the
United States or of any political subdivision thereof; or
- an estate or trust the income of which is subject to United States
federal income taxation regardless of its source.
The term United States Holder also includes certain former citizens and
residents of the United States.
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This discussion does not describe all of the tax consequences that may be
relevant to a holder in light of his particular circumstances or to holders
subject to special rules, such as:
- certain financial institutions;
- insurance companies;
- tax-exempt organizations;
- dealers in securities or foreign currencies;
- persons holding AT&T common stock, AT&T Broadband common stock or Comcast
common stock as part of a hedge;
- United States Holders whose functional currency is not the U.S. dollar;
- partnerships or other entities classified as partnerships for U.S.
federal income tax purposes;
- persons subject to the alternative minimum tax;
- shareholders who acquired their AT&T common stock, AT&T Broadband common
stock or Comcast common stock through the exercise of options or
otherwise as compensation or through a tax-qualified retirement plan; or
- holders of options granted under any AT&T or Comcast benefit plan.
In addition, this summary is limited to shareholders that hold their AT&T
common stock, AT&T Broadband common stock or Comcast common stock as capital
assets. This discussion also does not address any tax consequences arising under
the laws of any state, local or foreign jurisdiction.
Accordingly, each AT&T, AT&T Broadband and Comcast shareholder is strongly
urged to consult with a tax adviser to determine the particular federal, state,
local or foreign income or other tax consequences to him of the AT&T Broadband
spin-off and the mergers.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE SEPARATION AND THE AT&T
BROADBAND SPIN-OFF
It is a condition to both the AT&T Broadband spin-off and the mergers that
AT&T has obtained one or more private letter rulings from the Internal Revenue
Service, which will continue in effect at the time of the AT&T Broadband
spin-off and mergers, to the effect that:
- the separation and the AT&T Broadband spin-off will be tax-free to AT&T
and its shareholders under Sections 355 and 368(a) of the Code,
- the mergers will not cause the separation and the AT&T Broadband spin-off
to fail to be qualified as a tax-free transaction pursuant to Section 355
of the Code, and
- the separation and the AT&T Broadband spin-off will not cause the
distribution by AT&T of all of the common stock of AT&T Wireless or of
Liberty Media to fail to qualify as tax-free transactions pursuant to
Sections 355 and 368(a) of the Code.
This condition may be waived if AT&T and Comcast mutually agree to obtain
an opinion to the same effect from tax counsel of a nationally recognized
reputation mutually acceptable to AT&T and Comcast. To the extent this summary
describes the federal income tax consequences of the separation and the AT&T
Broadband spin-off, such consequences will be set forth in the private letter
ruling or the opinion referred to in the preceding sentence. The receipt of the
private letter ruling and its continuing validity are subject to factual
representations and assumptions. Neither AT&T nor AT&T Broadband nor Comcast is
aware of any facts or circumstances that would cause such representations and
assumptions to be untrue.
II-14
Assuming the continuing effectiveness of the private letter ruling or the
opinion described above, for U.S. federal income tax purposes, the tax
consequences of the separation and the AT&T Broadband spin-off are as follows:
- no gain or loss will be recognized by, and no amount will be included in
the income of, AT&T or AT&T Broadband upon the separation and the AT&T
Broadband spin-off other than gains related to certain intercompany
transactions that will be triggered by the AT&T Broadband spin-off;
- no gain or loss will be recognized by, and no amount will be included in
the income of, United States Holders of AT&T common stock upon their
receipt of shares of AT&T Broadband common stock in the AT&T Broadband
spin-off;
- a United States Holder of AT&T common stock will apportion the tax basis
of such holder's AT&T common stock on which AT&T Broadband common stock
is distributed between AT&T common stock and the AT&T Broadband common
stock received in the AT&T Broadband spin-off in proportion to the fair
market values of such AT&T common stock and AT&T Broadband common stock
on the date of the AT&T Broadband spin-off; and
- the holding period of the shares of AT&T Broadband common stock received
by a United States Holder of AT&T common stock in the AT&T Broadband
spin-off will include the period during which such holder held the AT&T
common stock on which the AT&T Broadband common stock is distributed.
Current Treasury Regulations require each holder of AT&T common stock who
receives AT&T Broadband common stock pursuant to the AT&T Broadband spin-off to
attach to his or her federal income tax return for the year in which the AT&T
Broadband spin-off occurs, a detailed statement setting forth such data as may
be appropriate in order to show the applicability of Section 355 of the Code to
the AT&T Broadband spin-off. AT&T will provide the appropriate information to
each of its shareholders of record.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS
AT&T and Comcast have structured the mergers so that it is anticipated that
the mergers will qualify as a tax-free exchange for U.S. federal income tax
purposes. It is a condition to the Comcast merger that Comcast receive an
opinion from Davis Polk & Wardwell, counsel to Comcast, dated the date of the
mergers and it is a condition to the AT&T Broadband merger that AT&T receive an
opinion from Wachtell, Lipton, Rosen & Katz, counsel to AT&T, dated the date of
the mergers, each to the effect that, on the basis of the facts, representations
and assumptions set forth in such opinion, the mergers will constitute an
exchange to which Section 351 of the Code applies. Any change in currently
applicable law, which may or may not be retroactive, or the failure of any
factual representations or assumptions to be true, correct and complete in all
material respects, could affect the validity of the Davis Polk & Wardwell tax
opinion and the Wachtell, Lipton, Rosen & Katz tax opinion.
An opinion of counsel represents counsel's best legal judgment and is not
binding on the Internal Revenue Service or any court. No ruling has been or will
be sought from the Internal Revenue Service as to the U.S. federal income tax
consequences of the mergers and, as a result, there can be no assurance that the
Internal Revenue Service will not disagree with, or challenge, any of the
conclusions described below.
Subject to the discussion below relating to the receipt of cash instead of
fractional shares and assuming the mergers qualify as an exchange under Section
351 of the Code, for U.S. federal income tax purposes, the tax consequences of
the mergers will be as follows:
- the mergers will constitute an exchange to which Section 351 of the Code
applies;
- no gain or loss will be recognized by Comcast, AT&T Broadband, AT&T
Broadband's merger subsidiary, or Comcast's merger subsidiary as a result
of the mergers;
II-15
- no gain or loss will be recognized by:
-- United States Holders of AT&T Broadband common stock on the exchange of
their AT&T Broadband common stock for AT&T Comcast common stock; or
-- United States Holders of Comcast common stock on the exchange of their
Comcast common stock for AT&T Comcast common stock;
- the aggregate adjusted basis of the AT&T Comcast common stock received in
the mergers by:
-- a United States Holder of AT&T Broadband common stock will be equal to
the aggregate adjusted basis of the United States Holder's AT&T
Broadband common stock exchanged for that AT&T Comcast common stock,
reduced by any tax basis allocable to the fractional share interests in
AT&T Comcast common stock for which cash is received; and
-- a United States Holder of Comcast common stock will be equal to the
aggregate adjusted basis of the United States Holder's Comcast common
stock exchanged for that AT&T Comcast common stock; and
- the holding period of the AT&T Comcast common stock received in the
mergers by:
-- a United States Holder of AT&T Broadband common stock will include the
holding period of the United States Holder's AT&T Broadband common
stock exchanged for that AT&T Comcast common stock; and
-- a United States Holder of Comcast common stock will include the holding
period of the United States Holder's Comcast common stock exchanged for
that AT&T Comcast common stock.
Cash Instead of Fractional Shares. AT&T Comcast will not issue any
fractional shares in the AT&T Broadband merger. Instead, any fractional
interests AT&T Broadband shareholders otherwise would have been entitled to
receive will be sold and the proceeds will be paid to those shareholders. The
receipt of cash instead of a fractional share of AT&T Comcast common stock by a
United States Holder of AT&T Broadband common stock will result in taxable gain
or loss to such United States Holder for U.S. federal income tax purposes based
upon the difference between the amount of cash received by such United States
Holder and the United States Holder's adjusted tax basis in the fractional share
as set forth above. The gain or loss will constitute capital gain or loss and
will constitute long-term capital gain or loss if the United States Holder's
holding period is greater than one year as of the date of the mergers. The
deductibility of capital losses is subject to limitations.
Backup Withholding. Under the Code, if you are a non-corporate AT&T
Broadband shareholder and you receive cash instead of fractional shares of AT&T
Comcast common stock, you may be subject, under certain circumstances, to backup
withholding at the rates provided for in the Code with respect to such cash
unless you provide proof of an applicable exemption or a correct taxpayer
identification number, and otherwise comply with applicable requirements of the
backup withholding rules. Amounts withheld under the backup withholding rules
are not additional taxes and may be refunded or credited against your U.S.
federal income tax liability; provided that you furnish the required information
to the Internal Revenue Service.
Reporting Requirements. A United States Holder of Comcast common stock or
AT&T Broadband common stock receiving AT&T Comcast common stock as a result of
the mergers may be required to retain records related to such United States
Holder's Comcast common stock or AT&T Broadband common stock, as the case may
be, and file with its federal income tax return a statement setting forth facts
relating to the mergers.
REGULATORY MATTERS
It is a condition to Comcast's and AT&T's obligations to complete the AT&T
Comcast transaction that all regulatory approvals required to complete the AT&T
Comcast transaction be obtained, except where the failure to obtain any such
approvals would not reasonably be expected to have a material
II-16
adverse effect on Comcast, AT&T's broadband business or AT&T's communications
business. See "Description of the AT&T Comcast Transaction Agreements -- The
Merger Agreement -- Conditions to the Completion of the Mergers" and
"Description of the AT&T Comcast Transaction Agreements -- The Separation and
Distribution Agreement -- Conditions to the Completion of the Separation and the
AT&T Broadband Spin-off." Comcast and AT&T have agreed to use their best efforts
to obtain all regulatory approvals that are necessary or advisable in connection
with the AT&T Comcast transaction. In addition, Comcast and AT&T have also
agreed to take all actions necessary to obtain termination of the applicable
waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
relating to the AT&T Comcast transaction and to obtain all consents of the FCC
required to complete the AT&T Comcast transaction. See "Description of the AT&T
Comcast Transaction Agreements -- The Merger Agreement -- Covenants -- Covenant
to Obtain Regulatory Approvals."
The material regulatory requirements affecting the AT&T Comcast transaction
are summarized below. Although Comcast and AT&T have not yet received the
regulatory approvals discussed below, Comcast and AT&T anticipate that they will
obtain regulatory approvals sufficient to complete the AT&T Comcast transaction
by the end of 2002.
Antitrust Considerations. The mergers are subject to the requirements of
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which
prevents specified transactions from being completed until required information
and materials are furnished to the U.S. Department of Justice and the Federal
Trade Commission and specified waiting periods are terminated or expire. On
January 22, 2002, Comcast and AT&T filed the required information and materials
to notify the U.S. Department of Justice and the Federal Trade Commission of the
mergers. Unless extended or earlier terminated, the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 waiting period will expire on February 21, 2002, which
is thirty calendar days after Comcast's and AT&T's filing of the required
notification materials.
The U.S. Department of Justice, the Federal Trade Commission and, under
certain circumstances, states or private parties may challenge the mergers on
antitrust grounds, either before or after expiration of the waiting period.
Accordingly, at any time before or after the completion of the mergers, either
the U.S. Department of Justice or the Federal Trade Commission could take action
under the antitrust laws as it deems necessary or desirable in the public
interest, or states or other persons could take action under the antitrust laws,
including seeking to enjoin the mergers. There can be no assurance that a
challenge to the mergers will not be made or that, if a challenge is made, that
Comcast and AT&T will prevail.
Federal Communications Commission. Pursuant to the Communications Act of
1934, as amended, the transfer of control of licenses issued by the FCC
typically requires prior FCC approval. Comcast and AT&T each directly or
indirectly hold FCC licenses and intend to obtain any necessary approvals from
the FCC in connection with the mergers and the other proposed transactions. The
FCC will conduct a proceeding to review the information and materials that
Comcast and AT&T will file in support of their applications. Interested members
of the public are entitled to participate in this proceeding. There can be no
assurance that a challenge to the mergers or the transfer of control of the
licenses and authorizations will not be made in this proceeding or that, if a
challenge is made, that Comcast and AT&T will prevail.
State and Local Governmental Authorities. The mergers are also subject to
certain state and local governmental approvals or actions. Comcast and AT&T have
filed or will file applications and formal notifications in connection with the
mergers with a substantial number of states and local franchising authorities.
These filings seek the level of review and consent appropriate under the laws
and regulations of each state and each local franchising authority's franchise
agreement. Where approval or consent is required for transfer of control of
cable television franchises, the governing legal standard addresses the legal,
technical and financial and, in Massachusetts, managerial qualifications of the
company acquiring control. For transfers of control of regulated telephony
service providers, the governing legal standard is typically whether the
transaction is "in the public interest."
States and local franchising authorities may, in connection with the
approval process, seek to impose conditions or limitations upon the companies.
As a result, depending on the nature of any conditions imposed by state
authorities or local franchise authorities, these conditions could jeopardize or
delay
II-17
completion of the mergers. Additionally, if Comcast and AT&T decide to complete
the mergers notwithstanding any conditions imposed by state authorities or local
franchise authorities, the expected benefits of the mergers may be reduced. See
"Summary and Overview of the Transactions -- Risk Factors -- Risk Factors
Relating to the Business of AT&T Comcast."
Other Regulatory Filings. Comcast and AT&T conduct operations in a number
of jurisdictions where other regulatory filings or approvals may be required or
advisable in connection with the completion of the AT&T Comcast transaction.
Comcast and AT&T are currently in the process of reviewing whether other filings
or approvals may be required or desirable in these other jurisdictions. If
Comcast and AT&T conclude other filings or approvals are required or desirable,
it is anticipated that such filings will be completed and such approvals will be
sought. However, the failure to complete such filings or to obtain such
approvals is not expected to have a material effect on the combined company.
There can be no assurances that Comcast and AT&T will obtain all of the
regulatory approvals described above that are necessary to complete the AT&T
Comcast transaction or that the granting of these approvals will not involve the
imposition of conditions on the completion of the AT&T Comcast transaction or
require changes to the terms of the AT&T Comcast transaction. See "Summary and
Overview of the Transactions -- Risk Factors -- Risk Factors Relating to the
AT&T Comcast Transaction".
APPRAISAL RIGHTS
Holders of Comcast Class A common stock and Comcast Class A Special common
stock are not entitled to appraisal rights in connection with the AT&T Comcast
transaction.
Holders of AT&T common stock are not entitled to appraisal rights in
connection with the AT&T Comcast transaction.
FEDERAL SECURITIES LAWS CONSEQUENCES; STOCK TRANSFER RESTRICTION AGREEMENTS
The shares of AT&T Comcast common stock to be issued in connection with the
mergers will be registered under the Securities Act and will be freely
transferable under the Securities Act, except for shares of AT&T Comcast common
stock issued to any person who is deemed to be an "affiliate" of either Comcast
or AT&T Broadband at the time of the meetings. Persons who may be deemed to be
affiliates of Comcast or AT&T Broadband include individuals or entities that
control, are controlled by or are under the common control of Comcast or AT&T
Broadband, as applicable, and may include executive officers and directors of
Comcast or AT&T Broadband, as applicable, as well as significant shareholders of
Comcast or AT&T Broadband, as applicable. Affiliates may not sell their shares
of AT&T Comcast common stock acquired in connection with the mergers except
pursuant to:
- an effective registration statement under the Securities Act covering the
resale of those shares;
- an exemption under paragraph(d) of Rule 145 under the Securities Act; or
- any other applicable exemption under the Securities Act.
AT&T Comcast's registration statement on Form S-4, of which this document
forms a part, does not cover the resale of shares of AT&T Comcast common stock
to be received by affiliates of Comcast or AT&T Broadband in the mergers.
ACCOUNTING TREATMENT
The mergers will be accounted for by Comcast as an acquisition under the
purchase method of accounting. Under this method of accounting, the assets and
liabilities of AT&T Broadband not previously owned by Comcast or its affiliates
will be recorded at their fair value, and any excess of Comcast's purchase price
over the fair value of AT&T Broadband's tangible net assets not previously owned
by Comcast or its affiliates will be recorded as intangible assets, including
goodwill.
II-18
CHAPTER THREE
FINANCIAL INFORMATION RELATING TO THE AT&T COMCAST TRANSACTION
AT&T COMCAST CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Combined Condensed Balance Sheet of AT&T
Comcast as of September 30, 2001 gives effect to the AT&T Comcast transaction.
The following Unaudited Pro Forma Combined Condensed Statements of Operations of
AT&T Comcast for the nine months ended September 30, 2001 and for the year ended
December 31, 2000 give effect to the AT&T Comcast transaction and AT&T's
acquisition of MediaOne Group, which occurred on June 15, 2000. The pro forma
financial statements reflect the fact that the AT&T Comcast transaction and the
MediaOne acquisition are accounted for under the purchase method of accounting.
Since the acquisition of MediaOne Group occurred prior to September 30,
2001, the financial position of MediaOne Group has been included in the
historical combined AT&T Broadband Group balance sheet as of September 30, 2001.
The Unaudited Pro Forma Combined Condensed Balance Sheet assumes the AT&T
Comcast transaction occurred on September 30, 2001. The Unaudited Pro Forma
Combined Condensed Statements of Operations assume the AT&T Comcast transaction
and AT&T's acquisition of MediaOne Group occurred on January 1, 2000. The
unaudited pro forma financial data is based on the historical consolidated
financial statements of Comcast, the historical combined financial statements of
AT&T Broadband Group and the historical consolidated financial statements of
MediaOne Group under the assumptions and adjustments set forth in the
accompanying explanatory notes.
AT&T and Comcast have determined that the AT&T Comcast transaction will be
accounted for as an acquisition by Comcast of AT&T Broadband Group. As Comcast
is considered the accounting acquiror, the historical basis of Comcast's assets
and liabilities will not be affected by the AT&T Comcast transaction. For
purposes of developing the Unaudited Pro Forma Combined Condensed Balance Sheet
as of September 30, 2001, AT&T Broadband Group's assets, including identifiable
intangible assets, and liabilities have been recorded at their estimated fair
values and the excess purchase price has been assigned to goodwill. The fair
values assigned in these pro forma financial statements are preliminary and
represent management's best estimates of current fair value which are subject to
revision upon completion of the AT&T Comcast transaction. Management of both
companies currently knows of no events or circumstances other than those
disclosed in these pro forma notes that would require a material change to the
preliminary purchase price allocation. However, a final determination of
required purchase accounting adjustments will be made upon the completion of a
study to be undertaken by AT&T Comcast in conjunction with independent
appraisers to determine the fair value of certain of AT&T Broadband Group's
assets, including identifiable intangible assets, and liabilities. Assuming
completion of the AT&T Comcast transaction, the actual financial position and
results of operations will differ, perhaps significantly, from the pro forma
amounts reflected herein due to a variety of factors, including access to
additional information, changes in value not currently identified and changes in
operating results between the dates of the pro forma financial data and the date
on which the AT&T Comcast transaction takes place. See Note (b) to Unaudited Pro
Forma Combined Condensed Balance Sheet.
Comcast stockholders will receive shares of AT&T Comcast Class A common
stock, AT&T Comcast Class B common stock and AT&T Comcast Class A Special common
stock in exchange for shares of Comcast Class A common stock, Comcast Class B
common stock and Comcast Class A Special common stock, respectively, based on an
exchange ratio of 1 to 1. AT&T Comcast will issue stock options to purchase
shares of AT&T Comcast common stock in exchange for all outstanding stock
options of Comcast, based on an exchange ratio of 1 to 1. See "Certain Legal
Information -- Comparison of AT&T, Comcast and AT&T Comcast Shareholder Rights"
for a description and comparison of the rights of each class of common stock.
III-1
The estimated aggregate consideration and Comcast's transaction costs
directly related to the AT&T Comcast transaction total $49,235.6 million. This
includes the fair value of the issuance of approximately 1,231 million shares of
AT&T Comcast common stock to AT&T shareholders in exchange for all of AT&T's
interests in AT&T Broadband Group, the fair value of the issuance of 115.0
million shares of AT&T Comcast common stock to Microsoft Corporation in exchange
for AT&T Broadband Group shares that Microsoft will receive immediately prior to
the completion of the AT&T Comcast transaction for settlement of their $5
billion aggregate principal amount in quarterly income preferred securities
(QUIPS), the fair value of AT&T Comcast stock options and stock appreciation
rights issued in exchange for AT&T Broadband Group stock options and stock
appreciation rights and Comcast's estimated transaction costs directly related
to the AT&T Comcast transaction. The fair value of the shares to be issued for
AT&T Broadband Group is based on a price per share of $35.97 which reflects the
weighted-average market price of Comcast Class A Special common stock during the
period beginning two days before and ending two days after the AT&T Comcast
transaction was announced. In limited circumstances the number of shares issued
to AT&T shareholders is subject to adjustment. In the event this occurs, the
fair value of all of the shares to be issued would be based on the market price
of Comcast Class A Special common stock on the closing date. In addition to the
consideration paid, AT&T Comcast will refinance $7,819.6 million of debt and
accrued interest assumed from AT&T Broadband Group based on the pro formas.
AT&T Comcast intends to review the synergies of the combined business,
which may result in a plan to realign or reorganize certain of AT&T Broadband
Group's existing operations. The costs of implementing such a plan, if it were
to occur, have not been reflected in the accompanying pro forma financial
statements. The impact of a potential realignment, assuming such a plan were in
place at the consummation date of the AT&T Comcast transaction, could increase
or decrease the amount of goodwill and intangible assets recognized by AT&T
Comcast in accordance with Emerging Issues Task Force No. 95-3, "Recognition of
Liabilities in Connection with a Purchase Business Combination." The Unaudited
Combined Condensed Statements of Operations exclude any benefits that may result
from synergies that may be derived, or the elimination of duplicative efforts.
Among the provisions of Statement of Financial Accounting Standards No.
141, "Business Combinations," new criteria have been established for determining
whether intangible assets should be recognized separately from goodwill.
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142") provides, among other guidelines, that goodwill
and intangible assets with indefinite lives will not be amortized, but rather
will be tested for impairment on at least an annual basis. Management of both
companies believes that cable franchise operating rights have indefinite lives
based upon an analysis utilizing the criteria in paragraph 11 of SFAS 142. The
pro forma adjustments to the Unaudited Pro Forma Combined Condensed Statements
of Operations reflect the elimination of AT&T Broadband Group's amortization
expense related to goodwill and cable franchise operating rights since this
acquisition will be accounted for under the provisions of SFAS 142.
Comcast incurred goodwill and cable franchise operating rights amortization
expense of approximately $1,556.0 million and $1,473.0 million for the year
ended December 31, 2000 and nine months ended September 30, 2001, respectively.
The historical consolidated financial statements of Comcast included in the
Unaudited Pro Forma Combined Condensed Statements of Operations include the
amortization expense related to Comcast's goodwill and cable franchise operating
rights, which has not been eliminated in the pro forma adjustments. Effective
January 1, 2002, Comcast will, in accordance with the provisions of SFAS 142, no
longer amortize goodwill and cable franchise operating rights.
The pro forma financial data presented assumes the AT&T Comcast transaction
is completed under the Preferred Structure (see "Description of the AT&T Comcast
Transaction Agreements -- The Merger Agreement -- Merger Consideration -- The
Preferred Structure"). However, if the AT&T Comcast transaction were completed
under the Alternative Structure (see "Description of the AT&T Comcast
Transaction Agreements -- The Merger Agreement -- Merger Consideration -- The
Alternative Structure"), this would have no impact on the pro forma financial
statements as presented. Management
III-2
of both companies believes that the assumptions used provide a reasonable basis
on which to present the unaudited pro forma financial data. In addition to
AT&T's acquisition of MediaOne Group, both companies have completed other
acquisitions and dispositions which are not significant, individually or in the
aggregate, and, accordingly, have not been included in the accompanying
unaudited pro forma financial data. The unaudited pro forma financial data may
not be indicative of the financial position or results that would have occurred
if AT&T's acquisition of MediaOne Group and the AT&T Comcast transaction had
been in effect on the dates indicated or which may be obtained in the future.
The unaudited pro forma financial data should be read in conjunction with
the historical consolidated financial statements and accompanying notes thereto
for Comcast, and the historical combined financial statements and accompanying
notes thereto for AT&T Broadband Group, which have been incorporated by
reference or included herein.
III-3
AT&T COMCAST CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 2001
HISTORICAL
HISTORICAL AT&T PRO FORMA PRO FORMA
COMCAST(A) BROADBAND(A) ADJUSTMENTS AT&T COMCAST
---------- ------------ ----------- ------------
(DOLLARS IN MILLIONS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................... $ 658.4 $ 253.0 $ 911.4
Investments................................. 1,271.9 1,271.9
Accounts receivable, net.................... 829.7 604.0 1,433.7
Inventories, net............................ 504.3 504.3
Other current assets........................ 165.5 570.0 25.0(b1) 760.5
--------- ---------- ---------- ----------
Total current assets...................... 3,429.8 1,427.0 25.0 4,881.8
--------- ---------- ---------- ----------
1,878.2(b2)
INVESTMENTS................................... 3,302.3 22,492.0 (1,701.0)(d) 25,971.5
--------- ---------- ---------- ----------
PROPERTY AND EQUIPMENT, net................... 7,001.7 14,292.0 21,293.7
--------- ---------- ---------- ----------
INTANGIBLE ASSETS
Goodwill.................................... 7,168.3 20,008.0 (2,683.7)(b3) 24,492.6
Cable franchise operating rights............ 19,938.1 45,513.0 (2,226.0)(b4) 63,225.1
Other intangible assets..................... 2,772.1 2,772.1
--------- ---------- ---------- ----------
29,878.5 65,521.0 (4,909.7) 90,489.8
Accumulated amortization.................... (5,503.2) (2,841.0) 2,841.0(b5) (5,503.2)
--------- ---------- ---------- ----------
24,375.3 62,680.0 (2,068.7) 84,986.6
--------- ---------- ---------- ----------
OTHER NON-CURRENT ASSETS...................... 672.3 3,370.0 25.0(b6) 4,067.3
--------- ---------- ---------- ----------
$38,781.4 $104,261.0 $ (1,841.5) $141,200.9
========= ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses....... $ 3,294.0 $ 2,692.2 $ 1,023.8(b7) $ 7,010.0
Accrued interest............................ 191.5 228.8 (48.4)(c) 371.9
Deferred income taxes....................... 194.6 194.6
25.0(b8)
Short-term debt............................. 5,390.0 (1,480.2)(c) 3,934.8
Current portion of long-term debt........... 554.4 572.0 1,126.4
--------- ---------- ---------- ----------
Total current liabilities................. 4,234.5 8,883.0 (479.8) 12,637.7
--------- ---------- ---------- ----------
250.0(b8)
(11.9)(b9)
LONG-TERM DEBT, less current portion.......... 11,494.8 17,312.0 1,528.6(c) 30,573.5
--------- ---------- ---------- ----------
DEFERRED INCOME TAXES......................... 6,453.1 25,659.0 276.7(b10) 32,388.8
--------- ---------- ---------- ----------
(179.0)(b11)
OTHER NON-CURRENT LIABILITIES................. 806.2 974.0 (253.9)(b12) 1,347.3
--------- ---------- ---------- ----------
MINORITY INTEREST............................. 954.0 3,319.0 (2,117.8)(b13) 2,155.2
--------- ---------- ---------- ----------
Company-Obligated Convertible Quarterly Income
Preferred Securities of Subsidiary Trust
Holding Solely Subordinated Debt Securities
of AT&T..................................... 4,718.0 (4,718.0)(b14)
--------- ---------- ---------- ----------
STOCKHOLDERS' EQUITY
1,346.0(b15)
Common stock................................ 944.9 (47.3)(d) 2,243.6
(1,653.7)(d)
Additional capital.......................... 11,742.6 47,614.6(b15) 57,703.5
Retained earnings........................... 1,952.0 1,952.0
Accumulated other comprehensive income...... 199.3 199.3
Combined attributed net assets.............. 43,396.0 (43,396.0)(b16)
--------- ---------- ---------- ----------
Total stockholders' equity................ 14,838.8 43,396.0 3,863.6 62,098.4
--------- ---------- ---------- ----------
$38,781.4 $104,261.0 $ (1,841.5) $141,200.9
========= ========== ========== ==========
See notes to Unaudited Pro Forma Combined Condensed Balance Sheet
III-4
AT&T COMCAST CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
These columns reflect the historical balance sheets of the respective
(a) companies. Certain reclassifications have been made to the consolidated
historical financial statements of Comcast and to the combined
historical financial statements of AT&T Broadband Group to conform to
the presentation expected to be used by AT&T Comcast.
(b) This entry reflects the preliminary allocation of the purchase price to
identifiable net assets acquired and the excess purchase price to
goodwill.
COMMON ADDITIONAL
STOCK CAPITAL TOTAL
-------- --------------- ----------
CALCULATION OF CONSIDERATION
Issuance of common stock to AT&T shareholders (1,231.0
million shares * $35.97)............................. $1,231.0(i) $43,048.1 $ 44,279.1
Issuance of common stock to Microsoft Corporation
(115.0 million shares * $35.97)...................... 115.0 4,021.6 4,136.6
Fair value of AT&T Comcast stock options resulting from
the conversion of AT&T Broadband Group stock options
in the merger based on Black-Scholes option pricing
model................................................ 544.9 544.9
-------- --------- ----------
(b15) Comcast common stock equity consideration.............. 1,346.0 47,614.6 48,960.6
(b8) Transaction costs (assumed to be funded -- $25.0
short-term debt and $250.0 long-term debt)........... 275.0
----------
Total consideration.................................... $ 49,235.6
==========
Preliminary estimate of fair value of identifiable net
assets acquired:
(b16) Book value of AT&T Broadband Group..................... $ 43,396.0
Elimination of gross AT&T Broadband Group goodwill..... (20,008.0)
(b1) Current portion of deferred financing fees............. 25.0
(b2) Preliminary estimate of adjustment to fair value of
investments.......................................... 1,878.2
(b4) Preliminary estimate of adjustment to fair value of
cable operating franchise rights..................... (2,226.0)
(b5) Elimination of AT&T Broadband Group accumulated
amortization......................................... 2,841.0
(b6) Long-term portion of deferred financing fees........... 25.0
(b7) Preliminary estimate of current tax liability arising
from the transaction................................. (1,023.8)
(b9) Preliminary estimate of fair value of AT&T Broadband
Group assumed long-term debt......................... 11.9
(b10) Preliminary estimate of adjustment to deferred tax
liability on pro forma adjustments at combined
federal and state statutory rate..................... (276.7)
(b11) Certain liabilities retained by AT&T................... 179.0
(b12) Preliminary estimate of adjustment to fair value of
other non-current liabilities........................ 253.9
(b13) Liabilities retained by AT&T related to TCI Pacific
Preferred shares..................................... 2,117.8
(b14) Redemption of Microsoft Corporation QUIPS.............. 4,718.0
----------
Preliminary estimate of fair value of identifiable net
assets acquired...................................... 31,911.3
----------
Acquisition goodwill................................... $ 17,324.3
==========
Calculation of goodwill acquisition adjustment
Acquisition goodwill................................... $ 17,324.3
Gross value of AT&T Broadband Group goodwill........... (20,008.0)
----------
(b3) Goodwill acquisition adjustment........................ $ (2,683.7)
==========
(i) Maximum number of shares of common stock that could
be issued in the AT&T Broadband merger............. 1,235.0
Share equivalent of intrinsic value of AT&T Broadband
Group stock options and stock appreciation rights..... (4.0)
--------
Common stock to be issued
to AT&T shareholders............................... 1,231.0
========
III-5
Certain programming and other contracts of AT&T Broadband and Comcast may,
by their terms, be assumed, altered or terminated as a result of the
completion of the AT&T Comcast transaction. However, due to confidentiality
provisions in those contracts as well as legal restrictions, those terms
cannot be shared between the two parties as of the date of this proxy.
Therefore, management cannot currently estimate the impact, if any, of
favorable or unfavorable contracts that may result from the ultimate
allocation of purchase price. See note (m) to the Unaudited Pro Forma
Combined Condensed Statements of Operations for a sensitivity analysis of
the purchase price allocation.
(c) Represents the refinancing of existing short-term debt due to AT&T
($5,390.0) and certain long-term debt ($2,381.2 plus accrued interest of
$48.4) with new debt of AT&T Comcast. The refinancing is assumed to be
funded half with short-term debt and half with long-term debt.
(d) Represents the reclassification of AT&T Broadband Group's investment in
Comcast as follows:
Elimination of Comcast stock held by AT&T Broadband Group... $ (1,701.0)
Reclassification of Comcast stock held by AT&T Broadband
Group to equity (par value common stock $47.3 and additional
capital $1,653.7)...................................... 1,701.0
----------
$ --
==========
III-6
AT&T COMCAST CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
HISTORICAL HISTORICAL PRO FORMA
HISTORICAL AT&T MEDIAONE INTERCOMPANY PRO FORMA AT&T
COMCAST(A) BROADBAND(A) 1/1/00-6/14/00(A) ADJUSTMENTS ADJUSTMENTS(E) COMCAST(M)
---------- ------------ ----------------- ------------ -------------- ----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
REVENUES
Service revenues................... $ 4,682.7 $ 8,445.0 $ 1,325.0 $ (65.1)(b) $14,387.6
Net sales from electronic
retailing........................ 3,535.9 3,535.9
--------- ---------- --------- --------- --------- ---------
8,218.6 8,445.0 1,325.0 (65.1) 17,923.5
--------- ---------- --------- --------- --------- ---------
COSTS AND EXPENSES
Operating.......................... 2,212.5 4,600.0 554.0 (21.5)(b) 7,345.0
Cost of goods sold from electronic
retailing........................ 2,284.9 2,284.9
Selling, general and
administrative................... 1,250.9 2,180.0 342.0 (21.6)(b) 3,751.3
Depreciation....................... 837.3 1,674.0 435.0 2,946.3
Amortization....................... 1,794.0 2,377.0 271.0 (2,435.8)(f) 2,006.2
Asset impairment, restructuring and
other charges.................... 6,270.0 6,270.0
--------- ---------- --------- --------- --------- ---------
8,379.6 17,101.0 1,602.0 (43.1) (2,435.8) 24,603.7
--------- ---------- --------- --------- --------- ---------
OPERATING LOSS....................... (161.0) (8,656.0) (277.0) (22.0) 2,435.8 (6,680.2)
OTHER INCOME (EXPENSE)
103.7(g)
Interest expense................... (691.4) (1,323.0) (312.0) 25.4(h) (2,197.3)
Investment income (expense)........ 983.9 (84.0) (37.4)(b) 862.5
Income related to indexed debt..... 666.0 666.0
(967.0)(i)
Equity in net income (losses) of
affiliates....................... (21.3) (67.0)(b) 485.0(f) (570.3)
Other income (expense)............. 2,825.5 45.0 3,341.0 (2,756.0)(c) 3,455.5
--------- ---------- --------- --------- --------- ---------
3,762.7 (1,362.0) 3,029.0 (2,860.4) (352.9) 2,216.4
--------- ---------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES,
MINORITY INTEREST, EXTRAORDINARY
ITEMS AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE.................. 3,601.7 (10,018.0) 2,752.0 (2,882.4) 2,082.9 (4,463.8)
370.0(i)
INCOME TAX (EXPENSE) BENEFIT......... (1,441.3) 1,183.0 (1,189.0) 1,181.0(d) (721.1)(j) (617.4)
--------- ---------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE MINORITY
INTEREST, EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE............................. 2,160.4 (8,835.0) 1,563.0 (1,701.4) 1,731.8 (5,081.2)
Net loss from equity investments..... (597.0) 597.0(i)
MINORITY INTEREST INCOME (EXPENSE)... (115.3) 4,062.0 (106.0)(b) 160.0(k) 4,000.7
--------- ---------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEMS AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE.................. 2,045.1 (5,370.0) 1,563.0 (1,807.4) 2,488.8 (1,080.5)
PREFERRED DIVIDENDS.................. (23.5) (23.5)
--------- ---------- --------- --------- --------- ---------
INCOME (LOSS) FOR COMMON STOCKHOLDERS
BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE............................. $ 2,021.6 $ (5,370.0) $ 1,563.0 $(1,807.4) $ 2,488.8 $(1,104.0)
========= ========== ========= ========= ========= =========
Earnings (loss) per share from
continuing operations before
extraordinary items -- basic....... $ 2.27 $ (0.50)
Earnings (loss) per share from
operations before extraordinary
items -- assuming dilution......... $ 2.16 $ (0.50)
Weighted average number of common
shares outstanding -- basic........ 890.7 1,298.7(l) 2,189.4
Weighted average number of common
shares outstanding -- assuming
dilution........................... 948.7 1,302.7(l) 2,251.4
See Notes to Unaudited Pro Forma Combined Condensed Statement of Operations
III-7
AT&T COMCAST CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
HISTORICAL PRO FORMA
HISTORICAL AT&T INTERCOMPANY PRO FORMA AT&T
COMCAST(A) BROADBAND(A) ADJUSTMENTS ADJUSTMENTS(E) COMCAST(M)
---------- ------------ ------------ -------------- ----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
REVENUES
Service revenues............................ $4,195.0 $ 7,756.0 $ (96.7)(b) $ $11,854.3
Net sales from electronic retailing......... 2,655.1 2,655.1
-------- --------- ------- --------- ---------
6,850.1 7,756.0 (96.7) 14,509.4
-------- --------- ------- --------- ---------
COSTS AND EXPENSES
Operating................................... 1,991.6 4,245.0 (56.2)(b) 6,180.4
Cost of goods sold from electronic
retailing................................. 1,685.6 1,685.6
Selling, general and administrative......... 1,125.8 1,951.0 (17.0)(b) 3,059.8
Depreciation................................ 760.4 1,952.0 2,712.4
Amortization................................ 1,698.7 1,681.0 (1,462.4)(f) 1,917.3
Asset impairment, restructuring and other
charges................................... 1,494.0 1,494.0
-------- --------- ------- --------- ---------
7,262.1 11,323.0 (73.2) (1,462.4) 17,049.5
-------- --------- ------- --------- ---------
OPERATING LOSS................................ (412.0) (3,567.0) (23.5) 1,462.4 (2,540.1)
OTHER INCOME (EXPENSE)
217.3(g)
Interest expense............................ (549.2) (1,347.0) 19.1(h) (1,659.8)
Investment income (expense)................. 1,045.7 (1,245.0) (18.7)(b) (218.0)
(43.0)(i)
Equity in net income (losses) of
affiliates................................ (26.1) 120.0(f) 50.9
Other income (expense)...................... 1,180.9 (911.0) 269.9
-------- --------- ------- --------- ---------
1,651.3 (3,503.0) (18.7) 313.4 (1,557.0)
-------- --------- ------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY
INTEREST, EXTRAORDINARY ITEMS AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE................. 1,239.3 (7,070.0) (42.2) 1,775.8 (4,097.1)
(494.8)(j)
INCOME TAX (EXPENSE) BENEFIT.................. (602.9) 3,214.0 (750.2)(d) 6.0(i) 1,372.1
-------- --------- ------- --------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST,
EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE........................... 636.4 (3,856.0) (792.4) 1,287 (2,725.0)
Net loss in equity investments................ (37.0) 37.0(i)
MINORITY INTEREST (EXPENSE) INCOME............ (89.8) 905.0 (24.0)(b) 120.0(k) 911.2
-------- --------- ------- --------- ---------
INCOME (LOSS) FOR COMMON STOCKHOLDERS BEFORE
EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE........................... $ 546.6 $(2,988.0) $(816.4) $ 1,444.0 $(1,813.8)
======== ========= ======= ========= =========
Earnings (loss) per share from continuing
operations before extraordinary items and
cumulative effect of accounting
change -- basic............................. $ 0.58 $ (0.81)
Earnings (loss) per share from continuing
operations before extraordinary items and
cumulative effect of accounting
change -- assuming dilution................. $ 0.56 $ (0.81)
Weighted average number of common shares
outstanding -- basic........................ 949.3 1,298.7(l) 2,248.0
Weighted average number of common shares
outstanding -- assuming dilution............ 964.7 1,302.7(l) 2,267.4
See Notes to Unaudited Pro Forma Combined Condensed Statement of Operations
III-8
AT&T COMCAST CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(a) These columns reflect the historical statements of operations of the
respective companies. Certain reclassifications have been made to the
consolidated historical financial statements of Comcast and the combined
historical financial statements of AT&T Broadband Group to conform to the
presentation expected to be used by AT&T Comcast.
(b) Adjustment reflects the elimination of historical intercompany transactions
between Comcast and AT&T Broadband Group as follows: amounts charged by
Comcast to AT&T Broadband Group for programming, the gains and losses
resulting from the sales of certain cable systems by AT&T Broadband Group
to Comcast, the gains recorded by AT&T Broadband Group resulting from the
fair value exchange of certain cable systems with Comcast and Excite@Home
transactions.
(c) Adjustment represents the gains recorded by Comcast resulting from
intercompany transactions with AT&T Broadband Group for the year ended
December 31, 2000.
Gain on systems exchanged................................. $1,711.0
Gain on receipt of Excite@Home right...................... 1,045.0
--------
Total.................................................. $2,756.0
========
(d) Represents the aggregate pro forma income tax effect of Notes (b) and (c)
above at the combined federal and state statutory rate.
(e) AT&T Broadband Group has certain intercompany agreements with AT&T Corp.
which will be terminated as of the date of the AT&T Comcast transaction.
The costs of replacing these services is uncertain. However, the impact of
the termination of these arrangements is not expected to be material.
(f) Represents the elimination of AT&T Broadband Group's and MediaOne Group's
historical goodwill and cable franchise operating rights amortization
expense for consolidated subsidiaries and equity method investments. Under
the accounting rules set forth in SFAS 142 issued by the Financial
Accounting Standards Board in June 2001, goodwill and intangibles with
indefinite lives are not amortized against earnings other than in
connection with an impairment.
(g) Represents the net effect on interest expense resulting from the financings
described in Note (c) to the Unaudited Pro Forma Combined Condensed Balance
Sheet. Pro forma interest expense was calculated based on the interest
rates of the historical debt outstanding plus the interest rates of the
planned credit facilities. The pro forma financial information assumes the
financings occurred on January 1, 2000. Amortization of deferred financing
costs was calculated based on the expected amounts and terms of the new
facilities. Short-term rates are assumed to be 4% and long-term rates are
assumed to be 7%. Assuming interest rates changed by 0.125%, the related
interest expense and pre-tax impact on earnings would be $9.7 for the year
ended December 31, 2000 and $7.3 for the nine months ended September 30,
2001.
(h) Represents the decrease in interest expense as a result of the adjustment
of AT&T Broadband Group's long-term debt to its fair value as described in
Note (c) to the Unaudited Pro Forma Combined Condensed Balance Sheet. The
difference between the fair value and the face amount of each borrowing is
amortized as a reduction to interest expense over the remaining term of the
borrowing.
(i) Represents the reclassification of losses in equity investments to conform
with the presentation currently used by Comcast.
(j) Represents the aggregate pro forma income tax effect of Notes (f) through
(h) above at the combined federal and state statutory rate.
III-9
(k) Represents the elimination of historical dividends on QUIPS exchanged for
AT&T Broadband Group common stock.
(l) For basic earnings per share, this adjustment represents the issuance of
AT&T Comcast shares to AT&T shareholders and Microsoft Corporation offset
by shares of Comcast owned by AT&T Broadband Group which are classified as
treasury shares (see Note (d) to the Unaudited Pro Forma Combined Condensed
Balance Sheet). In addition, earnings per share assuming dilution has been
adjusted to include the dilutive effects of AT&T Comcast stock options
issued in exchange for the AT&T Broadband Group stock options.
(m) The pro forma combined condensed financial statements reflect a preliminary
allocation to tangible assets, liabilities, goodwill and other intangible
assets. The final purchase price allocation may result in different
allocations for tangible and intangible assets than that presented in these
pro forma combined condensed financial statements. The following table
shows the absolute dollar effect on pro forma net income (loss) applicable
to common stockholders and net income (loss) per share assuming dilution
for every $500 of purchase price allocated to amortizable assets or certain
liabilities over assumed weighted average useful lives. An increase in the
purchase amount allocated to amortizable assets or a decrease in the amount
allocated to certain liabilities will result in a decrease to net income. A
decrease in the amount allocated to amortizable assets or an increase in
the amount allocated to certain liabilities will result in an increase to
net income.
NINE MONTHS
YEAR ENDED ENDED
WEIGHTED AVERAGE LIFE DECEMBER 31, 2000 SEPTEMBER 30, 2001
--------------------- ----------------- ------------------
Five years
Net income................................................ $61.5 $46.1
Per share................................................. $0.03 $0.02
Ten years
Net income................................................ $30.8 $23.1
Per share................................................. $0.01 $0.01
Twenty years
Net income................................................ $15.4 $11.5
Per share................................................. $0.01 $0.01
III-10
CHAPTER FOUR
OPINIONS OF FINANCIAL ADVISORS
OPINIONS OF COMCAST'S FINANCIAL ADVISORS
At the meeting of the Comcast Board on December 19, 2001, each of Morgan
Stanley, JPMorgan and Merrill Lynch rendered its opinion to the Comcast Board
that, as of that date and based upon and subject to the assumptions,
qualifications and limitations set forth therein, the conversion ratios in the
Comcast merger applicable to the holders of Comcast common stock, in the
aggregate, were fair from a financial point of view to the holders of Comcast
common stock, taken together. Each of Morgan Stanley, JPMorgan and Merrill Lynch
has consented to the inclusion of their respective opinions as Annexes G, H and
I, respectively, to this document.
THE FULL TEXT OF THE OPINIONS OF MORGAN STANLEY, JPMORGAN AND MERRILL
LYNCH, EACH DATED DECEMBER 19, 2001, WHICH SET FORTH, AMONG OTHER THINGS, THE
ASSUMPTIONS MADE, THE PROCEDURES FOLLOWED, MATTERS CONSIDERED, AND
QUALIFICATIONS AND LIMITATIONS OF THE REVIEWS UNDERTAKEN BY EACH OF MORGAN
STANLEY, JPMORGAN AND MERRILL LYNCH IN RENDERING THEIR RESPECTIVE OPINIONS ARE
ATTACHED AS ANNEXES G, H AND I, RESPECTIVELY, TO THIS DOCUMENT AND ARE
INCORPORATED INTO THIS DOCUMENT BY REFERENCE. THE SUMMARY OF THE MORGAN STANLEY,
JPMORGAN AND MERRILL LYNCH FAIRNESS OPINIONS SET FORTH IN THIS DOCUMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF EACH OF THE OPINIONS.
COMCAST SHAREHOLDERS SHOULD READ THESE OPINIONS CAREFULLY AND IN THEIR ENTIRETY.
EACH OF MORGAN STANLEY, JPMORGAN AND MERRILL LYNCH PROVIDED ITS OPINION FOR THE
INFORMATION AND ASSISTANCE OF THE COMCAST BOARD IN CONNECTION WITH ITS
CONSIDERATION OF THE PROPOSED AT&T COMCAST TRANSACTION. NONE OF THE MORGAN
STANLEY, JPMORGAN OR MERRILL LYNCH OPINIONS IS A RECOMMENDATION TO ANY COMCAST
SHAREHOLDER AS TO HOW ANY SHAREHOLDER SHOULD VOTE WITH RESPECT TO THE PROPOSED
AT&T COMCAST TRANSACTION OR ANY OTHER MATTER AND SHOULD NOT BE RELIED UPON BY
ANY COMCAST SHAREHOLDER AS SUCH.
OPINION OF MORGAN STANLEY
In connection with rendering its opinion, Morgan Stanley, among other
things:
- reviewed certain publicly available financial statements and other
business and financial information of or relating to Comcast, AT&T and
AT&T Broadband;
- reviewed certain internal financial statements and other financial and
operating data concerning Comcast prepared by the management of Comcast;
- reviewed certain financial forecasts, including information relating to
certain strategic, financial and operational benefits anticipated from
the proposed AT&T Comcast transaction, prepared by the management of
Comcast;
- discussed the past and current operations and financial condition and the
prospects of Comcast, including the strategic, financial and operational
benefits anticipated from the proposed AT&T Comcast transaction, with the
management of Comcast;
- reviewed certain internal financial statements and other financial
operating data concerning AT&T and AT&T Broadband (including, without
limitation, the structure, composition, operations, assets, liabilities
and pro forma historical balance sheets and income statements of AT&T
Broadband) prepared by the managements of AT&T and AT&T Broadband and
Comcast;
- reviewed certain financial forecasts (including, without limitation, as
to the pro forma forecasted balance sheets and income statements of AT&T
Broadband), and including information relating to certain strategic,
financial and operational benefits anticipated from the proposed AT&T
Comcast transaction, prepared by the managements of AT&T and AT&T
Broadband and of Comcast;
- discussed the past and current operations and financial condition and the
prospects of AT&T Broadband, including the strategic, financial and
operational benefits anticipated from the proposed AT&T Comcast
transaction, with the managements of AT&T, AT&T Broadband and Comcast;
IV-1
- reviewed the reported market prices and trading activity for Comcast
common stock and AT&T common stock;
- compared the financial performance of Comcast and the prices and trading
activity of Comcast common stock with that of certain other comparable
publicly traded companies and their securities;
- compared the financial performance of AT&T Broadband and the prices and
trading activity of the AT&T common stock with that of certain other
comparable publicly traded companies and their equity securities;
- reviewed the financial terms, to the extent publicly available, of
certain comparable transactions;
- participated in discussions and negotiations among representatives of
Comcast, AT&T, AT&T Broadband and their financial and legal advisors;
- reviewed final drafts of each of the merger agreement and the separation
and distribution agreement; and
- considered such other factors and performed such other analyses as it
deemed appropriate.
In connection with its review, Morgan Stanley assumed and relied upon,
without any responsibility for independent verification or liability therefor,
the accuracy and completeness of all information that was publicly available or
supplied or otherwise made available to it by Comcast, AT&T or AT&T Broadband or
otherwise reviewed by or for it for the purposes of the Morgan Stanley opinion.
With respect to the financial forecasts, including information relating to
certain strategic, financial and operational benefits anticipated from the
proposed AT&T Comcast transaction, prepared and furnished to or discussed with
it by Comcast, AT&T or AT&T Broadband, Morgan Stanley assumed that they had been
reasonably prepared on bases reflecting the best currently available estimates
and good faith judgments of Comcast's, AT&T's and AT&T Broadband's managements
as to the expected future financial performance of Comcast, AT&T Broadband or
AT&T Comcast, as the case may be, and the strategic, financial and operational
benefits anticipated from the proposed AT&T Comcast transaction. Morgan Stanley
expressed no view as to such financial forecast information, including the
strategic, financial and operational benefits anticipated from the proposed AT&T
Comcast transaction, or the assumptions on which they were based. In addition,
Morgan Stanley assumed that the mergers are intended as tax-free exchanges under
Section 351 of the Code and that the separation and the AT&T Broadband spin-off
will qualify as tax-free transactions under Sections 355 and 368(a) of the Code,
in each case for United States federal income tax purposes, and that the Section
355(e) top-up described under "Description of the AT&T Comcast Transaction
Agreements -- The Merger Agreement -- Merger Consideration -- Potential
Additional Payments" will not occur. Furthermore, Morgan Stanley assumed no
responsibility for conducting a physical inspection of the properties or
facilities of Comcast, AT&T or AT&T Broadband or for making or obtaining any
independent valuation or appraisal of the assets or liabilities of Comcast, AT&T
or AT&T Broadband, nor was Morgan Stanley furnished with any such valuations or
appraisals. The Morgan Stanley opinion is necessarily based on financial,
economic, market and other conditions as in effect on, and the information made
available to it as of, the date of its opinion. Subsequent developments may
affect its opinion and Morgan Stanley does not have any obligation to update,
revise, or reaffirm its opinion.
For purposes of rendering its opinion, Morgan Stanley assumed, in all
respects material to its analysis, that the proposed AT&T Comcast transaction
will be consummated as described in the merger agreement and the separation and
distribution agreement, that all the representations and warranties of each
party contained in the merger agreement and the separation and distribution
agreement were true and correct, that each party to the merger agreement and the
separation and distribution agreement will perform all of the covenants and
agreements required to be performed by it thereunder without any consents or
waivers of the other parties thereto, that all conditions to the consummation of
the proposed AT&T Comcast transaction will be satisfied without waiver thereof,
and that if the parties elect to consummate the proposed AT&T Comcast
transaction by means of an alternative structure of the type described under
"Description of the AT&T Comcast Transaction Agreements -- The Merger
Agreement -- Covenants -- Alternative Structure," such alternative structure
will not differ from the structure reflected in the merger
IV-2
agreement and the separation and distribution agreement in any respect material
to its analysis. Morgan Stanley noted that it is not a legal, tax or regulatory
expert and relied upon, without assuming any responsibility for independent
verification or liability therefor, the assessment of Comcast's legal, tax and
regulatory advisors with respect to the legal, tax and regulatory matters
related to the proposed transaction. Morgan Stanley also assumed that the
definitive merger agreement and the definitive separation and distribution
agreement will not differ in any material respects from the drafts thereof
furnished to and reviewed by it. Morgan Stanley further assumed that all
governmental, regulatory or other consents and approvals (contractual or
otherwise) necessary for or in connection with the consummation of the proposed
AT&T Comcast transaction will be obtained without any adverse effect on Comcast,
AT&T Broadband or AT&T Comcast, or on the contemplated benefits of the proposed
AT&T Comcast transaction, in any respect material to its analysis. In arriving
at its opinion, Morgan Stanley was not authorized to solicit, and did not
solicit, interest from any party with respect to a business combination or other
extraordinary transaction involving Comcast.
The Morgan Stanley opinion does not address the underlying decision by
Comcast to engage in the proposed AT&T Comcast transaction or the prices at
which Comcast common stock or AT&T Comcast common stock will trade after the
announcement or consummation of the proposed AT&T Comcast transaction, and
Morgan Stanley does not express any opinion or recommendation as to how the
shareholders of Comcast should vote at the shareholders' meetings held in
connection with the proposed AT&T Comcast transaction or any other matter.
OPINION OF JPMORGAN
In connection with rendering its opinion, JPMorgan, among other things:
- reviewed the final drafts of each of the merger agreement and the
separation and distribution agreement provided to it by Comcast;
- reviewed certain publicly available business and financial information
concerning Comcast, AT&T and AT&T Broadband and the industries in which
they operate;
- reviewed certain internal, non-public financial and operating data,
analyses and forecasts prepared by the managements of Comcast, AT&T and
AT&T Broadband relating to the businesses of Comcast, on the one hand,
and AT&T Broadband, on the other (including, without limitation, the
structure, composition, operations, assets, liabilities and pro forma
historical and forecasted balance sheets and income statements of AT&T
Broadband), as well as the estimated amount and timing of the cost
savings and related expenses and synergies expected to result from the
proposed AT&T Comcast transaction furnished to it by Comcast, AT&T and
AT&T Broadband;
- compared the proposed financial terms of the proposed AT&T Comcast
transaction with the publicly available financial terms of certain
transactions involving companies it deemed relevant;
- compared the financial and operating performance of Comcast and AT&T
Broadband with publicly available information concerning certain other
companies it deemed relevant and reviewed the current and historical
market prices of Comcast common stock and AT&T common stock and certain
publicly traded securities of such other companies;
- participated in certain discussions and negotiations among
representatives of Comcast, AT&T and AT&T Broadband and their financial
and legal advisors; and
- performed such other financial studies and analyses and considered such
other information as it deemed appropriate for the purposes of this
opinion.
In addition, JPMorgan held discussions with certain members of the
management of Comcast, AT&T and AT&T Broadband with respect to certain aspects
of the proposed AT&T Comcast transaction and the foregoing matters, including
the past and current business operations of Comcast, AT&T and AT&T Broadband,
the financial condition and future prospects and operations of Comcast and AT&T
Broadband, the effects of the proposed AT&T Comcast transaction, including the
estimated synergies, on the financial
IV-3
condition and future prospects of Comcast, AT&T Broadband and AT&T Comcast, and
certain other matters JPMorgan believed necessary or appropriate to its inquiry.
In giving its opinion, JPMorgan relied upon and assumed, without any
responsibility for independent verification or liability therefor, the accuracy
and completeness of all information that was publicly available or furnished to
it by Comcast, AT&T or AT&T Broadband or otherwise reviewed by or for it.
JPMorgan did not conduct any valuation or appraisal of any assets or liabilities
of Comcast, AT&T or AT&T Broadband, nor were any such valuations or appraisals
provided to it. In addition, JPMorgan did not assume any obligation to conduct
any inspection of the properties or facilities of Comcast, AT&T or AT&T
Broadband. In relying on financial analyses and forecasts provided to it,
including the estimated synergies, JPMorgan assumed that they had been
reasonably prepared based on assumptions reflecting the best currently available
estimates and judgments by the managements of Comcast, AT&T and AT&T Broadband
as to the expected future results of operations and financial condition of
Comcast, AT&T Broadband and AT&T Comcast and as to such other matters, including
the estimated synergies, to which such analyses or forecasts relate. JPMorgan
expressed no view as to such analyses or forecasts, including the estimated
synergies, or the assumptions on which they were based. JPMorgan also assumed
that the mergers will qualify as tax-free exchanges under Section 351 of the
Code and that the separation and the AT&T Broadband spin-off will qualify as
tax-free transactions under Sections 355 and 368(a) of the Code, in each case
for United States federal income tax purposes, and that the Section 355(e)
top-up described under "Description of the AT&T Comcast Transaction
Agreements -- The Merger Agreement -- Merger Consideration -- Potential
Additional Payments" will not occur.
For purposes of rendering its opinion, JPMorgan assumed, in all respects
material to its analysis, that the proposed AT&T Comcast transaction will be
consummated as described in the merger agreement and the separation and
distribution agreement, that all the representations and warranties of each
party contained in the merger agreement and the separation and distribution
agreement were true and correct, that each party to the merger agreement and the
separation and distribution agreement will perform all of the covenants and
agreements required to be performed by it thereunder without any consents or
waivers of the other parties thereto, that all conditions to the consummation of
the proposed AT&T Comcast transaction will be satisfied without waiver thereof,
and that if the parties elect to consummate the proposed AT&T Comcast
transaction by means of an alternative structure of the type described under
"Description of the AT&T Comcast Transaction Agreements -- The Merger
Agreement -- Covenants -- Alternative Structure," such alternative structure
will not differ from the structure reflected in the merger agreement and the
separation and distribution agreement in any respect material to its analysis.
JPMorgan noted that it is not a legal, tax or regulatory expert and relied upon,
without assuming any responsibility for independent verification or liability
therefor, the assessment of Comcast's legal, tax and regulatory advisors with
respect to the legal, tax and regulatory matters related to the proposed
transaction. JPMorgan also assumed that the definitive merger agreement and the
definitive separation and distribution agreement will not differ in any material
respects from the drafts thereof furnished to and reviewed by it. JPMorgan
further assumed that all governmental, regulatory or other consents and
approvals (contractual or otherwise) necessary for or in connection with the
consummation of the proposed AT&T Comcast transaction will be obtained without
any adverse effect on Comcast, AT&T Broadband or AT&T Comcast, or on the
contemplated benefits of the proposed transaction, in any respect material to
its analysis.
The JPMorgan opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to it as of, the
date of its opinion. Subsequent developments may affect its opinion and JPMorgan
does not have any obligation to update, revise, or reaffirm its opinion. The
JPMorgan opinion is limited to the fairness, from a financial point of view, to
the holders of Comcast common stock, taken together, of the Comcast conversion
ratios in the Comcast merger, in the aggregate, and JPMorgan does not express
any opinion as to the underlying decision by Comcast to engage in the proposed
AT&T Comcast transaction. JPMorgan does not express any opinion as to the price
at which Comcast common stock or AT&T Comcast common stock will trade at any
future time and JPMorgan is not expressing any opinion or recommendation as to
how the shareholders of Comcast should vote at the shareholders' meetings held
in connection with the proposed AT&T Comcast transaction or any other
IV-4
matter. In arriving at its opinion, JPMorgan was not authorized to solicit, and
did not solicit, interest from any party with respect to a business combination
or other extraordinary transaction involving Comcast.
OPINION OF MERRILL LYNCH
In connection with rendering its opinion, Merrill Lynch, among other
things:
- reviewed certain publicly available business and financial information
relating to Comcast, AT&T and AT&T Broadband that it deemed to be
relevant;
- reviewed certain information, including financial forecasts, relating to
the business, earnings, cash flow, assets, liabilities and prospects of
Comcast, AT&T and AT&T Broadband (including, without limitation, the
structure, composition, operations, assets, liabilities and pro forma
historical and forecasted balance sheets and income statements of AT&T
Broadband), as well as the amount and timing of the cost savings and
related expenses and synergies expected to result from the proposed AT&T
Comcast transaction furnished to it by Comcast, AT&T and AT&T Broadband;
- conducted discussions with members of management and representatives of
Comcast, AT&T and AT&T Broadband concerning the matters described above,
as well as their businesses and prospects before and after giving effect
to the proposed AT&T Comcast transaction and the expected synergies;
- reviewed the market prices and valuation multiples for Comcast common
stock and AT&T common stock and compared them with those of certain
publicly traded companies that it deemed to be relevant;
- reviewed the results of operations of Comcast and AT&T Broadband and
compared them with those of certain publicly traded companies that it
deemed to be relevant;
- compared the proposed financial terms of the AT&T Comcast transaction
with the financial terms of certain other transactions that it deemed to
be relevant;
- participated in certain discussions and negotiations among
representatives of Comcast, AT&T and AT&T Broadband and their financial
and legal advisors;
- reviewed the potential pro forma impact of the proposed AT&T Comcast
transaction;
- reviewed the final drafts of each of the merger agreement and the
separation and distribution agreement, respectively; and
- reviewed such other financial studies and analyses and took into account
such other matters as it deemed necessary, including Merrill Lynch's
assessment of general economic, market and monetary conditions.
In preparing its opinion, Merrill Lynch assumed and relied on the accuracy
and completeness of all information supplied or otherwise made available to it,
discussed with or reviewed by or for it, or publicly available, and Merrill
Lynch did not assume any responsibility for independently verifying such
information or liability therefor, or undertake an independent evaluation or
appraisal of any of the assets or liabilities of Comcast, AT&T or AT&T Broadband
and was not furnished with any such evaluation or appraisal. In addition,
Merrill Lynch did not assume any obligation to conduct any physical inspection
of the properties or facilities of Comcast, AT&T or AT&T Broadband. With respect
to the financial forecast information and the expected synergies furnished to or
discussed with it by Comcast, AT&T or AT&T Broadband, Merrill Lynch assumed that
they have been reasonably prepared and reflect the best currently available
estimates and judgment of Comcast's, AT&T's or AT&T Broadband's managements as
to the expected future financial performance of Comcast, AT&T Broadband or AT&T
Comcast, as the case may be, and the expected synergies. Merrill Lynch expressed
no view as to such financial forecast information, including the expected
synergies, or the assumptions on which they were based. Merrill Lynch further
assumed that the mergers will qualify as tax-free exchanges under Section 351 of
the Code and that the separation and the AT&T Broadband spin-off will qualify as
tax-free transactions under Sections 355 and
IV-5
368(a) of the Code, in each case for United States federal income tax purposes,
and that the Section 355(e) top-up described under "Description of the AT&T
Comcast Transaction Agreements -- The Merger Agreement -- Merger
Consideration -- Potential Additional Payments" will not occur. Merrill Lynch
also assumed that the final form of the merger agreement and the separation and
distribution agreement will be substantially similar to the last draft reviewed
by it.
The Merrill Lynch opinion is necessarily based upon market, economic and
other conditions as they existed and could be evaluated on, and on the
information made available to it as of, the date of its opinion. Subsequent
developments may affect its opinion and Merrill Lynch does not have any
obligation to update, revise, or reaffirm its opinion. Merrill Lynch assumed
that all governmental, regulatory or other consents and approvals (contractual
or otherwise) necessary for or in connection with the consummation of the
proposed AT&T Comcast transaction will be obtained without any adverse effect on
Comcast, AT&T Broadband or AT&T Comcast or on the contemplated benefits of the
proposed AT&T Comcast transaction, in any respect material to its analysis. For
purposes of rendering its opinion, Merrill Lynch assumed, in all respects
material to its analysis, that the proposed AT&T Comcast transaction will be
consummated as described in the merger agreement and the separation and
distribution agreement, that all the representations and warranties of each
party contained in the merger agreement and the separation and distribution
agreement are true and correct, that each party to the merger agreement and the
separation and distribution agreement will perform all of the covenants and
agreements required to be performed by it thereunder without any consents or
waivers of the other parties thereto, that all conditions to the consummation of
the proposed AT&T Comcast transaction will be satisfied without waiver thereof,
and that if the parties elect to consummate the proposed AT&T Comcast
transaction by means of an alternative structure of the type described under
"Description of the AT&T Comcast Transaction Agreements -- The Merger
Agreement -- Covenants -- Alternative Structure," such alternative structure
will not differ from the structure reflected in the merger agreement and the
separation and distribution agreement in any respect material to its analysis.
Merrill Lynch noted that they are not legal, tax or regulatory experts and
relied upon, without assuming any responsibility for independent verification or
liability therefor, the assessment of Comcast's legal, tax and regulatory
advisors with respect to the legal, tax and regulatory matters related to the
proposed AT&T Comcast transaction. In arriving at its opinion, Merrill Lynch was
not authorized to solicit, and did not solicit, interest from any party with
respect to a business combination or other extraordinary proposed transaction
involving Comcast.
The Merrill Lynch opinion does not address the merits of the underlying
decision by Comcast to engage in the proposed AT&T Comcast transaction and
Merrill Lynch does not express any opinion as to the prices at which the shares
of Comcast common stock or AT&T Comcast common stock will trade following the
announcement or consummation of the proposed AT&T Comcast transaction, as the
case may be. Furthermore, Merrill Lynch does not express any opinion or
recommendation as to how the shareholders of Comcast should vote at the
shareholders' meetings held in connection with the proposed AT&T Comcast
transaction or any other matter.
JOINT FINANCIAL ANALYSES OF COMCAST'S FINANCIAL ADVISORS
At the December 19, 2001 meeting of the Comcast Board, Morgan Stanley,
JPMorgan and Merrill Lynch reviewed with the members of the Comcast Board the
updated financial terms of the proposed AT&T Comcast transaction and the
application of those terms to the financial analyses prepared by Morgan Stanley,
JPMorgan and Merrill Lynch previously presented to the Comcast Board. Such terms
and analyses were summarized in a written presentation prepared for the meeting
by Morgan Stanley, JPMorgan and Merrill Lynch and delivered along with their
respective opinions to Comcast.
The following is a summary of the material analyses contained in the
presentation that was delivered to Comcast. Some of the summaries of the
financial analyses include information presented in tabular format. The tables
are not intended to stand alone, and in order to more fully understand the
financial analyses used by Morgan Stanley, JPMorgan and Merrill Lynch, the
tables must be read together with the full text of each summary.
IV-6
PUBLIC MARKET BROADBAND VALUATION
Morgan Stanley, JPMorgan and Merrill Lynch reviewed and analyzed certain
public market trading multiples for five publicly traded broadband companies
(Comcast, Cox Communications, Inc., Charter Communications, Inc., Adelphia
Communications Corporation and Cablevision Systems Corporation). The multiples
analyzed were derived by dividing the adjusted aggregate market value of each of
the companies (based on closing stock prices on December 18, 2001) by (i)
estimated year-end 2001 number of subscribers, (ii) estimated 2002 cable
revenues and (iii) estimated 2002 cable EBITDA. Morgan Stanley, JP Morgan and
Merrill Lynch also calculated the estimated 2002 cable EBITDA multiple divided
by estimated 2002-2005 cable EBITDA compound annual growth rates (hereinafter
referred to as EBITDA Multiple to Growth Ratio). For purposes of calculating
these multiples, Morgan Stanley, JPMorgan and Merrill Lynch adjusted the
aggregate market value of each of the companies to exclude the value of certain
of such company's non-cable or non-operating assets, based on Morgan Stanley
equity research (except as set forth below). Morgan Stanley, JPMorgan and
Merrill Lynch calculated the financial multiples and ratios based on publicly
available financial data as of December 18, 2001, Morgan Stanley equity research
estimates and, as to the value to be attributed to Comcast's non-cable assets,
Comcast management estimates, which were consistent with Wall Street research
estimates. Morgan Stanley, JPMorgan and Merrill Lynch then derived reference
ranges of such multiples from this analysis. A summary of the principal public
market trading multiples and the reference ranges of multiples that Morgan
Stanley, JPMorgan and Merrill Lynch derived are set forth below:
MULTIPLE OF ADJUSTED MARKET VALUE TO
REFERENCE RANGE
COMCAST COX CHARTER ADELPHIA CABLEVISION OF MULTIPLES
------- ------ ------- -------- ----------- ------------------
2001 Subscribers................ $4,139 $3,977 $3,707 $3,673 $4,397 $3,500 - $4,400
2002E Cable Revenue............. 5.9x 5.3x 5.5x 5.2x 5.2x 5x - 6x
2002E Cable EBITDA.............. 14.0x 13.8x 12.0x 13.2x 14.1x 13x - 15x
EBITDA Multiple to Growth
Ratio......................... 0.91x 1.06x 0.80x 0.71x 0.82x 0.8x - 1.1x
Using these derived reference ranges of multiples, Morgan Stanley, JPMorgan
and Merrill Lynch calculated implied valuation ranges for AT&T Broadband by
applying the reference ranges of multiples to the (i) year-end expected 2001
number of subscribers for AT&T Broadband (based on information provided by AT&T
and AT&T Broadband's management), (ii) estimated 2002 AT&T Broadband revenues
(based on Comcast management's estimates), (iii) estimated 2002 AT&T Broadband
EBITDA (based on Comcast management's estimates) and (iv) estimated 2002 AT&T
Broadband EBITDA based on applying an EBITDA margin of 35% to Comcast
management's estimate of 2002 AT&T Broadband revenues. Morgan Stanley, JPMorgan
and Merrill Lynch also calculated the estimated AT&T Broadband EBITDA Multiple
to Growth Ratio using Comcast management's estimate of AT&T Broadband's 2002 to
2005 EBITDA growth rate. Based on such analysis, Morgan Stanley, JPMorgan and
Merrill Lynch derived ranges of implied value for AT&T Broadband of $58 billion
to $70 billion on a 2001 subscriber multiples basis, $62 billion to $72 billion
on a 2002 estimated cable revenue multiples basis, $46 billion to $52 billion on
a 2002 estimated cable EBITDA multiples basis, $57 billion to $64 billion on a
2002 estimated cable EBITDA (adjusted for 35% margin) multiples basis, and $59
billion to $77 billion on an EBITDA Multiple to Growth Ratio basis, each as
compared to the implied value for AT&T Broadband in the proposed AT&T Comcast
transaction of approximately $73.2 billion (based on the closing price of
Comcast Common Stock on December 18, 2001). Morgan Stanley, JPMorgan and Merrill
Lynch noted that the derived ranges of implied public market values were
strictly public market ranges and that no control premium had been attributed in
this analysis.
The foregoing companies, in the judgment of each of Morgan Stanley,
JPMorgan and Merrill Lynch and based in part on conversations with the
managements of Comcast, AT&T and AT&T Broadband,
IV-7
were comparable to AT&T Broadband for purposes of this analysis. Morgan Stanley,
JPMorgan and Merrill Lynch noted that because of the differences between the
business mix, operations and other characteristics of AT&T Broadband and the
comparable companies, Morgan Stanley, JPMorgan and Merrill Lynch did not believe
that a purely quantitative comparable company analysis would be particularly
meaningful in this context. Rather, Morgan Stanley, JPMorgan and Merrill Lynch
believed an appropriate use of the comparable company analysis would also
involve qualitative judgments concerning differences between the financial and
operating characteristics of AT&T Broadband and the comparable companies, which
would affect the public trading values of the common stock of the comparable
companies, which judgments were applied in rendering the respective opinions of
Morgan Stanley, JPMorgan and Merrill Lynch.
PRIVATE MARKET VALUATION
Precedent Transactions. Morgan Stanley, JPMorgan and Merrill Lynch
reviewed and analyzed selected precedent transactions involving other companies
in the broadband industry that they deemed relevant and calculated the per
subscriber multiples paid in the selected transactions based on the transaction
values and the subscriber numbers from publicly available company press releases
and reports and/or public analyst research. The following table sets forth the
transactions that were reviewed in connection with this analysis:
SELECTED PRECEDENT TRANSACTIONS
TRANSACTION ANNOUNCEMENT DATE ACQUIROR TARGET
----------------------------- --------------- ---------------------
Apr-99 AT&T MediaOne
May-99 Charter Falcon
May-99 Cox TCA
May-99 Charter Fanch
May-99 Comcast AT&T (select markets)
Jun-99 Charter Bresnan
Jul-99 Cox Gannett
Jul-99 Cox AT&T (select markets)
Nov-99 Comcast Lenfest
Dec-99 Adelphia Cablevision (Ohio)
Apr-00 AT&T Cablevision (Boston)
Jan-01 Comcast AT&T (select markets)
Jan-01 Insight Midwest AT&T/Insight
The high, mean, median and low per subscriber multiples calculated in these
selected transactions were $5,378, $4,491, $4,500 and $3,500, respectively.
Morgan Stanley, JPMorgan and Merrill Lynch then derived from these selected
transactions a reference range of per subscriber multiples of $4,200 to $5,000,
and applying this range of multiples to the expected year-end 2001 number of
subscribers for AT&T Broadband based on information provided by AT&T and AT&T
Broadband's management, Morgan Stanley, JPMorgan and Merrill Lynch calculated an
implied valuation range for AT&T Broadband of $67 billion to $78 billion, as
compared to the implied value for AT&T Broadband in the proposed AT&T Comcast
transaction of $73.2 billion (based on the closing price of Comcast common stock
on December 18, 2001).
Among other factors, Morgan Stanley, JPMorgan and Merrill Lynch indicated
that the merger and acquisition transaction environment varies over time because
of macroeconomic factors such as interest rate and equity market fluctuations
and microeconomic factors such as industry results and growth expectations.
Morgan Stanley, JPMorgan and Merrill Lynch noted that no transaction reviewed
was
IV-8
identical to the proposed AT&T Comcast transaction and that, accordingly, these
analyses involve complex considerations and judgments concerning differences in
financial and operating characteristics of AT&T Broadband and other factors that
would affect the acquisition values in the comparable transactions, including
the size and demographic and economic characteristics of the markets of each
company and the competitive environment in which it operates.
AT&T Broadband DCF Valuation. Morgan Stanley, JPMorgan and Merrill Lynch
performed a five-year discounted cash flow analysis on AT&T Broadband as of
December 31, 2001 based on financial forecasts and estimates provided by
Comcast's management, excluding the effect of certain strategic, financial and
operational benefits anticipated in the proposed transaction according to
Comcast management. In conducting this discounted cash flow analysis, Morgan
Stanley, JPMorgan and Merrill Lynch utilized discount rates of between 9% and
11%, and last twelve months ("LTM") terminal EBITDA multiples of between 15x and
17x. The discount rates utilized in this analysis were chosen based upon an
analysis of the weighted average cost of capital of Comcast and other comparable
companies as well as Wall Street equity research.
Morgan Stanley, JPMorgan and Merrill Lynch also performed a separate
discounted cash flow analysis of the effect of certain strategic, financial and
operational benefits anticipated in the proposed transaction (or synergies)
based on information provided by the managements of Comcast, AT&T and AT&T
Broadband. In conducting this second discounted cash flow analysis, Morgan
Stanley, JPMorgan and Merrill Lynch utilized discount rates between 9% and 11%
and perpetual growth rates of between 3% and 4%. The discount rates utilized in
this analysis were chosen based upon an analysis of the weighted average cost of
capital of Comcast and other comparable companies as well as Wall Street equity
research.
Based on the aforementioned projections and assumptions, the discounted
cash flow analysis of AT&T Broadband yielded a range of implied values for AT&T
Broadband of $62 billion to $74 billion excluding synergies and $73 billion to
$92 billion including synergies, as compared to the implied value for AT&T
Broadband in the proposed AT&T Comcast transaction of $73.2 billion (based on
the closing price of Comcast common stock on December 18, 2001).
CONTRIBUTION ANALYSIS
Morgan Stanley, JPMorgan and Merrill Lynch calculated the implied relative
equity contributions of AT&T Broadband and Comcast to the combined company based
on their respective contributions of estimated 2001 year-end subscribers,
estimated 2002 to 2005 cable revenue and estimated 2002 to 2005 cable EBITDA, in
each case adjusted for the relative contribution of AT&T Broadband and Comcast,
respectively, to the leverage of the combined company. Such analysis was done
both with and without taking into account the transaction synergies estimated by
the managements of AT&T, AT&T Broadband and Comcast. Morgan Stanley, JPMorgan
and Merrill Lynch then compared the results of this analysis to the pro forma
equity ownership implied by the proposed AT&T Comcast transaction prior to the
conversion of the QUIPS. Based on the foregoing analysis, AT&T Broadband's
implied equity contribution ranged from 43.0% to 54.9% excluding synergies, and
50.7% to 61.0% including synergies, as compared to the pro forma AT&T Broadband
shareholder ownership of 55.8% in the proposed transaction (or 56.6% assuming
the issuance by AT&T Comcast of the maximum potential number of additional
shares of AT&T Comcast stock to AT&T Broadband shareholders provided in the
merger agreement under certain circumstances if the stock issued to AT&T
Broadband shareholders in the proposed AT&T Comcast transaction is not included
in the S&P 500 Index).
DCF CONTRIBUTION ANALYSIS
Morgan Stanley, JPMorgan and Merrill Lynch also derived an implied AT&T
Broadband ownership in the combined entity based on an analysis of the
respective discounted cash flow contributions of AT&T Broadband and Comcast to
the combined company both with and without taking into account the synergies
estimated by the managements of AT&T, AT&T Broadband and Comcast.
IV-9
Morgan Stanley, JPMorgan and Merrill Lynch conducted a five-year discounted
cash flow analysis of each of Comcast and AT&T Broadband as of December 31,
2001. For AT&T Broadband, the analysis was based on the same assumptions as in
the AT&T Broadband DCF Valuation described above, including utilizing the same
discount rates and LTM terminal EBITDA multiples as in that analysis. For
Comcast, the analysis was based on financial information and projections from
Morgan Stanley equity research dated November 1, 2001, and utilized discount
rates of 9% to 11% and LTM terminal EBITDA multiples of 14x to 16x. The assumed
discount rates were chosen based on an analysis of the weighted average cost of
capital of Comcast and other comparable companies as well as Wall Street equity
research.
Morgan Stanley, JPMorgan and Merrill Lynch then compared the low and high
discounted cash flow values of each of AT&T Broadband and Comcast to derive a
range of implied discounted cash flow equity contribution for AT&T Broadband.
Based on the foregoing analysis, AT&T Broadband's implied discounted cash flow
equity contribution ranged from 41% to 53% excluding synergies, and 47.5% to
60.5% including synergies.
GENERAL
In connection with the review of the proposed AT&T Comcast transaction by
the Comcast Board, Morgan Stanley, JPMorgan and Merrill Lynch performed a
variety of financial and comparable analyses for purposes of rendering their
respective opinions. The preparation of a fairness opinion is a complex process
and is not susceptible to partial analysis or summary description. In arriving
at their respective opinions, Morgan Stanley, JPMorgan and Merrill Lynch
considered the results of all of their analyses as a whole and did not attribute
any particular weight to any analysis or factor considered by them. Furthermore,
Morgan Stanley, JPMorgan and Merrill Lynch believe that the summary provided and
the analyses described above must be considered as a whole and that selecting
any portion of their analyses, without considering all of them, would create an
incomplete view of the process underlying their analyses and opinions. As a
result, the ranges of valuations resulting from any particular analysis or
combination of analyses described above were merely utilized to create points of
reference for analytical purposes and should not be taken to be the view of
Morgan Stanley, JPMorgan or Merrill Lynch with respect to the actual value of
Comcast, AT&T Broadband or AT&T Comcast.
In performing their analyses, Morgan Stanley, JPMorgan and Merrill Lynch
made numerous assumptions with respect to industry performance, general business
and economic conditions and other matters, many of which are beyond the control
of Morgan Stanley, JPMorgan, Merrill Lynch, Comcast, AT&T or AT&T Broadband. Any
estimates contained in the analyses of Morgan Stanley, JPMorgan and Merrill
Lynch are not necessarily indicative of future results or actual values, which
may be significantly more or less favorable than those suggested by such
estimates. The analyses performed were prepared solely as part of the analyses
of Morgan Stanley, JPMorgan and Merrill Lynch of the fairness of the Comcast
conversion ratios in the Comcast merger, in the aggregate, from a financial
point of view to the Comcast shareholders, taken together, and were prepared in
connection with the delivery by Morgan Stanley, JPMorgan and Merrill Lynch of
their respective opinions, each dated December 19, 2001, to the Comcast Board.
The analyses do not purport to be appraisals or to reflect the prices at which
Comcast common stock or AT&T Comcast common stock will trade following the
announcement or consummation of the proposed transaction. The Comcast conversion
ratios and other terms of the proposed AT&T Comcast transaction were determined
through arms' length negotiations among Comcast, AT&T and AT&T Broadband and
were approved by the Comcast Board. Morgan Stanley, JPMorgan and Merrill Lynch
provided advice to Comcast during such negotiations. However, Morgan Stanley,
JPMorgan and Merrill Lynch did not recommend any specific conversion ratios or
other form of consideration to Comcast or that any specific conversion ratios or
other form of consideration constituted the only appropriate consideration for
the proposed AT&T Comcast transaction.
The opinions of Morgan Stanley, JPMorgan and Merrill Lynch were one of many
factors taken into consideration by the Comcast Board in making its
determination to approve the proposed AT&T Comcast transaction. The analyses of
Morgan Stanley, JPMorgan and Merrill Lynch summarized above should not be viewed
as determinative of the opinion of the Comcast Board with respect to the value
of Comcast,
IV-10
AT&T Broadband or AT&T Comcast or of whether the Comcast Board would have been
willing to agree to different conversion ratios or other forms of consideration.
The foregoing summary does not purport to be a complete description of the
analyses performed by Morgan Stanley, JPMorgan and Merrill Lynch.
The Comcast Board selected Morgan Stanley, JPMorgan and Merrill Lynch as
its financial advisors because of their reputations as internationally
recognized investment banking and advisory firms with substantial experience in
transactions similar to this proposed transaction and because Morgan Stanley,
JPMorgan and Merrill Lynch are familiar with Comcast and its business. As part
of its investment banking and financial advisory business, each of Morgan
Stanley, JPMorgan and Merrill Lynch is continually engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes.
Each of Morgan Stanley, JPMorgan and Merrill Lynch provides a full range of
financial advisory and securities services and in the past, each of Morgan
Stanley, JPMorgan and Merrill Lynch and their respective affiliates have
provided financial advisory and financing services for Comcast and AT&T and
their affiliates and have received fees for the rendering of such services and
also may provide such services to Comcast, AT&T or AT&T Comcast and their
affiliates in the future for which it would expect to receive fees. In addition,
in the course of its business, each of Morgan Stanley, JPMorgan and Merrill
Lynch may (or its affiliates may) actively trade the debt and equity securities
of Comcast or AT&T or, after the proposed AT&T Comcast transaction, AT&T Comcast
for its own accounts or for the accounts of its customers and, accordingly, may
at any time hold long or short positions in such securities.
Under the terms of separate letter agreements, each dated July 8, 2001,
Comcast engaged each of Morgan Stanley, JPMorgan and Merrill Lynch to act as its
financial advisor in connection with the contemplated AT&T Comcast transaction.
Pursuant to the terms of these letters, Comcast has agreed to pay each of Morgan
Stanley, JPMorgan and Merrill Lynch an engagement fee and a customary
transaction fee upon consummation of the proposed transaction. Comcast has also
agreed to reimburse each of Morgan Stanley, JPMorgan and Merrill Lynch for its
reasonable out-of-pocket expenses incurred in connection with the engagement,
including attorney's fees, and to indemnify each of Morgan Stanley, JPMorgan and
Merrill Lynch and their related parties from and against certain liabilities,
including liabilities under the federal securities laws.
IV-11
OPINIONS OF AT&T'S FINANCIAL ADVISORS
CREDIT SUISSE FIRST BOSTON'S OPINION
Credit Suisse First Boston has acted as a financial advisor to AT&T in
connection with the mergers. AT&T selected Credit Suisse First Boston based on
Credit Suisse First Boston's experience, expertise and reputation. Credit Suisse
First Boston is an internationally recognized investment banking firm and is
regularly engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, leveraged buyouts, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes.
In connection with Credit Suisse First Boston's engagement, AT&T requested
that Credit Suisse First Boston consider the fairness, from a financial point of
view, of the AT&T Broadband exchange ratio provided for in the AT&T Broadband
merger to the holders of AT&T Broadband common stock immediately prior to the
mergers, other than Comcast and its affiliates. On December 19, 2001, at a
meeting of the AT&T Board held to consider the mergers, Credit Suisse First
Boston rendered to the AT&T Board an oral opinion, which opinion was confirmed
by delivery of a written opinion dated December 19, 2001, to the effect that, as
of that date and based on and subject to the matters described in its opinion,
the AT&T Broadband exchange ratio was fair, from a financial point of view, to
the holders of AT&T Broadband common stock immediately prior to the mergers,
other than Comcast and its affiliates.
THE FULL TEXT OF CREDIT SUISSE FIRST BOSTON'S WRITTEN OPINION, DATED
DECEMBER 19, 2001, TO THE AT&T BOARD, WHICH DESCRIBES THE PROCEDURES FOLLOWED,
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN,
IS ATTACHED AS ANNEX J AND IS INCORPORATED INTO THIS DOCUMENT BY REFERENCE.
HOLDERS OF AT&T COMMON STOCK ARE ENCOURAGED TO READ THIS OPINION CAREFULLY IN
ITS ENTIRETY. CREDIT SUISSE FIRST BOSTON'S OPINION IS ADDRESSED TO THE AT&T
BOARD AND RELATES ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE
AT&T BROADBAND EXCHANGE RATIO, AND DOES NOT ADDRESS ANY OTHER ASPECT OF THE
PROPOSED MERGERS OR ANY RELATED TRANSACTIONS, INCLUDING THE AT&T BROADBAND
SPIN-OFF, AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO ANY
MATTER RELATING TO THE MERGERS OR ANY RELATED TRANSACTIONS. THE SUMMARY OF
CREDIT SUISSE FIRST BOSTON'S OPINION IN THIS DOCUMENT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION.
In arriving at its opinion, Credit Suisse First Boston reviewed:
- the merger agreement;
- the separation and distribution agreement;
- other related documents;
- publicly available business and financial information relating to AT&T
Broadband and Comcast; and
- other information relating to AT&T Broadband and Comcast, including
financial forecasts, in the case of Comcast, as adjusted by the
management of AT&T Broadband and reviewed by AT&T and, in the case of
potential cost savings and synergies, as adjusted by the managements of
AT&T and AT&T Broadband, provided to or discussed with Credit Suisse
First Boston by AT&T, AT&T Broadband and Comcast.
Credit Suisse First Boston also met with the managements of AT&T, AT&T
Broadband and Comcast to discuss the businesses and prospects of AT&T Broadband
and Comcast. Credit Suisse First Boston also considered:
- financial data of AT&T Broadband and financial and stock market data of
Comcast, and compared those data with similar data for other publicly
held companies in businesses similar to AT&T Broadband and Comcast;
- to the extent publicly available, the financial terms of other business
combinations and other transactions announced or effected; and
IV-12
- other information, financial studies, analyses and investigations and
financial, economic and market criteria that it deemed relevant.
In connection with its review, Credit Suisse First Boston did not assume
any responsibility for independent verification of any of the information that
it reviewed or considered and relied on that information being complete and
accurate in all material respects. Credit Suisse First Boston was advised, and
assumed:
- with respect to the financial forecasts, including adjustments to the
forecasts, and other information and data, that the forecasts were
reasonably prepared on bases reflecting the best currently available
estimates and judgments of the managements of AT&T, AT&T Broadband and
Comcast as to the future financial performance of AT&T Broadband and
Comcast, the potential cost savings and synergies, including the amount,
timing and achievability of the cost savings and synergies, and strategic
benefits anticipated by the managements of AT&T, AT&T Broadband and
Comcast to result from the mergers and related transactions and the other
matters covered by the forecasts.
Credit Suisse First Boston also assumed, with AT&T's consent, that:
- in the course of obtaining the necessary regulatory and third party
approvals and consents for the proposed mergers and related transactions,
no modification, delay, limitation, restriction or condition will be
imposed that would have an adverse effect on AT&T, AT&T Broadband or
Comcast or the contemplated benefits of the proposed mergers or related
transactions in any respect meaningful to its analyses;
- the mergers and related transactions, including the AT&T Broadband
spin-off, will be consummated in accordance with the terms of the merger
agreement, the separation and distribution agreement and related
documents, without waiver, modification or amendment of any material
terms, conditions or agreements, and in compliance with all applicable
laws, including, in the case of the AT&T Broadband spin-off, laws
relating to insolvency and fraudulent conveyance and to the payments of
dividends; and
- the mergers would be treated as a tax-free exchange, and that the AT&T
Broadband spin-off would qualify as a tax-free distribution, for federal
income tax purposes.
Credit Suisse First Boston was not requested to make, and did not make, an
independent evaluation or appraisal of the assets or liabilities, contingent or
otherwise, of AT&T, AT&T Broadband or Comcast, and Credit Suisse First Boston
was not furnished with any evaluations or appraisals. Credit Suisse First
Boston's opinion was necessarily based on information available to it, and
financial, economic, market and other conditions as they existed and could be
evaluated, on the date of Credit Suisse First Boston's opinion.
Credit Suisse First Boston did not express any opinion as to:
- what the value of the securities of AT&T Broadband or AT&T Comcast
actually will be when issued; or
- the prices at which the securities of AT&T Broadband or AT&T Comcast
would trade at any time.
Credit Suisse First Boston's opinion did not address:
- any aspect of the mergers other than the AT&T Broadband exchange ratio to
the extent specified in its opinion;
- any related transactions, including the AT&T Broadband spin-off;
- the relative merits of the mergers or any related transactions as
compared to other business strategies that might have been available to
AT&T or AT&T Broadband; or
- the underlying business decision of AT&T to proceed with the mergers or
any related transactions.
IV-13
In connection with its engagement, Credit Suisse First Boston was requested
to approach, and held preliminary discussions with, third parties to solicit
indications of interest in the possible acquisition of all or a part of AT&T
Broadband. Although Credit Suisse First Boston evaluated the AT&T Broadband
exchange ratio from a financial point of view, Credit Suisse First Boston was
not requested to, and did not, recommend the specific consideration payable in
the AT&T Broadband merger, which consideration was determined between AT&T and
Comcast. Except as described above, AT&T imposed no other limitations on Credit
Suisse First Boston with respect to the investigations made or procedures
followed in rendering its opinion.
GOLDMAN SACHS' OPINION
On December 19, 2001, Goldman Sachs delivered its oral opinion, which it
subsequently confirmed in writing as of the same date, to the AT&T Board that,
based upon and subject to the matters described in the Goldman Sachs opinion and
based upon such other matters as Goldman Sachs considered relevant, as of that
date and based on the market conditions of that date, the AT&T Broadband
exchange ratio, as defined in the opinion, pursuant to the merger agreement was
fair from a financial point of view to the holders, other than Comcast and its
affiliates, of AT&T Broadband common stock immediately prior to the mergers.
THE FULL TEXT OF GOLDMAN SACHS' WRITTEN OPINION, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN
CONNECTION WITH ITS OPINION, IS ATTACHED HERETO AS ANNEX K AND IS INCORPORATED
HEREIN BY REFERENCE. GOLDMAN SACHS PROVIDED ITS OPINION AND ITS ADVISORY
SERVICES FOR THE INFORMATION AND ASSISTANCE OF THE AT&T BOARD IN CONNECTION WITH
ITS CONSIDERATION OF THE AT&T BROADBAND MERGER. GOLDMAN SACHS EXPRESSED NO
OPINION AS TO, AMONG OTHER THINGS, ANY RELATED TRANSACTION, INCLUDING THE AT&T
BROADBAND SPIN-OFF, AND ITS OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
SHAREHOLDER AS TO ANY MATTER RELATING TO THE MERGERS OR ANY RELATED
TRANSACTIONS. THE GOLDMAN SACHS OPINION IS NECESSARILY BASED UPON INFORMATION
AVAILABLE TO GOLDMAN SACHS AND FINANCIAL, ECONOMIC, MARKET AND OTHER CONDITIONS
AS THEY EXIST AND CAN BE EVALUATED AS OF THE DATE OF ITS OPINION, AND GOLDMAN
SACHS ASSUMES NO DUTY TO UPDATE OR REVISE ITS OPINION BASED ON CIRCUMSTANCES OR
EVENTS AFTER THE DATE OF THE OPINION. WE URGE YOU TO READ THE GOLDMAN SACHS
OPINION IN ITS ENTIRETY.
In connection with its opinion, Goldman Sachs reviewed, among other things:
- the merger agreement;
- the separation and distribution agreement;
- annual reports to shareholders and annual reports on Form 10-K of AT&T
and Comcast for the five years ended December 31, 2000;
- the preliminary proxy statement of AT&T dated July 3, 2001;
- other communications from AT&T and Comcast to their respective
shareholders;
- internal financial analyses and forecasts for Comcast prepared by its
management, as adjusted by AT&T Broadband management and reviewed by AT&T
management;
- internal financial analyses and forecasts for AT&T Broadband prepared by
AT&T Broadband management and reviewed and/or adjusted by AT&T
management; and
- cost savings and operating synergies projected to result from the
transactions contemplated by the merger agreement as prepared by the
managements of Comcast and AT&T Broadband and as further adjusted by the
managements of AT&T Broadband and AT&T.
Goldman Sachs also held discussions with members of the senior management
of AT&T, AT&T Broadband and Comcast regarding their assessment of the strategic
rationale for, and the potential benefits
IV-14
of, the transaction contemplated by the merger agreement and the past and
current business operations, financial condition and future prospects of their
respective companies. In addition, Goldman Sachs:
- reviewed the reported price and trading activity for the shares of AT&T
common stock, Comcast Class A common stock and Comcast Class A Special
common stock;
- compared financial information for AT&T Broadband and financial and stock
market information for Comcast with similar information for various other
companies the securities of which are publicly traded; and
- reviewed the financial terms of various recent business combinations in
the cable industry specifically and in other industries generally and
performed other studies and analyses as it considered appropriate.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial, accounting and other information and data discussed with or reviewed
by it and assumed the accuracy and completeness thereof for purposes of its
opinion. In that regard, Goldman Sachs assumed, with the consent of the AT&T
Board, that the forecasts and the synergies had been reasonably prepared on a
basis reflecting the best currently available judgments and estimates of the
managements of AT&T and AT&T Broadband. In addition, Goldman Sachs did not make
an independent evaluation or appraisal of the assets and liabilities of AT&T,
AT&T Broadband or Comcast or any of their subsidiaries and was not furnished
with any evaluation or appraisal.
For purposes of its analyses, Goldman Sachs was advised and assumed, with
the consent of the AT&T Board, that:
- all governmental, regulatory or other consents and approvals necessary
for the consummation of the transactions contemplated by the merger
agreement and the separation and distribution agreement will be obtained
without any adverse effect on AT&T, AT&T Broadband and Comcast or AT&T
Comcast following the mergers or the contemplated benefits of the
transactions in any respect meaningful to its analyses;
- the mergers and the other transactions contemplated by the merger
agreement and the separation and distribution agreement will be
consummated in accordance with the terms of these agreements, and without
waiver, modification or amendment of any material terms, conditions or
agreements and in compliance with all applicable laws including, in the
case of the AT&T Broadband spin-off, laws relating to insolvency and
fraudulent conveyance and to the payment of dividends; and
- for federal income tax purposes, the AT&T Broadband spin-off will qualify
as a tax-free distribution and the mergers will be treated as a tax-free
reorganization.
Goldman Sachs expressed no opinion as to:
- any aspect of the mergers other than the AT&T Broadband exchange ratio to
the extent specified in its opinion;
- any related transaction, including the AT&T Broadband spin-off;
- AT&T's underlying business decision to effect the mergers or any related
transactions;
- the prices at which the shares of AT&T Broadband common stock or of AT&T
Comcast Class A common stock, AT&T Comcast Class A Special common stock
or AT&T Comcast Class C common stock may trade at any time if and when
they are issued and trade publicly; or
- the relative merits of the transactions contemplated by the merger
agreement and the separation and distribution agreement as compared to
any alternative business transaction that might be available to AT&T or
to AT&T Broadband.
Goldman Sachs, as part of its investment banking business, is continually
engaged in performing financial analyses with respect to the valuation of
businesses and their securities in connection with
IV-15
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities and private placements
as well as for estate, corporate and other purposes.
AT&T selected Goldman Sachs as its financial advisor because it is an
internationally recognized investment banking firm that has substantial
experience in transactions similar to the mergers.
FINANCIAL ANALYSES
In preparing their respective opinions to the AT&T Board, Credit Suisse
First Boston and Goldman Sachs performed a variety of financial and comparative
analyses, including those described below. The summary of the analyses of Credit
Suisse First Boston and Goldman Sachs described below is not a complete
description of the analyses underlying their opinions. The preparation of a
fairness opinion is a complex process involving various determinations as to the
most appropriate and relevant methods of financial analysis and the application
of those methods to the particular circumstances and, therefore, a fairness
opinion is not readily susceptible to partial analysis or summary description.
In arriving at their respective opinions, Credit Suisse First Boston and Goldman
Sachs made qualitative judgments as to the significance and relevance of each
analysis and factor that it considered. Accordingly, Credit Suisse First Boston
and Goldman Sachs believe that their analyses must be considered as a whole and
that selecting portions of their analyses and factors or focusing on information
presented in tabular format, without considering all analyses and factors or the
narrative description of the analyses, could create a misleading or incomplete
view of the processes underlying their analyses and opinions.
In their analyses, Credit Suisse First Boston and Goldman Sachs considered
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of AT&T, AT&T
Broadband and Comcast. No company, transaction or business used in Credit Suisse
First Boston's and Goldman Sachs' analyses as a comparison is identical to AT&T,
AT&T Broadband, Comcast or the proposed mergers, and an evaluation of the
results of those analyses is not entirely mathematical. Rather, the analyses
involve complex considerations and judgments concerning financial and operating
characteristics and other factors that could affect the acquisition, public
trading or other values of the companies, business segments or transactions
analyzed. The estimates contained in the analyses of Credit Suisse First Boston
and Goldman Sachs and the ranges of valuations resulting from any particular
analysis are not necessarily indicative of actual values or predictive of future
results or values, which may be significantly more or less favorable than those
suggested by the analyses. In addition, analyses relating to the value of
businesses or securities do not purport to be appraisals or to reflect the
prices at which businesses or securities actually may be sold. Accordingly, the
analyses and estimates of Credit Suisse First Boston and Goldman Sachs are
inherently subject to substantial uncertainty.
The opinions of Credit Suisse First Boston and Goldman Sachs were only one
of many factors considered by the AT&T Board in its evaluation of the proposed
mergers and should not be viewed as determinative of the views of the AT&T Board
or management with respect to the mergers or the AT&T Broadband exchange ratio.
The following is a summary of the material financial analyses underlying
the opinions of Credit Suisse First Boston and Goldman Sachs delivered to the
AT&T Board. THE FINANCIAL ANALYSES SUMMARIZED BELOW INCLUDE INFORMATION
PRESENTED IN TABULAR FORMAT. IN ORDER TO FULLY UNDERSTAND CREDIT SUISSE FIRST
BOSTON'S AND GOLDMAN SACHS' FINANCIAL ANALYSES, THE TABLES MUST BE READ TOGETHER
WITH THE TEXT OF EACH SUMMARY. THE TABLES ALONE DO NOT CONSTITUTE A COMPLETE
DESCRIPTION OF THE FINANCIAL ANALYSES. CONSIDERING THE DATA IN THE TABLES BELOW
WITHOUT CONSIDERING THE FULL NARRATIVE DESCRIPTION OF THE FINANCIAL ANALYSES,
INCLUDING THE METHODOLOGIES AND ASSUMPTIONS UNDERLYING THE ANALYSES, COULD
CREATE A MISLEADING OR INCOMPLETE VIEW OF CREDIT SUISSE FIRST BOSTON'S AND
GOLDMAN SACHS' FINANCIAL ANALYSES.
SELECTED COMPANIES ANALYSIS
Credit Suisse First Boston and Goldman Sachs compared financial and
operating data of AT&T Broadband's core cable business, which excludes assets
relating to Time Warner Entertainment and various
IV-16
other cable joint ventures, referred to as AT&T Broadband Cable, to
corresponding data for the following five publicly traded companies in the cable
industry:
- Adelphia Communications Corporation
- Cablevision Systems Corporation
- Charter Communications, Inc.
- Comcast Corporation
- Cox Communications, Inc.
Credit Suisse First Boston and Goldman Sachs reviewed enterprise values,
calculated as equity value plus net debt, as a multiple of calendar years 2002
and 2003 estimated earnings before interest, taxes, depreciation and
amortization, commonly referred to as EBITDA. All multiples were based on
closing stock prices on December 18, 2001. Credit Suisse First Boston and
Goldman Sachs then applied a range of selected multiples derived from the
selected companies of calendar years 2002 and 2003 estimated EBITDA to
corresponding financial data of AT&T Broadband Cable, both with and without
giving effect to, in the case of calendar year 2003, a $7.5 billion potential
initial public offering of 19.0% of AT&T Broadband occurring at year-end 2002,
referred to as the IPO. Credit Suisse First Boston and Goldman Sachs also
applied a range of selected multiples derived from the selected companies to
AT&T Broadband Cable's calendar year 2004 estimated EBITDA, after giving effect
to the IPO, the result of which was then discounted to 2001 year-end present
value using a discount rate of 15%. Estimated financial data for AT&T Broadband
Cable were based on internal estimates of AT&T Broadband's management and
estimated financial data for the selected companies were based on publicly
available research analysts' estimates. This analysis indicated an implied
enterprise reference range for AT&T Broadband Cable of approximately $31.0
billion to $60.0 billion. Using this enterprise reference range, Credit Suisse
First Boston and Goldman Sachs then derived an implied reference range per 2001
AT&T Broadband Cable subscriber. This analysis indicated the following implied
reference range per 2001 AT&T Broadband Cable subscriber, as compared to the per
2001 AT&T Broadband Cable subscriber value implied by the AT&T Broadband merger
consideration attributable to AT&T Broadband Cable.
PER 2001 AT&T BROADBAND CABLE
IMPLIED REFERENCE RANGE SUBSCRIBER VALUE IMPLIED BY THE AT&T
PER 2001 AT&T BROADBAND BROADBAND MERGER CONSIDERATION
CABLE SUBSCRIBER ATTRIBUTABLE TO AT&T BROADBAND CABLE
----------------------- ------------------------------------
AT&T Broadband Cable............ $2,301 - $4,380 $4,604
Credit Suisse First Boston and Goldman Sachs also reviewed the per
subscriber values for the selected companies for the first three fiscal quarters
of 2001 and estimated fiscal fourth quarter of 2001. Credit Suisse First Boston
and Goldman Sachs then derived an implied reference range per 2001 subscriber
for the selected companies. This analysis indicated the following implied
reference range per 2001 subscriber for the selected companies, as compared to
the per 2001 AT&T Broadband Cable subscriber value implied by the AT&T Broadband
merger consideration attributable to AT&T Broadband Cable:
PER 2001 AT&T BROADBAND CABLE
IMPLIED REFERENCE RANGE SUBSCRIBER VALUE IMPLIED BY THE AT&T
PER 2001 SUBSCRIBER FOR BROADBAND MERGER CONSIDERATION
SELECTED COMPANIES ATTRIBUTABLE TO AT&T BROADBAND CABLE
----------------------- ------------------------------------
$3,250 - $4,000 $4,604
DISCOUNTED CASH FLOW ANALYSIS
Credit Suisse First Boston and Goldman Sachs calculated the present value
of the stand-alone, unlevered, after-tax free cash flows that AT&T Broadband
Cable could generate for the fiscal years 2002 to 2005. Credit Suisse First
Boston and Goldman Sachs performed this analysis based on four scenarios, AT&T
Broadband management case I, AT&T Broadband management case II, AT&T Broadband
alternate case I, and AT&T Broadband alternate case II. AT&T Broadband
management case I was based
IV-17
on internal estimates of AT&T Broadband's management. AT&T Broadband management
case II included adjustments to AT&T Broadband management case I based on
discussions with AT&T's management to reflect, among other things, the dilutive
effect of various financing alternatives. AT&T Broadband alternate case I
included adjustments to AT&T Broadband management case I based on discussions
with AT&T's management to reflect, among other things, the potential for
decreased revenue and profitability of AT&T Broadband Cable. AT&T Broadband
alternate case II included adjustments to AT&T Broadband alternate case I based
on discussions with AT&T's management to reflect, among other things, the
dilutive effect of various financing alternatives.
Credit Suisse First Boston and Goldman Sachs calculated a range of
estimated terminal values for AT&T Broadband Cable by applying selected EBITDA
multiples ranging from 12.0x to 14.0x to AT&T Broadband Cable's calendar year
2005 estimated EBITDA. The estimated free cash flows and calculated terminal
values were then discounted to present value using a discount rate of 11.0%.
This analysis indicated an implied enterprise reference range for AT&T
Broadband Cable of approximately $49.0 billion to $68.0 billion, based on the
four scenarios described above. Using this enterprise reference range, Credit
Suisse First Boston and Goldman Sachs then derived an implied reference range
per 2001 AT&T Broadband Cable subscriber. This analysis indicated the following
implied reference range per 2001 AT&T Broadband Cable subscriber, as compared to
the per 2001 AT&T Broadband Cable subscriber value implied by the AT&T Broadband
merger consideration attributable to AT&T Broadband Cable:
PER 2001 AT&T BROADBAND CABLE
IMPLIED REFERENCE RANGE SUBSCRIBER VALUE IMPLIED BY THE AT&T
PER 2001 AT&T BROADBAND BROADBAND MERGER CONSIDERATION
CABLE SUBSCRIBER ATTRIBUTABLE TO AT&T BROADBAND CABLE
----------------------- ------------------------------------
AT&T Broadband Cable............ $3,619 - $4,978 $4,604
Credit Suisse First Boston and Goldman Sachs also calculated the present
value of the unlevered, after-tax free cash flows that AT&T Broadband could
generate for fiscal years 2002 to 2005, on a stand-alone basis, based on AT&T
Broadband management case I, and the present value of the unlevered, after-tax
free cash flows that AT&T Comcast, pro forma for the mergers, could generate for
fiscal years 2002 to 2005. Estimated financial data for AT&T Broadband were
based on AT&T Broadband management case I. Estimated financial data for Comcast
were based on internal estimates of Comcast's management, as adjusted by AT&T
Broadband's management and reviewed by AT&T's management, to reflect, among
other things, the potential for decreased revenue and profitability of Comcast,
referred to as Comcast adjusted management case.
Credit Suisse First Boston and Goldman Sachs calculated a range of
estimated terminal values for AT&T Broadband, on a stand-alone basis, and AT&T
Comcast, after giving effect to the mergers, by applying an EBITDA multiple of
13.0x, the midpoint of the 12.0x to 14.0x range used in calculating the terminal
values, to AT&T Broadband's and AT&T Comcast's calendar year 2005 estimated
EBITDA. The estimated free cash flows and calculated terminal values were then
discounted to present value using a discount rate of 11.0%.
This analysis indicated the following approximate implied per share equity
values for AT&T Broadband common stock on a stand-alone basis, before and after
giving effect to the dilutive effect of various financing alternatives which
were based on discussions with AT&T's management, and the following implied per
share equity value reference range for AT&T Comcast, before and after taking
into account various levels of potential cost savings and other synergies
anticipated by the managements of AT&T, AT&T Broadband and Comcast to result
from the mergers:
STAND-ALONE STAND-ALONE AT&T COMCAST
(WITHOUT FINANCING) (WITH FINANCING) IMPLIED PER SHARE
IMPLIED PER SHARE IMPLIED PER SHARE EQUITY VALUE
EQUITY VALUE EQUITY VALUE REFERENCE RANGE
------------------- ----------------- -----------------
AT&T Broadband common stock........ $13.78 $12.09 $14.06 - $16.17
IV-18
CONTRIBUTION ANALYSIS
Credit Suisse First Boston and Goldman Sachs reviewed the relative
contributions of AT&T Broadband and of Comcast to AT&T Comcast's unlevered,
after-tax free cash flows for calendar years 2002 through 2005. Estimated
financial data for AT&T Broadband were based on AT&T Broadband management case
I, described above under the caption "Discounted Cash Flow Analysis." Estimated
financial data for Comcast were based on the Comcast adjusted management case,
described above under the caption "Discounted Cash Flow Analysis."
Credit Suisse First Boston and Goldman Sachs then computed the relative
contribution of AT&T Broadband and of Comcast to the discounted cash flow equity
reference range of AT&T Comcast. This analysis indicated the following range of
contribution percentages by AT&T Broadband to AT&T Comcast's discounted cash
flow equity reference range, as compared to the approximate fully diluted equity
ownership percentage of AT&T Broadband's shareholders:
AT&T BROADBAND PERCENTAGE IMPLIED AT&T BROADBAND SHAREHOLDER
CONTRIBUTION TO DISCOUNTED CASH FLOW OWNERSHIP PERCENTAGE FOLLOWING
EQUITY REFERENCE RANGE CONSUMMATION OF THE MERGERS
------------------------------------ ----------------------------------
50.2%-58.1% 56.0%
If the QUIPS exchange transaction described under "Description of the AT&T
Comcast Transaction Agreements -- The Exchange Agreement -- QUIPS Exchange" is
completed, the ownership percentage of AT&T Comcast attributable to the AT&T
Broadband shareholders immediately following the mergers would increase due to
the number of AT&T Broadband shares issued to Microsoft as a result of the QUIPS
exchange transaction, and the ownership attributable to AT&T Broadband
shareholders implied by the contribution analysis would increase accordingly.
Credit Suisse First Boston and Goldman Sachs also reviewed the relative
contributions of AT&T Broadband Cable and of Comcast to AT&T Comcast's first
three fiscal quarters of 2001 EBITDA and estimated fiscal fourth quarter of 2001
EBITDA and estimated calendar years 2002 through 2004 EBITDA and to AT&T
Comcast's estimated calendar year 2001 cable subscribers and number of homes
capable of cable subscription, based on AT&T Broadband management case I and
Comcast adjusted management case, both described above under the caption
"Discounted Cash Flow Analysis." Credit Suisse First Boston and Goldman Sachs
noted that this analysis indicated a range of contribution percentages by AT&T
Broadband to AT&T Comcast of 37.9% to 57.0%.
OTHER FACTORS
In the course of preparing its opinion, Credit Suisse First Boston and
Goldman Sachs also reviewed and considered other information and data,
including:
- the enterprise reference range and reference range per 2001 AT&T
Broadband Cable subscriber of AT&T Comcast, after giving effect to the
mergers, implied by a range of selected EBITDA multiples for calendar
years 2003 and 2004, after taking into account potential synergies
anticipated by the managements of AT&T, AT&T Broadband and Comcast to
result from the mergers and discounting the 2004 calendar year results to
2001 year-end present values using a discount rate of 15%;
- the estimated percentage changes in the current per share price of
Comcast common stock after giving effect to the mergers, assuming a range
of selected EBITDA multiples for calendar year 2003, before and after
taking into account potential synergies anticipated by the managements of
AT&T, AT&T Broadband and Comcast to result from the mergers; and
- the possible credit rating of AT&T Comcast, taking into account, among
other things, AT&T Comcast's estimated debt to EBITDA multiple for
calendar years 2002, 2003 and 2004, after taking into account potential
synergies anticipated by the managements of AT&T, AT&T Broadband and
Comcast to result from the mergers.
IV-19
MISCELLANEOUS
AT&T has agreed to pay each of Credit Suisse First Boston and Goldman Sachs
customary fees for their financial advisory services in connection with the
proposed mergers. AT&T also has agreed to reimburse Credit Suisse First Boston
and Goldman Sachs for their reasonable out-of-pocket expenses, including fees
and expenses of legal counsel, and to indemnify Credit Suisse First Boston and
Goldman Sachs and related parties against liabilities, including liabilities
under the federal securities laws, arising out of their respective engagements.
Credit Suisse First Boston and its affiliates in the past have provided,
and currently are providing, financial and investment banking services to AT&T
and some of its affiliates, and in the past have provided financial and
investment banking services to Comcast and some of its affiliates unrelated to
the proposed mergers, for which services Credit Suisse First Boston and its
affiliates have received, and expect to receive, compensation.
Goldman Sachs is familiar with AT&T having provided investment banking
services to AT&T from time to time, including:
- having acted as financial advisor to AT&T in connection with (i) its
acquisition of Teleport Communications Group Inc. in July 1998, (ii) its
acquisition of Tele-Communications Inc. in March 1999, (iii) its
divestiture of a 50% interest in Lenfest Communications Inc. in January
2000, (iv) its divestiture of cable assets to Cox Communications, Inc. in
March 2000, (v) its acquisition of MediaOne Group in June 2000, (vi) its
acquisition of assets from Cablevision Systems Corporation in January
2001, (vii) its analysis, consideration and negotiation of revisions to
AT&T's put arrangements with Cox Communications, Inc. and Comcast
involving At Home Corporation in May 2001, (viii) its distribution of the
outstanding shares of common stock of AT&T Wireless Inc. held by AT&T to
the holders of AT&T common stock in July 2001, (ix) its debt-for-equity
exchange offer involving AT&T's remaining stake in AT&T Wireless in July
2001, and (x) its transaction with BT Group plc relating to the unwinding
of the Concert joint venture announced in October 2001;
- having acted as joint lead arranger in connection with the loan
syndication of AT&T's senior credit facility in April 1999, aggregate
principal amount $30 billion, and joint lead arranger of its corporate
revolving credit facility in December 2000, aggregate principal amount
$25 billion, and in December 2001, aggregate principal amount $8 billion;
- having acted as joint bookrunner in connection with (i) the public
offering of AT&T Wireless Group tracking stock of AT&T in April 2000,
(ii) the public offering pursuant to Rule 144A of $1.65 billion aggregate
principal amount of Notes of AT&T due August 2002 in August 2001, and
(iii) the public offering pursuant to Rule 144A of $10.1 billion
aggregate principal amount of Notes of AT&T in multiple tranches and
currencies in November 2001;
- having acted as sole bookrunner in connection with the public offerings
pursuant to Rule 144A of (i) $3.0 billion of aggregate principal amount
of Notes of AT&T due July 2000 in July 1999 and (ii) $6.0 billion of
aggregate principal amount of Notes of AT&T in multiple tranches due July
2001 in July 2000;
- having acted as dealer with respect to AT&T's commercial paper program;
- having acted as financial advisor to AT&T in connection with the
restructuring announced by AT&T in 2000; and
- having acted as a financial advisor to AT&T in connection with, and
having participated in some of the negotiations leading up to, the merger
agreement, the separation and distribution agreement and the agreements
referred to therein.
IV-20
Goldman Sachs has also provided investment banking services to Comcast and
its affiliates from time to time, including:
- having acted as co-manager with respect to the public offering of PHONES
in March 1999, aggregate principal amount $870 million;
- having acted as joint lead agent on the $4.45 billion aggregate principal
amount consent solicitation for various Comcast debt securities in July
2000; and
- having acted as co-manager with respect to the public offerings of (i)
$0.5 billion aggregate principal amount of Comcast's 6.375% Senior
Unsecured Notes due 2006 and $1.0 billion aggregate principal amount of
Comcast's 3.75% Senior Notes due 2011 in January 2001, (ii) $0.75 billion
aggregate principal amount of Comcast's 6.875% Senior Notes due 2009 in
May 2001, and (iii) $0.75 billion aggregate principal amount of Comcast's
7.125% Senior Notes due 2013 in June 2001. Goldman Sachs may provide
investment banking and advisory services to AT&T, Comcast and their
respective affiliates in the future.
Pursuant to contracts between AT&T, a subsidiary of AT&T Broadband and
affiliates of Credit Suisse First Boston, the subsidiary of AT&T Broadband is
obligated to deliver to an affiliate of Credit Suisse First Boston either shares
of Comcast Class A Special common stock or, following the mergers, AT&T Comcast
Class A Special common stock or cash in an amount derived from the value of the
shares that would otherwise be delivered. In the ordinary course of business,
each of Credit Suisse First Boston and Goldman Sachs and their affiliates may
actively trade securities, including derivative securities, of AT&T and Comcast
and their respective affiliates and in the future may actively trade securities,
including derivative securities, of AT&T Comcast and its affiliates for their
own accounts and for the accounts of customers and, accordingly, may at any time
hold long or short positions in those securities.
IV-21
CHAPTER FIVE
DESCRIPTION OF THE AT&T COMCAST TRANSACTION AGREEMENTS
Except for the employee benefits agreement, this chapter describes the
material terms of each of the AT&T Comcast transaction agreements. For a
description of the material terms of the employee benefits agreement, see
"Employee Benefits Matters -- Other Benefits Matters -- Employee Benefits
Agreement."
THE MERGER AGREEMENT
The following summary of the merger agreement is qualified in its entirety
by reference to the complete text of the merger agreement, which is incorporated
by reference and attached as Annex A to this document.
STRUCTURE OF THE MERGERS
AT&T Broadband Acquisition Corp., a wholly owned subsidiary of AT&T
Comcast, will merge with and into AT&T Broadband, with AT&T Broadband continuing
as the surviving corporation and a wholly owned subsidiary of AT&T Comcast. This
merger is referred to in this document as the "AT&T Broadband merger." At
approximately the same time, Comcast Acquisition Corp., a wholly owned
subsidiary of AT&T Comcast, will merge with and into Comcast, with Comcast
continuing as the surviving corporation and a wholly owned subsidiary of AT&T
Comcast. This merger is referred to in this document as the "Comcast merger."
After completion of the mergers, the shareholders of Comcast and AT&T Broadband
will be shareholders of AT&T Comcast.
TIMING OF CLOSING
The closing date for the transaction will occur as soon as practicable
(and, in any event, within five business days) after satisfaction or waiver of
all conditions to the mergers set forth in the merger agreement. The mergers
will become effective after the separation and the AT&T Broadband spin-off on
the closing date for the transaction at a time that is mutually agreeable to
Comcast and AT&T.
MERGER CONSIDERATION
The Preferred Structure. If holders of Comcast Class A common stock,
voting as a single class, and holders of Comcast Class A common stock and
Comcast Class B common stock, voting together as a single class, approve the
preferred structure proposal:
- each share of AT&T Broadband common stock that is outstanding
immediately prior to the completion of the mergers will be converted in
the AT&T Broadband merger into the right to receive a number of shares
of AT&T Comcast Class A common stock determined by a formula described
under "-- Calculation of the AT&T Broadband Exchange Ratio" (if the AT&T
Broadband exchange ratio were determined as of the date of this
document, it would be approximately ); and
- each share of Comcast Class A common stock, Comcast Class B common stock
and Comcast Class A Special common stock that is outstanding immediately
prior to the completion of the mergers will be converted in the Comcast
merger into the right to receive one share of AT&T Comcast Class A
common stock, AT&T Comcast Class B common stock and AT&T Comcast Class A
Special common stock, respectively.
The AT&T Comcast capital structure described above is referred to in this
document as the "Preferred Structure." The rights of the classes of AT&T Comcast
common stock under the Preferred Structure are described under "Certain Legal
Information -- Description of AT&T Comcast Capital Stock."
V-1
The Alternative Structure. If the holders of the Comcast Class A common
stock, voting as a single class, or holders of Comcast Class A common stock and
Comcast Class B common stock, voting together as a single class, do not approve
the preferred structure proposal:
- each share of AT&T Broadband common stock that is outstanding
immediately prior to the completion of the mergers will be converted in
the AT&T Broadband merger into the right to receive a number of shares
of AT&T Comcast Class C common stock determined by a formula described
under "-- Calculation of the AT&T Broadband Exchange Ratio" (if the AT&T
Broadband exchange ratio were determined as of the date of this
document, it would be approximately ); and
- each share of Comcast Class A common stock, Comcast Class B common stock
and Comcast Class A Special common stock that is outstanding immediately
prior to the completion of the mergers will be converted in the Comcast
merger into the right to receive one share of AT&T Comcast Class A
common stock, AT&T Comcast Class B common stock and AT&T Comcast Class A
Special common stock, respectively.
The AT&T Comcast capital structure described above is referred to in this
document as the "Alternative Structure." The rights of the classes of AT&T
Comcast common stock under the Alternative Structure are described in "Certain
Legal Information -- Description of AT&T Comcast Capital Stock."
Potential Additional Payments. If there is a disparity in the per share
value of the class of AT&T Comcast common stock issued in the AT&T Broadband
merger and the AT&T Comcast Class A Special common stock such that the shares of
AT&T Comcast common stock issued to the AT&T Broadband shareholders in the AT&T
Broadband merger do not have a value in excess of 50% of the total value of the
shares of AT&T Comcast stock issued in the mergers, AT&T Comcast will issue a
number of additional shares of AT&T Comcast stock to the same AT&T Broadband
shareholders sufficient to ensure that the AT&T Broadband shareholders will hold
shares of AT&T Comcast stock representing more than 50% of the value of all
shares of AT&T Comcast stock issued in the mergers.
If, prior to the completion of the mergers, Standard & Poor's has not
committed that the class of AT&T Comcast common stock to be issued in the AT&T
Broadband merger will be included in the Standard & Poor's 500 Index immediately
after completion of the mergers and during 10 trading days randomly selected
from a post-closing pricing period the average trading price for such class of
AT&T Comcast common stock is less than that of the AT&T Comcast Class A Special
common stock, AT&T Comcast will issue additional shares of such class of AT&T
Comcast common stock to the same AT&T Broadband shareholders to offset such
price differential; provided that (1) AT&T Comcast will not be obligated
pursuant to this provision to compensate AT&T Broadband shareholders to the
extent the price differential exceeds 3% and (2) the number of shares of AT&T
Comcast common stock that would otherwise be issued pursuant to this provision
will be reduced by the number of shares (if any) issued by AT&T Comcast as
described in the preceding paragraph. Notwithstanding the foregoing, if the
class of AT&T Comcast common stock issued in the AT&T Broadband merger is
included in the Standard & Poor's 500 Index prior to the close of the pricing
period referred to above, AT&T Comcast will have no obligation to issue
additional shares of AT&T Comcast common stock pursuant to this provision.
V-2
CALCULATION OF THE AT&T BROADBAND EXCHANGE RATIO
In connection with the transaction, AT&T Comcast will issue up to 1.235
billion shares of AT&T Comcast common stock to the AT&T shareholders who receive
shares of AT&T Broadband common stock in the AT&T Broadband spin-off (not
including 115 million shares of AT&T Comcast common stock issued to Microsoft as
a result of the QUIPS exchange transaction). The number of shares of AT&T
Comcast common stock that each holder of AT&T Broadband common stock will
receive in the AT&T Broadband merger in exchange for each of such holder's
shares of AT&T Broadband common stock will be determined by the following
formula:
1,235,000,000 -- (I+F)/C
X = ------------------------
O
The exchange ratio (identified as "X" above) is calculated by reference to
the number of shares of AT&T Broadband common stock that is outstanding at the
completion of the transaction (identified as "O" above). The merger agreement
provides that this number "O" will include any outstanding restricted shares of
AT&T Broadband common stock that are not forfeited upon completion of the
transaction but will exclude any shares of AT&T Broadband common stock issued in
the QUIPS exchange transaction, which is described under "Description of the
AT&T Comcast Transaction Agreements -- The Exchange Agreement -- QUIPS Exchange"
or held by a wholly owned subsidiary of AT&T Broadband and any shares of AT&T
Broadband common stock that were not issued on account of the purported exercise
by an AT&T shareholder of appraisal rights in connection with the AT&T Comcast
transaction (unless such purported exercise has been withdrawn or such rights
have been invalidated).
The exchange ratio is also calculated by reference to the cost to AT&T
Comcast of assuming certain stock options and stock appreciation rights that are
held by employees of AT&T Broadband and former employees of AT&T and AT&T
Broadband. This latter cost is taken into account in the formula by subtracting
the quantity (I+F)/C from 1.235 billion in the numerator where "I" is the value
of stock options and stock appreciation rights outstanding on the day the merger
agreement was signed and held by employees of AT&T Broadband immediately prior
to the closing date, "F" is the value of stock options and stock appreciation
rights held by former employees that are being assumed by AT&T Comcast and "C"
is the market price of a share of Comcast Class A common stock immediately prior
to completion of the transaction.
If the exchange ratio were determined as of the date of this document, it
would be approximately [ ].
As described above, the exchange ratio is dependent on a number of factors
that may change between the date of execution of the merger agreement and the
date of completion of the AT&T Comcast transaction, including the number of
outstanding shares of AT&T common stock, the value of options and stock
appreciation rights and the price of Comcast Class A common stock. The following
is solely for purposes of illustrating the effects that certain actions taken in
this interim period may have on the exchange ratio. Each paragraph of the
following assumes that the only variable of the exchange ratio that changes is
the one listed in that paragraph:
- If AT&T issues additional shares of AT&T common stock before the record
date for the AT&T Broadband spin-off, the number of shares of AT&T
Broadband common stock distributed in the AT&T Broadband spin-off will
increase and the exchange ratio will therefore decrease. The merger
agreement requires AT&T to cause its subsidiary, TCI Pacific
Communications, Inc., to call for redemption, and redeem, all of the
outstanding shares of TCI Pacific Class A Senior Cumulative Exchangeable
preferred stock, or the TCI Pacific preferred stock, prior to completion
of the AT&T Comcast transaction. If prior to the redemption date, the
holders of the TCI Pacific preferred stock elect to exchange their
shares for AT&T common stock (as expected), AT&T will be required to
issue an estimated 52.3 million shares of AT&T common stock. See
"-- Covenants -- Redemption of TCI Pacific Preferred Stock." The
exchange ratio of [ ] referred to above assumes the issuance of
52.3 million shares of AT&T common stock as discussed in the
V-3
\
preceding sentence. In addition, the merger agreement permits AT&T to
issue up to 275 million shares of AT&T common stock in connection with
certain transactions. If AT&T issues all 275 million shares of AT&T
common stock discussed in the preceding sentence prior to completion of
the AT&T Comcast transaction and the exchange ratio were determined as
of the date of this document adjusted for such issuances and otherwise
using then current information, the exchange ratio would be
approximately [ ].
- If the stock price of AT&T immediately prior to the AT&T Broadband
spin-off is less than the stock price of AT&T as of the date of
execution of the merger agreement, it will cost less for AT&T Comcast to
assume certain stock options and stock appreciation rights and the
exchange ratio will increase.
- If the stock price of Comcast Class A common stock prior to the AT&T
Broadband spin-off is less than the stock price of Comcast Class A
common stock as of the date of execution of the merger agreement, the
cost to AT&T Comcast of assuming certain stock options and stock
appreciation rights (as expressed in terms of shares of Comcast Class A
common stock) will increase and the exchange ratio will decrease.
EXCHANGE OF SHARES
AT&T and Comcast will jointly designate an exchange agent to coordinate (1)
the exchange of Comcast common stock in the Comcast merger for AT&T Comcast
common stock, (2) the distribution of AT&T Comcast common stock in respect of
the AT&T Broadband common stock converted in the AT&T Broadband merger and (3)
the payment of cash to the former holders of AT&T Broadband common stock instead
of fractional shares of AT&T Comcast common stock.
As soon as reasonably practicable after completion of the mergers, the
exchange agent will mail to each holder of record of a certificate that
immediately prior to the completion of the mergers represented outstanding
shares of Comcast common stock (1) a letter of transmittal and (2) instructions
for effecting the surrender of the Comcast certificates in exchange for
certificates representing shares of AT&T Comcast common stock. Holders of
certificates representing shares of Comcast common stock that surrender their
certificates for cancellation to the exchange agent, together with a properly
completed letter of transmittal and such other documents as may reasonably be
required by the exchange agent will receive the appropriate merger
consideration. Holders of unexchanged shares of Comcast common stock will not be
entitled to receive any dividends or other distributions payable by AT&T Comcast
after the completion of the mergers until their certificates are surrendered.
AT&T will declare to holders of AT&T common stock, NYSE symbol "T," a
dividend of one share of AT&T Broadband common stock for each such share of AT&T
common stock immediately prior to the completion of the mergers. Certificates
representing these shares of AT&T Broadband common stock will not be delivered.
Instead, as soon as reasonably practicable after the completion of the mergers,
the exchange agent will deliver to the holders entitled to the dividend of AT&T
Broadband common stock the appropriate merger consideration payable to those
holders in respect of the AT&T Broadband common stock. Those holders will not be
required to deliver to the exchange agent certificates representing shares of
AT&T common stock or AT&T Broadband common stock prior to receipt of
certificates representing the shares of AT&T Comcast common stock into which
their shares of AT&T Broadband common stock are converted in the AT&T Broadband
merger. Holders of AT&T common stock, NYSE symbol "T," will continue to hold
their certificates which, after completion of the AT&T Broadband spin-off, will
represent an interest in AT&T's communications services business or, if AT&T
Consumer Services Group tracking stock has been issued, AT&T Business Services
Group (and AT&T's retained portion of the value of AT&T Consumer Services Group,
if any). No distribution of AT&T Broadband common stock will be made on shares
of AT&T Consumer Services Group tracking stock.
AT&T Comcast will not issue any fractional shares in the AT&T Broadband
merger. Instead, as promptly as practicable after the completion of the mergers,
the exchange agent will sell the "Excess Shares" of AT&T Comcast common stock at
then prevailing prices on The Nasdaq Stock Market.
V-4
"Excess Shares" means (1) the number of shares of AT&T Comcast common stock
delivered to the exchange agent by AT&T Comcast in respect of the AT&T Broadband
merger less (2) the aggregate number of whole shares of AT&T Comcast common
stock to be distributed to the holders of AT&T Broadband common stock in the
AT&T Broadband merger. As soon as practicable after the determination of the
amount of cash to be paid to the holders of AT&T Broadband common stock in lieu
of any fractional share interests, the exchange agent will deliver such amounts
to the applicable holders of AT&T Broadband common stock.
No fractional shares will be issuable in the Comcast merger because the
Comcast exchange ratio is 1:1.
In the event that any additional shares of AT&T Comcast common stock will
be issued as described under "-- Merger Consideration -- Potential Additional
Payments," AT&T Comcast will enter into appropriate arrangements with the
exchange agent providing for the delivery of such additional shares.
TREATMENT OF STOCK OPTIONS AND EQUITY-BASED AWARDS
AT&T Stock Options. Immediately prior to the AT&T Comcast transaction, as
a part of the AT&T Broadband spin-off, AT&T stock options will be converted as
described below pursuant to the employee benefits agreement (see "Employee
Benefits Matters -- Other Benefits Matters"). In connection with the
conversions, adjustments will be made to maintain the intrinsic value of the
original AT&T options immediately before and after the AT&T Broadband spin-off:
- AT&T stock options held by current employees of AT&T Broadband (including
any AT&T employees who become employees of AT&T Broadband in connection
with the AT&T Broadband spin-off) will be converted into AT&T Broadband
stock options;
- AT&T stock options held by current employees of AT&T (other than
employees of AT&T Broadband) will be converted into adjusted AT&T stock
options; and
- AT&T stock options held by former employees of AT&T and AT&T Broadband
will be converted into (1) adjusted AT&T stock options and (2) AT&T
Broadband stock options.
AT&T Broadband Stock Options. As of completion of the AT&T Comcast
transaction, each outstanding AT&T Broadband stock option will be converted, on
the same terms and conditions, into an option to acquire that number of shares
of AT&T Comcast Indexed Stock that has the same fair market value immediately
after the completion of the AT&T Comcast transaction as the aggregate fair
market value of shares of AT&T common stock subject to the existing AT&T
Broadband stock option prior to the AT&T Broadband spin-off less, in the case of
former employees of AT&T or AT&T Broadband, the aggregate fair market value of
the AT&T common stock subject to the adjusted AT&T stock option granted pursuant
to the employee benefits agreement. The per share exercise price for each newly
converted option will be equal to the aggregate exercise price of the applicable
AT&T Broadband stock option prior to the AT&T Broadband spin-off (less, in the
case of a former employee of AT&T or AT&T Broadband, the aggregate exercise
price of the adjusted AT&T stock option referred to above) divided by the number
of shares of AT&T Comcast Indexed Stock underlying such option. As of completion
of the AT&T Comcast transaction, each AT&T Broadband stock option held by
current AT&T Broadband employees (including AT&T employees who become AT&T
Broadband employees in the AT&T Broadband spin-off) will have vested and will
remain exercisable for the remainder of its original term (except for awards
held by any AT&T executive officer who has waived rights to vesting of certain
equity awards as a result of the AT&T Comcast transaction).
AT&T Restricted Stock and other AT&T Equity-Based Awards. Immediately
prior to the AT&T Comcast transaction, as a part of the AT&T Broadband spin-off,
AT&T restricted stock and other equity-based awards will be converted as
described below, pursuant to the employee benefits agreement (see "Employee
Benefits Matters -- Other Benefits Matters"). In connection with the
conversions, adjustments will be made to maintain the fair market value of the
original AT&T restricted stock or other equity-based award immediately before
and after the AT&T Broadband spin-off:
V-5
- AT&T restricted shares held by current employees of AT&T (other than
employees of AT&T Broadband) will be converted into (1) adjusted AT&T
restricted shares and (2) equity-based awards based on AT&T Broadband
common stock;
- AT&T restricted shares held by current employees of AT&T Broadband
(including AT&T employees who become employees of AT&T Broadband in
connection with the AT&T Broadband spin-off) will be converted into (1)
adjusted AT&T restricted shares and (2) AT&T Broadband restricted shares;
and
- Other equity-based awards based on AT&T common stock, regardless of by
whom held, will be converted into (1) adjusted equity-based awards based
on AT&T common stock and (2) equity-based awards based on AT&T Broadband
common stock.
AT&T Broadband Restricted Stock and other AT&T Broadband Equity-Based
Awards. As of the completion of the AT&T Comcast transaction, shares of AT&T
Broadband restricted stock will be converted into the right to receive AT&T
Comcast common stock on the terms and conditions applicable to AT&T Broadband
shareholders described above under "Merger Consideration." As of the completion
of the AT&T Comcast transaction, all other awards based on shares of AT&T
Broadband common stock will be converted, on the same terms and conditions, into
equivalent awards based on that number of shares of AT&T Comcast Indexed Stock
having the same fair market value immediately after the completion of the AT&T
Comcast transaction as the aggregate fair market value of shares of AT&T common
stock subject to the original AT&T equity awards. As of completion of the AT&T
Comcast transaction, each AT&T Broadband restricted share will have become free
of restrictions and each other equity-based award (based on AT&T or AT&T
Broadband common stock) held by current and former AT&T Broadband employees
(including AT&T employees who become AT&T Broadband employees in the AT&T
Broadband spin-off) will have vested (except for awards held by any AT&T
executive officer who has waived rights to vesting of certain equity awards as a
result of the AT&T Comcast transaction).
Comcast Stock Options. As of the completion of the AT&T Comcast
transaction each outstanding Comcast stock option will be converted into an
option to acquire, on the same terms and conditions, that number of shares of
AT&T Comcast Indexed Stock that has the same fair market value immediately after
the completion of the AT&T Comcast transaction as the aggregate fair market
value of shares of Comcast Class A Special common stock subject to the existing
Comcast stock option. The per share exercise price for each newly converted
option will be equal to the aggregate exercise price of the applicable Comcast
stock option divided by the number of shares of AT&T Comcast Indexed Stock
underlying such option.
Comcast Restricted Stock and the Comcast Equity-Based Awards. As of the
completion of the AT&T Comcast transaction, shares of Comcast restricted stock
will be converted into the right to receive AT&T Comcast common stock on the
terms and conditions applicable to Comcast shareholders described above under
"Merger Consideration." As of the completion of the AT&T Comcast transaction,
other awards based on shares of Comcast Class A Special common stock will be
converted, on the same terms and conditions, into equivalent awards based on
that number of shares of AT&T Comcast Indexed Stock having the same fair market
value immediately after the completion of the transaction as the aggregate fair
market value of shares of Comcast Class A Special common stock subject to the
existing Comcast equity awards.
COVENANTS
Each of Comcast and AT&T has undertaken certain covenants in the merger
agreement. The following summarizes the more significant of these covenants.
Interim Operations. Comcast and AT&T (with respect to its broadband
business) have agreed to conduct their business in the ordinary course
consistent with past practice and to not engage in specified material
transactions, in each case prior to the completion of the transaction, without
the prior written consent of the other party (which consent will not be
unreasonably withheld). AT&T has also agreed not to enter into any material
agreement or arrangement relating to its interest in amend or modify in any
V-6
material respect any of its existing material contracts relating to Time Warner
Entertainment, acquire (other than pursuant to a cashless exercise of an option
currently held by AT&T) additional interests in Time Warner Entertainment or
sell any part of its interest in Time Warner Entertainment, except solely for
cash or pursuant to the registration provisions of the Time Warner Entertainment
partnership agreement, in each case prior to the completion of the AT&T Comcast
transaction, without the prior written consent of Comcast (which consent will
not be unreasonably withheld). AT&T has further agreed to run its broadband
business for the benefit of the broadband business prior to the completion of
the AT&T Comcast transaction.
Covenant to Obtain Regulatory Approvals. AT&T and Comcast have agreed to
use their best efforts to promptly take all actions and to do all things
necessary, proper or advisable under applicable laws and regulations to complete
the AT&T Comcast transaction as soon as practicable. In addition, AT&T and
Comcast have agreed to take all actions necessary to obtain all required FCC
approvals and the expiration or termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976.
AT&T Board's Covenant to Recommend and Hold Meeting. The AT&T Board has
agreed to recommend approval and adoption of the merger agreement and the
transactions contemplated by the merger agreement to AT&T shareholders. However,
the AT&T Board is permitted to withdraw or modify, in a manner adverse to
Comcast, this recommendation if:
- AT&T is in compliance with its obligations to notify Comcast promptly
after its receipt of an Acquisition Proposal (as described below) and to
keep Comcast fully informed of the status and details of any such
Acquisition Proposal;
- the AT&T Board determines, after consulting with AT&T's outside legal
counsel, that it must take such action to comply with its fiduciary
duties under applicable law; and
- AT&T has delivered to Comcast a prior written notice advising Comcast
that it intends to take such action and describing its reasons for taking
such action (such notice to be delivered not less than two business days
prior to the time such action is taken).
An "Acquisition Proposal" is defined in the merger agreement generally as
any offer or proposal by any third party for, or any indication of interest in,
certain transactions, including any transaction (1) the entering into or
consummation of which would reasonably be expected to be inconsistent in any
material respect with the AT&T Comcast transaction or (2) that would reasonably
be expected to prevent or materially delay, impede or adversely affect the AT&T
Comcast transaction (provided that certain transactions involving AT&T's
communications business that might delay completion of the AT&T Comcast
transaction will not be considered "Acquisition Proposals").
Subject to applicable law, AT&T is required to submit the merger agreement
to AT&T shareholders at the AT&T meeting even if the AT&T Board determines at
any time after the date of this document and prior to the AT&T meeting that it
is no longer advisable or recommends that AT&T shareholders reject it.
No Solicitation. AT&T is prohibited from soliciting or encouraging
Acquisition Proposals from third parties or from providing nonpublic information
to or engaging in negotiations with any third party that has made or is known by
AT&T to be considering making an Acquisition Proposal. However, AT&T may furnish
nonpublic information and engage in negotiations with a third party that has
made an unsolicited Acquisition Proposal if the AT&T Board determines, after
consultation with its financial advisors and outside legal counsel, that such
Acquisition Proposal would reasonably be expected to lead to a proposal that
would be more favorable to the AT&T shareholders than the AT&T Comcast
transaction; provided that prior to taking any of such actions:
- AT&T is in compliance with its obligations to notify Comcast promptly
after its receipt of an Acquisition Proposal and to keep Comcast fully
informed of the status and details of any such Acquisition Proposal;
V-7
- the AT&T Board determines, after consulting with AT&T's outside legal
counsel, that it must take such action to comply with its fiduciary
duties under applicable law; and
- such third party executes a confidentiality agreement with terms no less
favorable in the aggregate to AT&T than those contained in the
confidentiality agreement between AT&T and Comcast.
Comcast Board's Covenant to Recommend. The Comcast Board has agreed to
recommend approval and adoption of the merger agreement and the transactions
contemplated by the merger agreement to Comcast shareholders.
Interim Finance Committee. Comcast and AT&T have agreed to establish an
Interim Finance Committee composed of Lawrence S. Smith, Executive Vice
President of Comcast, and Charles H. Noski, Senior Executive Vice President and
Chief Financial Officer of AT&T, for the purpose of engaging in financial
planning for AT&T Broadband. The Interim Finance Committee will seek to arrange
financing in an amount sufficient to:
- pay to AT&T at the closing of the transaction all debt owed to it by AT&T
Broadband;
- refinance certain AT&T Broadband debt that will be called for redemption
on the closing date for the transaction or shortly thereafter (see
"-- TOPrS Covenant"); and
- provide appropriate cash reserves to fund the operations of AT&T
Broadband after the completion of the transaction.
If Comcast is unable to obtain the financing described above on the terms
agreed upon by the Interim Finance Committee or the Interim Finance Committee is
unable to agree on the terms of such financing, Comcast will arrange for a
senior credit facility with a term not exceeding five years to provide such
financing.
TOPrS Covenant. AT&T Comcast has agreed that on the closing date for the
transaction, it will either call for redemption the AT&T Broadband debt known by
the acronym TOPrS that is then redeemable (and which has not been redeemed prior
to that date) and as to which AT&T has guaranteed certain obligations, cause
AT&T to be released from any such guarantee or post a letter of credit in
respect of such debt. With respect to any series of TOPrS that is not redeemable
on the closing date for the transaction and as to which AT&T has guaranteed
certain obligations, AT&T Comcast has agreed on the earliest date on which such
series of TOPrS may be redeemed to either redeem such series of TOPrS, cause
AT&T to be released from any such guarantee or post a letter of credit in
respect of such debt. As of the date of this filing, AT&T has announced that
approximately $1.3 billion of the outstanding TOPrS will be redeemed in February
and March 2002.
QUIPS Failure. Comcast and AT&T have agreed that if on the date that would
otherwise be the closing date for the AT&T Comcast transaction the QUIPS
exchange transaction does not occur (the "QUIPS Failure Date"), the closing date
for the AT&T Comcast transaction may be delayed for up to 180 days after the
QUIPS Failure Date. During this period, AT&T and Comcast will use commercially
reasonable efforts to complete the QUIPS exchange transaction or, if it appears
reasonably likely that the QUIPS exchange transaction will not occur, the
transfer of the obligations under the QUIPS (the "QUIPS Transfer") from AT&T to
AT&T Broadband, in either case on the closing date for the AT&T Comcast
transaction. If neither the QUIPS exchange transaction nor the QUIPS Transfer
occurs on the closing date for the AT&T Comcast transaction during such period,
AT&T Broadband will pay AT&T an additional amount at closing equal to the fair
market value of the QUIPS, as determined pursuant to an appraisal process
specified in the merger agreement. In such event, Comcast will be permitted to
sell assets and take any other actions that are necessary or reasonably designed
to enable it to provide AT&T Broadband with sufficient funds to pay AT&T the
QUIPS fair market value.
Covenant Regarding Standard & Poor's 500 Index. AT&T Comcast, Comcast and
AT&T have each agreed to use their reasonable best efforts to cause the AT&T
Comcast common stock to be issued in the AT&T Broadband merger (i.e., AT&T
Comcast Class A common stock under the Preferred Structure and AT&T Comcast
Class C common stock under the Alternative Structure) to be included in the
V-8
Standard & Poor's 500 Index upon completion of the AT&T Comcast transaction or
as promptly thereafter as possible.
Covenant Permitting Certain AT&T Transactions. Comcast and AT&T have
agreed that AT&T may enter into an agreement relating to a transaction providing
for the sale or disposition of more than 50% of AT&T's communications businesses
that would delay completion of the mergers (a "Significant Excepted
Transaction") if such Significant Excepted Transaction would not reasonably be
expected to result in a delay in the completion of the mergers past March 1,
2003, the date on or after which Comcast or AT&T may elect to terminate the
merger agreement if the mergers have not closed (the "End Date"); provided that,
in such event, at the request of Comcast, the End Date will be extended by the
reasonably expected period of delay in the completion of the mergers caused by
such Significant Excepted Transaction up to sixty days.
Comcast and AT&T have also agreed that AT&T may enter into an agreement
relating to a Significant Excepted Transaction that would reasonably be expected
to result in a delay in the completion of the mergers past the End Date but
which would not reasonably be expected to result in a delay in the completion of
the mergers to a date that is more than sixty days after the End Date; provided
that (1) Microsoft consents to extend the "end" date for the QUIPS exchange
transaction to the date after the End Date (which date will be no later than
sixty days after the End Date) on which it is reasonably anticipated that the
mergers would be completed if the Significant Excepted Transaction were to
occur, (2) the End Date is extended to the new "end" date for the QUIPS exchange
transaction and (3) AT&T (and not AT&T Broadband) agrees to pay any costs,
expenses or fees payable in connection with obtaining Microsoft's consent to the
extension of the "end" date for the QUIPS exchange transaction.
AT&T has agreed that it will not enter into any agreement relating to a
Significant Excepted Transaction that would reasonably be expected to result in
a delay in the completion of the mergers to a date that is more than sixty days
after the End Date.
Headquarters. Upon completion of the transaction, Comcast and AT&T have
agreed that AT&T Comcast's headquarters will be in Philadelphia, Pennsylvania.
Until the 2005 annual meeting of AT&T Comcast shareholders, AT&T Comcast will
maintain an executive office in the New York City metropolitan area.
Alternative Structure. Comcast and AT&T have agreed that, at the request
of the other party, it will consider amending the terms of the merger agreement
to the extent necessary to provide for a structure or a sequencing of the
mergers that is more tax efficient or otherwise more advantageous than the
structure and sequencing of the mergers described in this document and is not
adverse to the other party.
Shareholder Rights Plan. Comcast and AT&T have agreed to cause AT&T
Comcast to adopt a shareholder rights plan upon completion of the AT&T Comcast
transaction. For a description of the terms of the shareholder rights plan that
AT&T Comcast will adopt, see "Certain Legal Information -- Description of AT&T
Comcast Shareholder Rights Plan."
Post-Transaction Governance Arrangements. Comcast and AT&T have agreed to
various governance arrangements for AT&T Comcast after the completion of the
AT&T Comcast transaction. For a description of these arrangements, see
"Description of Governance Arrangements Following the AT&T Comcast Transaction."
Indemnification and Insurance. Comcast and AT&T have agreed to various
indemnification and insurance arrangements for officers and directors of AT&T,
Comcast and their respective subsidiaries after the completion of the AT&T
Comcast transaction. For a description of these arrangements, see "Employee
Benefits Matters -- Interests of Directors and Officers in the AT&T Comcast
Transaction -- Indemnification and Insurance."
Employee Benefits Matters. Comcast and AT&T have agreed to various
employee benefits matters. For a description of these matters, see "Employee
Benefits Matters."
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Agreement to Vote. Comcast has agreed to vote its shares of AT&T common
stock in favor of the AT&T Comcast transaction.
Covenant Regarding Comcast's AT&T Stock. Comcast and AT&T have agreed
that, prior to the AT&T Broadband spin-off, Comcast will exchange all of its
shares of AT&T common stock for shares of a newly created series of AT&T
exchangeable preferred stock. The AT&T exchangeable preferred stock will be
mandatorily exchangeable after the completion of the AT&T Comcast transaction
into shares of AT&T common stock. The exchange formula included in the merger
agreement will provide Comcast with an interest in the communications business
of AT&T that, subject to the next sentence, is equal in value to the interest
Comcast held in the combined communications and broadband business of AT&T prior
to the AT&T Comcast transaction. Comcast has agreed to cap the shares of AT&T
common stock (or shares of any class of AT&T stock issued as a dividend on
shares of AT&T common stock) it is eligible to receive pursuant to the exchange
formula included in the merger agreement at 10% of the outstanding shares of
AT&T common stock (or any class of stock issued as a dividend on AT&T common
stock). Comcast has also agreed that if as a result of the mandatory exchange it
holds in excess of 5% of the outstanding shares of AT&T common stock (or any
class of stock issued as a dividend on AT&T common stock), then (1) it will sell
the excess shares within a year of the exchange and (2) prior to the sale of the
excess shares it will vote them on any matter submitted to shareholders in the
same proportion as all other shareholders.
Redemption of TCI Pacific Preferred Stock. AT&T has agreed that prior to
the completion of the AT&T Comcast transaction, it will cause TCI Pacific (1) to
call for redemption all of the outstanding shares of TCI Pacific preferred stock
and (2) to the extent any of such shares are not exchanged for shares of AT&T
common stock prior to the applicable redemption date, to redeem all of such
shares remaining outstanding in exchange for shares of AT&T common stock.
Sural. Comcast and AT&T have agreed that Sural LLC, which is controlled by
Brian L. Roberts, President of Comcast, may elect to merge with and into AT&T
Comcast or one of its subsidiaries immediately prior to the mergers. If such
election is made, the members of Sural LLC, in exchange for their outstanding
interests in Sural LLC, would receive in the aggregate the same number of AT&T
Comcast shares of each class that Sural LLC would have received in the Comcast
merger had it not made such election.
REPRESENTATIONS AND WARRANTIES
The merger agreement includes substantially reciprocal representations and
warranties made by Comcast and AT&T customary for a transaction similar to the
AT&T Comcast transaction. The representations and warranties contained in the
merger agreement will not survive the completion of the AT&T Comcast transaction
or a termination of the merger agreement.
CONDITIONS TO THE COMPLETION OF THE MERGERS
Conditions to the Obligations of Comcast and AT&T. The obligations of each
party to the merger agreement to complete the mergers are subject to the
satisfaction or waiver (to the extent permissible) of the following conditions:
- approval of the AT&T Comcast transaction by the AT&T shareholders and the
Comcast shareholders;
- expiration or termination of any applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976;
- absence of a material legal prohibition on the transaction;
- approval for the listing on The Nasdaq Stock Market of the shares of AT&T
Comcast common stock to be issued in the mergers (other than the shares
of AT&T Comcast Class B common stock) or to be reserved for issuance in
connection with the mergers;
V-10
- receipt of all required regulatory approvals other than those the failure
of which to be obtained would not reasonably be expected to have a
Material Adverse Effect (as described below) on Comcast or AT&T's
broadband business;
- absence of any order or statute, rule or regulation restraining or
prohibiting the effective operation of the business of AT&T Comcast, AT&T
Broadband or Comcast after the completion of the mergers that would
reasonably be expected to have a Material Adverse Effect on Comcast or
AT&T's broadband business;
- completion of the separation and the AT&T Broadband spin-off;
- execution of all of the transaction agreements described or referred to
in this document;
- receipt and continuing effectiveness of an Internal Revenue Service
ruling or rulings (or, if Comcast and AT&T mutually agree, an opinion
from tax counsel acceptable to AT&T and Comcast) to the effect that, for
U.S. federal income tax purposes, the separation and the AT&T Broadband
spin-off will be tax-free, the mergers will not cause the separation and
the AT&T Broadband spin-off to fail to qualify as tax-free, and the
separation and the AT&T Broadband spin-off will not cause the
distribution by AT&T of all of the common stock of AT&T Wireless or of
Liberty Media to fail to qualify as tax-free transactions; and
- AT&T shall have obtained Note Consents, or defeased, purchased or
acquired debt, in respect of series representing at least 90% in
aggregate principal amount of the securities issued under the AT&T
indenture, dated September 7, 1990, and outstanding as of December 19,
2001. At December 19, 2001, there was approximately $12.7 billion in
aggregate principal amount subject to this condition.
Additional Conditions to the Obligations of AT&T. The obligations of AT&T
to consummate the AT&T Broadband merger are also subject to the satisfaction or
waiver (to the extent permissible) of the following conditions:
- material accuracy of the representations and warranties of Comcast,
including with respect to the absence of a Material Adverse Effect on
Comcast;
- performance by Comcast in all material respects of its obligations under
the merger agreement;
- receipt by AT&T of an opinion of Wachtell, Lipton, Rosen & Katz to the
effect that the combination of AT&T Broadband and Comcast will qualify as
a tax-free transaction; and
- performance by Sural in all material respects of its obligations under
the support agreement.
Additional Conditions to the Obligations of Comcast. The obligations of
Comcast to consummate the Comcast merger are also subject to the satisfaction or
waiver (to the extent permissible) of the following conditions:
- material accuracy of the representations and warranties of AT&T,
including with respect to the absence of a Material Adverse Effect on
AT&T Broadband;
- performance by AT&T in all material respects of its obligations under the
merger agreement; and
- receipt by Comcast of an opinion of Davis Polk & Wardwell to the effect
that the combination of AT&T Broadband and Comcast will qualify as a
tax-free transaction.
"Material Adverse Effect" with respect to Comcast or AT&T's broadband
business means a material adverse effect on the financial condition, assets or
results of operations of Comcast or AT&T's broadband business, as applicable,
taken as a whole, excluding any effect resulting from or arising in connection
with (1) changes or conditions generally affecting the industries in which
Comcast or AT&T's broadband business, as applicable, operate, (2) changes in
general economic, regulatory or political conditions or (3) the announcement of
the merger agreement or of the transactions contemplated by the merger
agreement.
V-11
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated in any of the following
circumstances:
- The merger agreement may be terminated by mutual written agreement of
Comcast and AT&T.
- The merger agreement may be terminated by either Comcast or AT&T if:
-- either party's shareholders fail to approve the transaction;
-- the mergers have not been completed by March 1, 2003; provided that the
party seeking to terminate the merger agreement pursuant to this
provision has not breached any provision of the merger agreement
resulting in the failure of the mergers to be completed by such date;
-- the other party breaches the merger agreement such that the related
closing conditions cannot be satisfied by March 1, 2003; or
-- any material law or regulation makes completion of the transaction
illegal or a permanent injunction prohibiting completion of the
transaction is entered.
- AT&T may terminate the merger agreement if the closing date for the
transaction has not occurred within 30 days of the QUIPS Failure Date;
provided that AT&T may terminate the merger agreement pursuant to this
provision only (1) on two business days' notice delivered to Comcast
prior to the 45th day after the QUIPS Failure Date and (2) if prior to
the effectiveness of the termination Comcast does not agree to close the
transaction by the 60th day after the QUIPS Failure Date.
- Comcast may terminate the merger agreement if:
-- the AT&T Board withdraws or modifies, in a manner adverse to Comcast,
its recommendation of the AT&T Comcast transaction; or
-- AT&T willfully and materially breaches its obligations set forth under
"-- Covenants -- AT&T Board's Covenant to Recommend and Hold Meeting"
or "-- Covenants -- No Solicitation."
If the merger agreement is terminated as provided above, the merger
agreement will become void without liability on the part of any party unless
such party has intentionally breached a covenant or other agreement included in
the merger agreement or knowingly breached a representation or warranty included
in the merger agreement. However, the provisions of the merger agreement
described below relating to termination fees and expenses will continue in
effect after any termination of the merger agreement.
TERMINATION FEES
AT&T will pay Comcast a termination fee in the amount of $1.5 billion in
cash if the merger agreement is terminated because:
- the AT&T Board withdraws or modifies, in a manner adverse to
Comcast, its recommendation of the AT&T Comcast transaction; or
- AT&T willfully and materially breaches its obligations set forth
under "-- Covenants -- AT&T Board's Covenant to Recommend and Hold
Meeting" or "-- Covenants -- No Solicitation."
In addition, AT&T will pay Comcast the termination fee specified above if
the merger agreement is terminated as a result of AT&T shareholders having
failed to approve the AT&T Comcast transaction at the AT&T shareholders meeting,
an Acquisition Proposal was pending at the time of the AT&T shareholders meeting
and, within one year of the AT&T shareholders meeting, AT&T enters into an
agreement relating to an alternative material transaction.
Comcast will pay AT&T a termination fee in the amount of $1.5 billion in
cash if the merger agreement is terminated because the Comcast Board withdraws
or modifies, in a manner adverse to
V-12
AT&T, its recommendation of the AT&T Comcast transaction or if Comcast
shareholders fail to approve the AT&T Comcast transaction.
EXPENSES
All costs and expenses incurred in connection with the transaction will be
paid by the party incurring the cost or expense; provided that (1) AT&T will pay
any costs and expenses incurred by AT&T Broadband that are in excess of $120
million (exclusive of any costs and expenses incurred by AT&T Broadband as
described in clauses (2), (3), (4) and (5) of this sentence), (2) AT&T Broadband
will pay any costs and expenses incurred in connection with any financing
arrangement entered into by AT&T Broadband as described under
"Covenants -- Interim Finance Committee," (3) AT&T Broadband will pay any costs
and expenses (to the extent not paid by AT&T Comcast) incurred in connection
with redeeming or refinancing the TOPrS, releasing AT&T from any obligations in
respect of the TOPrS or posting a letter of credit in support of such AT&T
obligations, in each case as described under "-- Covenants -- TOPrS Covenant,"
(4) AT&T Broadband will pay 50% of any costs and expenses in excess of $50
million incurred by AT&T or any of its subsidiaries in connection with obtaining
the Note Consents (through either a one-time cash payment of a consent fee or
through a coupon increase or a combination thereof), and (5) AT&T (and not AT&T
Broadband) and Comcast each will pay 50% of any fees and expenses, other than
attorneys' and accounting fees and expenses, incurred in relation to the
printing, filing and mailing of this document and the registration statement in
which this document is included.
AMENDMENTS AND WAIVERS
Any provision of the merger agreement may be amended or waived prior to the
completion of the mergers if, but only if, such amendment or waiver is in
writing and is signed, in the case of an amendment, by each of the parties to
the merger agreement or, in the case of a waiver, by each of the parties to the
merger agreement against whom the waiver is to be effective. After the adoption
of the merger agreement by the shareholders of Comcast or AT&T, no amendment or
waiver of any provision of the merger agreement may be made or given that
requires the approval of the shareholders of Comcast or AT&T, respectively,
unless such required approval is obtained.
V-13
THE SEPARATION AND DISTRIBUTION AGREEMENT
The following summary of the separation and distribution agreement is
qualified in its entirety by reference to the complete text of the separation
and distribution agreement, which is incorporated by reference and attached as
Annex B to this document.
THE SEPARATION
Assignment. AT&T will assign and transfer to AT&T Broadband all of AT&T's
and its subsidiaries' right, title and interest in all of the assets of AT&T's
broadband business which are not already held by AT&T Broadband or an AT&T
Broadband subsidiary. The assets comprising AT&T's broadband business are
generally determined in the following manner:
- Assets reflected in the AT&T Broadband Group balance sheet dated as of
December 31, 2000 are assets of AT&T's broadband business, except as
described below.
- Assets reflected in the AT&T Communications balance sheet dated as of
December 31, 2000 are assets of AT&T's communications business, except as
described below.
- Certain assets are specifically assigned to AT&T's broadband business
regardless of whether or not they are reflected in the AT&T Broadband
Group balance sheet dated as of December 31, 2000.
- Certain assets are specifically assigned to AT&T's communications
business regardless of whether or not they are reflected in the AT&T
Communications balance sheet dated as of December 31, 2000.
- Assets that are not reflected in the AT&T Broadband Group balance sheet
or the AT&T Communications balance sheet, in each case dated as of
December 31, 2000, or specifically assigned to AT&T's broadband business
or AT&T's communications business are assigned to the business to which
they primarily relate.
Assumption. At the same time as the assignment, AT&T Broadband will assume
all of the liabilities of AT&T's broadband business that are not already
liabilities of AT&T Broadband or an AT&T Broadband subsidiary. The liabilities
of AT&T's broadband business are generally determined in the following manner:
- Liabilities reflected in the AT&T Broadband Group balance sheet dated as
of December 31, 2000 are liabilities of AT&T's broadband business, except
as described below.
- Liabilities reflected in the AT&T Communications balance sheet dated as
of December 31, 2000 are liabilities of AT&T's communications business,
except as described below.
- Certain liabilities are specifically assigned to AT&T's broadband
business regardless of whether or not they are reflected in the AT&T
Broadband Group balance sheet dated as of December 31, 2000.
- Certain liabilities are specifically assigned to AT&T's communications
business regardless of whether or not they are reflected in the AT&T
Communications balance sheet dated as of December 31, 2000.
- Certain liabilities such as liabilities arising out of the AT&T Comcast
transaction or involving At Home or AT&T Wireless (to the extent AT&T is
not indemnified by AT&T Wireless for such liabilities) are divided evenly
between AT&T's broadband business and AT&T's communications business
regardless of whether or not they are reflected in the AT&T Broadband
Group balance sheet or the AT&T Communications balance sheet, in each
case dated as of December 31, 2000.
- Liabilities that are not reflected in the AT&T Broadband Group balance
sheet or the AT&T Communications balance sheet, in each case dated as of
December 31, 2000, or specifically assigned to AT&T's broadband business
or AT&T's communications business are assigned to the business to which
they primarily relate.
V-14
THE AT&T BROADBAND SPIN-OFF
After the separation, AT&T will spin off AT&T Broadband by distributing to
each holder of record of a share of AT&T common stock, NYSE symbol "T," on the
record date for the AT&T Broadband spin-off, except for those holders that have
purported to exercise appraisal rights under New York Law, one share of AT&T
Broadband common stock for each share of AT&T common stock held. The record date
for the AT&T Broadband spin-off will be the close of business on the date of
completion of the mergers unless otherwise agreed by AT&T and Comcast. No
distribution of AT&T Broadband common stock will be made upon AT&T Consumer
Services Group tracking stock.
Since the AT&T Broadband merger will occur shortly after the AT&T Broadband
spin-off, AT&T shareholders will not be sent stock certificates representing the
shares of AT&T Broadband common stock distributed to them in the AT&T Broadband
spin-off. Instead, AT&T will cause the distribution agent for AT&T Broadband
common stock issued in the AT&T Broadband spin-off to hold AT&T Broadband common
stock in trust for AT&T shareholders as of the record date pending conversion of
AT&T Broadband common stock into shares of AT&T Comcast common stock pursuant to
the AT&T Broadband merger. After the AT&T Broadband merger, the applicable AT&T
shareholders will be mailed stock certificates representing the shares of AT&T
Comcast common stock into which their shares of AT&T Broadband common stock were
converted, and cash in lieu of fractional shares, as described under "The Merger
Agreement -- Exchange of Shares."
TIMING OF THE SEPARATION AND THE AT&T BROADBAND SPIN-OFF
The separation and the AT&T Broadband spin-off are scheduled to occur on
the closing date for the mergers. See "-- The Merger Agreement -- Timing of
Closing." On the closing date, the separation will occur prior to the AT&T
Broadband spin-off which will occur prior to the mergers. With the consent of
Comcast, which consent will not be unreasonably withheld, AT&T may effect the
separation and the AT&T Broadband spin-off prior to the closing date for the
mergers.
REPAYMENT OF INTRACOMPANY DEBT
AT&T Broadband has agreed to repay at the completion of the AT&T Comcast
transaction any debt that it or any AT&T Broadband subsidiary owes to AT&T or
any AT&T subsidiary (other than AT&T Broadband or any AT&T Broadband
subsidiary). As described under "-- The Merger Agreement -- Covenants -- Interim
Finance Committee," Comcast has agreed to arrange for the financing necessary to
permit AT&T Broadband to repay debt owed by AT&T Broadband and its subsidiaries
to AT&T and its subsidiaries (other than AT&T Broadband and its subsidiaries).
AT&T has also agreed to repay at the completion of the AT&T Comcast transaction
any debt that it or any of its subsidiaries (other than AT&T Broadband or any
AT&T Broadband subsidiary) owes to AT&T Broadband or any AT&T Broadband
subsidiary. As of September 30, 2001, the aggregate amount of indebtedness owed
by AT&T Broadband and its subsidiaries to AT&T and its subsidiaries (other than
AT&T Broadband and its subsidiaries) was $5.39 billion. Absent additional
deleveraging activities, it is expected that this figure will grow to fund
capital expenditures, operations and third party debt maturities and redemptions
through the completion of the AT&T Comcast transaction.
POST-SPIN-OFF TRANSACTIONS
The ability of AT&T and AT&T Broadband to engage in certain acquisitions,
redeem stock, issue equity securities or take any other action or actions that
in the aggregate would be reasonably likely to have the effect of causing or
permitting one or more persons to acquire directly or indirectly stock
representing a 50% or greater interest (within the meaning of Section 355(e) of
the Code) in AT&T or AT&T Broadband or otherwise jeopardize the non-recognition
of taxable gain or loss for U.S. federal income tax purposes to AT&T, AT&T
affiliates and AT&T shareholders in connection with the separation and the AT&T
Broadband spin-off may be limited for a period of 25 months following the AT&T
Broadband spin-off.
V-15
DISPOSITION OF TIME WARNER ENTERTAINMENT INTEREST
Upon any disposition of all or any portion of its interest in Time Warner
Entertainment after the signing of the merger agreement, AT&T Broadband has
agreed to pay AT&T 50% of the proceeds received from such disposition in excess
of the threshold amount described in the next sentence reduced by taxes on 50%
of such excess. The threshold amount is equal to the balance (plus 7% simple
interest per annum on the balance) of $10.2 billion reduced by the aggregate
proceeds of any previous dispositions of any portion of the Time Warner
Entertainment interest.
If the Time Warner Entertainment interest has not been fully disposed of
within 54 months of the completion of the transaction, the remaining Time Warner
Entertainment interest will be appraised at fair market value. To the extent
that the amount of such appraisal exceeds the threshold amount specified above,
AT&T Broadband has agreed to pay AT&T 50% of such excess (on a tax-adjusted
basis).
CONDITIONS TO THE COMPLETION OF THE SEPARATION AND THE AT&T BROADBAND SPIN-OFF
The obligations of AT&T to complete the separation and the AT&T Broadband
spin-off are subject to the satisfaction or waiver (to the extent permissible)
of certain conditions, including:
- receipt of all required regulatory approvals other than those the failure
of which to be obtained would not reasonably be expected to have a
Material Adverse Effect with respect to AT&T's broadband business or
AT&T's communications business (as defined under "-- The Merger
Agreement -- Conditions to the Completion of the Mergers" but with
respect to AT&T's communications business);
- satisfaction of all conditions necessary to permit the AT&T Broadband
spin-off to qualify as a tax-free distribution to AT&T, AT&T Broadband
and the AT&T shareholders and absence of any condition likely to prevent
the AT&T Broadband spin-off from qualifying as a tax-free distribution to
AT&T, AT&T Broadband and the AT&T shareholders;
- absence of a legal prohibition on the separation or the AT&T Broadband
spin-off;
- approval of the transaction by AT&T shareholders; and
- satisfaction of all of the other conditions to the mergers specified
under "-- The Merger Agreement-Conditions to the Completion of the
Mergers" other than the condition that the separation and the AT&T
Broadband spin-off have been completed and other than the additional
conditions to Comcast's obligations to effect the mergers.
MUTUAL RELEASE; INDEMNIFICATION
Mutual Release of Pre-Closing Claims. AT&T and AT&T Broadband have each
agreed to release the other from any and all claims that it may have against the
other party arising from any acts or events occurring or failing to occur prior
to the completion of the AT&T Broadband spin-off, subject to certain exceptions
specified in the separation and distribution agreement.
Indemnification by AT&T. After completion of the AT&T Broadband spin-off,
AT&T will indemnify AT&T Broadband from any and all liabilities relating to,
arising out of or resulting from any of the following:
- the failure of AT&T or any of its subsidiaries or any other person to pay
any liabilities, or perform under any contracts, of AT&T's communications
business;
- the assets or contracts of AT&T's communications business; and
- any breach of the separation and distribution agreement or any of the
ancillary agreements by AT&T.
V-16
Indemnification by AT&T Broadband. After completion of the transaction,
AT&T Broadband will indemnify AT&T from any and all liabilities relating to,
arising out of or resulting from any of the following:
- the failure of AT&T Broadband or any of its subsidiaries or any other
person to pay any liabilities, or perform under any contracts, of the
AT&T Broadband business;
- the assets or contracts of AT&T's broadband business;
- any breach of the separation and distribution agreement or any of the
ancillary agreements by AT&T Broadband; and
- if neither the QUIPS exchange transaction nor the QUIPS Transfer occurs,
any liabilities relating to, arising out of or resulting from any action
commenced by Microsoft claiming that the transaction violates the terms
of the QUIPS; however, in the event that AT&T is required to repay the
QUIPS as a result of such action, the indemnified liability in respect of
the repayment will be reduced by the amount of the QUIPS fair market
value plus any accrued interest on the QUIPS since the date of
determination of the QUIPS fair market value. See "-- The Merger
Agreement -- Covenants -- QUIPS Failure."
Tax Indemnification. Subject to the exceptions described below, AT&T
Broadband will indemnify AT&T against 50% of the taxes and related costs
assessed against AT&T resulting from the disqualification of the separation and
the AT&T Broadband spin-off as tax-free transactions under Section 355 of the
Code.
If such disqualification results from a transaction involving the stock or
assets of AT&T Broadband occurring after the AT&T Broadband spin-off, from AT&T
Broadband's failure to remain actively engaged in a trade or business or from
the failure of any representation made with respect to AT&T Broadband in
connection with certain tax opinions and Internal Revenue Service rulings, then
AT&T Broadband will be required to indemnify AT&T against all such taxes and
related costs.
If such disqualification results from a transaction involving the stock or
assets of AT&T occurring after the AT&T Broadband spin-off, from AT&T's failure
to remain actively engaged in a trade or business or from the failure of any
representation made with respect to AT&T in connection with certain tax opinions
and Internal Revenue Service rulings, then AT&T Broadband is not required to
indemnify AT&T against any such taxes or related costs.
AT&T Broadband will also indemnify AT&T against 50% of the taxes and
related costs resulting from the Liberty Media or AT&T Wireless spin-offs
failing to be tax-free, unless either spin-off becomes taxable as a result of an
action taken by AT&T or AT&T Broadband, in which case the acting party bears
full responsibility for any resulting AT&T liabilities. AT&T Broadband's
obligation described in the preceding sentence is reduced by AT&T Broadband's
share of any indemnification that AT&T receives from Liberty Media or AT&T
Wireless as a result of the relevant spin-off failing to qualify as tax-free.
Other Indemnification. AT&T and AT&T Broadband will indemnify each other
for 50% of any liability resulting from any untrue statement or omission of a
material fact in any registration statement relating to the AT&T Broadband
spin-off or in any other filing made by AT&T or AT&T Broadband with the
Securities and Exchange Commission in connection with the separation, the AT&T
Broadband spin-off, the AT&T Broadband merger or any related agreements.
TERMINATION
The separation and distribution agreement may be terminated by AT&T if the
merger agreement has terminated.
AMENDMENTS AND WAIVERS
Any provision of the separation and distribution agreement may be amended
or waived prior to the completion of the transaction if, but only if, such
amendment or waiver is in writing and is signed, in the case of an amendment, by
AT&T, AT&T Broadband and Comcast or, in the case of a waiver, by the party to
the separation and distribution agreement against whom the waiver is to be
effective and Comcast.
V-17
THE SUPPORT AGREEMENT
In connection with the merger agreement, AT&T, Comcast, AT&T Comcast, Sural
LLC and Brian L. Roberts have entered into a support agreement relating to the
shares of Comcast voting stock held by Sural prior to the completion of the AT&T
Comcast transaction and the shares of AT&T Comcast voting stock that will be
held by Sural after completion of the AT&T Comcast transaction (all of such
shares are referred to in this section as the "Comcast Shares"). As of the date
of this document, Sural held shares of Comcast voting stock representing
approximately 86.7% of Comcast's outstanding voting power. The following summary
of the support agreement is qualified in its entirety by reference to the
complete text of the support agreement, which is incorporated by reference and
attached as an exhibit to the registration statement in which this document is
included.
VOTING AGREEMENT
Sural has agreed to vote the Comcast Shares:
- in favor of adoption of the merger agreement and approval of the
transactions contemplated by the merger agreement;
- against any action or agreement that would reasonably be expected to
result in a breach of any covenant, representation or warranty or any
other obligation or agreement of Comcast under the merger agreement or
that would reasonably be expected to result in any of the conditions to
the obligations of the parties under the merger agreement not being
fulfilled;
- in favor of any other matter relating to the consummation of the
transactions contemplated by the merger agreement with respect to which
Sural may be entitled to vote; and
- against any other matter that would reasonably be expected to prevent,
interfere with or delay consummation of the transactions contemplated by
the merger agreement.
COVENANTS
No Inconsistent Agreements. Sural has agreed that it will not enter into
any voting agreement or grant a proxy or power of attorney or take any other
action with respect to the Comcast Shares which is inconsistent with the terms
of the support agreement. Brian L. Roberts has agreed that he will not enter
into any voting agreement or grant a proxy or power of attorney or take any
other action with respect to any units of membership interests in Sural which is
inconsistent with the terms of the support agreement.
Dispositions Prior to Completion of the AT&T Comcast Transaction. Sural
has agreed that prior to the completion of the transaction it will not transfer
ownership of any of the Comcast Shares, except to certain permitted transferees
who agree to be bound by the same transfer restrictions.
Dispositions After Completion of the AT&T Comcast Transaction. Sural has
agreed that from and after the completion of the AT&T Comcast transaction until
the tenth anniversary of the completion of the AT&T Comcast transaction it will
not transfer ownership of any of its shares of AT&T Comcast Class B common
stock, except to certain permitted transferees who agree to be bound by the same
transfer restrictions or in a transaction that (1) permits AT&T Comcast's other
shareholders to dispose of all of their shares of AT&T Comcast stock for the
same per share consideration as Sural receives for its shares of AT&T Comcast
Class B common stock (or, if higher, any of its shares of any other class of
AT&T Comcast common stock) and (2) is approved by the disinterested holders of
AT&T Comcast's voting stock. Brian L. Roberts has also agreed that from and
after the completion of the AT&T Comcast transaction until the tenth anniversary
of the completion of the AT&T Comcast transaction he will not transfer ownership
of any of his securities or other equity interests in Sural, except to certain
permitted transferees who agree to be bound by the same transfer restrictions or
in a transaction that (1) permits AT&T Comcast's other shareholders to dispose
of all of their shares of AT&T Comcast stock for the same per share
consideration as the effective per share consideration that Brian L. Roberts
receives (as a result of his ownership interest in Sural) for each of the shares
of AT&T Comcast Class B common stock held
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by Sural (or, if higher, any of the shares of any other class of AT&T Comcast
common stock), and (2) is approved by the disinterested holders of AT&T
Comcast's voting stock. Following the tenth anniversary of the completion of the
AT&T Comcast transaction, subject to applicable law, the holders of the AT&T
Comcast Class B common stock will be permitted to transfer their shares of AT&T
Comcast Class B common stock in a transaction in which they receive a premium
that is disproportionate to the premium (if any) received by the other holders
of AT&T Comcast stock for their shares of AT&T Comcast stock.
Interested Party Transactions. AT&T Comcast has agreed that, except as
described in the next sentence, after the completion of the AT&T Comcast
transaction neither it nor any of its subsidiaries will enter into any material
transaction with Brian L. Roberts or any of his associates or any permitted
transferee unless such transaction is approved by AT&T Comcast's disinterested
directors. Compensation arrangements between Brian L. Roberts or any of his
associates on the one hand and AT&T Comcast or any of its subsidiaries on the
other hand will require the approval of the disinterested directors of the
compensation committee of the AT&T Comcast Board.
Additional Voting Agreements. Sural has agreed that from and after the
completion of the AT&T Comcast transaction until the 2005 annual meeting of AT&T
Comcast shareholders, it will vote its shares of AT&T Comcast Class B common
stock against any proposed amendment to the governance arrangements set forth in
the AT&T Comcast charter. See "Description of Governance Arrangements Following
the AT&T Comcast Transaction."
Sural has further agreed that if Brian L. Roberts dies or becomes incapable
of performing his duties prior to the fifth anniversary of the completion of the
AT&T Comcast transaction, then, unless Ralph J. Roberts has sole voting power in
respect of the election of directors with respect to all outstanding shares of
AT&T Comcast Class B common stock, from the date of Brian L. Roberts's death or
inability to perform his duties until the fifth anniversary of the completion of
the AT&T Comcast transaction, Sural will vote its shares of AT&T Comcast Class B
common stock in any election of AT&T Comcast directors in the same proportion as
the holders of shares of AT&T Comcast common stock (other than AT&T Comcast
Class B common stock and any other voting shares of AT&T Comcast owned by Brian
L. Roberts or Sural or any permitted transferee) vote in such election of
directors. Each permitted transferee of any of such securities will also be
required to agree, as a condition to such transfer, to the same voting
obligations.
ENFORCEMENT
The support agreement provides that any determination with respect to
Sural's, Brian L. Roberts's or AT&T Comcast's compliance with the support
agreement or otherwise with respect to the items described in "-- Covenants," in
each case after the completion of the AT&T Comcast transaction, including any
determination as to the enforcement action to be taken by AT&T Comcast in
connection with such determination, will be made for AT&T Comcast by the
disinterested, independent persons on the AT&T Comcast Board; provided that any
Comcast director designee (including any replacement Comcast director designee)
or any director who was a Comcast director designee or any spouse, parent,
sibling, lineal descendant, aunt, uncle, cousin, other close relative of Brian
L. Roberts or their respective spouses will not be considered a disinterested,
independent person.
AMENDMENTS
Any provision of the support agreement may be amended if such amendment is
in writing and is signed by each of the parties to the support agreement.
However, no amendment of any provision described under "-- Covenants" or
"-- Enforcement" will be effective without the approval of:
- a majority of the disinterested, independent persons on the AT&T Comcast
Board; provided that any Comcast director designee (including any
replacement Comcast director designee) or any director who was a Comcast
director designee or any spouse, parent, sibling, lineal descendant,
aunt, uncle, cousin, other close relative of Brian L. Roberts or their
respective spouses will not be considered disinterested, independent
persons; and
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- holders of a majority of the votes cast by the holders of all of the
classes of AT&T Comcast capital stock entitled to vote (other than the
AT&T Comcast Class B common stock and any other voting shares of AT&T
Comcast owned by Brian L. Roberts, Sural or any permitted transferee).
TERMINATION
The support agreement terminates on the earlier to occur of (1) one day
after the tenth anniversary of the completion of the transaction and (2) any
termination of the merger agreement.
V-20
THE EXCHANGE AGREEMENT
In connection with the AT&T Comcast transaction, Comcast and Microsoft
entered into an exchange agreement dated December 7, 2001. On December 19, 2001,
following execution of the merger agreement, AT&T and AT&T Comcast each became a
party to the exchange agreement. The following summary of the exchange agreement
is qualified in its entirety by reference to the complete text of the exchange
agreement, which is incorporated by reference and attached as an exhibit to the
registration statement in which this document is included.
QUIPS EXCHANGE
QUIPS. Microsoft (through a wholly owned subsidiary) holds $5 billion in
aggregate liquidation preference amount of 5% Convertible Quarterly Income
Preferred Securities (referred to in this document by their acronym "QUIPS") of
AT&T Finance Trust I, a Delaware business trust. The QUIPS are convertible into
$5 billion aggregate face amount of 5% Junior Convertible Subordinated
Debentures due 2029 of AT&T, which are in turn convertible into AT&T common
stock.
The Exchange. In connection with the AT&T Broadband spin-off, Microsoft
has agreed to exchange the QUIPS for a number of shares of AT&T Broadband common
stock that will be converted in the AT&T Broadband merger into 115 million
shares of AT&T Comcast Class A common stock under the Preferred Structure (or
AT&T Comcast Class C common stock under the Alternative Structure). This
transaction is referred to in this document as the "QUIPS exchange transaction."
INTERNET ACCESS
Until the fifth anniversary of the QUIPS exchange transaction, subject to
the completion of the QUIPS exchange transaction, AT&T Comcast has agreed that
if AT&T Comcast offers a high-speed Internet access agreement to any third
party, then it will be obligated to offer an agreement on nondiscriminatory
terms with respect to the same cable systems to Microsoft for its Internet
service provider, The Microsoft Network.
COVENANTS
Each of Comcast, Microsoft, AT&T and AT&T Comcast has undertaken certain
covenants in the exchange agreement. The following summarizes the more
significant of these covenants.
Merger Documentation. Comcast has agreed that, without the prior written
consent of Microsoft (which consent will not be unreasonably withheld), Comcast
will not agree to any amendment or waiver of any provision of any of the AT&T
Comcast transaction agreements that would reasonably be expected to (1) conflict
with any provision of the exchange agreement, the agreements relating to the
set-top box commitment described below or any access agreement entered into
between Microsoft and AT&T Comcast pursuant to the most favored nation provision
described above or (2) be materially adverse to Microsoft's rights under the
exchange agreement or the benefits that Microsoft reasonably expects to realize
from the exchange agreement, in the case of (2), to the extent that any such
amendment or waiver would have an effect on Microsoft that is materially
disproportionate to the effect it would have on other AT&T Broadband or AT&T
Comcast shareholders.
Lockup. Prior to six months after completion of the QUIPS exchange
transaction, subject to certain exceptions, Microsoft has agreed that it will
not sell, or enter into any agreement, arrangement or negotiations relating to
the sale of, any of the shares of AT&T Comcast common stock that it receives in
connection with the QUIPS exchange transaction.
Indemnity. Comcast has agreed to indemnify Microsoft against any claim by
Comcast, AT&T or any shareholder of Comcast, AT&T or AT&T Comcast for any loss
arising as a result of the AT&T Broadband spin-off or the mergers failing to be
tax-free, except to the extent such a failure results directly from a breach by
Microsoft of its covenant described under "-- Lockup" or of the failure of a
related representation and warranty made by Microsoft in the exchange agreement.
V-21
CONDITIONS TO THE COMPLETION OF THE QUIPS EXCHANGE
Conditions to the Obligations of Microsoft. The obligations of Microsoft
to complete the QUIPS exchange transaction are subject to the satisfaction or
waiver (to the extent permissible) of the following conditions:
- absence of a material legal prohibition on the QUIPS exchange transaction
or the mergers;
- except as provided in the next bullet point, satisfaction or waiver of
all conditions to the mergers and the reasonable satisfaction of
Microsoft that the mergers will occur immediately following the QUIPS
exchange transaction;
- satisfaction (but not waiver) of the condition to the mergers that there
has been no Material Adverse Effect with respect to AT&T's broadband
business;
- material accuracy of the representations and warranties of Comcast, AT&T
and AT&T Comcast contained in the exchange agreement or made pursuant to
the exchange agreement;
- performance by Comcast, AT&T and AT&T Comcast of all of their respective
obligations under the exchange agreement;
- approval for the listing on The Nasdaq Stock Market of the shares of AT&T
Comcast common stock to be issued in the mergers (other than the shares
of AT&T Comcast Class B common stock);
- delivery by AT&T and Comcast of opinions of counsel relating to various
corporate matters; and
- after completion of the AT&T Broadband spin-off, AT&T Broadband holds
substantially all of the assets and liabilities of AT&T's broadband
business.
Conditions to the Obligations of Comcast and AT&T. The obligations of
Comcast and AT&T to complete the QUIPS exchange transaction are subject to the
satisfaction or waiver (to the extent permissible) of the following conditions:
- satisfaction or waiver of all conditions to the mergers and the
reasonable satisfaction of Comcast that the mergers will occur;
- material accuracy of the representations and warranties of Microsoft
contained in the exchange agreement;
- performance by Microsoft of all of its obligations under the exchange
agreement; and
- delivery by Microsoft of an opinion of counsel relating to various
corporate matters.
TERMINATION
The exchange agreement may be terminated by either Comcast or Microsoft in
any of the following circumstances:
- the merger agreement has been terminated;
- any law or regulation makes completion of the QUIPS exchange transaction
illegal or a permanent injunction prohibiting completion of the QUIPS
exchange transaction is entered; or
- the mergers have not been completed by March 1, 2003.
INTERACTIVE TECHNOLOGY AGREEMENT
In connection with the exchange agreement, Microsoft and Comcast Cable
Communications, Inc. have entered into a three-year agreement pursuant to which
the parties will conduct a trial during 2002 of an interactive television
platform, including set-top box middleware. If the trial results meet agreed
V-22
technical standards, the platform meets defined competitive requirements and a
launch would meet Comcast Cable's reasonable business objectives, Comcast Cable
has agreed that it will commercially launch the Microsoft platform to at least
25% of its newly installed middleware customer base.
THE TAX SHARING AGREEMENT
The following summary of the tax sharing agreement is qualified in its
entirety by reference to the complete text of the tax sharing agreement, which
is incorporated by reference into this document and attached as an exhibit to
the registration statement in which this document is included.
IN GENERAL
AT&T Broadband is currently included in AT&T's federal consolidated income
tax group and AT&T Broadband's tax liability will be included in the
consolidated federal income tax liability of AT&T for 2002 until the time of the
AT&T Broadband spin-off. The tax sharing agreement provides for tax sharing
payments between AT&T Broadband and AT&T for periods prior to the AT&T Broadband
spin-off, based on the taxes or tax benefits of hypothetical affiliated groups
consisting of the businesses, assets and liabilities that make up AT&T
Broadband, on the one hand, and all other businesses, assets and liabilities of
AT&T, on the other hand. Each group is generally responsible for the taxes
attributable to its lines of business and entities comprising its group.
AT&T and AT&T Broadband have agreed that the consolidated tax liability
(before credits) of the hypothetical group will be allocated to each group based
on such group's contribution to consolidated taxable income. This allocation
will take into account losses, deductions and other tax attributes that are
utilized by the hypothetical group even if these attributes could not be
utilized on a stand-alone basis. Tax sharing payments in respect of the
consolidated tax liability of the hypothetical group, after allocation of
consolidated tax credits, will be made between AT&T and AT&T Broadband
consistent with the allocations under the tax sharing agreement. As between AT&T
and AT&T Broadband, certain tax items are specially allocated to the AT&T group
and AT&T Broadband group under the tax sharing agreement.
AT&T BROADBAND SPIN-OFF
AT&T and AT&T Broadband have agreed that taxes related to intercompany
transactions that are triggered by the AT&T Broadband spin-off will be generally
allocated to AT&T Broadband.
NON-INCOME TAX LIABILITIES
AT&T and AT&T Broadband have agreed that joint non-income tax liabilities
will generally be allocated between AT&T and AT&T Broadband based on the amount
of such taxes attributable to each group's line of business. If the line of
business with respect to which the liability is appropriately associated cannot
be readily determined, the tax liability will be allocated to the AT&T group.
AUDIT ADJUSTMENTS
AT&T and AT&T Broadband have agreed that taxes resulting from audit
adjustments will generally be allocated between the two groups based on line of
business. In general, AT&T controls audits and administrative matters related to
pre-spin-off periods.
POST-SPIN-OFF TAX ATTRIBUTES
Generally, AT&T Broadband may not carry back a loss, credit or other tax
attribute from a post-spin-off period to a pre-spin-off period, unless AT&T
Broadband obtains AT&T's consent (which, in the case of significant net
operating or capital loss carrybacks, may not be unreasonably withheld) and then
only to the extent permitted by applicable law.
V-23
AMENDMENTS AND WAIVERS
Any provision of the tax sharing agreement may be amended or waived prior
to the completion of the transaction if, but only if, such amendment or waiver
is in writing and is signed, in the case of an amendment, by AT&T, AT&T
Broadband and Comcast or, in the case of a waiver, by the party to the tax
sharing agreement against whom the waiver is to be effective and Comcast.
THE ANCILLARY AGREEMENTS
In addition to the other agreements described in this section, AT&T and
AT&T Broadband have entered into various other commercial agreements in
connection with the transaction. A brief summary of these agreements follows:
NETWORK SERVICE AGREEMENTS.
AT&T and AT&T Broadband have entered into four principal network service
agreements as follows.
- Master Carrier Agreement. This agreement reflects the rates, terms and
conditions on which AT&T's business services group will provide voice,
data and Internet services to AT&T Broadband, including both wholesale
services (those used as a component in AT&T Broadband's services to its
customers) and "administrative" services (for internal AT&T Broadband
usage). Pricing is market based, with provisions defining an ongoing
process to ensure that the prices remain competitive.
- First Amended and Restated Local Network Connectivity Services
Agreement. This agreement reflects the rates, terms and conditions on
which AT&T's business services group will provide certain local network
connectivity services to AT&T Broadband for use in providing local
telephone services to AT&T Broadband's subscribers. This agreement
consists of two parts:
-- a capital lease from AT&T's business services group to AT&T Broadband
of certain network switching and transport assets to be used
exclusively by AT&T Broadband for a term of up to ten years (commencing
January 1, 2001 for initial assets leased under the agreement); and
-- an operating agreement for the provision of local network connectivity,
management and operational services in support of AT&T Broadband's
local cable telephone services, with a minimum term of five years
commencing January 1, 2001.
- Master Facilities Agreement. This agreement permits AT&T or any of its
subsidiaries to use existing fiber facilities owned or leased by AT&T
Broadband or its controlled affiliates, together with related services.
In addition, AT&T Broadband will construct and lease to AT&T new fiber
facilities in the areas served by AT&T Broadband's cable systems for use
in providing telecommunications services. The term of the build-out
period will expire on January 8, 2012. Subject to certain termination
rights specified in this agreement, the term of AT&T's right to use
facilities leased under this agreement will expire on January 8, 2028,
renewable at AT&T's option for successive 20-year terms in perpetuity.
- Interconnection and Intercarrier Compensation Term Sheet. This
agreement, which has a five-year initial term commencing January 1, 2001,
specifies the terms of interconnection of the parties' networks, and
compensation for:
-- the origination or termination of interexchange traffic for the other
party; and
-- the exchange of local traffic between the parties' local customers.
High Speed Internet Services Binding Term Sheet. This agreement reflects
the rates, terms and conditions on which AT&T will provide specified processes,
procedures and services to support AT&T
V-24
Broadband in its provision of broadband Internet services to AT&T Broadband
subscribers. This agreement has a four-year initial term commencing December 4,
2001.
Intellectual Property Agreement. This agreement specifies the ownership
and license rights granted by each party to the other in specified patents,
software, copyrights and trade secrets. Among other rights granted, the effect
of this agreement is to allow AT&T Broadband and AT&T to continue to have the
same rights to use the intellectual property that they had at the time of the
separation and AT&T Broadband spin-off.
Other Agreements to be Executed. AT&T and AT&T Comcast will enter into a
corporate name agreement immediately prior to the completion of the transaction
pursuant to which AT&T will grant to AT&T Comcast the right to use the term
"AT&T" as part of its full corporate name, but prohibit any use of "AT&T" as a
trade name, trademark, or service mark, or in a domain name other than specified
domain names permitted for certain purposes. Such grant of rights will be
perpetual unless terminated as a result of the Roberts family's voting power
falling below 33% or pursuant to any other terms of the agreement.
Subject to the terms of the separation and distribution agreement, prior to
the completion of the transaction, AT&T and AT&T Broadband may also enter into
other agreements in connection with the transaction.
V-25
CHAPTER SIX
AT&T CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The AT&T Corp. Management's Discussion and Analysis of Financial Condition
and Results of Operations set forth below was included in AT&T's Annual Report
on Form 10-K/A for the year ended December 31, 2000, and AT&T's Current Report
on Form 8-K filed on September 24, 2001 restating the company's financial
results to reflect AT&T Wireless as a discontinued operation and Quarterly
Report on Form 10-Q for the nine months ended September 30, 2001. The AT&T
groups referred to in this joint proxy statement/prospectus differ in various
financial and other respects from the segments described in this section. For
financial and other information on the AT&T groups, see the information set
forth elsewhere in this joint proxy statement/prospectus.
OVERVIEW
AT&T Corp. (AT&T) is among the world's communications leaders, providing
voice, data, video and broadband telecommunications services to large and small
businesses, consumers and government agencies. AT&T provides domestic and
international long distance; regional and local communications services; cable
television and Internet communications services. AT&T also provides directory
and calling-card services to support its communications business.
MERGER WITH MEDIAONE GROUP, INC.
AT&T completed the merger with MediaOne Group, Inc. (MediaOne) on June 15,
2000, in a cash and stock transaction valued at approximately $45 billion. AT&T
issued approximately 603 million shares, of which 60 million were treasury
shares, and made cash payments of approximately $24 billion.
The merger was recorded under the purchase method of accounting, and
accordingly, the results of MediaOne have been included with the financial
results of AT&T, within its Broadband segment, since the date of acquisition.
Periods prior to the merger were not restated to include the results of
MediaOne.
TRACKING STOCKS
On April 27, 2000, AT&T issued a new class of stock to track the
performance of AT&T Wireless Group. AT&T sold 360 million shares of AT&T
Wireless Group tracking shares at a price of $29.50 per share. The 360 million
shares tracked approximately 16% of the financial performance of AT&T Wireless
Group.
In addition, in connection with the 1999 acquisition of
Tele-Communications, Inc. (TCI), renamed AT&T Broadband (Broadband), AT&T issued
a separate tracking stock to reflect the financial performance of Liberty Media
Group (LMG), TCI's former programming and technology investment businesses. The
outstanding Liberty Media Group tracking stock tracks 100% of the financial
performance of LMG.
AT&T Wireless and Liberty Media Group were split off on July 9, 2001 and
August 10, 2001, respectively.
The remaining results of operations of AT&T, including the financial
performance of AT&T Wireless Group not represented by the tracking stock, are
referred to as the AT&T Common Stock Group and are represented by AT&T common
stock. The results of AT&T Wireless Group, both the financial performance
reflected in the AWE tracking stock and the financial performance reflected in
AT&T common stock, are reported as income (loss) from discontinued operations in
AT&T's Consolidated Statements of Income.
A tracking stock is designed to provide financial returns to its holders
based on the financial performance and economic value of the assets it tracks.
Ownership of shares of AT&T common stock, AT&T Wireless Group tracking stock or
Liberty Media Class A or B tracking stock did not represent a
VI-1
direct legal interest in the assets and liabilities of any of the groups, but an
ownership of AT&T in total. The specific shares represented an interest in the
economic performance of the net assets of each of the groups. AT&T Wireless and
Liberty Media Group were split off on July 9, 2001 and August 10, 2001,
respectively.
The earnings attributable to AT&T Wireless Group are excluded from the
earnings available to AT&T Common Stock Group and are reflected as earnings from
discontinued operations of AT&T Wireless group. Similarly, the earnings and
losses related to LMG are excluded from the earnings available to AT&T Common
Stock Group.
AT&T did not have a controlling financial interest in LMG for financial
accounting purposes; therefore, AT&T's ownership in LMG is reflected as an
investment accounted for under the equity method in AT&T's consolidated
financial statements. The amounts attributable to LMG are reflected in the
accompanying consolidated financial statements as "Equity earnings (losses) from
Liberty Media Group" and "Investment in Liberty Media Group and related
receivables, net."
AT&T Wireless Group was an integrated business of AT&T and Liberty Media
Group was a combination of certain assets and businesses of AT&T, neither of
which was a stand-alone entity. As AT&T Wireless Group and Liberty Media Group
were tracking stocks of AT&T, separate financial statements are not required to
be filed. The tracking stocks were governed by a common board of directors, the
AT&T board of directors could make operational and financial decisions or
implement policies that affect disproportionately the businesses of any group.
For example, AT&T's board of directors may decide to transfer funds or to
reallocate assets, liabilities, revenue, expenses and cash flows among groups,
without the consent of shareholders. All actions by the board of directors are
subject to the board members' fiduciary duties to all shareholders of AT&T as a
group and not just to holders of a particular class of tracking stock and to
AT&T's charter, policy statements, by-laws and inter-company agreements.
AT&T's board of directors may change or supplement the policies set forth
in the tracking stock policy statements and AT&T's by-laws in the sole
discretion of AT&T's board of directors, subject to the provisions of any
inter-group agreement but without approval of AT&T's shareholders. In addition,
the fact that AT&T has separate classes of common stock could give rise to
occasions when the interests of the holders of AT&T common stock, AT&T Wireless
Group common stock and Liberty Media Group tracking stock diverge, conflict or
appear to diverge or conflict. AT&T's board of directors would make any change
or addition to the policies set forth in the tracking stock policy statements or
AT&T's by-laws, and would respond to any actual or apparent divergence of
interest among AT&T's groups, in a manner consistent with its fiduciary duties
to AT&T and all of its shareholders after giving consideration to the
potentially divergent interests and all other relevant interests of the holders
of the separate classes of AT&T's shares.
You should consider that as a result of the flexibility provided to AT&T's
board of directors, it may be difficult for investors to assess the future
prospects of a tracking stock group based on that group's past performance.
RESTRUCTURING OF AT&T
On October 25, 2000, AT&T announced a restructuring plan designed to fully
separate or issue separately tracked stocks intended to reflect the financial
performance and economic value of each of AT&T's four major operating units.
On December 19, 2001, AT&T and Comcast Corporation announced an agreement
to combine AT&T Broadband with Comcast in a transaction valuing AT&T Broadband.
Under the terms of the agreement, AT&T will spin-off AT&T Broadband and
simultaneously merge it with Comcast, forming a new company to be called AT&T
Comcast Corporation. AT&T shareholders will receive a number of shares of AT&T
Comcast common stock calculated pursuant to a formula specified in the merger
agreement. If determined as of the date of the merger agreement, the exchange
ratio would have been approximately .34, assuming the AT&T shares held by
Comcast are included in the number of shares of
VI-2
AT&T common stock outstanding. Assuming Comcast retains its AT&T shares and
converts them into exchangeable preferred stock of AT&T as contemplated by the
merger agreement, the exchange ratio would be approximately 0.35 as of the date
of the execution of the merger agreement. AT&T shareowners will own a 56%
economic stake and have a 66% voting interest in the new company, calculated as
of the date of the merger agreement. The merger remains subject to regulatory
review, shareholder approval by both companies and certain other conditions and
is expected to close by the end of 2002. AT&T also reaffirmed its commitment to
create a tracking stock designed to reflect the economic value and financial
performance of its AT&T Consumer business. The tracking stock is expected to be
distributed to AT&T shareholders following shareholder approval in 2002.
AT&T's restructuring plan is complicated and involves a substantial number
of steps and transactions, including obtaining various conditions, such as
Internal Revenue Service rulings. AT&T expects that the transactions associated
with AT&T's restructuring plan will be tax-free to U.S. shareowners. Future
financial conditions, superior alternatives or other factors may arise or occur
that make it inadvisable to proceed with part or all of AT&T's restructuring
plans. Any or all of the elements of AT&T's restructuring plan may not occur as
AT&T currently expects or in the time frames that AT&T currently contemplates,
or at all. Alternative forms of restructuring, including sales of interests in
these businesses, would reduce what is available for distribution to shareowners
in the restructuring.
On May 25, 2001, AT&T completed an exchange offer of AT&T common stock for
AT&T Wireless stock. Under the terms of the exchange offer, AT&T issued 1.176
shares of AT&T Wireless Group tracking stock in exchange for each share of AT&T
common stock validly tendered. A total of 372.2 million shares of AT&T common
stock were tendered in exchange for 437.7 million shares of AT&T Wireless Group
tracking stock.
On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a
separate, independently traded company. All AT&T Wireless tracking stock was
converted into AT&T Wireless common stock on a one-for-one basis and 1,136
million shares of AT&T Wireless common stock, held by AT&T, were distributed to
AT&T common shareowners on a basis of 0.3218 of a share of AT&T Wireless for
each AT&T share outstanding. AT&T common shareowners received whole shares of
AT&T Wireless and cash payments for fractional shares. The Internal Revenue
Service (IRS) ruled that the transaction qualified as tax-free for AT&T and its
shareowners for U.S. federal income tax purposes, with the exception of cash
received for fractional shares. For accounting purposes, the deemed effective
split-off date is June 30, 2001. AT&T retained approximately $3 billion, or
7.3%, of AT&T Wireless common stock, about half of which was used in a
debt-for-equity exchange in July and approximately $1.3 billion was monetized in
the fourth quarter of 2001. The split-off of AT&T Wireless resulted in a noncash
tax-free gain of $13,503 million, which represents the difference between the
fair value of the Wireless tracking stock at the date of the split-off and
AT&T's book value in AT&T Wireless Services. This gain was recorded in the third
quarter of 2001 as a "Gain on disposition of discontinued operations."
On August 10, 2001, AT&T completed the split-off of Liberty Media
Corporation as an independent, publicly-traded company. AT&T redeemed each
outstanding share of Class A and Class B Liberty Media Group (LMG) tracking
stock for one share of Liberty Media Corporation's Series A and Series B common
stock, respectively. In the redemption, shares of Liberty Media Corporation were
issued to former holders of Liberty Media Group tracking stock in exchange for
their shares of Liberty Media Group tracking stock. The IRS ruled that the
split-off of Liberty Media Corporation qualified as a tax-free transaction for
AT&T, Liberty Media and their shareowners. For accounting purposes, the deemed
effective split-off date is July 31, 2001.
FORWARD-LOOKING STATEMENTS
This document may contain forward-looking statements with respect to AT&T's
restructuring plan, financial condition, results of operations, cash flows,
dividends, financing plans, business strategies, operating efficiencies or
synergies, budgets, capital and other expenditures, network build out and
upgrade, competitive positions, availability of capital, growth opportunities
for existing products, benefits from new
VI-3
technologies, availability and deployment of new technologies, plans and
objectives of management, and other matters.
These forward-looking statements, including, without limitation, those
relating to the future business prospects, revenue, working capital, liquidity,
capital needs, network build out, interest costs and income, are necessarily
estimates reflecting the best judgment of senior management and involve a number
of risks and uncertainties that could cause actual results to differ materially
from those suggested by the forward-looking statements. These forward-looking
statements should, therefore, be considered in light of various important
factors that could cause actual results to differ materially from estimates or
projections contained in the forward-looking statements including, without
limitation:
- the risks associated with the implementation of AT&T's restructuring plan
and the AT&T Comcast transaction, which are complicated and involve a
substantial number of different transactions each with separate
conditions, any or all of which may not occur as AT&T currently intends,
or which may not occur in the timeframe AT&T currently expects,
- the risks associated with each of AT&T's main business units, operating
as independent entities as opposed to as part of an integrated
telecommunications provider following completion of AT&T's restructuring
plan, including the inability of these groups to rely on the financial
and operational resources of the combined company and these groups having
to provide services that were previously provided by a different part of
the combined company,
- the impact of existing and new competitors in the markets in which these
groups compete, including competitors that may offer less expensive
products and services, desirable or innovative products, technological
substitutes, or have extensive resources or better financing,
- the impact of oversupply of capacity resulting from excessive deployment
of network capacity,
- the ongoing global and domestic trend towards consolidation in the
telecommunications industry, which may have the effect of making the
competitors of these entities larger and better financed and afford these
competitors with extensive resources and greater geographic reach,
allowing them to compete more effectively,
- the effects of vigorous competition in the markets in which the company
operates, which may decrease prices charged, increase churn and change
customer mix, profitability and average revenue per user,
- the ability to enter into agreements to provide, and the cost of entering
new markets necessary to provide, services,
- the ability to establish a significant market presence in new geographic
and service markets,
- the availability and cost of capital and the consequences of increased
leverage,
- the successful execution of plans to dispose of non-strategic assets as
part of an overall corporate deleveraging plan,
- the impact of any unusual items resulting from ongoing evaluations of the
business strategies of the company,
- the requirements imposed on the company or latitude allowed to
competitors by the Federal Communications Commission (FCC) or state
regulatory commissions under the Telecommunications Act of 1996 or other
applicable laws and regulations,
- the risks associated with technological requirements, technology
substitution and changes and other technological developments,
- the results of litigation filed or to be filed against the company,
VI-4
- the possibility of one or more of the markets in which the company
competes being impacted by changes in political, economic or other
factors, such as monetary policy, legal and regulatory changes or other
external factors over which these groups have no control, and
- the risks related to AT&T's joint ventures.
The words "estimate," "project," "intend," "expect," "believe," "plan" and
similar expressions are intended to identify forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of this document. Moreover, in the future, AT&T,
through its senior management, may make forward-looking statements about the
matters described in this document or other matters concerning AT&T.
The discussion and analysis that follows provides information management
believes is relevant to an assessment and understanding of AT&T's consolidated
results of operations and financial condition.
CONSOLIDATED RESULTS OF OPERATIONS
The comparison of third quarter and year-to-date 2001 results with the
corresponding periods in 2000 was impacted by events, such as acquisitions and
dispositions, that occurred during these two years. For example, on June 15,
2000, AT&T acquired MediaOne, which was included in AT&T's year-to-date 2001
results, but was only included in AT&T's prior year results since the date of
acquisition.
Year-over-year comparison was also impacted by the consolidation of At Home
Corporation (Excite@Home) beginning September 1, 2000, due to
corporate-governance changes, which gave AT&T a controlling interest. On
September 30, 2001, AT&T had an approximate 23% economic interest and 74% voting
interest in Excite@Home. The consolidation of Excite@Home resulted in the
inclusion of 100% of its results in each line item of AT&T's Consolidated
Statement of Operations for the three and nine months ended September 30, 2001
and for the one month ended September 30, 2000. Losses attributable to the other
shareholders of Excite@Home were reflected within "Minority Interest Income
(Expense)" in the Consolidated Statement of Operations and "Minority Interest"
in the Consolidated Balance Sheet. As a result of the significant losses
incurred by Excite@Home, the minority interest balance was fully utilized,
therefore, in the third quarter of 2001 AT&T recognized more than its 23% of the
losses of Excite@Home. On September 28, 2001, Excite@Home filed for Chapter 11
bankruptcy protection. As a result, AT&T no longer consolidated Excite@Home's
results in AT&T's Consolidated Balance Sheet as of September 30, 2001.
Effective July 1, 2000, the Federal Communication Commission (FCC)
eliminated Primary Interexchange Carrier Charges (PICC or per-line charges) that
AT&T pays for residential and single-line businesses. The elimination of these
per-line charges resulted in lower access expense as well as lower revenue,
since AT&T has historically billed its customers for these charges.
The comparison of 2000 results with 1999 was also impacted by events, such
as acquisitions and dispositions that occurred during these two years. In 2000
AT&T acquired MediaOne, which was included in AT&T's 2000 results for part of
the year, but was not in 1999 results. In 1999, AT&T acquired TCI and the IBM
Global Network (now AT&T Global Network Services, or AGNS). These businesses
were included in 2000 results for a full year, but only a part of 1999 (since
their respective dates of acquisition). Further, AT&T disposed of certain
international businesses during 1999 and 2000. The results of businesses sold in
1999 were included in 1999 results for part of the year, and were not in 2000
results. Likewise, businesses sold in 2000 were included in 1999 results for the
full year and in 2000 results for part of the year.
On January 5, 2000, AT&T launched Concert, its global joint venture with
British Telecommunications plc (BT). AT&T contributed all of its international
gateway-to-gateway assets and the economic value of approximately 270
multinational customers specifically targeted for direct sales by Concert. As a
result, 2000 results do not include the revenue and expenses associated with
these customers and businesses, while 1999 does, and 2000 results include AT&T's
proportionate share of Concert's earnings in "Net losses from other equity
investments."
VI-5
The comparison of 2000 results with 1999 was also impacted by the
elimination of Primary Interexchange Carrier Charges (PICC or per-line charges)
that AT&T pays for residential and single-line business customers.
The comparison of 1999 results with 1998 was also impacted by the 1999
acquisitions of TCI and AGNS, since 1999 results include these businesses for
part of the year, while 1998 does not include them. This comparison is also
impacted by the 1999 dispositions of international businesses, which were
included in 1999 results for part of the year, but were in 1998 results for the
full year.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2000
REVENUE
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- -------------------
2001 2000 2001 2000
--------- --------- -------- --------
(DOLLARS IN MILLIONS)
AT&T Business.......................................... $ 6,885 $ 7,222 $21,147 $21,701
AT&T Consumer.......................................... 3,822 4,651 11,614 14,651
AT&T Broadband......................................... 2,393 2,420 7,423 5,693
Corporate and Other.................................... (13) (117) (220) (422)
Total revenue.......................................... $13,087 $14,176 $39,964 $41,623
Total revenue for the three months ended September 30, 2001 decreased 7.7%,
or $1.1 billion, compared with the corresponding prior year period. The decline
was primarily driven by lower revenue resulting from accelerating declines in
long distance voice revenue of approximately $1.5 billion and decreased revenue
of approximately $0.3 billion primarily due to the impact of net dispositions
and the consolidation of Excite@Home. Partially offsetting the decrease was
increased revenue primarily from telephony and high speed data at AT&T Broadband
and increased revenue primarily from data and Internet protocol (IP) services
within AT&T Business.
Total revenue for the nine months ended September 30, 2001 decreased 4.0%,
or $1.7 billion, compared with the corresponding prior year period. The decline
was largely driven by accelerating declines in long distance voice revenue of
approximately $4.4 billion. Partially offsetting the decline was growth
primarily from data and Internet protocol (IP) within AT&T Business and
increased revenue primarily from telephony and high speed data at AT&T
Broadband. Also offsetting the decline was revenue of approximately $0.9 billion
largely due to net acquisitions, primarily MediaOne, the consolidation of
Excite@Home and the elimination of PICC.
AT&T expects long distance revenue to continue to be negatively impacted by
ongoing competition and product substitution.
Revenue by segment is discussed in more detail in the segment results
section.
OPERATING EXPENSES
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
2001 2000 2001 2000
------- ------- --------- --------
(DOLLARS IN MILLIONS)
Costs of services and products......................... $3,476 $3,282 $10,458 $9,249
Costs of services and products increased $0.2 billion, or 5.9%, in the
third quarter of 2001 compared with the third quarter of 2000. Approximately
$0.4 billion of the increase was due to higher costs associated with AT&T's
growth businesses, primarily data/IP, local voice services and broadband
services, and a higher pension credit in 2000, primarily driven by a higher
pension trust asset base resulting from increased investment returns. Partially
offsetting the increase was $0.2 billion of lower costs associated with
VI-6
lower revenue, primarily long distance voice and $0.1 billion due to the net
impact of net dispositions and the consolidation of Excite@Home.
Costs of services and products increased $1.2 billion, or 13.1%, for the
nine months ended September 30, 2001 compared with the same period in 2000.
Approximately $0.9 billion of the increase was driven by the net acquisitions,
primarily MediaOne and the consolidation of Excite@Home. Also contributing to
the increase was approximately $0.8 billion of higher costs associated with
AT&T's growth businesses, primarily at AT&T Broadband and AT&T's outsourcing
business, as well as a higher pension credit in 2000. Partially offsetting these
increases were $0.3 billion of lower costs associated with lower volumes,
primarily from AT&T's international ventures, AT&T Consumer long distance and
lower payphone compensation costs, $0.1 billion of lower costs associated with
lower long distance revenue from AT&T Business and $0.1 billion of AT&T's
reduction efforts.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
2001 2000 2001 2000
------- ------- -------- ---------
(DOLLARS IN MILLIONS)
Access and other connection............................ $3,033 $3,147 $9,289 $10,180
Access and other connection expenses decreased 3.6% in the third quarter of
2001 compared with the third quarter of 2000. Approximately $0.2 billion of this
reduction was due to lower international connection rates, per-line charges for
multi-line business customers and per minute access rates. These reductions were
partially offset by a $0.1 billion increase due to overall volume growth
primarily related to local service.
Access and other connection expenses decreased 8.8% for the nine months
ended September 30, 2001, compared with the same period in 2000. Approximately
$1.3 billion of the decrease was due to lower per-line charges and mandated
reductions in per minute access rates. In July 2000 per line charges that AT&T
paid for residential and single-line business customers were eliminated by the
FCC. These reductions were offset by a $0.4 billion increase due to overall
volume growth primarily related to local service and higher universal service
fund contributions.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
2001 2000 2001 2000
------- ------- ------- -------
(DOLLARS IN MILLIONS)
Selling, general and administrative.................. $2,540 $2,461 $8,144 $7,366
Selling, general and administrative (SG&A) expenses increased $0.1 billion,
or 3.2%, in the third quarter of 2001, compared with the third quarter of 2000.
Increased customer care, advertising, sales and other general and administrative
expenses in support of growth businesses, primarily data/IP, local voice and
broadband services drove approximately $0.2 billion of the increase. Lower
pension credit resulting from decreased return on plan assets accounted for
approximately $0.1 billion of the increase. Partially offsetting these increases
were lower costs associated with the impact of decreased long distance voice
volume and cost control efforts of approximately $0.3 billion primarily from
AT&T Consumer and AT&T Broadband.
Selling, general and administrative (SG&A) expenses increased $0.8 billion,
or 10.5%, for the nine months ended September 30, 2001 as compared with the
corresponding prior year period. Approximately $0.3 billion of the increase was
due to net acquisitions, primarily MediaOne and the consolidation of
Excite@Home. Increased customer care, sales, advertising and other general and
administrative expenses in support of growth businesses, primarily data/IP,
local voice and broadband services drove approximately $0.5 billion of the
increase. In addition, costs associated with the exchange offer of AT&T common
stock for AT&T Wireless stock, combined with a lower pension credit resulting
from decreased return on plan assets accounted for approximately $0.3 billion of
the increase. Partially offsetting these increases were lower costs associated
with the impact of decreased long distance voice volume and cost control efforts
of approximately $0.5 billion primarily from AT&T Consumer and AT&T Broadband.
VI-7
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
2001 2000 2001 2000
------- ------- ------- -------
(DOLLARS IN MILLIONS)
Depreciation and other amortization.................. $1,682 $1,568 $5,116 $4,204
Depreciation and other amortization expenses increased $0.1 billion, or
7.3%, in the third quarter of 2001 compared with the corresponding prior year
period. The increase was largely due to a higher asset base primarily resulting
from infrastructure investment in 2000 and 2001, as well as the consolidation of
Excite@Home, partially offset by cable system dispositions. Capital expenditures
were $1.7 billion and $2.7 billion for the third quarter of 2001 and 2000,
respectively. The primary focus of capital spending continues to be on the
growth areas of broadband, data and IP, and local.
Depreciation and other amortization expenses increased $0.9 billion, or
21.7%, for the nine months ended September 30, 2001 compared with the
corresponding prior year period. Approximately one-half of the increase was due
to the acquisition of MediaOne. The remaining increase was largely due to a
higher asset base primarily resulting from infrastructure investment in 2000 and
2001, as well as the consolidation of Excite@Home. Capital expenditures were
$6.0 billion and $7.0 billion for the nine months ended September 30, 2001 and
2000, respectively. The primary focus for capital expenditures continues to be
on the growth areas of broadband, data and IP, and local.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- -------------------
2001 2000 2001 2000
------ ------ ------- -------
(DOLLARS IN MILLIONS)
Amortization of goodwill, franchise costs and other
purchased intangibles................................ $592 $787 $1,920 $1,433
Amortization of goodwill, franchise costs and other purchased intangibles
decreased $0.2 billion, or 24.7%, in the third quarter of 2001 compared with the
corresponding prior year period. This decrease was primarily due to lower
goodwill associated with Excite@Home resulting from an impairment of goodwill
recorded subsequent to September 30, 2000.
Amortization of goodwill, franchise costs and other purchased intangibles
increased $0.5 billion, or 34.0%, for the nine months ended September 30, 2001
compared with the nine months ended September 30, 2000. This increase was
primarily due to the acquisition of MediaOne.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- --------------------
2001 2000 2001 2000
------ ------ -------- ------
(DOLLARS IN MILLIONS)
Net restructuring and other charges.................... $399 $24 $1,494 $797
During the third quarter of 2001, $399 million of net restructuring and
other charges were recorded by Excite@Home. Included in these charges were $376
million of asset impairment charges and $23 million of restructuring and exit
costs, primarily due to continued weakness in the on-line media market and the
recent bankruptcy filing. These charges included the write-off of goodwill and
other intangible assets, warrants granted in connection with distributing the
@Home service and fixed assets. The restructuring and exits costs, consisted of
$4 million for severance costs, $14 million related to facility closings and $5
million primarily related to termination of contractual obligations. The
severance costs, for approximately 860 employees, primarily resulted from
continued cost reduction efforts by Excite@Home. Since AT&T consolidates, but
only owns approximately 23% of Excite@Home, a portion of the charges recorded by
Excite@Home was not included as a reduction to AT&T's net income, but rather
eliminated in AT&T's September 30, 2001 Consolidated Statement of Operations as
a component of "Minority interest income (expense)."
Net restructuring and other charges for the nine months ended September 30,
2001, totaled $1,494 million. The charge includes $1,171 million of asset
impairment charges related to Excite@Home,
VI-8
$323 million for restructuring and exit costs which consisted of $151 million
for severance costs, $156 million for facility closings and $16 million
primarily related to termination of contractual obligations.
The asset impairment charges recorded during the nine months ended
September 30, 2001 included $1,032 million recorded by Excite@Home primarily due
to continued weakness in the on-line media market and the recent bankruptcy
filing. These charges included the write-down of goodwill and other intangible
assets related to various acquisitions, primarily Excite, warrants granted in
connection with distributing the @Home service, and fixed assets. In addition,
AT&T recorded a related goodwill impairment charge of $139 million associated
with its acquisition goodwill of Excite@Home. Since AT&T consolidates, but only
own approximately 23% of Excite@Home, a portion of the charges recorded by
Excite@Home was not included as a reduction to AT&T's net income, but rather
eliminated in its September 30, 2001 Consolidated Statement of Operations as a
component of "Minority interest income (expense)."
The severance costs, for approximately 7,700 employees, primarily resulted
from synergies created by the MediaOne merger as well as continued cost
reduction efforts by Excite@Home. Approximately 36% of the affected employees
are management employees and 64% are non-management employees.
This restructuring initiative is projected to yield cash savings of
approximately $1 million in 2001 (net of severance benefit pay-outs of
approximately $151 million) and approximately $260 million per year thereafter.
The initiative will yield no EBIT savings, net of restructuring charges in 2001,
and is projected to yield approximately $260 million per year thereafter. The
cost savings, primarily attributable to reduced personnel-related expenses, will
be realized in costs of services and products and SG&A expenses.
During the third quarter of 2000, AT&T recorded $24 million of net
restructuring and other charges. The charge resulted from synergies associated
with the MediaOne merger and related to cash termination benefits associated
with the involuntary separation of approximately 490 employees. Approximately
one-half of the individuals were management employees and one-half were
non-management employees.
During the nine months ended September 30, 2000, AT&T recorded $797 million
of net restructuring and other charges, which included $706 million of
restructuring and exit costs primarily associated with AT&T's initiative to
reduce costs by the end of 2000, and $91 million related to the
government-mandated disposition of AT&T Communications (U.K.) Ltd., which would
have competed directly with Concert.
The charge for the nine months ended September 30, 2000 included cash
termination benefits of $482 million associated with the involuntary separation
of approximately 6,700 employees. Approximately one-half of the individuals were
management employees and one-half were non-management employees.
The charge also included $62 million of network lease and other contract
termination costs associated with penalties incurred as part of notifying
vendors of the termination of these contracts during the first quarter 2000 and
$144 million of benefit curtailment costs associated with employee separations
as part of these exit plans.
During the nine months ended September 30, 2000, AT&T also recorded an
asset impairment charge of $18 million related to the write-down of
unrecoverable assets in certain businesses in which the carrying value was no
longer supported by estimated future cash flows.
As a result of AT&T's commitment to managing and reducing costs across all
areas of the business to remain cost competitive, AT&T expects to record a
restructuring charge in the fourth quarter of 2001. This restructuring charge is
primarily associated with a series of cost-control initiatives being undertaken
largely in AT&T Business.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- -------------------
2001 2000 2001 2000
------- ------- ------- -------
(DOLLARS IN MILLIONS)
Operating income...................................... $1,365 $2,907 $3,543 $8,394
VI-9
Operating income decreased $1.5 billion, or 53.0%, in the third quarter of
2001 compared with the third quarter of 2000. Approximately $0.2 billion of the
third quarter decrease was due to the consolidation of Excite@Home and the
impact of net dispositions. The remaining decrease largely reflects declines in
long distance voice revenue and spending in growth areas as well as higher
restructuring and other charges recorded by Excite@Home. The decrease was
partially offset by lower amortization of goodwill and lower access and
connection rates AT&T paid to connect domestic calls on the facilities of other
service providers. A portion of the impact of the operating loss generated by
Excite@Home was offset in minority interest income (expense), reflecting the
interest of Excite@Home AT&T does not own.
Operating income decreased $4.9 billion, or 57.8%, for the nine months
ended September 30, 2001, compared with the same period in 2000. Approximately
$2.0 billion of the decrease was due to the consolidation of Excite@Home, and
the impact of net acquisitions, primarily MediaOne. The remaining decrease
reflects declines in long distance voice business and spending in growth areas.
The decrease was partially offset by the impact of lower access and connection
rates, lower restructuring and other charges and lower amortization of goodwill.
A majority of the impact of the operating loss generated by Excite@Home was
offset in minority interest income (expense), reflecting the portion of
Excite@Home AT&T does not own.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- -------------------
2001 2000 2001 2000
--------- ------ -------- -------
(DOLLARS IN MILLIONS)
Other (expense) income................................ $(4,966) $365 $(7,195) $1,358
Other (expense) income for the third quarter of 2001 was an expense of $5.0
billion, an increase in expense of $5.3 billion from the third quarter of 2000.
The increase in expense was primarily driven by a charge of $3.5 billion related
to the discontinuation of Concert, AT&T's global joint venture with BT,
including approximately $0.6 billion associated with an agreement with BT in
which AT&T will assume BT's ownership in AT&T Canada and certain other
obligations. In addition, AT&T recorded a $1.8 billion charge related to the
estimated loss on AT&T's commitment to purchase the remaining public shares of
AT&T Canada. Also contributing to the higher expense was a $0.4 billion
mark-to-market loss on Vodaphone ADRs, which were used to settle exchangeable
notes that matured during the third quarter of 2001. These expenses were
partially offset by a $0.5 billion tax-free gain associated with the disposal of
a portion of AT&T's retained interest in AT&T Wireless in a debt-for-equity
exchange.
Other (expense) income for the nine months ended September 30, 2001 was an
expense of $7.2 billion, an increase in expense of $8.6 billion compared with
the same period in 2000. The higher expense was in part driven by $5.3 billion
of charges associated with the discontinuation of Concert and AT&T's obligation
to purchase the public shares of AT&T Canada and impairment charges of
approximately $1.3 billion primarily relating to AT&T's investment in Net2Phone.
In addition, effective January 1, 2001, in conjunction with the adoption of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," AT&T
reclassified certain investment securities, which support debt that is indexed
to those securities, from "available-for-sale" to "trading." As a result, AT&T
recorded a charge of $0.8 billion reflecting the initial reclassification impact
of the adoption of SFAS No. 133 as well as the ongoing investment and derivative
revaluation. Also contributing to the higher expense was a $0.8 billion loss on
the Excite@Home put obligation settlement with Cox and Comcast and $0.2 billion
of lower net gains on the sales and dispositions of businesses and investments.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- -------------------
2001 2000 2001 2000
------ ------ ------- -------
(DOLLARS IN MILLIONS)
Interest expense....................................... $786 $896 $2,426 $2,000
Interest expense decreased 12.2%, or $0.1 billion, in the third quarter of
2001 compared with the same period in 2000. The decrease was primarily due to
the lower average debt balance reflecting the Company's debt reduction efforts
in 2001.
VI-10
Interest expense increased 21.3%, or $0.4 billion, for the nine months
ended September 30, 2001, compared with the same period in 2000. The increase
was largely due to the higher average debt balance primarily as a result of
AT&T's June 2000 acquisition of MediaOne, including outstanding debt of MediaOne
and debt issued to fund the MediaOne acquisition. The impact of MediaOne was
partially offset by the Company's debt reduction efforts in 2001. Also
contributing to the increase was the higher average interest rate for the nine
months ended September 30, 2001 versus the same period in 2000.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- -------------------
2001 2000 2001 2000
--------- ------ -------- -------
(DOLLARS IN MILLIONS)
(Benefit) provision for income taxes................... $(2,092) $939 $(2,746) $2,532
The provision for income taxes decreased $3.0 billion to a benefit of $2.1
billion in the third quarter of 2001 compared with a provision of $0.9 billion
in the third quarter of 2000. The decrease was primarily due to a loss before
income taxes in the third quarter of 2001, compared with earnings before income
taxes in the third quarter of 2000. The effective tax rate for the third quarter
of 2001 was 47.7%, compared with 39.5% for the prior year third quarter. The
third quarter effective tax benefit rate was favorably impacted by a significant
net tax benefit related to Excite@Home, including a benefit from the
deconsolidation, partially offset by the prior consolidation of its operating
losses, for which the company was unable to record tax benefits. Also favorably
impacting the effective tax benefit rate was the tax-free gain associated with
the disposal of a portion of AT&T's retained interest in AT&T Wireless in a
debt-for-equity exchange.
The provision for income taxes decreased $5.3 billion, or 208.5%, to a
benefit of $2.7 billion for the nine months ended September 30, 2001 compared
with a provision of $2.5 billion for the same period in 2000. The decrease was
primarily due to a loss before income taxes for the nine months ended September
30, 2001, compared with earnings before income taxes for the same prior year
period. The effective tax rate for the nine months ended September 30, 2001 was
45.2%, compared with 32.7% for the same period in 2000. The 2001 effective tax
rate was favorably impacted by a significant net tax benefit related to
Excite@Home, including a benefit from the deconsolidation and the put obligation
settlement with Cox and Comcast, partially offset by the prior consolidation of
its operating losses, for which the company was unable to record tax benefits.
Also favorably impacting the effective tax benefit rate was the redemption of
AT&T stock held by Comcast in exchange for certain cable systems and the
tax-free gain associated with the disposal of a portion of AT&T's retained
interest in AT&T Wireless in a debt-for-equity exchange. These impacts were
partially offset by higher non tax-deductible goodwill amortization. The 2000
effective tax rate was positively impacted by a tax-free gain resulting from an
exchange of AT&T stock for an entity owning certain cable systems and other
assets with Cox and the benefit of the write-off of the related deferred tax
liability.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- -------------------
2001 2000 2001 2000
------ ------ ------- -----
(DOLLARS IN MILLIONS)
Minority interest income (expense)..................... $177 $103 $1,015 $11
Minority interest income, which is recorded net of income taxes, represents
an adjustment to AT&T's income to reflect the less than 100% ownership of
consolidated subsidiaries as well as dividends on preferred stock issued by
subsidiaries of AT&T. The Company recorded $0.2 billion of minority interest
income in the third quarter of 2001 and $0.1 billion of minority interest
expense in the third quarter of 2000. Minority interest income was $1.0 billion
of income for the nine months ended September 30, 2001 and $11 million of income
for the nine months ended September 30, 2000. The increase in both periods is
primarily due to the consolidation of Excite@Home effective September 1, 2000.
The minority interest income in both periods primarily reflects a loss generated
by Excite@Home, including business restructuring and asset impairment charges,
that were attributable to the other shareholders of Excite@Home. The income tax
benefit recorded on minority interest income was $6 million and $39
VI-11
million for the third quarter of 2001 and 2000, respectively. The income tax
benefit recorded on minority interest income was $93 million and $98 million for
the nine months ended September 30, 2001 and September 30, 2000, respectively.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- -------------------
2001 2000 2001 2000
------ -------- -------- -------
(DOLLARS IN MILLIONS)
Equity earnings (losses) from Liberty Media Group...... $111 $1,756 $(2,711) $2,965
Equity earnings (losses) from Liberty Media Group (LMG), which is recorded
net of income taxes, decreased $1.6 billion for the third quarter of 2001
compared with the third quarter of 2000. The decrease largely reflects lower
gains on dispositions in the third quarter of 2001, partially offset by earnings
of affiliates in 2001 compared with losses in 2000 as well as the write-down of
impaired investments in 2000.
Equity earnings (losses) from LMG, which is recorded net of income taxes,
decreased $5.7 billion for the year-to-date period through July 31, 2001,
compared with the year-to-date period ended September 30, 2000. The decrease
largely reflects lower gains on dispositions, higher losses of affiliates and
higher unrealized losses on financial instruments of LMG.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- --------------------
2001 2000 2001 2000
------ ------ ------ ------
(DOLLARS IN MILLIONS)
Net losses from other equity investments.............. $88 $222 $423 $615
Net losses from other equity investments, recorded net of income taxes,
were $0.1 billion in the third quarter of 2001 and $0.2 billion for the same
period of 2000, a decrease of 60.3%. The decrease in losses is primarily due to
lower losses related to Time Warner Entertainment (TWE) and Cablevision Systems
Corporation (Cablevision) as a result of these investments being accounted for
under the equity method in third quarter of 2000 and the cost method in the
third quarter of 2001. TWE was reclassified to an asset held for sale in the
fourth quarter of 2000, and accordingly earnings or losses, including
amortization of goodwill, were no longer recorded. Likewise, in the second
quarter of 2001, AT&T began accounting for its investment in Cablevision as a
cost method investment as a result of AT&T no longer having representation on
the board of directors. In addition, Excite@Home also contributed to the
decrease. These decreases were partially offset by higher losses related to
Concert. The income tax benefit recorded on net losses from other equity
investments was $136 million and $152 million for the third quarter of 2001 and
2000, respectively. Also included in this line is amortization of goodwill
associated with non-consolidated investments. This totaled $23 million and $233
million for the third quarter of 2001 and 2000, respectively.
Net losses from other equity investments were $0.4 billion for the nine
months ended September 30, 2001, a decrease of $0.2 billion, or 31.3%, compared
with the same period of 2000. This decrease was primarily due to the
consolidation of Excite@Home and higher earnings relating to Cablevision,
primarily reflecting a gain associated with the sale of cable properties. In
addition, the change in accounting treatment for TWE from an equity method
investment to a cost method investment also contributed to the decrease. These
decreases were partially offset by higher equity losses from Concert and
Net2Phone. The income tax benefit recorded on net losses from other equity
investments for the first nine months of 2001 was $302 million and $419 million
for the same period of 2000. Amortization of goodwill associated with
non-consolidated investments, recorded as a reduction of income, totaled $179
million and $458 million for the nine months ended September 30, 2001 and 2000,
respectively.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- -------------------
2001 2000 2001 2000
--------- ------ -------- -----
(DOLLARS IN MILLIONS)
Gain on disposition of discontinued operations......... $13,503 $-- $13,503 $--
VI-12
The gain on disposition of discontinued operations represents the
difference between the fair value of the Wireless tracking stock on July 9,
2001, the date of the split-off, and AT&T's book value in AT&T Wireless
Services.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- --------------------
2001 2000 2001 2000
------ ------ ------ ------
(DOLLARS IN MILLIONS)
Cumulative effect of accounting change................. $-- $-- $904 $--
Cumulative effect of accounting change, net of applicable income taxes, is
comprised of $0.4 billion for AT&T Group (other than LMG) and $0.5 billion for
LMG for the nine months ended September 30, 2001. The $0.4 billion recorded by
AT&T, excluding LMG represents fair value adjustments of debt instruments
including those acquired in conjunction with the MediaOne merger, as well as to
AT&T's warrant portfolio due to the adoption of SFAS No. 133.
The $0.5 billion recorded by Liberty Media Group represents the impact of
separately recording the embedded call option obligations associated with LMG's
senior exchangeable debentures due to the adoption of SFAS No. 133.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
2001 2000 2001 2000
------ ------ ------ ------
(DOLLARS IN MILLIONS)
Dividend requirements of preferred stock................ $235 $-- $652 $--
Dividend requirements of preferred stock were $0.2 billion in the third
quarter of 2001 and $0.7 billion for the nine months ended September 30, 2001.
The preferred stock dividend represented interest in connection with convertible
preferred stock issued to NTT DoCoMo in January of 2001 as well as accretion of
the beneficial conversion feature. On July 9, 2001, in conjunction with the
split-off of AT&T Wireless Group, these preferred shares were converted into
AT&T Wireless common stock. As a result, AT&T fully amortized, in the third
quarter, the remaining beneficial conversion feature balance of $0.2 billion.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- -------------------
2001 2000 2001 2000
------ ------ ----- -----
(DOLLARS IN MILLIONS)
Premium on wireless tracking stock exchange............ $-- $-- $80 $--
VI-13
The premium on the wireless tracking stock exchange was $80 million for the
nine months ended September 30, 2001. The premium represents the excess of fair
value of the Wireless tracking stock issued over the fair value of the AT&T
common stock exchanged and was calculated based on the closing share prices of
AT&T common stock and AT&T Wireless tracking stock on May 25, 2001.
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
AT&T Common Stock Group -- per basic share:
(Loss) earnings -- continuing operations................. $(0.69) $ 0.35 $(0.94) $1.35
Earnings -- discontinued operations...................... -- -- 0.03 0.06
Gain on disposition of discontinued operations........... 3.82 -- 3.67 --
Cumulative effect of accounting change................... -- -- 0.10 --
AT&T Common Stock Group earnings......................... $ 3.13 $ 0.35 $ 2.86 $1.41
AT&T Common Stock Group -- per diluted share:
(Loss) earnings -- continuing operations................. $(0.69) $ 0.35 $(0.94) $1.34
Earnings -- discontinued operations...................... -- -- 0.03 0.06
Gain on disposition of discontinued operations........... 3.82 -- 3.67 --
Cumulative effect of accounting change................... -- -- 0.10 --
AT&T Common Stock Group earnings......................... $ 3.13 $ 0.35 $ 2.86 $1.40
AT&T Wireless Group -- per basic and diluted share:
Earnings (loss) from discontinued operations............. $ -- $(0.01) $ 0.08 $0.05
Liberty Media Group -- per basic and diluted share:
Earnings (loss) -- before cumulative effect of
accounting change...................................... $ 0.04 $ 0.68 $(1.05) $1.15
Cumulative effect of accounting change................... -- -- 0.21 --
Liberty Media Group earnings (loss)...................... $ 0.04 $ 0.68 $(0.84) $1.15
The loss from continuing operations per diluted share attributable to the
AT&T Common Stock Group was $0.69 in the third quarter of 2001 compared with
earnings per share (EPS) on a diluted basis of $0.35 in the third quarter of
2000. The year over year decline was largely driven by charges recorded in
conjunction with AT&T's agreement to unwind its Concert joint venture and AT&T's
obligation to purchase the public shares of AT&T Canada. Also contributing to
the decline was lower operating income, the acceleration of the amortization of
the beneficial conversion feature associated with conversion of NTT DoCoMo
preferred stock, as well as a mark-to-market loss recorded in conjunction with
the settlement of certain exchangeable notes that matured during the quarter.
These losses were partially offset by a tax free gain associated with the
disposal of a portion of AT&T's retained interest in AT&T Wireless Services and
the net impact of the deconsolidation of Excite@Home.
The loss from continuing operations per diluted share attributable to the
AT&T Common Stock Group was $0.94 for the nine months ended September 30, 2001
compared with earnings per diluted share of $1.35 for the nine months ended
September 30, 2000. The year over year loss was primarily driven by lower
operating income, charges relating to the agreement to unwind AT&T's Concert
joint venture and AT&T's obligation to purchase the public shares of AT&T
Canada. In addition, the decline reflects an impairment charge reflecting an
other than temporary decline on AT&T's investment in Net2Phone, a charge
relating to the initial reclassification impact of the adoption of SFAS No. 133
which revalued certain securities reclassified from "available-for-sale" to
"trading," and dividends and associated amortization of the beneficial
conversion feature on NTT DoCoMo preferred stock, partially offset by the net
impact of the deconsolidation of Excite@Home.
VI-14
The Consolidated Financial Statements of AT&T reflect AT&T Wireless as a
discontinued operation. Accordingly, for periods prior to the split-off of AT&T
Wireless, revenue, costs and expenses of AT&T Wireless have been excluded from
the respective captions in the Consolidated Statements of Operations, and have
been reported as "Income from discontinued operations" for all periods
presented. Earnings from discontinued operations per diluted share attributable
to the AT&T Common Stock Group were $0.03 for the year-to-date period through
June 30, 2001, the deemed effective AT&T Wireless split-off date for accounting
purposes and $0.06 for the nine months ended September 30, 2000. Upon the split-
off of AT&T Wireless Group in the third quarter 2001, AT&T recorded $13.5
billion, or $3.82 per diluted share, as "Gain on the disposition of discontinued
operations."
The earnings (loss) per share from discontinued operations attributable to
AT&T Wireless Group for the year-to-date period through June 30, 2001, the
deemed effective AT&T Wireless group split-off date for accounting purposes, the
third quarter of 2000 and from April 27, 2000, the date of the stock offering,
through September 30, 2000, were $0.08, $(0.01) and $0.05, respectively.
The earnings (loss) per diluted share attributable to Liberty Media Group
(LMG) were earnings of $0.04 and a loss of $0.84 for the third quarter and year
to date periods through July 31, 2001, the deemed effective LMG split-off date
for accounting purposes, respectively. This compares with earnings of $0.68 and
$1.15 in the third quarter and nine months ended September 30, 2000,
respectively.
SEGMENT RESULTS
In support of the services AT&T provides, AT&T segments its results by the
business units that support its primary lines of business: AT&T Business, AT&T
Consumer and AT&T Broadband. The balance of AT&T's continuing operations,
excluding LMG is included in a Corporate and Other category. Although not a
segment, AT&T also discusses the results of LMG prior to its split-off as an
independent company.
EBIT is the primary measure used by AT&T's chief operating decision makers
to measure AT&T's operating results and to measure segment profitability and
performance. AT&T calculates EBIT as operating (loss) income plus net pretax
losses from equity investments, pretax minority interest income (expense) and
other income. In addition, AT&T management also uses EBITDA as a measure of
segment profitability and performance, and is defined as EBIT, excluding
minority interest (expense) income other than Excite@Home's minority interest
(expense) income, plus depreciation and amortization. Interest and taxes are not
factored into the segment profitability measure used by the chief operating
decision makers; therefore, trends for these items are discussed on a
consolidated basis. AT&T management believes EBIT and EBITDA are meaningful to
investors because they provide analysis of operating results using the same
measures used by AT&T's chief operating decision makers. In addition, AT&T
believes that both EBIT and EBITDA allow investors a means to evaluate the
financial results of each segment in relation to total AT&T. EBIT for AT&T was a
deficit of $3,654 million and earnings of $2,962 million, and EBITDA was a
deficit of $1,347 million and earnings of $5,430 million for the three months
ended September 30, 2001 and 2000, respectively. EBIT was a deficit of $3,455
million and earnings of $8,631 million, and EBITDA was earnings of $3,705
million and $14,757 million for the first nine months of 2001 and 2000,
respectively. EBIT for AT&T was $8,364 million, $10,881 million and $8,266
million for the years ended December 31, 2000, 1999 and 1998, respectively.
EBITDA for AT&T was $17,075 million, $17,724 million and $11,844 million for the
years ended December 31, 2000, 1999 and 1998, respectively. AT&T's calculation
of EBIT and EBITDA may or may not be consistent with the calculation of these
measures by other public companies. EBIT and EBITDA should not be viewed by
investors as an alternative to generally accepted accounting principles (GAAP)
measures of income as a measure of performance or to cash flows from operating,
investing and financing activities as a measure of liquidity. In addition,
EBITDA does not take into account changes in certain assets and liabilities as
well as interest and taxes which can affect cash flow.
The discussion of segment results includes revenue, EBIT, EBITDA, total
assets and capital additions. The discussion of EBITDA for AT&T Broadband is
modified to exclude other income and net
VI-15
losses from equity investments. Total assets for each segment includes all
assets, except intercompany receivables. Prepaid pension assets and
corporate-owned or leased real estate are generally held at the corporate level,
and therefore are included in the Corporate and Other group. Capital additions
for each segment include capital expenditures for property, plant and equipment,
additions to nonconsolidated investments, increases in franchise costs and
additions to internal-use software.
In connection with AT&T's corporate restructuring program set forth in late
2000, AT&T's existing segments reflect certain managerial changes since the
publication of AT&T's 2000 annual report. The changes are as follows: AT&T
Business was expanded to include the results of international operations and
ventures. In addition, certain corporate costs that were previously recorded
within the Corporate and Other Group have been allocated to the respective
segments in an effort to ultimately have the results of these businesses reflect
all direct corporate costs as well as overhead for shared services. All prior
period results have been restated to reflect these changes.
Reflecting the dynamics of AT&T's business, AT&T continuously reviews its
management model and structure, which may result in additional adjustments to
its operating segments in the future.
AT&T BUSINESS
AT&T Business offers a variety of global communications services, including
long distance, local, and data and IP networking to small and medium-sized
businesses, large domestic and multinational businesses and government agencies.
AT&T Business is also a provider of voice, data and IP transport to service
resellers (wholesale services).
AT&T Business includes AT&T Solutions, the company's professional-services
outsourcing business, which provides seamless solutions that maximize the
competitive advantage of networking-based electronic applications for global
clients. AT&T Business also includes the results of International ventures and
operations.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2001 2000 2001 2000
-------- ------- ------- -------
(DOLLARS IN MILLIONS)
External revenue........................................ $ 6,750 $7,022 $20,550 $21,172
Internal revenue........................................ 135 200 597 529
Total revenue........................................... 6,885 $7,222 21,147 $21,701
EBIT.................................................... (4,377) 1,690 (1,933) 4,428
EBITDA.................................................. (3,352) 2,737 1,145 7,548
OTHER ITEMS
Capital additions....................................... $ 1,105 $1,821 $ 3,808 $ 4,642
AT SEPTEMBER 30, 2001 AT DECEMBER 31, 2000
--------------------- --------------------
Total assets............................................ $40,236 $42,747
REVENUE
AT&T Business revenue decreased $0.3 billion, or 4.7%, in the third quarter
of 2001, and declined $0.6 billion, or 2.5%, for the nine months ended September
30, 2001, compared with the same periods in 2000. The decreases were primarily
due to a decline in long distance voice revenue of approximately $0.6 billion
and $1.6 billion in the third quarter of 2001 and the first nine months of 2001,
respectively. The decreases were partially offset by growth in data/IP of
approximately $0.2 billion and $0.9 billion for the third quarter of 2001 and
the first nine months of 2001, respectively.
Long distance voice services revenue decreased at a mid-teen percentage
rate in the third quarter of 2001 and a low-teen percentage for the nine months
ended September 30, 2001. These declines were due
VI-16
to a declining average price per minute reflecting the competitive forces within
the industry that are expected to continue. Long distance voice minute volumes
were relatively flat for the third quarter of 2001 and grew at a low
single-digit percentage for the nine months ended September 30, 2001, compared
to the corresponding prior year periods.
Data services, which represent the transportation of data, rather than
voice, along AT&T's network, grew at a high single-digit percentage rate in the
third quarter of 2001 and nearly 14% for the nine months ended September 30,
2001. Growth was led by the strength of packet services, which includes frame
relay, IP and Asynchronous Transfer Mode (ATM) services during both of these
periods. In addition, data services revenue during the nine months ended
September 30, 2001, was positively impacted by growth in high-speed private line
services.
Local voice services revenue grew at a high-teen percentage rate in the
third quarter of 2001 and a low-20 percentage rate in the nine months ended
September 30, 2001, compared with the same prior year periods. The prior
year-to-date period included an unfavorable adjustment related to legal rulings
concerning compensation payable to other carriers for call completion; excluding
this adjustment, local voice grew approximately 18%. AT&T added approximately
170,000 and over 450,000 access lines for the quarter and year-to-date periods,
respectively, bringing total access lines in service as of September 30, 2001 to
over 2.7 million, an increase of 29.9% compared with September 30, 2000. AT&T
served nearly 6,300 buildings on-net at September 30, 2001, representing a 2.0%
increase compared with September 30, 2000.
AT&T Business Services internal revenue decreased $65 million, or 32.6%,
for the third quarter of 2001 and increased $68 million, or 12.8%, for the
year-to-date period compared with the same periods in 2000. The decrease for the
quarter was due to the split-off of AT&T Wireless on July 9, 2001, as these
sales are now reported as external revenue, partially offset by greater sales of
services to other AT&T units that resell such services to their external
customers, primarily AT&T Broadband. The increase for the year-to-date period
was due to greater sales of services to other AT&T units, primarily AT&T
Broadband and Excite@Home, partially offset by lower internal revenue, primarily
from AT&T Wireless, as a result of the split-off.
EBIT/EBITDA
EBIT declined $6.1 billion, or 359.0%, in the third quarter of 2001 and
$6.4 billion, or 143.7%, for the nine months ended September 30, 2001, compared
with the same periods in 2000. EBITDA declined $6.1 billion, or 222.5%, and $6.4
billion, or 84.8%, respectively, in the third quarter and the first nine months
of 2001. These declines primarily reflect the $5.3 billion of charges recorded
during the third quarter of 2001 related to Concert and AT&T Canada. These
declines also reflect the impact of pricing pressure within the long distance
voice business as well as the shift from higher margin long distance services to
lower margin growth services and the impact of higher equity losses recorded for
Concert. Partially offsetting the year-to-date EBIT decline was a gain of
approximately $0.5 billion recorded on the sale of AT&T's stake in Japan Telecom
in the second quarter of 2001. Additionally, the year-to-date comparisons also
reflect restructuring charges of $0.4 billion recorded in the first quarter of
2000.
OTHER ITEMS
Capital additions decreased 39.3% in the third quarter of 2001 and 18.0% in
the first nine months of 2001, compared with the same prior year periods. These
decreases reflect lower capital expenditures for network assets that support all
services provided by AT&T Business.
Total assets decreased $2.5 billion, or 5.9%, at September 30, 2001,
compared with December 31, 2000. The decrease reflects lower other investments
and related advances resulting from the write-down of AT&T Business' investment
in Concert, higher equity losses from Concert and the sale of Japan Telecom.
VI-17
AT&T CONSUMER
AT&T Consumer provides a variety of communications services including long
distance, local toll (intrastate calls outside the immediate local area) and
Internet access to residential customers. In addition, AT&T Consumer provides
transaction services, such as prepaid calling card and operator-handled calling
services. Local phone service is also provided in certain areas.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2001 2000 2001 2000
------- ------- ------- -------
(DOLLARS IN MILLIONS)
Revenue................................................. $3,822 $4,651 $11,614 $14,651
EBIT.................................................... 1,282 1,806 3,817 5,271
EBITDA.................................................. 1,331 1,849 3,962 5,394
OTHER ITEMS
Capital additions....................................... $ 43 $ 41 $ 96 $ 104
AT SEPTEMBER 30, 2001 AT DECEMBER 31, 2000
--------------------- --------------------
Total assets............................................ $2,555 $3,150
REVENUE
AT&T Consumer revenue declined 17.8%, or $0.8 billion, in the third quarter
of 2001 and declined 20.7%, or $3.0 billion, for the first nine months of 2001
compared with the corresponding periods in 2000. The revenue decline in both
periods reflects the impacts of volume reductions, primarily in traditional
voice services due to the acceleration of wireless and e-mail substitution, the
impacts of ongoing competition and the continued migration of customers to
lower-priced products and optional calling plans. The revenue decline in the
third quarter of 2001 was slightly offset by an increase in the level of call
volumes related to the events of September 11th. Long distance calling volumes
declined at a low double-digit rate in both the third quarter and the first nine
months of 2001. In addition, the revenue decline for the nine months ended
September 30, 2001, reflects the elimination of per-line charges in July 2000 of
approximately $0.5 billion.
EBIT/EBITDA
EBIT and EBITDA declined 29.0% and 28.0%, respectively, in the third
quarter of 2001 compared with the prior year quarter. EBIT and EBITDA declined
27.6% and 26.5%, respectively, for the first nine months of 2001 compared with
the same period in 2000. The decline in both periods was primarily driven by the
impact of the revenue declines partially offset by cost-control initiatives.
With impact of wireless and e-mail substitution continuing to increase and as
the local exchange carriers continue their entry into the Consumer Long Distance
business, EBIT and EBITDA are likely to continue to decline.
EBIT and EBITDA margins were 33.5% and 34.8%, respectively, for the third
quarter of 2001 and were 38.8% and 39.7%, respectively, for the third quarter of
2000. EBIT and EBITDA margins were 32.9% and 34.1%, respectively, and 36.0% and
36.8%, respectively, for the nine months ended September 30, 2001 and 2000.
OTHER ITEMS
Capital additions were about the same in the third quarter of 2001 compared
with the third quarter of 2000 and decreased slightly for the first nine months
of 2001 compared with the corresponding period in 2000.
Total assets declined $0.6 billion to $2.6 billion at September 30, 2001
compared to $3.2 billion at December 31, 2000. The decline was primarily driven
by lower receivables, reflecting lower revenue.
VI-18
AT&T BROADBAND
AT&T Broadband offers a variety of services through its cable broadband
network, including traditional analog video and advanced services such as
digital video service, high-speed data service and broadband telephony service.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2001 2000 2001 2000
------- ------- ------- -------
(DOLLARS IN MILLIONS)
Revenue.................................................. $2,393 $2,420 $7,423 $5,693
EBIT..................................................... (538) (640) (1,834) (771)
EBITDA excluding other income*........................... 602 498 1,496 1,196
OTHER ITEMS
Capital additions........................................ $ 782 $1,252 $2,641 $3,586
AT SEPTEMBER 30, 2001 AT DECEMBER 31, 2000
--------------------- --------------------
Total assets............................................ $104,054 $114,848
---------------
* EBITDA for AT&T Broadband excludes net losses from equity investments and
other income
The results of operations for the three and nine months ended September 30,
2001 and the three months ended September 30, 2000 include a full period of
MediaOne operations, while the nine months ended September 30, 2000, includes
only 3 months and two weeks of operations for MediaOne.
REVENUE
Broadband revenue declined $27 million, or 1.1%, for the three months ended
September 30, 2001 compared with the corresponding prior year period. This
decrease in revenue was impacted by the net dispositions of cable systems of
approximately $0.3 billion, almost entirely offset by revenue growth from new
services (broadband telephony and high-speed data) of approximately $0.2 billion
and revenue growth from other video services, primarily expanded basic cable and
digital video, of approximately $0.1 billion. AT&T Broadband revenue grew $1.7
billion, or 30.4%, for the nine months ended September 30, 2001, compared with
the corresponding prior year period. Approximately $1.0 billion of the increase
was due to the acquisition of MediaOne offset by the net dispositions of cable
systems. In addition, the increase was attributable to revenue growth from new
services of approximately $0.4 billion and growth in other video services,
primarily expanded basic cable and digital video, of approximately $0.2 billion.
At September 30, 2001, Broadband serviced approximately 13.7 million basic
cable customers, passing approximately 24.6 million homes, compared with 16.1
million basic cable customers, passing approximately 28.0 million homes at
September 30, 2000. At September 30, 2001, Broadband provided digital video
service to approximately 3.2 million customers, high-speed data service to
approximately 1.4 million customers and broadband telephony service to
approximately 0.9 million customers. This compares with 2.5 million
digital-video customers, approximately 0.9 million high-speed data customers,
and 0.3 million broadband telephony customers at September 30, 2000.
EBIT/EBITDA
EBIT for the third quarter of 2001 was a deficit of $0.5 billion, an
improvement of $0.1 billion from the comparable prior year period. This
improvement was primarily due to the impacts associated with the growth in new
services of approximately $0.1 billion, growth in other video services,
primarily expanded basic cable and digital video, of approximately $0.1 billion
and lower pretax equity losses of $0.1 billion. Partially offsetting this
increased EBIT was the impacts of net dispositions of cable systems of
approximately $0.1 billion and $0.1 billion of higher net loss on the sales of
businesses and investments.
VI-19
The EBIT deficit for the nine months ended September 30, 2001 increased
$1.1 billion from the comparable prior year period deficit of $0.8 billion. This
increase was largely due to the impacts of the acquisition of MediaOne and the
net dispositions of cable systems of approximately $0.7 billion as well as
higher restructuring and other charges and increased depreciation and
amortization, programming and advertising expenses of approximately $0.7
billion. In addition, the increase was attributable to $0.5 billion of lower net
gains on sales of businesses and investments. These increases were offset by
$0.4 billion of lower pretax equity losses, impacts associated with the growth
in new services of approximately $0.2 billion and growth in other video
services, primarily expanded basic cable and digital video, of approximately
$0.2 billion.
EBITDA, which excludes net losses from equity investments and other income,
was $0.6 billion for the three months ended September 30, 2001, an improvement
of $0.1 billion, or 20.9%, from the comparable prior year period. This
improvement was primarily due to the impacts associated with the growth in new
services of approximately $0.1 billion and growth in other video services,
primarily expanded basic cable and digital video, of approximately $0.1 billion.
Partially offsetting this increased EBITDA were the impacts of net dispositions
of cable systems of approximately $0.1 billion.
EBITDA, for the nine months ended September 30, 2001 was $1.5 billion, an
improvement of $0.3 billion, or 25.1%, from $1.2 billion in the comparable prior
year period. This improvement was primarily due to the acquisition of MediaOne
of $0.4 billion and the impacts associated with the growth in new services of
approximately $0.2 billion and growth in other video services, primarily
expanded basic cable and digital video, of approximately $0.2 billion. Partially
offsetting this improvement was increased programming and advertising expenses
of $0.2 billion, the impact of net dispositions of cable systems of $0.2 billion
and higher restructuring and other charges of $0.1 billion.
OTHER ITEMS
Capital additions decreased 37.5% to $0.8 billion for the three months
ended September 30, 2001 from $1.3 billion for the comparable prior year period.
This decrease was primarily driven by reductions in plant upgrades and launches
of advanced services. Capital additions decreased 26.3% to $2.6 billion for the
nine months ended September 30, 2001 from $3.6 billion for the comparable prior
year period. This decrease was primarily driven by a $0.5 billion decrease in
contributions to various non-consolidated investments.
Total assets at September 30, 2001, were $104.1 billion compared with
$114.8 billion at December 31, 2000. The decrease in total assets at September
30, 2001 is primarily due to cable-system sales.
CORPORATE AND OTHER
This group reflects the results of corporate staff functions, the
elimination of transactions between segments, as well as the results of
Excite@Home.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2001 2000 2001 2000
----- ------- -------- -------
(DOLLARS IN MILLIONS)
Revenue................................................. $(13) $ (117) $ (220) $ (422)
EBIT.................................................... (21) 106 (3,505) (297)
EBITDA.................................................. 118 338 (3,019) 225
OTHER ITEMS
Capital additions....................................... $ 50 $1,489 $ 303 $1,573
AT SEPTEMBER 30, 2001 AT DECEMBER 31, 2000
--------------------- --------------------
Total assets............................................ $13,204 $12,101
VI-20
REVENUE
Revenue for corporate and other for the third quarter of 2001 primarily
includes the elimination of intercompany revenue of negative $171 million (a $39
million decrease from prior year) and revenue from Excite@Home of $140 million
(a $61 million increase from prior year). Revenue for corporate and other for
the first nine months of 2001 primarily includes the elimination of intercompany
revenue of negative $696 million ($155 million increase from prior year) and
revenue from Excite@Home of $418 million (a $339 million increase from prior
year). The increase was primarily driven by the consolidation of Excite@Home,
partially offset by decline in Excite@Home revenue in September 2001 and lower
elimination of internal revenue as a result of the split-off of AT&T Wireless on
July 9, 2001, which was partially offset by increased sales from Excite@Home to
AT&T Broadband and from AT&T Business Services to AT&T Broadband.
EBIT/EBITDA
EBIT and EBITDA declined $0.1 billion and $0.2 billion, respectively, to a
deficit of $21 million and income of $0.1 billion, respectively, in the third
quarter of 2001 compared with the third quarter of 2000. The decline was
primarily due to a $0.4 billion mark-to-market loss on Vodaphone ADRs, which
were used to settle exchangeable notes that matured during the third quarter of
2001 and $0.1 billion lower gains on sales of various other investments. Also
contributing to the decline was lower investment-related income of $0.1 billion,
higher Excite@Home loss of $0.1 billion and a lower pension credit of $0.1
billion, primarily due to unfavorable investment performance. These declines
were partially offset by a $0.5 billion tax-free gain associated with the
disposal of a portion of AT&T's retained interest in AT&T Wireless in a
debt-for-equity exchange and a $0.1 billion gain for the ongoing investment and
derivative revaluation.
EBIT and EBITDA declined $3.2 billion to deficits of $3.5 billion and $3.0
billion, respectively, for nine months ended September 30, 2001, compared with
the same prior year period. The decline was primarily due to a $1.1 billion
investment impairment charge related to Net2Phone and a $0.8 billion loss on the
Excite@Home put obligation settlement with Cox Communications, Inc. and Comcast
Corporation. Also contributing to the decline was $0.8 billion loss associated
with the adoption of SFAS No. 133 as well as the related ongoing investment
revaluation. The decline was also driven by lower investment-related income of
$0.2 billion, lower pension credit of $0.1 billion, primarily due to unfavorable
investment performance, higher costs associated with the AT&T Wireless stock
exchange offer of $0.1 billion and lower gains on sales of investments of $0.1
billion. These were partially offset by lower net restructuring and other
charges of $0.3 billion.
OTHER ITEMS
Capital additions declined $1.4 billion, or 96.6%, in the third quarter of
2001 compared with the third quarter of 2000. Capital additions declined $1.3
billion, or 80.7%, in the first nine months of 2001 compared with the same
period in 2000. The decline in both periods was primarily driven by AT&T's
investment in Net2Phone made in the third quarter of 2000.
Total assets increased $1.1 billion, to $13.2 billion at September 30,
2001. The increase was primarily driven by a higher cash balance held at
September 30, 2001, AT&T's retained interest in AT&T Wireless and higher
deferred tax assets as a result of the unwind of AT&T's Concert joint venture
and settlement of exchangeable notes. These increases were partially offset by
the deconsolidation of Excite@Home, the write-down of AT&T's investment in
Net2Phone and the transfer of a loan to Concert to the AT&T Business segment,
which was written off in the third quarter of 2001.
LIBERTY MEDIA GROUP RESULTS
Liberty Media Group (LMG) produces, acquires and distributes entertainment,
educational and informational programming services through all available formats
and media. LMG is also engaged in electronic retailing services, direct
marketing services, advertising sales relating to programming services,
infomercials and transaction processing. LMG was split off from AT&T on August
10, 2001. The
VI-21
operating results of LMG for the third quarter and year-to-date period ended
July 31, 2001 (the deemed effective LMG split-off date for accounting purposes)
and three and nine months ended September 30, 2000, were reflected as "Equity
earnings (losses) from Liberty Media Group" in the accompanying Consolidated
Statements of Operations. The investment in LMG was no longer included in AT&T's
Consolidated Balance Sheet at September 30, 2001. Equity earnings (losses) from
LMG decreased $1.6 billion for the third quarter of 2001 compared with the third
quarter of 2000. The decrease largely reflects lower gains on dispositions in
the third quarter of 2001, partially offset by earnings of affiliates in 2001
compared with losses in 2000 as well as the write-down of impaired investments
in 2000. Equity earnings (losses) from LMG decreased $5.7 billion for the
year-to-date period through July 31, 2001, compared with the year-to-date period
ended September 30, 2000. The decrease largely reflects lower gains on
dispositions, higher losses of affiliates and higher unrealized losses on
financial instruments of LMG.
THREE YEARS ENDED DECEMBER 31, 2000
REVENUE
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
Business Services........................... $28,900 $28,692 $25,357
Consumer Services........................... 18,894 21,753 22,763
Broadband................................... 8,226 5,070 --
Other and Corporate......................... (487) (542) (303)
Total Revenue............................... $55,533 $54,973 $47,817
Total revenue increased 1.0%, or $0.6 billion, in 2000 compared with the
prior year primarily driven by a growing demand for AT&T's Internet protocol
(IP) products and outsourcing and broadband services of approximately $2.2
billion and the impact of acquisitions and the consolidation of Excite@Home,
offset by the impact of Concert, dispositions and the elimination of PICC of
approximately $1.5 billion. These revenue increases were offset by continued
declines in long distance voice revenue of approximately $2.9 billion. AT&T
expects long distance revenue to continue to be negatively impacted by ongoing
competition and product substitution.
Total revenue in 1999 increased $7.2 billion, or 15.0%, compared with 1998.
Approximately $6.5 billion of the increase was due to acquisitions, net of
dispositions. The remaining increase was fueled by growth in business data,
business long distance voice and outsourcing revenue, partially offset by the
continued decline of consumer long distance voice revenue.
Revenue by segment is discussed in greater detail in the segment results
section.
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
Access and other connection................. $13,140 $14,439 $15,116
Access and other connection expenses decreased 9.0%, to $13.1 billion in
2000, compared with $14.4 billion in 1999. Included within access and other
connection expenses are costs that AT&T pays to connect domestic calls on the
facilities of other service providers. Mandated reductions in per-minute access
costs and decreased per-line charges resulted in lower costs of approximately
$1.5 billion. Also contributing to the decrease was more efficient network
usage. These decreases were partially offset by approximately $0.6 billion of
higher costs due to volume increases, and $0.5 billion as a result of higher
Universal Service Fund contributions. Since most of these charges are passed
through to the customer, the per-minute access-rate and per-line charge
reductions and the increased Universal Service Fund contributions have generally
resulted in a corresponding impact on revenue.
VI-22
Costs paid to telephone companies outside of the United States to connect
calls made to countries outside of the United States (international settlements)
are also included within access and other connection expenses. These costs
decreased approximately $0.5 billion in 2000, as result of the commencement of
operations of Concert. Concert now incurs most of AT&T's international
settlements as well as earns most of AT&T's foreign-billed revenue, previously
incurred and earned directly by AT&T. In 2000, Concert billed AT&T a net expense
composed of international settlement (interconnection) expense and
foreign-billed revenue. The amount charged by Concert in 2000 was lower than
interconnection expense incurred in 1999, since AT&T recorded these transactions
as revenue and expense, as applicable. Partially offsetting the decline were
costs incurred related to Concert products that AT&T now sells to its customers.
Access and other connection expenses declined $0.7 billion, or 4.5%, in
1999 compared with the prior year. This decline resulted from $0.9 billion of
mandated reductions in per-minute access rates in 1999 and 1998, and $0.6
billion of lower international settlement rates resulting from AT&T's
negotiations with international carriers. Additionally, AT&T continues to manage
these costs through more efficient network usage. These reductions were
partially offset by $0.8 billion of higher costs due to volume growth, and $0.3
billion as a result of increased per-line charges and Universal Service Fund
contributions.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
--------- --------- --------
(DOLLARS IN MILLIONS)
Costs of services and products.............................. $12,795 $11,013 $8,285
Costs of services and products include the costs of operating and
maintaining AT&T's networks, costs to support AT&T's outsourcing contracts,
programming and licensing costs for cable services, the provision for
uncollectible receivables and other service-related costs.
These costs increased $1.8 billion, or 16.2%, in 2000 compared with 1999.
Nearly $1.9 billion of the increase was due to acquisitions and the impact of
consolidating Excite@Home, net of the impact of Concert and divestments of
international businesses. Expense also increased due to higher costs associated
with new outsourcing contracts of approximately $0.5 billion and approximately
$0.3 billion of higher video-programming costs principally due to rate increases
and higher costs associated with new broadband services. These increases were
partially offset by approximately $0.9 billion of costs savings from continued
cost control initiatives and a higher pension credit in 2000, primarily driven
by a higher pension trust asset base, resulting from increased investment
returns.
Costs of services and products rose $2.7 billion, or 32.9%, in 1999
compared with 1998, primarily due to acquisitions, net of dispositions, which
accounted for approximately $3.6 billion of the increase. The higher costs
associated with new outsourcing contracts increased expenses by approximately
$0.2 billion. Partially offsetting the 1999 increases were network cost-control
initiatives of approximately $0.4 billion, and approximately $0.3 billion of
lower expenses in Business Services related to per-call compensation expense,
provision for uncollectible receivables and gross receipts and property taxes.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- --------- ---------
(DOLLARS IN MILLIONS)
Selling, general and administrative......................... $9,752 $10,894 $10,693
Selling, general and administrative (SG&A) expenses decreased $1.1 billion,
or 10.5%, in 2000 compared with 1999. Approximately $2.0 billion of the decrease
was due to savings from continued cost-control initiatives and a higher pension
credit in 2000, primarily driven by a higher pension trust asset base, resulting
from increased investment returns. Partially offsetting this decrease was
approximately $0.5 billion of higher expenses associated with AT&T's growing
broadband business, and nearly $0.5 billion of expenses associated with
acquisitions and the consolidation of Excite@Home, net of the impact of Concert
and dispositions.
VI-23
SG&A expenses increased $0.2 billion, or 1.9%, in 1999 compared with 1998.
This increase was primarily due to acquisitions, net of dispositions, which
resulted in an increase in SG&A expenses of approximately $1.2 billion. Largely
offsetting this increase were AT&T's continued efforts to control costs on a
companywide basis, which resulted in lower SG&A expenses of approximately $0.9
billion, including lower spending for consumer long distance
acquisition-programs.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN MILLIONS)
Depreciation and other amortization......................... $5,924 $5,137 $3,533
Depreciation and other amortization expenses rose $0.8 billion, or 15.3%,
in 2000 compared with 1999 and increased $1.6 billion, or 45.4%, in 1999
compared with 1998. Approximately $0.5 billion of the increase in 2000 compared
with 1999 and $0.9 billion of the increase in 1999 compared with 1998,
respectively was due to acquisitions and the consolidation of Excite@Home, net
of dispositions and the impact of Concert, as applicable. The remaining increase
was primarily due to a higher asset base resulting from continued infrastructure
investment. Total capital expenditures for 2000, 1999 and 1998 were $10.4
billion, $11.2 billion and $6.9 billion, respectively. AT&T continues to focus
the vast majority of its capital spending on its growth businesses of broadband,
data and IP and local.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- ------
(DOLLARS IN MILLIONS)
Amortization of goodwill, franchise costs and other
purchased intangibles..................................... $2,665 $1,057 $44
Amortization of goodwill, franchise costs and other purchased intangibles
increased $1.6 billion, or 152.3%, in 2000 compared with the prior year. This
increase was largely attributable to the consolidation of Excite@Home, as well
as acquisitions, primarily MediaOne and TCI. Franchise costs represent the value
attributable to agreements with local authorities that allow access to homes in
Broadband's service areas. Other purchased intangibles arising from business
combinations primarily included customer relationships.
Amortization of goodwill, franchise costs and other purchased intangibles
increased $1.0 billion in 1999 compared with 1998 due primarily to the
acquisition of TCI and, to a lesser extent, AGNS.
As a result of AT&T's evaluation of recent changes in its industry and the
views of regulatory authorities, AT&T expects that the amortization period for
all licensing costs, franchise costs, and goodwill associated with newly
acquired telecommunications and cable operations will not exceed 25 years.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- ------ --------
(DOLLARS IN MILLIONS)
Net restructuring and other charges......................... $7,029 $975 $2,514
During 2000, AT&T recorded $7.0 billion of net restructuring and other
charges, which had an approximate $0.90 earnings per diluted share impact to the
AT&T Common Stock Group. The 2000 charge included $6.2 billion of asset
impairment charges related to Excite@Home, $759 million for restructuring and
exit costs associated with AT&T's initiative to reduce costs, and $91 million
related to the government-mandated disposition of AT&T Communications (U.K.)
Ltd., which would have competed directly with Concert.
The asset impairment charges related to Excite@Home resulted from the
deterioration of the market conditions and market valuations of Internet-related
companies during the fourth quarter of 2000, which caused Excite@Home to
conclude that intangible assets related to their acquisitions of
Internet-related companies may not be recoverable. Accordingly, Excite@Home
conducted a detailed assessment of the recoverability of the carrying amounts of
acquired intangible assets. This assessment resulted in a determination that
certain acquired intangible assets, including goodwill, related to these
acquisitions, including Excite, were impaired as of December 31, 2000. As a
result, Excite@Home recorded
VI-24
impairment charges of $4.6 billion in December 2000, representing the excess of
the carrying amount of the impaired assets over their fair value.
The impairment was allocated to each asset group based on a comparison of
carrying values and fair values. The impairment write-down within each asset
group was allocated first to goodwill, and if goodwill was reduced to zero, to
identifiable intangible assets in proportion to carrying values.
Since AT&T owns approximately 23% of Excite@Home, 77% of the charge
recorded by Excite@Home was not included as a reduction to AT&T's net income,
but rather was eliminated in AT&T's 2000 Consolidated Statement of Income as
"Minority interest income (expense)."
Also as a result of the foregoing, AT&T recorded a goodwill and
acquisition-related impairment charge of $1.6 billion associated with the
acquisition of its investment in Excite@Home. The write-down of AT&T's
investment to fair value was determined utilizing discounted expected future
cash flows.
The $759 million charge for restructuring and exit plans was primarily due
to headcount reductions, mainly in network operations and Business Services,
including the consolidation of customer-care and call centers, as well as
synergies created by the MediaOne merger.
Included in exit costs was $503 million of cash termination benefits
associated with the separation of approximately 7,300 employees as part of
voluntary and involuntary termination plans. Approximately one-half of the
separations were management employees and one-half were nonmanagement employees.
Approximately 6,700 employee separations were related to involuntary
terminations and approximately 600 to voluntary terminations.
AT&T also recorded $62 million of network lease and other contract
termination costs associated with penalties incurred as part of notifying
vendors of the termination of these contracts during the year, and net losses of
$32 million related to the disposition of facilities primarily due to synergies
created by the MediaOne merger.
Also included in restructuring and exit costs in 2000 was $144 million of
benefit plan curtailment costs associated with employee separations as part of
these exit plans. Further, AT&T recorded an asset impairment charge of $18
million related to the write-down of unrecoverable assets in certain businesses
where the carrying value was no longer supported by estimated future cash flows.
The 2000 restructuring initiatives are projected to yield cash savings of
approximately $690 million per year, as well as EBIT (earnings before interest
and taxes, including pretax minority interest and net pretax losses from other
equity investments) savings of approximately $700 million per year. AT&T expects
increased spending in growth businesses will largely offset these cash and EBIT
savings. The EBIT savings, primarily attributable to reduced personnel-related
expenses, will be realized in SG&A expenses and costs of services and products.
During 1999, AT&T recorded $1.0 billion of net restructuring and other
charges, which had an approximate $0.27 earnings per diluted share impact to the
AT&T Common Stock Group.
A $594 million in-process research and development charge was recorded
reflecting the estimated fair value of research and development projects at TCI,
as of the date of the acquisition, which had not yet reached technological
feasibility or had no alternative future use. The projects identified related to
efforts to offer voice over IP, product-integration efforts for advanced set-top
devices, cost-savings efforts for broadband-telephony implementation, and
in-process research and development related to Excite@Home. AT&T estimated the
fair value of in-process research and development for each project using an
income approach, which was adjusted to allocate fair value based on the
project's percentage of completion. Under this approach, the present value of
the anticipated future benefits of the projects was determined using a discount
rate of 17%. For each project, the resulting net present value was multiplied by
a percentage of completion based on effort expended to date versus projected
costs to complete.
The charge associated with voice-over-IP technology, which allows voice
telephony traffic to be digitized and transmitted in IP data packets, was $225
million as of the date of acquisition. Current voice-
VI-25
over-IP equipment does not yet support many of the features required to connect
customer premises equipment to traditional phone networks. Further technical
development is also needed to ensure voice quality that is comparable to
conventional circuit-switched telephony and to reduce the power consumption of
the IP-telephony equipment. AT&T started testing IP-telephony equipment in the
field in late-2000 and will continue tests throughout 2001.
The charge associated with product-integration efforts for advanced set-top
devices, which will enable AT&T to offer next-generation digital services, was
$114 million as of the acquisition date. The associated technology consists of
the development and integration work needed to provide a suite of software tools
to run on the digital set-top box hardware platform. It is anticipated that
field trials will begin in late-2001 for next-generation digital services.
The charge associated with cost-savings efforts for broadband-telephony
implementation was $101 million as of the date of acquisition. Telephony cost
reductions primarily consist of cost savings from the development of a "line of
power switch," which allows AT&T to cost effectively provide power for customer
telephony equipment through the cable plant. This device will allow AT&T to
provide line-powered telephony without burying the cable line to each house.
Trials related to AT&T's telephony cost reductions are complete, and
implementation has begun in certain markets.
Additionally, the in-process research and development charge related to
Excite@Home was valued at $154 million. This charge related to projects to allow
for self-provisioning of devices and the development of next-generation client
software, network and back-office infrastructure to enable a variety of network
devices beyond personal computers and improved design for the regional data
centers' infrastructure.
Although there are technological issues to overcome to successfully
complete the acquired in-process research and development, AT&T expects
successful completion. AT&T estimates the costs to complete the identified
projects will not have a material impact on AT&T's results of operations. If,
however, AT&T is unable to establish technological feasibility and produce
commercially viable products/services, anticipated incremental future cash flows
attributable to expected profits from such new products/services may not be
realized.
Also in 1999, a $145 million charge for restructuring and exit costs was
recorded as part of AT&T's initiative to reduce costs. The restructuring and
exit plans primarily focused on the maximization of synergies through headcount
reductions in Business Services and network operations, including the
consolidation of customer-care and call centers.
Included in exit costs was $142 million of cash termination benefits
associated with the separation of approximately 2,800 employees as part of
voluntary and involuntary termination plans. Approximately one-half of the
separations were management employees and one-half were nonmanagement employees.
Approximately 1,700 employee separations were related to involuntary
terminations and approximately 1,100 to voluntary terminations.
The 1999 restructuring initiatives are projected to yield cash savings of
approximately $250 million per year. This restructuring yielded EBIT savings of
approximately $260 million in 2000, and is expected to save nearly $260 million
per year thereafter. AT&T expects increased spending in growth businesses will
largely offset these cash and EBIT savings. The EBIT savings, primarily
attributable to reduced personnel-related expenses, will be realized in SG&A
expenses and costs of services and products.
AT&T also recorded net losses of $307 million related to the
government-mandated disposition of certain international businesses that would
have competed directly with Concert, and $50 million related to a contribution
agreement Broadband entered into with Phoenixstar, Inc. That agreement requires
Broadband to satisfy certain liabilities owed by Phoenixstar and its
subsidiaries. The remaining obligation under this contribution agreement and an
agreement that MediaOne had is $57 million, which was fully accrued for at
December 31, 2000. In addition, AT&T recorded benefits of $121 million related
to the settlement of pension obligations for former employees who accepted
AT&T's 1998 voluntary retirement incentive program (VRIP) offer.
VI-26
During 1998, AT&T recorded $2.5 billion of net restructuring and other
charges, which had an approximate $0.59 earnings per diluted share impact to the
AT&T Common Stock Group. The bulk of the charge was associated with AT&T's
overall cost-reduction program and the approximately 15,300 management employees
who accepted the VRIP offer. A restructuring charge of $2,724 million was
composed of $2,254 million and $169 million for pension and postretirement
special-termination benefits, respectively, $263 million of benefit plan
curtailment losses and $38 million of other administrative costs. AT&T also
recorded charges of $125 million for related facility costs and $150 million for
executive-separation costs. These charges were partially offset by benefits of
$940 million as AT&T settled pension benefit obligations for 13,700 of the total
VRIP employees. In addition, the VRIP charges were partially offset by the
reversal of $256 million of 1995 business restructuring reserves primarily
resulting from the overlap of VRIP on certain 1995 projects.
Also included in the 1998 net restructuring and other charges were asset
impairment charges totaling $718 million, of which $633 million was related to
AT&T's decision not to pursue Total Service Resale (TSR) as a local-service
strategy. AT&T also recorded an $85 million asset impairment charge related to
the write-down of unrecoverable assets in certain international operations where
the carrying value was no longer supported by future cash flows. This charge was
made in connection with the review of certain operations that would have
competed directly with Concert.
Additionally, $85 million of merger-related expenses were recorded in 1998
in connection with the Teleport Communications Group Inc. (TCG) merger, which
was accounted for as a pooling of interests. Partially offsetting these charges
was a $92 million reversal of the 1995 restructuring reserve. This reversal
reflected reserves no longer deemed necessary. The reversal primarily included
separation costs attributed to projects completed at a cost lower than
originally anticipated. Consistent with the three-year plan, the 1995
restructuring initiatives were substantially completed by the end of 1998.
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
-------- --------- --------
(DOLLARS IN MILLIONS)
Operating income............................................ $4,228 $11,458 $7,632
Operating income decreased $7.2 billion, or 63.1%, in 2000 compared with
1999. The decrease was primarily due to higher net restructuring and other
charges of $6.1 billion. Also contributing to the decrease was the impact of the
acquisition of MediaOne and the consolidation of Excite@Home, which lowered
operating income by $1.5 billion. A majority of the impact of operating losses
and the restructuring charge generated by Excite@Home was offset in minority
interest income (expense), reflecting the approximate 77% of Excite@Home AT&T
does not own. Partially offsetting these decreases were cost-control initiatives
and a larger pension credit associated with AT&T's mature long distance
businesses and related support groups, partially offset by lower long distance
revenue.
Operating income rose $3.8 billion, or 50.1%, in 1999 compared with 1998.
The increase was driven by approximately $2.2 billion of operating income
improvements in Business Services and Consumer Services, reflecting operating
expense efficiencies, partially offset by higher restructuring charges for these
units. Also contributing to the increase was $1.9 billion of lower net
restructuring and other charges for all other units.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- ------ ------
(DOLLARS IN MILLIONS)
Other income................................................ $1,150 $826 $812
Other income increased $0.3 billion, or 39.3%, in 2000 compared with 1999.
This increase was primarily due to greater net gains on sales of businesses and
investments of approximately $0.7 billion, and higher investment-related income
of approximately $0.3 billion. The higher gains on sales were driven by
significant gains associated with the swap of cable properties with Comcast
Corporation (Comcast) and Cox Communications, Inc. (Cox), the sale of AT&T's
investment in Lenfest Communications, Inc. (Lenfest) and related transactions.
These gains aggregated approximately $0.5 billion and had an
VI-27
approximate $0.21 earnings per diluted share impact to the AT&T Common Stock
Group. In 1999, AT&T recorded significant gains associated with the sale of
AT&T's Language Line Services business and a portion of AT&T's ownership
interest in AT&T Canada which aggregated approximately $0.3 billion and had an
approximate $0.05 earnings per diluted share impact to the AT&T Common Stock
Group. Offsetting the increases to other income in 2000 was an approximate $0.5
billion charge reflecting the increase in the fair value of put options held by
Comcast and Cox related to Excite@Home stock, and approximately $0.2 billion of
higher investment impairment charges.
Other income increased $14 million, or 1.8%, in 1999 compared with 1998.
The increase was primarily due to higher net gains on sales of businesses and
investments of approximately $0.2 billion offset by lower investment-related
income of approximately $0.2 billion. In 1999, AT&T recorded significant gains
associated with the sale of its Language Line Services business and a portion of
its ownership interest in AT&T Canada which aggregated approximately $0.3
billion and had an approximate $0.05 earnings per diluted share impact to the
AT&T Common Stock Group. In 1998, AT&T recorded a significant gain associated
with the sale of AT&T Solutions Customer Care of approximately $0.4 billion and
had an approximate $0.08 earnings per diluted share impact to the AT&T Common
Stock Group.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- ------
(DOLLARS IN MILLIONS)
Interest expense............................................ $2,964 $1,503 $293
Interest expense increased 97.2%, or $1.5 billion, in 2000 compared with
1999. The increase was primarily due to a higher average debt balance as a
result of AT&T's June 2000 acquisition of MediaOne, including outstanding debt
of MediaOne and debt issued to fund the MediaOne acquisition, and AT&T's March
1999 acquisition of TCI.
Interest expense increased $1.2 billion in 1999 compared with 1998, due to
a higher average debt balance associated with AT&T's acquisitions, including
debt outstanding of TCI at the date of acquisition.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN MILLIONS)
Provision for income taxes.................................. $3,284 $4,016 $2,989
The effective income tax rate is the provision for income taxes as a
percent of income from continuing operations before income taxes. The effective
income tax rate was 136.1% in 2000, 37.3% in 1999 and 36.7% in 1998. In 2000,
the effective tax rate was negatively impacted by Excite@Home, which is unable
to record tax benefits associated with its pretax losses. Therefore the $4.6
billion restructuring charges taken by Excite@Home in 2000 had no associated tax
benefit. The 2000 effective tax rate was positively impacted by a tax-free gain
resulting from an exchange of AT&T stock for an entity owning certain cable
systems and other assets with Cox and the benefit of the write-off of the
related deferred tax liability. The 1999 effective tax rate was negatively
impacted by a non-tax-deductible research and development charge, but positively
impacted by a change in the net operating loss utilization tax rules that
resulted in a reduction in the valuation allowance and the income tax provision.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- ------- ------
(DOLLARS IN MILLIONS)
Minority interest income (expense).......................... $4,103 $(126) $(1)
Minority interest income (expense), which is recorded net of income taxes,
represents an adjustment to AT&T's income to reflect the less than 100%
ownership of consolidated subsidiaries as well as dividends on preferred stock
issued by subsidiaries of AT&T. The $4.2 billion increase in minority interest
in 2000 resulted from the consolidation of Excite@Home effective September 1,
2000. The minority interest income in 2000 primarily reflects losses generated
by Excite@Home, including the goodwill impairment charge, that were attributable
to the approximate 77% of Excite@Home not owned by AT&T. The
VI-28
decrease in minority interest in 1999 compared with 1998 was primarily due to
dividends on preferred securities issued by a subsidiary trust of AT&T in 1999.
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
-------- --------- --------
(DOLLARS IN MILLIONS)
Equity earnings (losses) from Liberty Media Group........... $1,488 $(2,022) --
Equity earnings from LMG, which are recorded net of income taxes, were $1.5
billion in 2000, compared with losses of $2.0 billion in 1999. The increase was
primarily due to gains on dispositions, including gains associated with the
mergers of various companies that LMG had investments in. Gains were recorded
for the difference between the carrying value of LMG's interest in the acquired
company and the fair value of securities received in the merger. In addition,
lower stock compensation expense in 2000 compared with 1999 contributed to the
increase. These were partially offset by impairment charges recorded on LMG's
investments to reflect other than temporary declines in value and higher losses
relating to LMG's equity affiliates.
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
Net losses from other equity investments.................... $588 $756 $109
Net losses from other equity investments, which are recorded net of income
taxes, were $0.6 billion in 2000, a 22.2% improvement compared with 1999. This
improvement was primarily a result of higher earnings from AT&T's investment in
Cablevision Systems Corp. (Cablevision) of approximately $0.2 billion due to
gains from cable-system sales. Offsetting this increase were losses from AT&T's
stake in Time Warner Entertainment Company, L.P. (TWE) which AT&T acquired in
connection with the MediaOne merger and greater equity losses from Excite@Home,
which aggregated approximately $0.1 billion.
VI-29
Net losses from other equity investments were $0.8 billion in 1999 compared
with $0.1 billion in 1998, primarily due to losses AT&T recorded on investments
it acquired through TCI, largely Cablevision and Excite@Home.
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
-------- --------- --------
(DOLLARS IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
AT&T Common Stock Group:
Income from continuing operations......................... $2,645 $ 5,883 $5,052
Income (loss) from discontinued operations................ 460 (433) 193
Gain on sale of discontinued operations................... -- -- 1,290
Earnings from continuing operations per share:
Basic.................................................. 0.76 1.91 1.89
Diluted................................................ 0.75 1.87 1.87
Earnings (loss) from discontinued operations per share:
Basic.................................................. 0.13 (0.14) 0.07
Diluted................................................ 0.13 (0.13) 0.07
Gain on sale of discontinued operations -- basic and
diluted.............................................. -- -- 0.48
AT&T Wireless Group:
Income from discontinued operations....................... $ 76 -- --
Earnings from discontinued operations per share:
Basic and diluted...................................... 0.21 -- --
Liberty Media Group:
Income (loss)............................................. $1,488 $(2,022) --
Earnings (loss) per share:
Basic and diluted...................................... 0.58 (0.80) --
Earnings per diluted share (EPS) attributable to continuing operations of
the AT&T Common Stock Group were $0.75 in 2000 compared with $1.87 in 1999, a
decrease of 59.9%. The decrease was primarily due to higher restructuring and
asset impairment charges and the MediaOne acquisition, including the impact of
shares issued, operating losses of MediaOne and additional interest expense.
Also contributing to the decrease was the impact of Excite@Home, including the
mark-to-market adjustment related to the put options held by Comcast and Cox.
These were partially offset by an increase in other income, primarily associated
with higher net gains on sales of businesses and investments, and higher
investment-related income, and lower losses from equity investments. Also
impacting EPS was higher operating income associated with AT&T's mature long
distance businesses.
EPS from continuing operations attributable to the AT&T Common Stock Group
on a diluted basis were $1.87 in both 1999 and 1998. EPS increased primarily due
to increased income from AT&T's Business and Consumer operations due to revenue
growth and operating expense efficiencies, as well as lower net restructuring
and other charges. Offsetting these increases was the impact of the TCI and AGNS
acquisitions, including the impact of shares issued and equity losses of
Excite@Home and Cablevision.
EPS for Liberty Media Group was $0.58 in 2000, compared with a loss of
$0.80 per share for 1999. The increase in EPS was primarily due to gains on
dispositions, including gains associated with the mergers of various companies
that LMG had investments in. Gains were recorded for the difference between the
carrying value of LMG's interest in the acquired company and the fair value of
securities received in the merger. In addition, lower stock compensation expense
in 2000 compared with 1999 contributed to the increase. These were partially
offset by impairment charges recorded on LMG's
VI-30
investments to reflect other than temporary declines in value and higher losses
relating to LMG's equity affiliates.
DISCONTINUED OPERATIONS
Pursuant to 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 of AT&T reflect the
disposition of AT&T Universal Card Services (UCS), which was sold on April 2,
1998, and AT&T Wireless, which was split-off from AT&T on July 9, 2001, as
discontinued operations. Accordingly, the revenue, costs and expenses, and cash
flows of UCS, through the date of disposition, and AT&T Wireless have been
excluded from the respective captions in the 2000, 1999 and 1998 Consolidated
Statements of Income and Consolidated Statements of Cash Flows and have been
reported as "Income from discontinued operations," net of applicable income
taxes; and as "Net cash provided by discontinued operations." The assets and
liabilities of AT&T Wireless have been excluded from the respective captions in
the December 31, 2000 and 1999 Consolidated Balance Sheets and are reported as
"Net assets of discontinued operations." The gain associated with the sale of
UCS is recorded as "Gain on sale of discontinued operations," net of applicable
income taxes in the 1998 Consolidated Statement of Income.
EXTRAORDINARY ITEMS
In August 1998, AT&T extinguished approximately $1.0 billion of TCG's debt.
The $217 million pretax loss on the early extinguishment of debt was recorded as
an extraordinary loss. The after-tax impact was $137 million, or $0.05 per
diluted share.
SEGMENT RESULTS
BUSINESS SERVICES
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(DOLLARS IN MILLIONS)
External revenue............................................ $28,157 $28,087 $25,001
Internal revenue............................................ 743 605 356
Total revenue............................................... 28,900 28,692 25,357
EBIT........................................................ 5,990 5,248 4,017
EBITDA...................................................... 10,200 9,468 7,376
Capital additions........................................... 6,839 9,091 6,773
AT DECEMBER 31,
-----------------
2000 1999
------- -------
Total assets................................................ $42,747 $37,974
REVENUE
In 2000, Business Services revenue grew $0.2 billion, or 0.7%, compared
with 1999. Strength in data and IP services as well as growth in AT&T's
outsourcing business contributed $1.8 billion to the increase. This growth was
largely offset by an approximate $0.9 billion decline in long distance voice
services as a result of continued pricing pressures in the industry and
approximately $0.5 billion due to the net impacts of Concert, international
dispositions and acquisitions.
Revenue in 1999 grew $3.3 billion, or 13.2%. The acquisition of AGNS
contributed approximately $1.1 billion to the growth. Data, IP and outsourcing
services grew approximately $1.5 billion in 1999 compared with 1998, while long
distance voice services and local services contributed approximately $0.6
billion to the revenue increase.
VI-31
Data services, which represent the transportation of data, rather than
voice, along AT&T's network, was impacted by acquisitions and the formation of
Concert. Excluding these impacts, data services grew at a high-teens percentage
rate in 2000. Growth was led by the continued strength of frame relay services;
IP services, which include IP-connectivity services and virtual private network
(VPN) services; and high-speed private-line services. Excluding the impact of
AGNS, data services grew at a high-teens percentage rate in 1999, led by
strength in frame relay and high-speed private-line services.
AT&T Solutions outsourcing revenue grew 47.9% in 2000 and 146.0% in 1999.
More than one-half of the 2000 growth and approximately 65% of the 1999 growth
was driven by AT&T's acquisition of AGNS. The remaining growth in both years was
primarily due to growth from new contract signings and add-on business from
existing clients.
Excluding the impact of Concert, long distance voice services revenue
declined at a mid single-digit percentage rate in 2000 due to a declining
average price per minute reflecting the competitive forces within the industry
which are expected to continue. Partially offsetting this decline was a high
single-digit percentage growth rate in minutes. In 1999, long distance voice
revenue grew at a low single-digit percentage rate, as volumes grew at a
high-teens percentage rate, which was largely offset by a declining average rate
per minute.
Local voice services revenue grew nearly 20% in 2000 and more than 50% in
1999. During 2000, AT&T added more than 867,000 access lines, with the total
reaching nearly 2.3 million at the end of the year. During 1999, AT&T added more
than 719,000 access lines. Access lines enable AT&T to provide local service to
customers by allowing direct connection from customer equipment to the AT&T
network. AT&T serves more than 6,000 buildings on-network (buildings where AT&T
owns the fiber that runs into the building), representing an increase of
approximately 3.5% over 1999. At the end of 1999, AT&T served just over 5,800
buildings on-network compared with approximately 5,200 buildings at the end of
1998.
Business Services internal revenue increased $138 million, or 22.7%, in
2000 and $249 million, or 70.0%, in 1999. The increase in 2000 was the result of
greater sales of business long distance services to other AT&T units that resell
such services to their external customers, primarily Broadband and Wireless
Services. In 1999, the increase in internal revenue was primarily due to greater
sales of long distance services to Wireless Services.
EBIT/EBITDA
EBIT improved $0.7 billion, or 14.2%, and EBITDA improved $0.7 billion, or
7.7%, in 2000 compared with 1999. This improvement reflects an increase in
revenue and lower costs as a result of AT&T's continued cost-control efforts,
partially offset by the formation of Concert and the acquisition of AGNS.
In 1999, EBIT improved $1.2 billion, or 30.6%, and EBITDA improved $2.1
billion, or 28.4%, compared with 1998. These increases were driven by revenue
growth combined with margin improvement resulting from ongoing cost-control
initiatives. The increase in EBIT was offset somewhat by increased depreciation
and amortization expenses resulting from increased capital expenditures aimed at
data, IP and local services.
OTHER ITEMS
Capital additions decreased $2.3 billion in 2000, and increased $2.3
billion in 1999. In 2000, the decrease was a result of lower spending for AT&T's
long distance network (including the data network) and lower investment in
nonconsolidated international investments. In 1999, the increase was primarily
due to additional spending for the build out of AT&T's local services SONET
transport network and increased nonconsolidated international investments that
support AT&T's global strategy.
VI-32
Total assets increased $4.8 billion, or 12.6%, at December 31, 2000,
compared with December 31, 1999. The increase was primarily due to net increases
in property, plant and equipment as a result of capital additions, as well as
receivables from Concert, and higher goodwill due to AT&T Latin America.
CONSUMER SERVICES
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(DOLLARS IN MILLIONS)
Revenue..................................................... $18,894 $21,753 $22,763
EBIT........................................................ 6,893 7,619 6,289
EBITDA...................................................... 7,060 7,803 6,406
Capital additions........................................... 148 299 99
AT DECEMBER 31,
---------------
2000 1999
------ ------
Total assets................................................ $3,150 $3,781
REVENUE
Consumer Services revenue declined 13.1%, or $2.9 billion, in 2000 compared
with 1999. Approximately $0.9 billion of the decline was due to the elimination
of per-line charges in 2000 and the impact of Concert. The remainder of the
decline was primarily due to a decline in traditional voice services, such as
Domestic Dial 1, reflecting the ongoing competitive nature of the consumer long
distance industry, which has resulted in pricing pressures and a loss of market
share. Also negatively impacting revenue was product substitution and market
migration away from direct-dial wireline and higher-priced calling-card services
to the rapidly growing wireless services and lower-priced prepaid-card services.
As a result, calling volumes declined at a mid single-digit percentage rate in
2000. AT&T expects competition and product substitution to continue to
negatively impact Consumer Services revenue.
In August 1999, AT&T introduced AT&T One Rate, which allows customers to
make long distance calls, 24 hours a day, seven days a week, for the same rate.
These One Rate offers continue to be well received in the market with more than
12 million customers enrolled since the plan's introduction. In addition, AT&T
has been successful in packaging services in the consumer market by giving
customers the option of intraLATA service with its One Rate offers. More than
60% of the customers enrolled in One Rate have chosen AT&T as their intraLATA
provider.
AT&T's any distance New York Local One Rate offer, which combines both
local and long distance service, has experienced high customer acceptance. AT&T
ended the year with nearly 760,000 customers under this plan.
In 1999, Consumer Services revenue decreased $1.0 billion, or 4.4%, on a
mid single-digit percentage decline in volumes. The 1999 decline reflects the
ongoing competitive nature of the consumer long distance industry, as well as
product substitution and market migration away from direct dial and higher-
priced calling-card services to rapidly growing wireless services and
lower-priced prepaid-card services.
EBIT/EBITDA
EBIT declined $0.7 billion, or 9.5%, and EBITDA declined $0.7 billion, or
9.5%, in 2000 compared with 1999. The declines in EBIT and EBITDA primarily
reflect the decline in the long distance business, offset somewhat by
cost-control initiatives. In addition, the declines reflect $0.2 billion of
lower gains on sales of businesses, primarily the 1999 sale of Language Line
Services, and higher restructuring charges. Reflecting AT&T's cost-control
initiatives, EBIT and EBITDA margins in 2000 improved to 36.5% and 37.4%,
respectively, compared with 35.0% and 35.9%, respectively, in 1999.
VI-33
EBIT grew $1.3 billion, or 21.1%, and EBITDA grew $1.4 billion, or 21.8%,
in 1999. The EBIT margin improved to 35.0% in 1999 (excluding the gain on the
sale of Language Line Services, the 1999 EBIT margin was 34.3%) from 27.6% in
the prior year. The EBIT and EBITDA growth for 1999 reflects ongoing
cost-reduction efforts, particularly in marketing spending, as well as lower
negotiated international settlement rates.
OTHER ITEMS
Capital additions decreased $0.2 billion, or 50.6%, in 2000 as a result of
a planned reduction in spending on the voice network and reduced spending on
internal-use software as most of the functionality upgrades were completed in
1999. In 1999, capital additions increased $0.2 billion, or 201.9%, primarily
due to increased spending on internal-use software to add more functionality to
AT&T's services and in support of AT&T WorldNet Services subscriber growth.
Total assets declined $0.6 billion, or 16.7%, during 2000. The decline was
primarily due to assets transferred to Concert during 2000, as well as lower
accounts receivable, reflecting lower revenue.
BROADBAND
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
2000 1999
--------- ---------
(DOLLARS IN MILLIONS)
Revenue..................................................... $ 8,226 $ 5,070
EBIT........................................................ (1,240) (1,545)
EBITDA*..................................................... 1,639 733
Capital additions........................................... 4,968 4,759
AT DECEMBER 31,
------------------
2000 1999
-------- -------
Total assets................................................ $114,848 $53,810
---------------
* EBITDA for Broadband excludes net losses from equity investments and other
income.
Results of operations for the year ended December 31, 2000, include the
results of MediaOne since its acquisition on June 15, 2000, while the year ended
December 31, 1999, does not include any results of MediaOne. Additionally, the
results of operations for the year ended December 31, 1999, include 10 months of
TCI's results, reflecting its acquisition in March 1999, while 2000 includes a
full 12 months of TCI's results.
REVENUE
Broadband revenue grew $3.2 billion in 2000, or 62.3%, compared with 1999.
Approximately $2.8 billion of the increase in revenue was due to the acquisition
of MediaOne in 2000 and TCI in 1999. In addition, revenue from new services
(digital video, high-speed data, and broadband telephony) and a basic-cable rate
increase contributed approximately $0.4 billion to the revenue increase.
At December 31, 2000, Broadband serviced approximately 16.0 million
basic-cable customers, passing approximately 28.3 million homes, compared with
11.4 million basic-cable customers, passing approximately 19.7 million homes at
December 31, 1999. The increase reflects the acquisition of MediaOne. At
December 31, 2000, Broadband provided digital video service to approximately 2.8
million customers, high-speed data service to approximately 1.1 million
customers, and broadband telephony service to approximately 547,000 customers.
This compares with approximately 1.8 million digital-video customers,
approximately 207,000 high-speed data customers, and nearly 8,300 broadband
telephony customers at the end of 1999.
VI-34
EBIT/EBITDA
EBIT in 2000 was a deficit of $1.2 billion, an improvement of $0.3 billion,
or 19.7%. This improvement was due to approximately $0.5 billion of higher gains
on sales of businesses and investments, primarily gains on the swap of cable
properties with Cox and Comcast and the sale of AT&T's investment in Lenfest,
and $0.4 billion lower restructuring charges primarily associated with an
in-process research and development charge recorded in connection with the 1999
acquisition of TCI. Also contributing to the improvement were lower pretax
losses from equity investments of $0.5 billion, due in part to a $0.3 billion
improvement from AT&T's investment in Cablevision due to gains from cable-system
sales. These improvements were largely offset by the impact of the acquisition
of MediaOne as well as TCI of approximately $0.5 billion and higher expenses
associated with high-speed data and broadband telephony services of
approximately $0.4 billion.
EBITDA, which excludes net losses from equity investments and other income,
was $1.6 billion in 2000, an improvement of $0.9 billion compared with 1999.
This improvement was due to the impact of the MediaOne and TCI acquisitions of
$0.7 billion and lower restructuring charges of $0.4 billion. Higher expenses
associated with high-speed data and broadband telephony of approximately $0.2
billion offset these increases.
OTHER ITEMS
Capital additions increased 4.4% to approximately $5.0 billion in 2000,
from $4.8 billion in 1999. The increase was due to higher capital expenditures
of $0.8 billion primarily due to MediaOne, which was almost entirely offset by
decreased contributions to various nonconsolidated investments of $0.7 billion.
In 1999, spending was largely directed toward cable-distribution systems,
focusing on the upgrade of cable plant-assets, as well as equity infusions into
various investments.
Total assets at December 31, 2000, were $114.8 billion compared with $53.8
billion at December 31, 1999. The increase in total assets was primarily due to
the MediaOne acquisition and an increase in property, plant and equipment as a
result of capital expenditures, net of depreciation expense. These increases
were partially offset by a decrease in the mark-to-market valuation of certain
investments.
CORPORATE AND OTHER
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- ------- ---------
(DOLLARS IN MILLIONS)
Revenue..................................................... $ (487) $(542) $ (303)
EBIT........................................................ (3,279) (441) (2,040)
EBITDA...................................................... (2,382) 37 (1,938)
Capital additions........................................... 1,683 271 310
AT DECEMBER 31,
-----------------
2000 1999
------- -------
Total assets................................................ $12,101 $12,069
REVENUE
Revenue for corporate and other primarily includes the elimination of
intercompany revenue of negative $0.8 billion (an increase of $0.1 billion from
1999)and revenue from Excite@Home of $0.2 billion (which was consolidated
beginning on September 1, 2000).
For 1999, revenue decreased $0.2 billion, or 78.6%. The decline was driven
by an increase in the elimination of intercompany revenue and the sale of AT&T
Solutions Customer Care (ASCC) in 1998.
VI-35
EBIT/EBITDA
EBIT and EBITDA deficits in 2000 increased $2.8 billion and $2.4 billion to
$3.3 billion and $2.4 billion, respectively. The increases in the deficits were
largely related to Excite@Home. In 2000, restructuring and other charges, net of
minority interest, were $2.9 billion higher primarily due to goodwill impairment
charges recorded by Excite@Home and AT&T related to Excite@Home. Other impacts
included a charge of approximately $0.5 billion for the fair market value
increase of put options held by Comcast and Cox related to Excite@Home, and
operating losses from Excite@Home. Partially offsetting these declines were an
increase in the pension credit due to a higher pension trust asset base
resulting from increased investment returns, and lower expenses associated with
AT&T's continued efforts to reduce costs, which aggregated approximately $0.6
billion. In addition, higher net gains on sales of investments and an increase
in interest income increased EBIT and EBITDA by approximately $0.6 billion.
In 1999, EBIT and EBITDA improved $1.6 billion and $2.0 billion to a
deficit of $0.4 billion and earnings of $37 million, respectively. The
improvements were driven by $2.4 billion of lower net restructuring and other
charges in 1999 compared with 1998, partially offset by higher net losses from
other equity investments, lower gains on the sales of businesses and lower
interest income, which negatively impacted EBIT and EBITDA by $0.6 billion.
Additionally, EBIT was impacted by dividends on trust preferred securities. In
1998, AT&T recorded a gain on the sale of ASCC.
OTHER ITEMS
Capital additions increased $1.4 billion in 2000. The increase was driven
by AT&T's investment in 2000 in Net2Phone, Inc. (Net2Phone). 1999 Capital
additions were essentially flat when compared to 1998.
Total assets were consistent at December 31, 2000 and December 31, 1999.
LIBERTY MEDIA GROUP
Earnings from LMG were $1.5 billion in 2000 compared with losses of $2.0
billion from the date of acquisition through December 31, 1999. The increase was
primarily due to gains on dispositions, including gains associated with the
mergers of various companies that LMG had investments in. Gains were recorded
for the difference between the carrying value of LMG's interest in the acquired
company and the fair value of securities received in the merger. In addition,
lower stock compensation expense in 2000 compared with 1999 contributed to the
increase. These were partially offset by impairment charges recorded on LMG's
investments to reflect other than temporary declines in value and higher losses
relating to LMG's equity affiliates.
LIQUIDITY
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
---------------------
2001 2000
-------- ----------
(DOLLARS IN MILLIONS)
CASH FLOWS:
Provided by operating activities.......................... $6,741 $ 8,114
Used in investing activities.............................. (35) (26,436)
Provided by financing activities.......................... (7,432) 23,301
Provided by (used in) discontinued operations............. 4,860 (5,686)
Net cash provided by operating activities of $6.7 billion for the nine
months ended September 30, 2001 was primarily due to the loss from continuing
operations, excluding non-cash income items and the adjustment for net gains on
sales of businesses and investments, of $8.7 billion, partially offset by net
changes in other operating assets and liabilities of $1.1 billion and a decrease
in accounts payable of $0.8 billion. Net cash provided by operating activities
of $8.1 billion for the nine months ended
VI-36
September 30, 2000 was primarily due to income from continuing operations,
excluding non-cash income items and the adjustment for net gains on sales of
businesses and investments, of $11.6 billion, partially offset by an increase in
accounts receivable of $2.1 billion and a decrease in accounts payable of $1.4
billion.
AT&T's investing activities resulted in a net use of cash of $35 million
for the nine months ended September 30, 2001, compared with $26.4 billion for
the comparable period in 2000. For the nine months ended September 30, 2001,
AT&T spent $6.5 billion on capital expenditures and received approximately $4.8
billion, primarily from the net dispositions of cable systems, and approximately
$1.8 billion from the sale of investments. For the nine months ended September
30, 2000, AT&T spent approximately $16.6 billion for acquisitions of businesses,
primarily MediaOne, $7.8 billion on capital expenditures, $2.4 billion for
non-consolidated investments, including Net2Phone and infusions into existing
cable investments, and loaned $1.0 billion to Concert. In addition, AT&T
received approximately $0.8 billion primarily from the sale of investments.
For the nine months ended September 30, 2001, net cash used in financing
activities was $7.4 billion, compared with net cash provided by financing
activities of $23.3 billion for the nine months ended September 30, 2000. During
the nine months ended September 30, 2001, AT&T made net payments of $11.0
billion to reduce debt, paid AT&T Wireless $5.8 billion to settle an
intercompany loan in conjunction with its split-off from AT&T and paid dividends
of $0.4 billion. In addition, AT&T received $9.8 billion from the issuance of
convertible preferred stock to NTT DoCoMo. During the nine months ended
September 30, 2000, AT&T received $16.1 billion from the net issuance of debt
and $10.3 billion from the AT&T Wireless tracking stock offering. In addition,
AT&T paid dividends of $2.2 billion and $0.6 billion for net acquisitions of
treasury shares and redeemed securities for $0.2 billion.
For the nine months ended September 30, 2001, net cash provided by
discontinued operations was $4.9 billion, compared with a net use of cash of
$5.7 billion during the nine months ended September 30, 2000. During the nine
months ended September 30, 2001, AT&T Wireless issued $6.5 billion of bonds,
partially offset by spending of $2.3 billion on capital expenditures, and was
split-off from AT&T on July 9, 2001. For the nine months ended September 30,
2000, AT&T Wireless made net expenditures of $3.2 billion to acquire businesses
and spent $3.0 billion on capital expenditures.
At September 30, 2001, AT&T had current assets of $16.5 billion and current
liabilities of $32.0 billion. The current assets were primarily comprised of
trade and other receivables of $10.0 billion and cash of $4.2 billion. A
significant portion of the current liabilities, $18.4 billion, related to
short-term notes, the majority of which were commercial paper or debt with an
original maturity of one year or less.
AT&T expects that it will retire a portion of the short-term debt with
other financing arrangements, including the monetization of publicly-held
securities and sales of certain non-strategic assets and investments.
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
--------- --------- ----------
(DOLLARS IN MILLIONS)
CASH FLOWS:
Provided by operating activities of continuing
operations............................................. $11,665 $10,509 $ 9,944
(Used in) provided by investing activities of continuing
operations............................................. (30,045) (23,884) 4,135
Provided by (used in) financing activities of continuing
operations............................................. 25,732 13,854 (11,051)
Used in discontinued operations........................... (8,306) (2,594) (207)
In 2000, net cash provided by operating activities of continuing operations
increased $1.2 billion. The increase was primarily driven by increased other
assets and liabilities and an increase in net income excluding the noncash
impact of depreciation and amortization, net restructuring and other charges,
minority interest income (expense) and the impact of earnings and losses from
equity investments, and increased gains on sales of businesses and investments,
partially offset by decreased accounts payable. In 1999, net cash provided by
operating activities of continuing operations increased $0.6 billion, primarily
VI-37
due to an increase in net income excluding the noncash impact of depreciation
and amortization, net restructuring and other charges and the impact of earnings
and losses from equity investments, mostly offset by decreased other assets and
liabilities and increased accounts receivable, due primarily to higher revenue,
and an increase in tax payments from the gain on the 1998 sale of UCS.
AT&T's investing activities resulted in a net use of cash of $30.0 billion
in 2000, compared with a net use of cash of $23.9 billion in 1999. During 2000,
AT&T used approximately $16.7 billion for acquisitions of businesses, primarily
MediaOne, and spent $11.5 billion on capital expenditures. During 1999, AT&T
spent approximately $11.9 billion on capital expenditures, approximately $6.0
billion on acquisitions of businesses, primarily AGNS, and contributed $5.5
billion of cash to LMG. During 1998, AT&T received $10.6 billion related to the
sales of businesses, including receivables from UCS, partially offset by capital
expenditures of $6.8 billion.
During 2000, net cash provided by financing activities was $25.7 billion,
compared with $13.9 billion in 1999. In 2000, AT&T received $10.3 billion from
the AT&T Wireless Group tracking stock offering and borrowed an additional $17.0
billion of short-term debt and $2.5 billion of net long-term debt. These were
partially offset by the payment of $3.0 billion in dividends. In 1999, AT&T
received $10.2 billion from the issuance of commercial paper and short-term
debt, $6.1 billion from the net issuance of long-term debt and $4.6 billion from
the issuance of redeemable preferred securities. These sources of cash were
partially offset by the acquisition of treasury shares of $4.6 billion and the
payment of dividends of $2.7 billion. Cash used in financing activities in 1998
primarily related to repayment of long-term and short-term debt, the acquisition
of treasury shares and dividends paid on common stock.
At December 31, 2000, AT&T had current assets of $14.7 billion and current
liabilities of $48.0 billion. A significant portion of the current liabilities,
$31.8 billion, relates to short-term notes, the majority of which were
commercial paper or debt with an original maturity of one year or less. AT&T
expects that it will retire a portion of the short-term debt with other
financing arrangements, including the monetization of publicly-held securities,
sales of certain non-strategic assets and investments, and securitization of
certain accounts receivable. At December 31, 2000, AT&T had a current liability
of $2.6 billion, reflecting AT&T's obligation under put options held by Comcast
and Cox. In January 2001, Comcast and Cox exercised their rights under the put
options and elected to receive AT&T stock in lieu of cash.
On February 28, 2001, AT&T exercised its registration rights in TWE and
formally requested TWE to begin the process of converting the limited
partnership into a corporation with registered equity securities. On May 14,
2001, AT&T named Credit Suisse First Boston as its investment banker for the
registration process under the TWE partnership agreement.
In October 2001, AT&T sold 19.2 million shares of Cablevision NY Group
Class A common stock and, through a trust, 26.9 million shares of a mandatorily
exchangeable trust security that will be exchangeable into up to 26.9 million
shares of Cablevision NY Group Class A common stock at maturity in three years.
The offering generated approximately $1.4 billion of pretax net proceeds.
In connection with the split-off of AT&T Wireless on July 9, 2001, AT&T
retained approximately 185 million shares of AT&T Wireless Services valued at
approximately $3.0 billion and immediately exchanged $1.6 billion of those
shares to retire debt. In October of 2001, AT&T monetized a portion of its
remaining interest in AT&T Wireless and received approximately $600 million in
proceeds.
Since the announced restructuring plans to create four new businesses,
AT&T's debt ratings have been under review by the applicable rating agencies. As
a result of this review, AT&T's long-term and short-term ratings have been
downgraded and the long-term ratings put on credit watch with a negative
outlook. These actions will result in an increased cost of future borrowings and
will limit AT&T's access to the capital markets.
AT&T is pursuing various measures to reduce its debt level. However, there
can be no assurance that AT&T will be able to obtain financing on terms that are
acceptable to it. If these efforts cannot be completed successfully or on terms
and within the timeframe contemplated, AT&T's financial condition
VI-38
would be materially adversely affected. Some of these adverse conditions include
AT&T's ability to pursue acquisitions or make capital expenditures to expand its
network and cable plant, or pay dividends.
On December 28, 2000, AT&T entered into a 364-day, $25 billion
revolving-credit facility syndicated to 39 banks which has subsequently been
reduced to $14.3 billion as a result of the NTT DoCoMo investment, the AT&T
Wireless bond offering, the sale of Japan Telecom and the sale of various cable-
systems and the sale of Cablevision common stock. At September 30, 2001, the
revolving-credit facility was unused.
On October 31, 2001, AT&T's Board of Directors approved the sale of senior
notes for private placement, the proceeds of which will be utilized to retire
short-term indebtedness and for general corporate purposes.
Also in connection with AT&T's restructuring, it has reviewed its dividend
policy as it relates to each of the new businesses. On December 20, 2000, AT&T
announced that the board of directors reduced AT&T's quarterly dividend to
$0.0375 per share, from $0.22 per share.
AT&T's board of directors has the power to make determinations that may
impact the financial and liquidity position of each of the tracking stock
groups. This power includes the ability to set priorities for use of capital and
debt capacity, to determine cash management policies and to make decisions
regarding whether to make capital expenditures and as to the timing and amount
of any capital expenditures. All actions by the board of directors are subject
to the board members' fiduciary duties to all shareholders of AT&T as a group
and not just to holders of a particular class of tracking stock and to AT&T's
policy statements, by-laws and inter-company agreements. As a result of this
discretion of AT&T's board of directors, it may be difficult for investors to
assess each group's liquidity and capital resource needs and in turn the future
prospects of each group based on past performance.
FINANCIAL CONDITION
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(DOLLARS IN MILLIONS)
Total assets................................................ $160,049 $234,360
Total liabilities........................................... 99,511 121,611
Total shareowners' equity................................... 52,198 103,198
Total assets decreased $74.3 billion, or 31.7%, to $160.0 billion at
September 30, 2001 from $234.4 billion at December 31, 2000. This decrease was
primarily due to the split-off of Liberty Media Group in August 2001 and AT&T
Wireless in July 2001. In addition, the decrease was due to lower investments
and related advances resulting from the write-down of Concert and Net2Phone, and
unfavorable mark-to-market adjustments on certain investments as well as the
sale of other investments; lower franchise costs as a result of the net
disposition of cable systems and amortization; lower investments from the
exchange of AT&T's investment in Vodaphone for the settlement of debt. Partially
offsetting these decreases was a higher cash balance.
Total liabilities decreased $22.1 billion, or 18.2%, to $99.5 billion at
September 30, 2001 from $121.6 billion at December 31, 2000. This decrease was
primarily a result of the repayment of debt, a reduction in deferred income
taxes, primarily resulting from deferred tax assets from the write-down of
Concert and Net2Phone and the recording of AT&T's obligation to purchase all of
the outstanding shares of AT&T Canada, as well as the deconsolidation of
Excite@Home. Partially offsetting this decrease was an increase in other
long-term liabilities and deferred credits primarily associated with AT&T's
obligation to purchase all of the outstanding shares of AT&T Canada.
Minority interest decreased $1.2 billion, or 25.2%, to $3.6 billion at
September 30, 2001 from $4.8 billion at December 31, 2000. This decrease was
primarily due to Excite@Home.
VI-39
Total Shareowners' Equity decreased $51.0 billion, or 49.4%, to $52.2
billion at September 30, 2001 from $103.2 billion at December 31, 2000. This
decrease is primarily due to the split-off of Liberty Media Group, the impacts
of the split-off of AT&T Wireless and net losses from continuing operations. The
decrease was partially offset by the issuance of stock to settle the Excite@Home
put obligation with Cox and Comcast. In September 2001, when AT&T declared its
quarterly dividend to the AT&T Common Stock Group shareowners of $133 million,
the company was in an accumulated deficit position primarily as a result of the
split-off of AT&T Wireless. As a result, the company reduced additional paid-in
capital for the entire amount of the dividend declared.
Net debt-to-annualized EBITDA for AT&T's continuing operations was 6.25x at
September 30, 2001 as compared with 3.80x at December 31, 2000, reflecting lower
EBITDA partially offset by lower debt, primarily the result of the company's
debt reduction efforts.
The debt ratio for AT&T's continuing operations (debt of continuing
operations divided by total debt of continuing operations and equity excluding
discontinued operations) was 45.1% at September 30, 2001 as compared with 57.2%
at December 31, 2000. For purposes of this calculation, equity includes the
convertible quarterly trust preferred securities and redeemable preferred stock
of subsidiary and excludes the equity of discontinued operations at December 31,
2000. This decrease was primarily driven by the repayment of debt as well as
increased equity.
In addition, included in debt of continuing operations are approximately
$5.8 billion of notes, which are exchangeable into or collateralized by
securities AT&T owns. Excluding this debt, the debt ratio for AT&T's continuing
operations at September 30, 2001 was 42.0%.
AT DECEMBER 31
---------------------
2000 1999
--------- ---------
(DOLLARS IN MILLIONS)
Total assets................................................ $234,360 $163,457
Total liabilities........................................... 121,611 77,458
Total shareowners' equity................................... 103,198 78,927
Total assets increased $70.9 billion, or 43.4%, at December 31, 2000,
primarily due to the impact of the MediaOne acquisition, which resulted in
increased goodwill, franchise costs, other investments including TWE and
Vodafone Group plc; and the addition of property, plant and equipment. Property,
plant and equipment also increased due to capital expenditures made during the
year, net of depreciation expense and equipment contributed to Concert. This
equipment contribution, as well as a $1.0 billion loan to Concert, and AT&T's
investment in Net2Phone are reflected as an increase to other investments.
Additionally, other receivables increased due to Concert.
Total liabilities at December 31, 2000, increased $44.2 billion, or 57.0%,
primarily due to the impact of the MediaOne acquisition, including debt of
MediaOne and borrowings to fund the acquisition, as well as the consolidation of
Excite@Home. In addition, total debt increased due to the monetization of AT&T's
investments in Microsoft Corporation and Comcast.
Minority interest increased $2.5 billion to $4.9 billion, primarily
reflecting the minority interest of AT&T's ownership of Excite@Home resulting
from the consolidation of Excite@Home beginning September 1, 2000, and the
preferred stock outstanding of a MediaOne subsidiary.
Total shareowners' equity was $103.2 billion at December 31, 2000, an
increase of 30.8% from December 31, 1999. This increase was primarily due to the
issuance of AT&T common stock for the MediaOne acquisition as well as the
issuance of AT&T Wireless Group tracking stock.
The ratio of total debt to total capital for AT&T's continuing operations,
excluding LMG (debt of continuing operations divided by total debt of continuing
operations and equity excluding discontinued operations and LMG) was 57.2% at
December 31, 2000, compared with 54.3% at December 31, 1999. The equity portion
of this calculation includes convertible trust preferred securities, as well as
subsidiary redeemable preferred stock and excludes the equity of discontinued
operations and LMG. The increase
VI-40
was primarily driven by higher debt associated with the MediaOne merger, largely
offset by a higher equity base associated with the MediaOne merger and the AT&T
Wireless Group tracking stock offering. The ratio of debt (net of cash) to
EBITDA was 3.80X at December 31, 2000, compared with 1.96X at December 31, 1999,
reflecting additional debt associated with the MediaOne merger. Included in debt
was approximately $8.7 billion of notes, which are exchangeable into or
collateralized by securities AT&T owns. Excluding this debt, the ratio of
net-debt-to-EBITDA at December 31, 2000, was 3.29X.
RISK MANAGEMENT
AT&T is exposed to market risk from changes in interest and foreign
exchange rates, as well as changes in equity prices associated with affiliate
companies. In addition, AT&T is exposed to market risk from fluctuations in the
prices of securities which AT&T monetized through the issuance of debt. On a
limited basis, AT&T uses certain derivative financial instruments, including
interest rate swaps, options, forwards, equity hedges and other derivative
contracts, to manage these risks. AT&T does not use financial instruments for
trading or speculative purposes. All financial instruments are used in
accordance with board-approved policies.
AT&T uses interest rate swaps to manage the impact of interest rate changes
on earnings and cash flows and also to lower its overall borrowing costs. AT&T
monitors its interest rate risk on the basis of changes in fair value. Assuming
a 10% downward shift in interest rates at September 30, 2001, the fair value of
unhedged debt would have decreased by approximately $1.4 billion. Assuming a 10%
downward shift in interest rates, the fair value of interest rate swaps and the
underlying hedged debt would have changed by $10 million and $3 million at
December 31, 2000 and 1999, respectively. In 2000, AT&T entered into a combined
interest rate, forward contract to hedge foreign-currency-denominated debt.
Assuming a 10% downward shift in both interest rates and the foreign currency,
the fair value of the contract and the underlying hedged debt would have changed
by $88 million. In addition, certain debt is indexed to the market prices of
securities AT&T owns. Changes in the market prices of these securities result in
changes in the fair value of this debt. Assuming a 10% downward change in the
market price of these securities, the fair value of the underlying debt and
securities would have decreased by $534 million at December 31, 2000. Assuming a
10% downward shift in interest rates at December 31, 2000 and 1999, the fair
value of unhedged debt would have increased by $1.2 billion and $938 million,
respectively.
AT&T uses forward and option contracts to reduce its exposure to the risk
of adverse changes in currency exchange rates. AT&T is subject to foreign
exchange risk for foreign-currency-denominated transactions, such as debt
issued. In addition, in 1999 AT&T was subject to foreign exchange risk related
to reimbursements to foreign telephone companies for their portion of the
revenue billed by AT&T for calls placed in the United States to a foreign
country. AT&T monitors its foreign exchange rate risk on the basis of changes in
fair value. Assuming a 10% appreciation in the U.S. dollar at December 31, 2000
and 1999, the fair value of these contracts would have resulted in additional
unrealized losses of $6 million and $29 million, respectively. Because these
contracts are entered into for hedging purposes, AT&T believes that these losses
would be largely offset by gains on the underlying firmly committed or
anticipated transactions.
AT&T uses equity hedges to manage its exposure to changes in equity prices
associated with stock appreciation rights (SARs) of affiliated companies.
Assuming a 10% decrease in equity prices of affiliated companies, the fair value
of the equity hedges would have decreased by $29 million and $81 million at
December 31, 2000 and 1999, respectively. Because these contracts are entered
into for hedging purposes, AT&T believes that the decrease in fair value would
be largely offset by gains on the underlying transaction.
In order to determine the changes in fair value of AT&T's various financial
instruments, AT&T uses certain modeling techniques, namely Black-Scholes, for
its SARs and equity collars. AT&T applies rate sensitivity changes directly to
its interest rate swap transactions and forward rate sensitivity to its foreign
currency forward contracts.
VI-41
The changes in fair value, as discussed above, assume the occurrence of
certain adverse market conditions. They do not consider the potential effect of
favorable changes in market factors and do not represent projected losses in
fair value that AT&T expects to incur. Future impacts would be based on actual
developments in global financial markets. AT&T does not foresee any significant
changes in the strategies used to manage interest rate risk, foreign currency
rate risk or equity price risk in the near future.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," which supercedes Accounting Principles Board
(APB) Opinion No. 16. SFAS No. 141 requires all business combinations initiated
after June 30, 2001 be accounted for under the purchase method. In addition,
SFAS No. 141 establishes criteria for the recognition of intangible assets
separately from goodwill. These requirements are effective for fiscal years
beginning after December 15, 2001, which for AT&T means January 1, 2002. AT&T
does not expect that the adoption of SFAS No. 141 will have a material effect on
AT&T's results of operations, financial position or cash flows.
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which supercedes APB Opinion No. 17. Under SFAS No. 142,
goodwill and indefinite lived intangible assets will no longer be amortized, but
rather will be tested for impairment upon adoption and at least annually
thereafter. In addition, the amortization period of intangible assets with
finite lives will no longer be limited to 40 years. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001, which for AT&T means the
standard will be adopted on January 1, 2002. In connection with the adoption of
this standard, AT&T's unamortized goodwill balance will no longer be amortized,
but will continue to be tested for impairment. Therefore, AT&T expects that this
standard will have a significant impact on AT&T's future operating results. AT&T
is assessing the impact of the standard on other indefinite lived assets and the
total impact, including adoption impairment impacts, if any, of such standard on
AT&T's results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This standard requires that obligations associated with
the retirement of tangible long-lived assets be recorded as liabilities when
those obligations are incurred, with the amount of the liability initially
measured at fair value. Upon initially recognizing a liability for an asset
retirement obligation, an entity must capitalize the cost by recognizing an
increase in the carrying amount of the related long-lived asset. Over time, this
liability is accreted to its present value, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. SFAS No. 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002, which for AT&T
means the standard will be adopted on January 1, 2003. AT&T does not expect that
the adoption of this statement will have a material impact on AT&T's results of
operations, financial position or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS No. 144 applies to all long-lived assets, including
discontinued operations, and consequently amends APB Opinion No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." Based on SFAS No. 121, SFAS No. 144 develops one accounting model
for long-lived assets that are to be disposed of by sale, as well as addresses
the principal implementation issues. SFAS No. 144 requires that long-lived
assets that are to be disposed of by sale be measured at the lower of book value
or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
SFAS No. 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001, which for AT&T means the standard will be
adopted
VI-42
on January 1, 2002. AT&T does not expect that the adoption of SFAS No. 144 will
have a material impact on AT&T's results of operations, financial position or
cash flows.
SUBSEQUENT EVENTS
On October 23, 2001, AT&T sold approximately 19.2 million shares of
Cablevision NY Group Class A common stock and, through a trust, 23.4 million
shares of a mandatorily exchangeable trust security that will be exchangeable
into up to 23.4 million shares of Cablevision NY Group Class A common stock at
maturity in three years. The offering price was $36.05 per share for both the
common shares and the exchangeable securities. The offerings generated
approximately $1.3 billion of pretax proceeds, net of underwriting fees. The
sale resulted in a pretax loss of approximately $0.2 billion. In addition, the
underwriters have exercised a portion of their over-allotment options, which
resulted in the sale of an additional 3.5 million shares of the exchangeable
securities through the trust. AT&T received additional proceeds of approximately
$0.1 billion from this transaction.
In October 2001, AT&T completed the disposition of 45 million shares of
AT&T Wireless generating proceeds of approximately $600 million. In December of
2001, AT&T completed the disposition of its remaining interest in AT&T Wireless
through the monetization of 45.8 million AT&T Wireless shares generating
proceeds of approximately $660 million.
On November 21, 2001 AT&T closed a $10.1 billion global bond offering
consisting of five tranches: $1.5 billion in five-year notes; $2.75 billion in
ten-year notes; $2.75 billion in 30-year notes; 1.5 billion euros of two-year
notes; and 2.0 billion euros of five-year notes. The proceeds from the offering
will primarily be used to retire short-term debt.
On December 14, 2001, AT&T entered into a 364-day, $8 billion syndicated
revolving-credit facility.
On December 18, 2001, AT&T sold 14.7 million shares of Rainbow Media Group
Class A tracking stock and 9.8 million shares of a trust security that will be
exchangeable into up to 9.8 million shares of Rainbow Media Group Class A
tracking stock at maturity in approximately three years. The offerings generated
approximately $487 million of pretax net proceeds.
In January and February of 2002, AT&T announced that it will redeem $1,312
million of trust preferred securities in February and March of 2002. These
amounts are classified as long-term debt in the accompanying consolidated
balance sheets.
In January 2002, AT&T Corp. entered into a $2.6 billion five-year agreement
with Accenture Ltd. for Accenture to provide management, new technology and
training for AT&T Consumer Services. Under the terms of the agreement, Accenture
will be responsible for providing new technology development and ongoing
management direction to improve AT&T Consumer Services' customer care
operations, with goals of reducing costs, raising productivity, and improving
sales and customer service. AT&T Consumer Services will continue to develop and
implement its overall business and marketing strategies and new product
offerings.
In connection with the adoption of SFAS No. 142, AT&T believes that
franchise cost represents an indefinite-lived asset as defined in SFAS No. 142.
Accordingly, effective January 1, 2002, AT&T will no longer amortize franchise
costs, but will test the asset for impairment. As of September 30, 2001, AT&T
had franchise costs of $43.3 billion and goodwill of $24.8 billion, both of
which will no longer be amortized. For the nine months ended September 30, 2001,
amortization of these intangible assets was $1,636 million. In addition, AT&T
had excess basis related to AT&T's equity method investment of $8.6 billion at
September 30, 2001, with related amortization of $179 million for the nine
months ended September 30, 2001. In accordance with this statement these costs
will no longer be amortized beginning January 1, 2002. AT&T is continuing to
assess the adoption impairment impacts of such standard on AT&T's results of
operations.
VI-43
CHAPTER SEVEN
AT&T BROADBAND GROUP
DESCRIPTION OF AT&T BROADBAND GROUP
OVERVIEW
AT&T Broadband Group is one of the nation's largest broadband
communications businesses based on customers served as of September 30, 2001,
providing cable television, high-speed cable Internet services and telephone
services. AT&T Broadband Group's business consists primarily of the combined
assets and business of TCI, acquired by AT&T on March 9, 1999, and MediaOne,
acquired by AT&T on June 15, 2000. As of September 30, 2001, AT&T Broadband
owned and operated cable systems in 13 of the 20 largest Designated Marketing
Areas, which represented 82% of AT&T Broadband Group's total subscribers. AT&T
Broadband Group's broadband networks passed approximately 24.6 million homes and
served approximately 13.75 million video customers as of September 30, 2001.
AT&T Broadband Group continues to upgrade its systems, 74% of which were
upgraded to a capacity equal to or greater than 550 MHz and 77% of which were
two-way capable as of September 30, 2001.
AT&T Broadband Group's broadband networks enable it to deliver a suite of
advanced entertainment, information and communications services, including its
digital cable, high-speed cable Internet and broadband telephone services. As of
September 30, 2001, AT&T Broadband Group provided a variety of advanced
services, including:
- digital cable, with over 3.16 million digital cable subscribers or 23.0%
of AT&T Broadband Group's basic subscribers,
- high-speed cable Internet service, with approximately 1.39 million
high-speed cable Internet service subscribers or 9.6% of marketable
homes, and
- broadband telephone service, with approximately 924,000 local telephone
subscribers or 14.8% of marketable homes.
In addition to fees from residential customers for the services AT&T
Broadband Group offers, AT&T Broadband Group also derives revenues from the sale
of advertising time on satellite-delivered program services, such as ESPN, MTV
and CNN, and on local cable channels, as well as the payment of license and/or
launch fees by certain program services.
As of September 30, 2001:
- AT&T Broadband Group had 13.75 million basic subscribers, 94% of whom
were concentrated in AT&T Broadband Group's 20 largest markets,
- 40% of AT&T Broadband Group's subscribers were located in its three
largest markets: Boston, San Francisco and Chicago, and
- 10.84 million, or 79% of AT&T Broadband's subscribers, were in markets
where AT&T Broadband Group had more than 500,000 customers.
In addition to AT&T Broadband Group's wholly owned cable systems, AT&T
Broadband Group also owns a number of investments in companies, joint ventures
and partnerships, the most significant of which are:
- Time Warner Entertainment Company, L.P., which owns and operates the
business of Warner Bros., Inc. and HBO and cable systems serving
approximately 11 million subscribers, and manages cable systems owned by
AOL Time Warner serving approximately 1.8 million subscribers;
- Insight Midwest, which owns and operates cable systems that serve
approximately 1.2 million subscribers in Indiana, Kentucky, Illinois and
Ohio; and
VII-1
- Texas Cable Partners, which owns and operates cable systems that serve
approximately 1.1 million subscribers in Texas.
AT&T Broadband Corp. is a Delaware corporation that was organized in 2001,
with its principal executive offices at 188 Inverness Drive West, Englewood, CO
80112. Its telephone number is (303) 858-3000 and primary Internet site is
http://www.attbroadband.com.
For financial information about AT&T Broadband Group, see "Selected
Financial Information -- AT&T Broadband Group" and the combined financial
statements of AT&T Broadband Group, which are included in Annex L to this
document.
INDUSTRY OVERVIEW
AT&T Broadband Group operates in the communications industry, offering
cable television services (both analog and digital), high-speed cable Internet
services and telephone service, in each case primarily to residential and small
business customers. AT&T Broadband Group also is pursuing other additional
services, including video on demand and interactive television that take
advantage of its broadband network.
Cable television is a service that delivers multiple channels of video and
audio programming to subscribers that pay a monthly fee for the services they
receive. Cable television systems receive video, audio and data signals
transmitted by nearby television broadcast stations, terrestrial microwave relay
services and communications satellites. These signals then are amplified and
distributed by coaxial cable and optical fiber to the premises of customers that
pay a fee for the service. In many cases, cable television systems also
originate and distribute local programming. Cable television systems typically
are constructed and operated pursuant to nonexclusive franchises awarded by
local franchising authorities for specified periods of time.
Cable television systems offer varying levels of service, which may
include, among other programming, local broadcast network affiliates and
independent television stations, other news, information and entertainment
channels, such as CNN, CNBC, ESPN and MTV, and selected premium services, such
as HBO, Showtime, The Movie Channel, Starz and Cinemax.
Cable television revenues principally are derived from monthly fees paid by
subscribers, sales of pay-per-view movies and events, sale or advertising time
on advertiser supported programming, and installation charges.
High-speed cable Internet services deliver typical internet service
provider, or ISP, services, such as e-mail, instant messaging, personal webspace
management and personalized home pages, and content. In some cases, AT&T
Broadband Group provides distinct localized content in addition to national
content. Subscribers pay a monthly fee for the services they receive, including
access to public areas on the Internet. Other revenue streams may be derived
from sales of premium content and services, advertising spots, premium placement
of media/service providers within the service, and installation service.
Cable telephone service is a technology that allows cable operators to
offer telephone service over the same hybrid fiber/coaxial network that supplies
television service. Cable telephone service systems have three basic
components -- a headend unit, a customer premise unit and a management
interface. Cable operators connect to the public switched telephone network
through an interface on the headend unit that conforms to one of several
standards. At the customer premise unit, voice transmission is separated from
the coaxial drop and routed to a twisted copper pair connected to the customer's
existing inside telephone wiring.
AT&T Broadband Group is in the process of developing, testing or offering
on a limited basis a variety of new or expanded services, including video on
demand, interactive television, targeted advertising, multiple service tiers of
high-speed cable Internet service, home networking, multiple ISP offerings and a
VII-2
set of communications services that are designed to work seamlessly over all
television, computer and telephone platforms.
TECHNICAL OVERVIEW
As of September 30, 2001, AT&T Broadband Group's systems were comprised of
approximately 250,000 miles of network passing approximately 24.6 million homes,
resulting in a density of slightly less than 100 homes per mile. As of that
date, AT&T Broadband Group's systems were made up of an aggregate of 41 headends
in its top 20 markets. As of September 30, 2001, approximately 61% of AT&T
Broadband Group's network was equal to or greater than 750 MHz, approximately
13% of its network was greater than or equal to 550 MHz and less than 750 MHz
and approximately 26% of its network was less than 550 MHz.
AT&T Broadband Group's network design calls for a digital two-way active
network with a fiber optic trunk system carrying signals to nodes within its
customers' neighborhoods. The signals are transferred to a coaxial network at
the node for delivery to its customers. AT&T Broadband Group has designed the
fiber system to be capable of subdividing the nodes if traffic on the network
requires additional capacity. AT&T Broadband Group's design allows its systems
to have the capability to run multiple separate channel lineups from a single
headend and to insert targeted advertisements into specific neighborhoods based
on node location.
The following chart outlines the status of the capacities of AT&T Broadband
Group's cable systems, historically and as of September 30, 2001:
PERCENT OF NETWORK MILES
----------------------------------------------
GREATER THAN OR EQUAL TO 750 OR PERCENT OF
LESS THAN 550 MHZ AND LESS THAN GREATER NETWORK TWO-
550 MHZ 750 MHZ MHZ WAY CAPABLE
--------- ------------------------ ------- ------------
As of December 31, 1999.......... 28% 22% 50% 55%
As of December 31, 2000.......... 21% 16% 63% 75%
As of September 30, 2001......... 26% 13% 61% 77%
SERVICES
Cable Television Service. AT&T Broadband Group offer its customers a wide
array of traditional cable television services and programming offerings. AT&T
Broadband Group offers a basic level of service which typically includes from 15
to 25 channels of television programming. As of September 30, 2001,
approximately 89% of AT&T Broadband Group's customers elected to pay an
additional amount to receive additional channels under its expanded basic
service, which AT&T Broadband Group calls its Standard Cable package. Premium
channels, which AT&T Broadband Group offers individually or in packages of
several channels, are optional add-ons to its basic service.
AT&T Broadband's cable television services include the following:
- Basic Service. All of AT&T Broadband Group's customers receive its basic
level of service, which generally consists of local broadcast television
and local community programming, including public, educational or
governmental, or PEG, programming, and may include a limited number of
satellite-delivered channels.
- Standard Cable. AT&T Broadband Group's Standard Cable package includes
basic service, plus expanded basic. This level of service includes a
group of satellite-delivered and non-broadcast channels such as ESPN,
CNN, Discovery Channel and Lifetime.
- Premium Channels. These channels provide unedited, commercial-free
movies, sports and other special event entertainment programming. AT&T
Broadband Group offers subscriptions to numerous premium channels,
including HBO, Cinemax, Starz!, Showtime and The Movie Channel,
individually or in packages.
VII-3
- Pay-Per-View. These channels allow customers with addressable set-top
boxes to pay to view a single showing of a recently released movie or a
one-time special sporting event or music concert on an unedited,
commercial-free basis.
Through AT&T Digital Cable, AT&T Broadband Group also offers additional
special interest networks, premium channels, pay-per-view, digital music and an
interactive on-screen guide, as described under "-- Advanced Services."
AT&T Broadband Group's service basic subscribers, including its digital
cable customers, are served as follows:
DECEMBER 31, SEPTEMBER 30,
------------------ -------------
1998 1999 2000 2001
---- ---- ---- -------------
(IN MILLIONS)
Managed through AT&T Broadband Group's operating
divisions.......................................... 11.4 11.3 15.9 13.65
Other non-managed subsidiaries of AT&T Broadband
Group.............................................. 0.5 0.1 0.1 0.1
---- ---- ---- -----
Total................................................ 11.9 11.4 16.0 13.75
==== ==== ==== =====
In addition to the above, the FCC currently attributes AT&T Broadband Group
with the subscribers of various other entities as a consequence of AT&T
Broadband Group's investments in those entities.
The following table sets forth selected statistical data regarding AT&T
Broadband Group's cable television operations:
DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------------
1998 1999 2000 2001
----------- ----------- ----------- -----------
Homes passed by cable(1)(3)...... 19,889,000 19,668,000 28,031,000 24,623,000
Basic service subscribers(3)..... 11,948,000 11,408,000 16,090,000 13,750,000
Basic service subscribers as a
percentage of homes passed..... 59% 57% 58% 56%
Average monthly revenue per basic
service subscriber(2)(3)....... $ 32.24 $ 42.97 $ 46.28 $ 48.71
---------------
(1) Homes passed is based on homes actually marketed and does not include
multiple dwelling units passed by the cable plant that are not connected to
it.
(2) Based on video service revenues for the last month of the period, including
installation charges and certain other nonrecurring revenues, such as
pay-per-view, advertising and home shopping revenues.
(3) Year-end statistics regarding AT&T Broadband Group's subscribers and homes
passed by cable are materially affected by AT&T Broadband Group's
acquisition and divestiture program discussed under "-- Acquisitions and
Divestitures." Notable variations arose during 1998, when AT&T Broadband
Group contributed cable systems serving approximately 2,700,000 customers to
other persons, and during 2000, when AT&T Broadband Group acquired
approximately 5,000,000 customers from MediaOne.
Advanced Services. As network upgrades are activated, AT&T Broadband Group
offers new and advanced services, including interactive digital cable and
high-speed cable Internet service. In addition, AT&T Broadband Group offers
all-distance telephone services in selected markets.
Digital Cable. AT&T Broadband Group offers digital cable service, which
includes additional channels on its existing service tiers, the creation of new
service tiers and the introduction of multiple packages of premium services.
AT&T Broadband Group's digital cable service also includes an electronic program
guide, on demand pay-per-view and up to 30 channels of digital music. In
addition, AT&T Broadband Group offers more premium and special interest
networks. AT&T Broadband Group's
VII-4
interactive digital cable service also allows it to offer TV-formatted
information to its customers that has local content and is targeted to a
specific system or community. For example, through this service AT&T Broadband
Group offers local weather, sports, news and dining information.
Below is a summary of operating statistics for digital cable services:
DECEMBER 31,
--------------------- SEPTEMBER 30,
1999 2000 2001
--------- --------- -------------
Digital cable customers........................... 1,800,000 2,815,000 3,165,000
Digital penetration as a percentage of basic
service subscribers............................. 15.8% 17.5% 23.0%
AT&T Broadband Group offers its customers four digital packages -- Bronze,
Silver, Gold and Platinum. These packages allow viewers to select the level of
services they receive to fit their individual interests.
High-Speed Cable Internet. AT&T Broadband Group offers high-speed cable
Internet service for personal computers over its networks in all of its upgraded
systems.
Below is a summary of AT&T Broadband Group's high-speed cable Internet
service operating statistics:
DECEMBER 31,
---------------------- SEPTEMBER 30,
1999 2000 2001
--------- ---------- -------------
Data marketable homes passed..................... 4,974,000 14,523,000 14,482,000
Customers........................................ 207,000 1,060,000 1,387,000
Penetration...................................... 4.2% 7.3% 9.6%
AT&T Broadband Group's high-speed cable Internet service enables data to be
transmitted substantially faster than through conventional telephone modem
technologies, and the cable connection does not interfere with normal telephone
activity or usage. AT&T Broadband Group's high-speed cable Internet service
offers unlimited access to public areas on the Internet.
Until recently, AT&T Broadband Group and At Home Corporation were parties
to a master distribution agreement pursuant to which At Home provided AT&T
Broadband Group with broadband network services and content aggregation
necessary for the delivery of high-speed cable Internet services to AT&T
Broadband Group's customers. On September 28, 2001, At Home and its U.S.
subsidiaries filed for protection under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Northern District
of California. On November 30, 2001, the bankruptcy court granted a motion made
by At Home for authority to reject the master distribution agreement and other
similar agreements with other customers of At Home, thereby giving At Home the
authority to terminate service to AT&T Broadband Group and other customers at
any time. As a result, on December 1, 2001, At Home terminated service to AT&T
Broadband Group and, in response, AT&T Broadband Group converted the majority of
its customers to a new AT&T-managed network during the first week of December.
AT&T Broadband Group currently provides "AT&T Broadband Internet" branded high
speed cable Internet service to its customers pursuant to an agreement with AT&T
to provide certain network and backbone support services to AT&T Broadband
Group.
Broadband Telephone Service. AT&T Broadband Group currently offers
broadband telephone services to customers in 16 markets using AT&T Broadband
Group's systems' direct, two-way connections to homes. AT&T Broadband Group
utilizes its broadband network to provide local telephone services and resell
AT&T long distance services.
VII-5
Below is a summary of AT&T Broadband Group's operating statistics for
broadband telephone services:
DECEMBER 31,
------------------- SEPTEMBER 30,
1999 2000 2001
------- --------- -------------
Telephone-ready homes passed....................... 721,000 6,103,000 6,258,000
Customers.......................................... 8,000 547,000 924,000
Penetration........................................ 1.1% 9.0% 14.8%
AT&T Broadband Group's broadband telephone service initiatives progressed
substantially in 2000. During 2000, AT&T Broadband Group increased the number of
markets in which it offers telephone service from ten to 16, and increased its
customer base from 8,000 to 547,000. As of September 30, 2001, AT&T Broadband
Group offered broadband telephone services in: Atlanta, Boston, the San
Francisco Bay Area, Chicago, Dallas, Denver, Hartford, Jacksonville, Twin
Cities, Pittsburgh, Richmond, Seattle, Salt Lake City, St. Louis, Southern
California and Portland, Oregon. AT&T Broadband Group offers a variety of
options and calling plans with various price points. These options and calling
plans range from basic one line service to multiple lines with full feature
functionality.
Advertising. AT&T Broadband Group sells advertising time on
satellite-delivered program services such as CNN, Discovery, ESPN and Lifetime,
and on local channels. In addition to the sale of advertising time to local and
regional advertisers, AT&T Broadband Group participates in the national spot
advertising marketplace through its sales representation arrangement with and
investment in National Cable Communications, LLC, a partnership that represents
cable systems in the sale of time to national spot advertisers.
STRATEGY
AT&T Broadband Group's strategy is to utilize the technological
capabilities of its broadband cable systems to be a full-service provider of
entertainment, information and communications services in the markets it serves.
To implement this strategy, AT&T Broadband Group continues to upgrade its cable
systems to allow it to deliver more information and entertainment services and
to provide for two-way communications capability. Continuing the upgrade of its
cable systems is expected to enhance AT&T Broadband Group's ability to increase
penetration of advanced services, including digital cable, high-speed cable
Internet service and all-distance telephone service. Providing quality customer
service also is a key element of AT&T Broadband Group's strategy. Throughout its
operations, AT&T Broadband Group focuses on achieving reliable customer service
with financial results comparable to the overall cable industry.
ACQUISITIONS AND DIVESTITURES
AT&T Broadband Group has sought to improve the geographic footprint of its
cable systems by selectively exchanging its cable systems for systems of other
cable operators or acquiring systems in close proximity to its systems. In this
regard, AT&T Broadband Group completed a significant number of transactions in
2000 and the first nine months of 2001 that substantially changed the size and
profile of its cable system network, and had signed agreements as of September
30, 2001 for additional system sales. The principal transactions are described
below:
- In January 2000, a subsidiary of AT&T Broadband Group sold its entire 50%
interest in Lenfest to a subsidiary of Comcast. In consideration for its
50% interest, AT&T Broadband Group received 47,289,843 shares of Comcast
Special Class A common stock.
- In February 2000, AT&T Broadband Group redeemed a portion of its interest
in Bresnan Communications Group LLC for $285 million in cash. AT&T
Broadband Group then contributed its remaining interest in Bresnan to CC
VIII, LLC, in exchange for a preferred ownership interest.
VII-6
- In March 2000, AT&T Broadband Group redeemed approximately 50.3 million
shares of AT&T common stock held by Cox in exchange for stock of a
subsidiary of AT&T Broadband Group owning cable television systems
serving approximately 312,000 customers, AT&T Broadband Group's interest
of $1,088 million in certain investments, $878 million of franchise costs
and $503 million of other net assets.
- In April 2000, AT&T Broadband Group contributed 103,000 subscribers into
a joint venture with Midcontinent Media, Inc. in exchange for a 50%
interest in Midcontinent Communications, a general partnership.
- In June 2000, MediaOne merged into a subsidiary of AT&T, whereby AT&T
Broadband Group acquired approximately 5 million basic cable subscribers,
0.2 million digital video subscribers, 0.3 million high-speed cable
Internet service subscribers and 0.1 million broadband telephone service
subscribers.
- Effective December 31, 2000, AT&T Broadband Group transferred systems
serving approximately 770,000 subscribers primarily located in Washington
D.C., Florida, Georgia, Michigan, New Jersey and Pennsylvania to Comcast
in exchange for systems serving approximately 700,000 subscribers
primarily located in Sacramento, California, Longmont, Colorado, Florida,
Georgia and Chicago, Illinois.
- In January 2001, AT&T Broadband Group transferred 98,400 subscribers to
Insight Communications Company, Inc. In a subsequent transaction, AT&T
Broadband Group contributed 247,500 additional subscribers in the
Illinois markets to Insight Midwest, a partnership owned 50% by AT&T
Broadband Group and 50% by Insight Communications, and Insight
Communications also contributed additional subscribers to the
partnership. The expanded joint venture continues to be managed by
Insight Communications.
- In January 2001, AT&T Broadband Group acquired 358,000 subscribers in the
Boston metropolitan area from Cablevision and transferred 130,000 New
York subscribers, 44 million shares of AT&T common stock valued at
approximately $871 million and approximately $204 million in cash to
Cablevision.
- On January 5, 2001, AT&T Broadband completed an exchange whereby AT&T
Broadband contributed approximately 82,000 subscribers in the Corpus
Christi, TX area to Texas Cable Partners, L.P. (a partnership in which
AT&T Broadband holds a 50% partnership interest); and AT&T Broadband
received from Texas Cable Partners, L.P. approximately 97,000 subscribers
in areas surrounding the Dallas metro, TX area.
- On March 1, 2001, AT&T Broadband completed an exchange with CableOne,
Inc. whereby AT&T Broadband received approximately 105,000 subscribers in
the Santa Rosa/Modesta, CA area from CableOne, Inc.; and AT&T Broadband
transferred approximately 149,000 subscribers in ID, OR, and WA to
CableOne, Inc.
- On April 30, 2001, a subsidiary of AT&T sold to Comcast certain cable
systems attributed to AT&T Broadband Group serving approximately 590,000
subscribers in Delaware, New Mexico, Maryland, New Jersey, Pennsylvania
and Tennessee in exchange for 63.9 million shares of AT&T common stock
valued at $1,423 million.
- On June 29, 2001, a subsidiary of AT&T sold to MediaCom Communications
Corporation cable systems attributed to AT&T Broadband Group serving
approximately 94,000 customers in Missouri for approximately $295 million
in net cash.
- Effective June 30, 2001, a subsidiary of AT&T transferred to Charter
cable systems attributed to AT&T Broadband serving approximately 563,000
customers in Alabama, California, Illinois, Missouri and Nevada. AT&T
Broadband Group, through its attributed entities, received $1,497 million
in net cash, $222 million in cash restricted for future acquisitions of
cable systems, and a cable system in Florida serving 9,000 customers.
VII-7
- Effective June 30, 2001, AT&T, together with certain subsidiaries
attributed to AT&T Broadband Group transferred its 99.75% interest in an
entity owning the Baltimore, Maryland cable television system, serving
approximately 115,000 customers, to Comcast for approximately $510
million.
- On July 18, 2001, a subsidiary of AT&T sold to MediaCom cable systems
attributed to AT&T Broadband Group serving approximately 710,000
customers in Georgia, Iowa and Illinois for approximately $1,724 million
in net cash.
- On October 25, 2001, a subsidiary of AT&T and Universal Cable
Communications, Inc. (also known as Classic Cable) signed a definitive
agreement and simultaneously closed a transaction in which cable systems
located in the Town of Breckenridge, Colorado and unincorporated Summit
County, Colorado serving approximately 4,400 customers were sold to the
subsidiary of AT&T for approximately $16.3 million.
- On December 17, 2001, a subsidiary of AT&T and Adelphia closed a
transaction in which certain cable systems attributable to AT&T Broadband
Group serving approximately 128,000 customers in central Pennsylvania and
Ohio were sold to Adelphia for approximately $245 million in cash and
Adelphia Class A Common stock valued at approximately $73 million.
- On December 19, 2001, a subsidiary of AT&T and USA Media Group LLC closed
a transaction whereby cable systems located in Half Moon Bay, California
and unincorporated San Mateo County, California serving approximately
7,400 customers were sold to the subsidiary of AT&T for approximately
$23.2 million.
- On December 20, 2001, a subsidiary of AT&T and Northland Cable
Television, Inc. closed a transaction whereby cable systems located in
Bainbridge Island, Washington and unincorporated Kitsap County,
Washington serving approximately 6,500 customers were sold to the
subsidiary of AT&T for approximately $19.7 million.
Total managed basic service customers declined between 1997 and 1998 as a
result of certain contribution transactions entered into in 1998. In the most
significant of these transactions, on March 4, 1998, AT&T Broadband Group
contributed to Cablevision certain of its cable television systems serving
approximately 830,000 customers in exchange for approximately 48.9 million newly
issued Cablevision Class A common shares and the assumption of indebtedness.
In addition to the Cablevision transaction discussed in the paragraph
above, during 1998 AT&T Broadband Group also completed eight transactions
whereby AT&T Broadband Group contributed cable television systems serving in the
aggregate approximately 1,924,000 customers to eight separate joint ventures in
exchange for non-controlling ownership interests in each of the joint ventures,
and the assumption and repayment by these joint ventures of indebtedness.
SALES AND MARKETING
AT&T Broadband Group's marketing programs and campaigns offer a variety of
services packaged and tailored to its markets. AT&T Broadband Group markets its
services through promotional campaigns and local media and newspaper
advertising, through telemarketing, direct mail advertising, online selling and
in person selling. In addition, AT&T Broadband Group reserves a portion of its
inventory of locally inserted cable television advertising to market its
services.
PROGRAMMING SUPPLIERS
AT&T Broadband Group has various contracts to obtain basic and premium
programming from program suppliers whose compensation is typically based on a
fixed fee per customer or a percentage of its gross receipts for the particular
service. AT&T Broadband Group has entered into long-term agreements with several
programming suppliers, including ABC/Disney, AOL Time Warner, CBS/Viacom, NBC,
News Corp. and Starz! Encore. Generally these agreements provide for fees based
on the number of subscribers. However, certain of these agreements provide for a
flat fee or guaranteed payment obligation
VII-8
regardless of subscriber levels. AT&T Broadband Group's programming contracts
are generally for a fixed period of time and are subject to negotiated renewal.
Some program suppliers provide volume discount pricing structures or offer
marketing support to AT&T Broadband Group.
AT&T Broadband Group's programming costs have increased substantially in
recent years due to additional programming being provided to its customers,
increased costs to produce or purchase programming, inflationary increases and
other factors affecting the cable television industry.
AT&T Broadband Group also has various retransmission consent arrangements
with commercial broadcast stations, which expire at various times over the next
ten years, with a significant portion expiring prior to December 31, 2002. None
of these consent arrangements requires payment of fees for carriage. However,
AT&T Broadband Group does provide non-cash consideration, including entering
into agreements with certain broadcast networks to carry satellite delivered
cable programming, which is associated with the network carried by such
stations.
AGREEMENTS WITH LIBERTY MEDIA
AT&T Broadband Group is a party to various arrangements with Liberty Media.
Effective August 2001, Liberty Media was split off from AT&T and is no longer an
affiliate of AT&T Broadband Group.
Preferred Vendor Status. AT&T Broadband Group has granted Liberty Media
preferred vendor status with respect to access, timing and placement of new
programming services. This means that AT&T Broadband Group must use its
reasonable efforts to provide digital basic distribution of new services created
by Liberty Media and its affiliates, on mutual "most favored nation" terms and
conditions and otherwise consistent with industry practices, subject to the
programming meeting standards that are consistent with the type, quality and
character of AT&T Broadband Group's cable services as they may evolve over time.
Extension of Term of Affiliation Agreements. AT&T Broadband Group has
agreed to extend any existing affiliation agreement of Liberty Media and its
affiliates that expires on or before March 9, 2004, to a date not before March
9, 2009, if most favored nation terms are offered and the arrangements are
consistent with industry practice.
Interactive Video Services. AT&T Broadband Group has agreed to enter into
arrangements with Liberty Media for interactive video services under one of the
following two arrangements, which will be at the election of AT&T Broadband
Group:
- Pursuant to a five-year arrangement, renewable for an additional
four-year period on then-current most favored nation terms, AT&T
Broadband Group will make available to Liberty Media capacity equal to
one 6 MHz channel (in digital form and including interactive enablement,
first screen access and hot links to relevant web sites -- all to the
extent implemented by AT&T Broadband Group cable systems) to be used for
interactive, category-specific video channels that will provide
entertainment, information and merchandising programming. The foregoing,
however, will not compel AT&T Broadband Group to disrupt other
programming or other channel arrangements. The interactive video services
are to be accessible through advanced set-top boxes deployed by AT&T
Broadband Group, except that, unless specifically addressed in a mutually
acceptable manner, AT&T Broadband Group will have no obligation to deploy
set-top boxes of a type, design or cost materially different from that it
would otherwise have deployed. The content categories may include, among
others, music, travel, health, sports, books, personal finance,
automotive, home video sales and games.
- AT&T Broadband Group may enter into one or more mutually agreeable
ventures with Liberty Media for interactive, category-specific video
channels that will provide entertainment, information and merchandising
programming. Each venture will be structured as a 50/50 venture for a
reasonable commercial term, and will provide that Liberty Media and AT&T
Broadband Group will not provide interactive services in the category(s)
of interactive video services provided through the venture for the
duration of such term other than the joint venture services in the
applicable
VII-9
categories. When the distribution of interactive video services occurs
through a venture arrangement, AT&T Broadband will share in the revenue
and expense of the provision of the interactive services pro rata to its
ownership interest in lieu of the commercial arrangements described in
the preceding paragraph. At the third anniversary of the formulation of
any such venture, AT&T Broadband Group may elect to purchase Liberty
Media's ownership interest in the venture at fair market value. Liberty
Media and AT&T Broadband Group have agreed to endeavor to make any such
transaction tax efficient to Liberty Media.
At the date of this document, AT&T Broadband Group has not entered into any
further agreements with Liberty Media regarding the distribution of specific
interactive television channels. As a result, the exact terms under which AT&T
Broadband Group may provide carriage of these channels has not been determined,
and AT&T Broadband Group has not made any elections between the alternative
carriage arrangements described above. Although AT&T Broadband Group will
continue to endeavor to negotiate agreements with Liberty Media concerning
distribution of interactive channels within the framework of the above
arrangement, there can be no assurance that AT&T Broadband Group will be able to
conclude any such agreement on acceptable terms.
Affiliation Agreements. AT&T Broadband Group is party to affiliation
agreements pursuant to which it purchases programming from Liberty Media's
subsidiaries and affiliates. Some of these agreements provide for penalties and
charges in the event the supplier's programming is not carried on AT&T Broadband
Group's cable systems or not delivered to a contractually specified number of
customers. Charges to AT&T Broadband Group for such programming are generally
based upon customary rates and often provide for payments to AT&T Broadband
Group by Liberty Media's subsidiaries and business affiliates for marketing
support.
In July 1997, AT&T Broadband Group's predecessor, TCI, entered into a
25-year affiliation term sheet with Starz Encore Group (formerly Encore Media
Group) pursuant to which AT&T Broadband Group may be obligated to pay monthly
fixed amounts in exchange for unlimited access to Encore and Starz! programming.
The commitment increases annually from $288 million in 2001 to $315 million in
2003, and will increase annually through 2022 with inflation. The affiliation
term sheet further provides that to the extent Starz Encore Group's programming
costs increase above certain levels, AT&T Broadband Group's payments under the
term sheet will be increased in proportion to the excess. Starz Encore Group has
requested payment from AT&T Broadband Group of amounts it contends are AT&T
Broadband Group's proportionate share of Starz Encore Group's excess programming
costs during the first quarter of 2001 (which amount, approximately $40 million,
Starz Encore Group indicated it expects to represent the bulk of what it
considers AT&T Broadband Group's proportionate share of excess programming costs
Starz Encore Group considers to be payable for the year 2001). Excess
programming costs payable by AT&T Broadband Group for the balance of 2001 and in
future years are not presently estimable, and could be significantly larger or
smaller than the amount requested for the first quarter of 2001. By letter dated
May 29, 2001, AT&T Broadband Group indicated that in its view the Starz Encore
term sheet as a whole is unenforceable and reserved its right to terminate the
term sheet. AT&T Broadband Group indicated to Starz Encore Group that it would
not pay the excess programming costs requested to date and disputed the
enforceability of the excess programming costs pass through provisions of the
term sheet, among other provisions. In July 2001, Starz Encore Group filed suit
seeking payment of the 2001 excess programming costs and a declaration that the
term sheet is a binding and enforceable contract. In October 2001, AT&T
Broadband Group and Starz Encore Group agreed to stay the litigation until
August 31, 2002 to allow the parties time to continue negotiations toward a
potential business resolution of this dispute.
OTHER ASSETS
Joint Ventures. AT&T Broadband Group possesses a number of investments in
companies, joint ventures and partnerships, the most significant of which are
Time Warner Entertainment, Insight Midwest and Texas Cable Partners.
VII-10
Time Warner Entertainment. Time Warner Entertainment is a Delaware limited
partnership that was formed in 1992 to own and operate substantially all of the
business of Warner Bros., HBO and the cable television businesses owned and
operated by Time Warner prior to that time. AT&T Broadband Group's current
interest in Time Warner Entertainment was acquired by AT&T Broadband Group in
connection with the MediaOne acquisition. Currently, AT&T Broadband Group,
through its wholly owned subsidiaries, owns limited partnership interests
representing 25.51% of the pro rata priority (Series A) capital and residual
equity capital of Time Warner Entertainment. The remaining 74.49% limited
partnership interests in the Series A capital and residual capital of Time
Warner Entertainment, as well as 100% of the junior priority (Series B) capital
of Time Warner Entertainment, are held by subsidiaries of AOL Time Warner. AT&T
has an option, which we refer to as the "TWE option", to increase its Series A
priority capital and residual capital interests of Time Warner Entertainment by
up to 8.5% in certain events. Subsidiaries of AOL Time Warner act as the general
partners of Time Warner Entertainment, and AT&T is not involved in the
management of the partnership or its business but has certain protective
governance rights pertaining to certain limited significant matters relating to
Time Warner Entertainment such as the dissolution or merger or voluntary
bankruptcy of Time Warner Entertainment.
On February 28, 2001, AT&T submitted a request to Time Warner
Entertainment, pursuant to the Time Warner Entertainment partnership agreement,
that Time Warner Entertainment reconstitute itself as a corporation and register
for sale in an initial public offering an amount of partnership interests held
by AT&T Broadband Group (up to the full amount held by AT&T Broadband Group)
determined by an independent investment banking firm so as to provide sufficient
trading liquidity and minimize any initial public offering discount. Under the
Time Warner Entertainment partnership agreement, upon this request, AT&T
Broadband Group and Time Warner are to cause an independent investment banker to
determine both such registrable amount of partnership interests and the price at
which the registrable amount could be sold in a public offering. The partnership
agreement provides that, upon determination of the registrable amount and the
appraised value of the registrable amount, Time Warner Entertainment may elect
not to register these interests, but instead to allow AT&T Broadband Group the
option to require that Time Warner Entertainment purchase the registrable amount
at the appraised value, subject to certain adjustments. If AT&T Broadband Group
does put the registrable amount to Time Warner Entertainment under such
circumstances, Time Warner Entertainment may call the remainder of AT&T
Broadband Group's interest in Time Warner Entertainment at a price described in
the Time Warner Entertainment partnership agreement. If Time Warner
Entertainment elects to register the interests, then Time Warner Entertainment
must promptly use its best efforts to cause the partnership to be in a position
to be reconstituted as a corporation and to effect an initial public offering.
However, Time Warner Entertainment may have an option to purchase these
interests immediately prior to the time the public offering would otherwise have
been declared effective by the SEC at the proposed public offering price less
underwriting fees and discounts if the proposed public offering price (as
determined by the managing underwriter) is less than 92.5% of the appraised
value. If, at the conclusion of this process, AT&T Broadband Group has any
remaining interests in Time Warner Entertainment, AT&T Broadband Group will have
the right to request registration of those interests for public sale after July
1, 2002 (if no public offering of Time Warner Entertainment shall have taken
place, or 18 months after a public offering pursuant to AT&T Broadband's
request).
On February 28, 2001, AT&T Broadband Group also commenced the process of
obtaining an appraisal of Time Warner Entertainment in order to enable it to
exercise the Time Warner Entertainment option. At that time, AT&T Broadband
Group agreed to suspend the registration rights process and the Time Warner
Entertainment option appraisal process until March 15, 2001. Since then, AT&T
Broadband Group and AOL Time Warner have been engaged in discussions regarding
the retention of a mutually satisfactory investment banker to perform the
appraisals of Time Warner Entertainment under the Time Warner Entertainment
partnership agreement and the Time Warner Entertainment option.
If the procedures described above do not result in the disposition by AT&T
Broadband Group of its entire interest in Time Warner Entertainment, then under
the terms of the Time Warner Entertainment
VII-11
partnership agreement, AT&T may be required to offer Time Warner Entertainment
the opportunity to repurchase the remaining interest in the partnership before
the AT&T Comcast Transaction may be completed in its current form.
Insight Midwest, L.P. Insight Midwest is a Delaware limited partnership
formed in 1999 to own and operate certain cable systems in Indiana. AT&T
Broadband Group holds a 50% limited partnership interest and Insight holds a 50%
general partnership interest in Insight Midwest. The business of the partnership
is managed by Insight Communications, as the general partner, although certain
matters also require the approval of AT&T Broadband Group. Insight Midwest
currently has approximately 1.2 million cable video subscribers.
Texas Cable Partners, L.P. Texas Cable Partners is a Delaware limited
partnership formed in December 1998 to own and operate certain cable systems in
Texas. The partnership is owned 50% by AT&T Broadband Group and 50% by the Time
Warner Entertainment-Advance/Newhouse Partnership, approximately two-thirds of
which is owned by Time Warner Entertainment. The general manager of Texas Cable
Partners is Time Warner Cable, a division of Time Warner Entertainment, although
certain governance matters require the approval of the management committee on
which the Time Warner Entertainment- Advance/Newhouse Partnership and AT&T
Broadband Group have equal representation. Texas Cable Partners currently has
approximately 1.1 million cable video subscribers.
Other Investments. AT&T Broadband Group has interests in a number of
different joint ventures and companies.
COMPETITION
Cable television competes for customers in local markets with other
providers of entertainment, news and information. The competitors in these
markets include direct broadcast satellite service, broadcast television and
radio, satellite master antenna television systems, wireless cable providers,
newspapers, magazines and other printed material, motion picture theatres, video
cassettes, DVDs and other sources of information and entertainment, including
directly competitive cable television operations and ISPs. The Cable Television
Consumer Protection and Competition Act of 1992, or the 1992 Cable Act, and the
Telecommunications Act are designed to increase competition in the cable
television industry.
Additionally, AT&T Broadband Group faces significant competition from both
local telephone companies and new providers of services such as Internet service
and telephone services. Providers of competitive high-speed data offerings
include fixed wireless companies, direct broadcast satellite companies and DSL
providers.
There are alternative methods of distributing the same or similar services
offered by cable television systems. Further, these technologies have been
encouraged by the U.S. Congress and the FCC to offer services in direct
competition with existing cable systems.
Direct Broadcast Satellite. Direct broadcast satellite has emerged as
significant competition to cable systems. The direct broadcast satellite
industry has grown rapidly over the last several years, far exceeding the growth
rate of the cable television industry, and now serves approximately 17.2 million
subscribers nationwide. Direct broadcast satellite service allows a subscriber
to receive video (as well as non-video) services directly via satellite using a
relatively small dish antenna. Moreover, video compression technology allows
direct broadcast satellite providers to offer more than 400 digital channels,
thereby surpassing the typical analog or hybrid analog-digital cable system.
Direct broadcast satellite companies historically were prohibited from
retransmitting popular local broadcast programming, but a change to the existing
copyright laws in November 1999 eliminated this legal impediment. Direct
broadcast satellite companies now need to secure retransmission consent from the
popular broadcast stations they wish to carry, and now face mandatory carriage
obligations of less popular broadcast stations as of January 2002. These new
"must carry" rules require satellite companies to carry all local broadcast
stations in a local market where they carry any such station pursuant to a new
compulsory copyright license. In response to the legislation, DirecTV, Inc. and
EchoStar Communications Corporation already have begun carrying the major
network
VII-12
stations in the nation's top television markets. The direct broadcast satellite
industry initiated a judicial challenge to the statutory requirement mandating
carriage of less popular broadcast stations. This lawsuit alleges that the
must-carry requirement (similar to the requirement already applicable to cable
systems, and discussed under "-- Cable Regulation and Legislation -- Must
Carry/Retransmission Consent") is unconstitutional. The Court of Appeals for the
Fourth Circuit recently upheld the constitutionality of these rules. Direct
broadcast satellite companies also have begun offering Internet services.
EchoStar began providing high-speed Internet service in late 2000, and DirecTV,
which has partnered with AOL Time Warner, reports that it will begin providing
its own version of high-speed Internet service shortly. Further, in October 2001
EchoStar entered into an agreement to acquire DirecTV. These developments will
provide significant new competition to AT&T Broadband Group's offering of video
programming and high-speed cable Internet service.
Broadcast Television. Cable television has long competed with broadcast
television, which consists of television signals that the viewer is able to
receive without charge using an "off-air" antenna. The extent of this
competition (which is for both the acquisition and delivery of programming, as
well as for advertising) is dependent upon the quality and quantity of broadcast
signals available through off-air reception compared to the services provided by
the local cable system. The recent licensing of digital spectrum by the FCC will
provide incumbent television licensees with the ability to deliver high
definition television pictures and multiple digital-quality program streams, as
well as advanced digital services, such as subscription video.
DSL. The deployment of DSL technology allows the provision of Internet
services to subscribers at data transmission speeds greater than available over
conventional telephone lines. In addition, DSL providers offer voice services
including via offerings that divide up a phone line into several voice channels
and an always-on data line. All significant local telephone companies and
certain other telecommunications companies have launched DSL service. The FCC
has a policy of encouraging the deployment of DSL and similar technologies, both
by incumbent telephone companies and new, competing telephone companies. The
FCC's regulations in this area are subject to change. The development and
deployment of DSL technology by local telephone companies provides substantial
competition to AT&T Broadband Group's high-speed cable Internet services and
cable telephone services.
Private Cable. AT&T Broadband Group also competes with Satellite Master
Antenna Television systems, which provide multichannel program services and
high-speed Internet services directly to hotel, motel, apartment, condominium
and similar multi-unit complexes within a cable television system's franchise
area, generally free of any regulation by federal, state and local government
authorities and sometimes on an exclusive basis. FCC rules restrict the ability
of cable operators to maintain ownership of cable wiring inside multi-unit
buildings, thereby making it less expensive for Satellite Master Antenna
Television competitors (as well as other competitors that are increasingly
targeting multi-unit building subscribers such as direct broadcast satellite) to
reach those customers. The FCC also has ruled that private cable operators can
lease video distribution capacity from local telephone companies and, thereby,
distribute cable programming services over the public rights-of-way without
obtaining a franchise. In 1999, both the Fifth and Seventh Circuit Courts of
Appeal upheld this FCC policy. This could provide a significant regulatory
advantage for private cable operators in the future. The 1992 Cable Act ensures
that Satellite Master Antenna Television Systems (as well as other providers of
multichannel video programming to end users) will have access to most of the
significant cable television programming services at nondiscriminatory rates.
Cable System Overbuilds. Cable operators may compete with other cable
operators or new entities seeking franchises for competing cable television
systems at any time during the terms of existing franchises. The 1992 Cable Act
promotes the granting of competitive franchises and AT&T Broadband Group systems
operate under nonexclusive franchises. Several years ago, there was a
significant increase in the number of cities that constructed their own cable
television systems in a manner similar to city-provided utility services. These
systems typically compete directly with the existing cable operator without the
burdens of franchise fees or other local regulation. The total number of
municipal overbuild cable systems remains relatively small. Additionally,
several years ago there was a significant increase in
VII-13
investments in private company overbuilders of cable systems. If this trend were
to resume, AT&T Broadband Group cable systems could face an increasing number of
markets in which a second cable system will be competing directly with AT&T
Broadband Group system, providing video, audio, interactive television,
high-speed Internet and telephone services. To date, overbuilds have not had a
material impact on AT&T Broadband Group's results.
Telephone Company Entry. The Telecommunications Act eliminated the
statutory and regulatory restrictions that prevented local telephone companies
from competing with cable operators in the provision of video services. The
Telecommunications Act allows local telephone companies, including regional
phone companies, to compete with cable television operators both inside and
outside their telephone service areas. AT&T Broadband Group expects that it
could face competition from telephone companies for the provision of video
services, whether it is through wireless cable or through upgraded telephone
networks. AT&T Broadband Group assumes that all major telephone companies
already have entered or may enter the business of providing video services.
Although enthusiasm on the part of local exchange carriers appears to be waning,
AT&T Broadband Group is aware that telephone companies have already built, or
are in the process of building, competing cable system facilities in a number of
AT&T Broadband Group's franchise areas. As AT&T Broadband Group continues to
expand its offerings to include Internet and other telecommunications services,
it will be subject to competition from the local telephone companies and other
telecommunications providers. The telecommunications industry is highly
competitive, and includes competitors with substantial financial and personnel
resources, brand name recognition and long-standing relationships with
regulatory authorities.
Utility Company Entry. The Telecommunications Act eliminated certain U.S.
federal restrictions on utility holding companies and thus frees all utility
companies to provide cable television services. AT&T Broadband Group expects
this could result in another source of competition in the delivery of video,
telephone and high-speed Internet services.
MMDS. Another alternative method of distribution is multichannel,
multi-point distribution systems, or MMDS, which deliver programming services
over microwave channels to customers equipped with special antennas. MMDSs are
less capital intensive, are not required to obtain local franchises or pay
franchise fees, and are subject to fewer regulatory requirements than cable
television systems.
Local Voice. AT&T Broadband Group's cable telephone service competes
against incumbent local exchange carriers and competitive local exchange
carriers in the provision of local voice services. Moreover, many of these
carriers are expanding their offerings to include Internet service. The
incumbent local exchange carriers have very substantial capital and other
resources, longstanding customer relationships and extensive existing facilities
and network rights-of-way. A few competitive local exchange carriers also have
existing local networks and significant financial resources.
Fixed Wireless. Fixed wireless technologies compete with AT&T Broadband
Group in the provision of Internet and voice services. Fixed wireless providers
serve the same functions as a wireline provider, by interconnecting private
networks, bypassing a local exchange carrier or connecting to the Internet. The
technology involved in point-to-point microwave connections has advanced,
allowing the use of higher frequencies, and thus smaller antennas, resulting in
lower costs and easier-to-deploy systems for private use and encouraging the use
of such technology by carriers. Fixed wireless systems are designed to emulate
cable connections, and they use the same interfaces and protocols, such as T1,
frame relay, Ethernet and ATM. Fixed wireless systems also match the service
parameters of cable systems, and consequently any application that operates over
a cable should be able to operate over a fixed wireless system.
Resellers. Among AT&T Broadband Group's competitors in the areas of voice
and Internet services are resellers. Resellers typically are low-cost
aggregators that serve price-conscious market segments and value-added resellers
that target customers with special needs.
IP Telephone. IP telephone providers compete directly against AT&T
Broadband Group's cable telephone service. IP telephone providers derive most of
their revenues from per-minute charges, but they also offer other services
including voicemail and IP telephone equipment. The leading IP telephone
VII-14
company is Net2Phone, Inc., which derived approximately 85% of its 2000 revenue
from per-minute charges, and approximately 34% of its 2000 revenue from
international customers. Although the offerings of IP telephone providers are
limited mostly to voice services, these companies seek to expand to other areas
of the telecommunications industry, and may succeed in doing so in the future.
General. In addition to competition for customers, the cable television
industry competes with broadcast television, radio, print media and other
sources of information and entertainment for advertising revenue. As the cable
television industry has developed additional programming, its advertising
revenue has increased. Cable operators sell advertising spots primarily to local
and regional advertisers.
AT&T Broadband Group has no basis upon which to estimate the number of
cable television companies and other entities with which it competes or may
potentially compete. The full extent to which other media or home delivery
services will compete with cable television systems may not be known for some
time, and there can be no assurance that existing, proposed or as yet
undeveloped technologies will not become dominant in the future.
EMPLOYEES
At September 30, 2001, AT&T Broadband Group employed approximately 41,000
individuals in its operations, virtually all of whom are located in the United
States. Approximately 2,000 of these employees are represented by the
Communications Workers of America or the International Brotherhood of Electrical
Workers, both of which are affiliated with the AFL-CIO.
LEGAL PROCEEDINGS
In the normal course of business, AT&T Broadband Group is subject to
proceedings, lawsuits and other claims, including proceedings under government
laws and regulations related to environmental and other matters. Such matters
are subject to many uncertainties and outcomes are not predictable with
assurance. Consequently, AT&T Broadband Group is unable to ascertain the
ultimate aggregate amount of monetary liability or financial impact with respect
to these matters at September 30, 2001. While these matters could affect
operating results of any one quarter when resolved in future periods, it is
management's opinion that after final disposition, any monetary liability or
financial impact to AT&T Broadband Group beyond that provided for at year-end
would not be material to AT&T Broadband Group's annual consolidated financial
position or results of operations.
At Home Corporation was formerly a provider of broadband internet access to
various cable companies, including AT&T Broadband and Comcast, and of internet
portal services. Through a subsidiary, AT&T owns approximately 23% of the
outstanding common stock and 74% of the voting power of the outstanding common
stock of At Home Corporation. Until shortly after At Home's bankruptcy filing,
AT&T appointed a majority of At Home's directors and it now appoints none. In
addition, AT&T has had various commercial relationships with At Home over time,
principally as a provider of internet backbone services to At Home, and as party
to a master distribution agreement pursuant to which At Home provided broadband
internet access to customers of AT&T Broadband, Comcast and Cox Communications,
Inc. On September 28, 2001, At Home and its U.S. subsidiaries filed for
protection under chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the Northern District of California after having
earlier that day entered into an asset purchase agreement with AT&T under which,
subject to various conditions, AT&T would have acquired the internet access
business of At Home through the bankruptcy proceedings.
On November 30, 2001, the bankruptcy court granted a motion made by At Home
for authority to reject the master distribution agreement and other similar
agreements with other customers of At Home. Early in the morning of December 1,
2001, At Home terminated its internet access service to AT&T Broadband customers
and, in response, AT&T Broadband transitioned its customers to a proprietary
broadband access service. Subsequently, AT&T terminated the asset purchase
agreement with At Home due to the termination of service and other breaches of
the agreement by At Home. At Home has
VII-15
announced that it will shut down the entirety of its access operations for all
its remaining cable customers, including Comcast, on February 28, 2002.
In 1997, AT&T Broadband Group's predecessor, TCI, entered into a 25-year
affiliation term sheet with Starz Encore Group pursuant to which AT&T Broadband
Group may be obligated to pay fixed monthly amounts in exchange for unlimited
access to all of the existing Encore and STARZ! programming. The commitment
increases annually from $288 million in 2001 to $315 million in 2003, and will
increase annually through 2022 with inflation. The affiliation term sheet
further provides that to the extent Starz Encore Group's programming costs
increase above certain levels, AT&T Broadband Group's payments under the Starz
Encore term sheet will be increased in proportion to the excess. Starz Encore
Group has requested payment from AT&T Broadband Group of amounts it contends are
AT&T Broadband Group's proportionate share of Starz Encore Group's excess
programming costs during the first quarter of 2001 (which amount, approximately
$40 million, Starz Encore Group indicated it expects to represent the bulk of
what it considers AT&T Broadband Group's proportionate share of excess
programming for year 2001). Excess programming costs payable by AT&T Broadband
Group for the balance of 2001 and in future years are not presently estimable
and could be significantly larger or smaller than the amount requested for the
first quarter of 2001. By letter dated May 29, 2001, AT&T Broadband Group
indicated that in its view the Starz Encore term sheet as a whole is
unenforceable and reserved its right to terminate the term sheet. AT&T Broadband
Group indicated to Starz Encore Group that it would not pay the excess
programming costs requested to date and disputed the enforceability of the
excess programming costs pass through provisions of the term sheet, among other
provisions. On July 10, 2001, Starz Encore Group initiated a lawsuit against
AT&T Broadband Group and Satellite Services, Inc., a subsidiary of AT&T
Broadband Group that is also a party to the term sheet, in Arapahoe County
District Court, Colorado, seeking payment of the 2001 excess programming costs
and a declaration that the term sheet is a binding and enforceable contract. In
November 2001, AT&T Broadband Group and Starz Encore Group agreed to stay the
litigation until August 31, 2002 to allow the parties time to continue
negotiations toward a potential business resolution of this dispute.
CABLE REGULATION AND LEGISLATION
The operation of cable television systems is extensively regulated by the
FCC, some state governments and most local governments. The Telecommunications
Act altered the regulatory structure governing the nation's telecommunications
providers. It removed barriers to competition in both the cable television
market and the local telephone market. Among other things, it reduced the scope
of cable rate regulation.
The Telecommunications Act required the FCC to implement numerous
rulemakings, some of which are still subject to court challenges. Moreover,
Congress and the FCC have frequently revisited the subject of cable television
regulation and may do so again. Future legislative and regulatory changes could
adversely affect AT&T Broadband Group's operations. This section briefly
summarizes key laws and regulations currently affecting the growth and operation
of AT&T Broadband Group's cable systems.
Cable Rate Regulation. The 1992 Cable Act imposed an extensive rate
regulation regime on the cable television industry, which regulation limited the
ability of cable companies to increase subscriber fees. Under that regime, all
cable systems were subjected to rate regulation, unless they faced effective
competition in their local franchise area. U.S. federal law now defines
"effective competition" on a community-specific basis as requiring satisfaction
of various conditions, such as the penetration of competitive video services to
15% of the households in a cable system's franchise area.
Although the FCC establishes all cable rate rules, local government units
(commonly referred to as local franchising authorities) are primarily
responsible for administering the regulation of the lowest level of cable
service -- the basic service tier, which typically contains local broadcast
stations and PEG access channels. Before a local franchising authority begins
basic service tier rate regulation, it must certify to the FCC that it will
follow applicable U.S. federal rules, and many local franchising authorities
have voluntarily declined to exercise this authority. Local franchising
authorities also have primary responsibility
VII-16
for regulating cable equipment rates. Under U.S. federal law, charges for
various types of cable equipment must be unbundled from each other and from
monthly charges for programming services, and priced no higher than the
operator's actual cost, plus an 11.25% rate of return.
The FCC historically administered rate regulation of any cable programming
service tiers (i.e., all tiers other than the basic service tier), which
typically contain satellite-delivered programming. Under the Telecommunications
Act, however, the FCC's authority to regulate cable programming service tier
rates ended on March 31, 1999.
Cable Entry into Telecommunications. The Telecommunications Act provides
that no state or local laws or regulations may prohibit or have the effect of
prohibiting any entity from providing any interstate or intrastate
telecommunications service. States are authorized, however, to impose
"competitively neutral" requirements regarding universal service, public safety
and welfare, service quality and consumer protection. State and local
governments also retain their authority to manage the public rights-of-way.
Although the Telecommunications Act clarifies that traditional cable franchise
fees may be based only on revenues related to the provision of cable television
services, it also provides that local franchising authorities may require
reasonable, competitively neutral compensation for management of the public
rights-of-way when cable operators provide telecommunications service. The
Telecommunications Act prohibits local franchising authorities from requiring
cable operators to provide telecommunications service or facilities as a
condition of a franchise grant, renewal or transfer, except that local
franchising authorities argue they can seek "institutional networks" as part of
these franchise negotiations.
In particular, cable operators that provide telecommunications services and
cannot reach agreement with local utilities over pole attachment rates in states
that do not regulate pole attachment rates will be subject to a methodology
prescribed by the FCC for determining the rates. These rates may be higher than
those paid by cable operators that do not provide telecommunications services.
The favorable pole attachment rates afforded cable operators under U.S.
federal law can be increased by utility companies owning the poles during a
five-year phase-in period beginning in 2001 if the cable operator provides
telecommunications service as well as cable service over its plant. The FCC
clarified that a cable operator's provision of cable Internet service does not
affect the favorable pole rates, but a recent decision by the Eleventh Circuit
Court of Appeals disagreed. In January 2002, the U.S. Supreme Court overturned
the Eleventh Circuit decision and upheld the applicability of the more favorable
FCC -- prescribed pole rates regardless of the delivery of Internet services.
Cable entry into telecommunications will be affected by the regulatory
landscape now being fashioned by the FCC and state regulators. One critical
component of the Telecommunications Act intended to facilitate the entry of new
telecommunications providers (including cable operators) is the interconnection
obligation imposed on all telecommunications carriers. This requires, for
example, that the incumbent local exchange carrier must allow new competing
telecommunications providers to connect to the local telephone distribution
system. A number of implementation details are subject to ongoing regulatory and
judicial review, but the basic requirement is now well established. At the same
time, incumbent local exchange carriers continue to make it difficult for
competitors to lease and use parts of their network in order to provide
competing services. Although local exchange carriers and cable operators can now
expand their offerings across traditional service boundaries, the general
prohibitions remain on local exchange carrier buyouts (i.e., any ownership
interest exceeding 10%) of co-located cable systems, cable operator buyouts of
co-located local exchange carrier systems, and joint ventures among cable
operators and local exchange carriers in the same market. The Telecommunications
Act provides a few limited exceptions to this buyout prohibition.
Cable Systems Providing Internet Service. Although there is at present no
significant U.S. federal regulation of cable system delivery of Internet
services, and the FCC recently issued several reports finding no immediate need
to impose this regulation, this situation may change as cable systems expand
their broadband delivery of Internet services. In particular, proposals have
been advanced at the FCC and Congress that would require cable operators to
provide "open access" to unaffiliated ISPs and on-line service providers. The
Federal Trade Commission and the FCC recently imposed certain open access
VII-17
requirements on Time Warner and AOL in connection with their merger, but those
requirements are not applicable to other cable operators. Some states and local
franchising authorities may seek to impose franchise conditions related to
Internet access as part of cable franchise renewals or transfers. In June 2000,
the Ninth Circuit Court of Appeals rejected an attempt by the City of Portland,
Oregon to impose mandatory Internet access requirements on the local cable
operator. AT&T Broadband Group has completed a technical and operational trial
to test how multiple ISPs can offer high-speed, always-on cable Internet service
over a hybrid fiber/coaxial network.
Cable Television Ownership Restrictions. Pursuant to the 1992 Cable Act,
the FCC adopted regulations establishing a 30% limit on the number of
multichannel video subscribers (including cable, direct broadcast satellite,
Satellite Master Antenna Television, MMDS and other subscribers) nationwide that
a cable operator may reach through cable systems in which it holds an
attributable interest, with an increase to 35% if the additional cable systems
are minority controlled. The FCC stayed the effectiveness of its ownership
limits pending judicial review.
The FCC directly addressed the 30% ownership rule (and the applicable
ownership attribution standards) in its June 2000 ruling on the MediaOne
acquisition. The FCC allowed the MediaOne acquisition to go forward, but
required AT&T to elect one of three divestiture options to come into compliance
with the 30% ownership cap. Specifically, AT&T was required to either (1) divest
its interest in Time Warner Entertainment, (2) terminate its involvement in Time
Warner Entertainment's video programming activities, which would require
divestiture of substantially all of AT&T's video programming interests,
including its interest in Liberty Media, or (3) divest interests in cable
systems. Compliance (or arrangements for compliance) was required by May 2001.
The FCC order also established safeguards restricting AT&T Broadband Group's
communication with Time Warner Entertainment, as well as its communication with,
and participation in, Time Warner Entertainment Board meetings for iN DEMAND and
certain other video programming services.
The FCC previously adopted regulations limiting carriage by a cable
operator of national programming services in which that operator holds an
attributable interest to 40% of the activated channels on each of the cable
operator's systems. The rules provide for the use of two additional channels or
a 45% limit, whichever is greater, provided that the additional channels carry
minority controlled programming services. The regulations also grandfather
existing carriage arrangements that exceed the channel limits, but require new
channel capacity to be devoted to unaffiliated programming services until the
system achieves compliance with the regulations. These channel occupancy limits
apply only up to 75 activated channels on the cable system, and the rules do not
apply to local or regional programming services.
In March 2001, the D.C. Circuit Court of Appeals struck down the rules
adopted by the FCC pertaining to ownership and programming carriage and remanded
the issues back to the FCC for further review. Following this decision, the FCC
suspended the compliance deadlines initially provided in its order related to
the MediaOne acquisition to afford the FCC an opportunity to determine the
relationship, if any, between the court decision and the conditions required in
the MediaOne order. The duration of such suspension and the ultimate actions of
the FCC cannot be determined at this time.
The Telecommunications Act eliminates statutory restrictions on
broadcast/cable cross-ownership (including broadcast network/cable
restrictions), but leaves in place existing FCC regulations prohibiting local
cross-ownership between television stations and cable systems. The
broadcast/cable cross ownership restriction currently is subject to a court
challenge on First Amendment and other grounds. The Telecommunications Act
leaves in place existing restrictions on cable cross-ownership with Satellite
Master Antenna Television and MMDS facilities, but lifts those restrictions
where the cable operator is subject to effective competition. In January 1995,
however, the FCC adopted regulations that permit cable operators to own and
operate Satellite Master Antenna Television systems within their franchise area,
provided that this operation is consistent with local cable franchise
requirements.
Must Carry/Retransmission Consent. The 1992 Cable Act contains broadcast
signal carriage requirements that allow local commercial television broadcast
stations to elect once every three years between requiring a cable system to
carry the station, i.e., must carry, or negotiating for payments for
VII-18
granting permission to the cable operator to carry the station, i.e.,
retransmission consent. Less popular stations typically elect must carry, and
more popular stations typically elect retransmission consent. Must carry
requests can dilute the appeal of a cable system's programming offerings, and
retransmission consent demands may require substantial payments or other
concessions (e.g., a requirement that the cable system also carry the local
broadcaster's affiliated cable programming service). Either option has a
potentially adverse effect on AT&T Broadband Group's business. The burden
associated with must carry obligations could dramatically increase if television
broadcast stations proceed with planned conversions to digital transmissions and
if the FCC determines that cable systems must carry simultaneously all analog
and digital services transmitted by the television stations (or, alternatively,
all of the multicast services in a broadcaster's digital feed, as opposed to
just the "primary video" service) during the multi-year transition in which a
single broadcast licensee is authorized to transmit both an analog and a digital
signal. The FCC tentatively decided against imposition of dual digital and
analog must carry in a January 2001 ruling, and also decided that only the
broadcaster's primary video service must be carried by the cable operator. At
the same time, however, it initiated further fact gathering, which, ultimately,
could lead to a reconsideration of these conclusions.
Access Channels. Local franchising authorities can include franchise
provisions requiring cable operators to set aside certain channels for
non-commercial PEG access programming. U.S. federal law also requires a cable
system with 36 or more channels to designate a portion of its activated channel
capacity (up to 15%) for commercial leased access by unaffiliated third parties.
The FCC has adopted rules regulating the terms, conditions and maximum rates a
cable operator may charge for use of this designated channel capacity, but use
of commercial leased access channels has been relatively limited.
"Anti-Buy Through" Provisions. U.S. federal law requires each cable system
to permit customers to purchase premium services or pay-per-view video
programming offered by the operator on a per-channel or a per-program basis
without the necessity of subscribing to any tier of service (other than the
basic service tier) unless the system's lack of addressable converter boxes or
other technological limitation does not permit it to do so. The statutory
exemption for cable systems that do not have the technological capability to
comply expires in October 2002, but the FCC may extend that period on a
case-by-case basis if deemed necessary pursuant to a specific waiver petition.
Access to Programming. To spur the development of independent cable
programmers and competition to incumbent cable operators, the 1992 Cable Act
imposed restrictions on the dealings between cable operators and cable
programmers. Of special significance from a competitive business posture, the
1992 Cable Act precludes satellite video programmers affiliated with cable
operators from favoring cable operators over competing multichannel video
programming distributors (such as direct broadcast satellite and MMDS
distributors). This provision limits the ability of vertically integrated
satellite cable programmers to offer exclusive programming arrangements to AT&T
Broadband Group. Both Congress and the FCC have considered proposals that would
expand the program access rights of cable's competitors, including the
possibility of subjecting both terrestrially delivered video programming and
video programmers that are not affiliated with cable operators to all program
access requirements. Pursuant to the Satellite Home Viewer Improvement Act, the
FCC has adopted regulations governing retransmission consent negotiations
between broadcasters and all multichannel video programming distributors,
including cable and direct broadcast satellite.
Inside Wiring; Subscriber Access. FCC rules require an incumbent cable
operator, upon expiration of a multiple dwelling unit service contract, to sell,
abandon or remove "home run" wiring that was installed by the cable operator in
the multiple dwelling unit building. These inside wiring rules are expected to
assist building owners in their attempts to replace existing cable operators
with new programming providers that are willing to pay the building owner a
higher fee, where a higher fee is permissible. The FCC also has proposed
abrogating or severely restricting all existing and future exclusive multiple
dwelling unit service agreements held by incumbent cable operators, but allowing
these contracts when held by new entrants. In another proceeding, the FCC has
preempted restrictions on the deployment of private antennae on rental property
within the exclusive use of a tenant, such as balconies and patios. This FCC
ruling may limit the extent to which multiple dwelling unit owners may enforce
certain aspects of multiple
VII-19
dwelling unit agreements that otherwise prohibit, for example, placement of
digital broadcast satellite receiver antennae in multiple dwelling unit areas
under the exclusive occupancy of a renter. These developments may make it more
difficult for AT&T Broadband Group to provide service in multiple dwelling unit
complexes.
Customer Equipment Regulation. As noted, cable customer equipment is
subject to rate regulation unless the cable system is deemed by the FCC to face
effective competition. In addition, the FCC ruled that cable customers must be
allowed to purchase cable converters and other such navigation device equipment
from third parties, such as retailers, and established a multi-year phase-in
during which security functions, which would remain in the operator's exclusive
control, would be unbundled from non-security functions, which then could be
satisfied by third-party vendors. The first phase implementation date was July
1, 2000. Compliance was technically and operationally difficult in some
locations, so AT&T Broadband Group and several other cable operators filed a
request at the FCC that the requirement be waived in those systems. The request
resulted in a temporary deferral of the compliance deadline for those systems.
The separate security module requirement applies to all digital and
"hybrid" devices (i.e., devices that access both analog and digital services),
but not to analog-only devices. So long as multichannel video providers subject
to the rules comply with the separate security module requirement, they may
continue to provide "integrated devices" (i.e., navigation devices containing
both embedded security and non-security functions) to their customers until
January 1, 2005, at which time they will be barred from placing these devices in
service. AT&T Broadband Group has advocated the elimination of this "integrated
box ban."
Other Regulations of the FCC. In addition to the FCC regulations noted
above, there are other regulations of the FCC covering such areas as:
- equal employment opportunity (currently suspended as a result of a
judicial ruling, although the FCC recently has sought to reimpose a
subset of these rules);
- subscriber privacy;
- programming practices, including, among other things,
-- syndicated program exclusivity, which requires a cable system to delete
particular programming offered by a distant broadcast signal carried on
the system that duplicates the programming for which a local broadcast
station has secured exclusive distribution rights,
-- network program nonduplication,
-- local sports blackouts,
-- indecent programming,
-- lottery programming,
-- political programming,
-- sponsorship identification,
-- children's programming advertisements,
-- closed captioning; and
-- video description;
- registration of cable systems and facilities licensing;
- maintenance of various records and public inspection files;
- aeronautical frequency usage;
- lockbox availability;
VII-20
- antenna structure notification;
- tower marking and lighting;
- consumer protection and customer service standards;
- technical standards;
- consumer electronics equipment compatibility; and
- emergency alert systems.
The FCC recently initiated an inquiry to determine whether the cable
industry's future provision of interactive services should be subject to
regulations ensuring equal access and competition among service vendors. The
inquiry, which grew out of the FCC's review of the AOL/Time Warner merger, is in
its earliest stages.
The FCC has the authority to enforce its regulations through the imposition
of substantial fines, the issuance of cease and desist orders and/or the
imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate certain transmission facilities used in connection
with cable operations.
Copyright. Cable television systems are subject to U.S. federal copyright
licensing covering carriage of television and radio broadcast signals. In
exchange for filing certain reports and contributing a percentage of their
revenue to a U.S. federal copyright royalty pool (this percentage varies
depending on the size of the system and the number of distant broadcast
television signals carried), cable operators can obtain blanket permission to
retransmit copyrighted material on broadcast signals. The possible modification
or elimination of this compulsory copyright license is subject to continuing
review and could adversely affect AT&T Broadband Group's ability to obtain
desired broadcast programming. In addition, the cable industry pays music
licensing fees to Broadcast Music, Inc. and the American Society of Composers,
Authors and Publishers. Copyright clearances for nonbroadcast programming
services are arranged through private negotiations.
State and Local Regulation. Cable television systems generally are
operated pursuant to nonexclusive franchises granted by a municipality or other
state or local government entity. The Telecommunications Act clarified that the
need for an entity providing cable services to obtain a local franchise depends
solely on whether the entity crosses public rights-of-way. U.S. federal law now
prohibits franchise authorities from granting exclusive franchises or from
unreasonably refusing to award additional franchises covering an existing cable
system's service area. Cable franchises generally are granted for fixed terms,
and in many cases are terminable if the franchisee fails to comply with material
provisions. Noncompliance by the cable operator with franchise provisions also
may result in monetary penalties.
The terms and conditions of franchises vary materially from jurisdiction to
jurisdiction. Each franchise generally contains provisions governing cable
operations, service rates, franchise fees, system construction and maintenance
obligations, system channel capacity, design and technical performance, customer
service standards, and indemnification protections. A number of states subject
cable television systems to the jurisdiction of centralized state governmental
agencies. Although local franchising authorities have considerable discretion in
establishing franchise terms, there are certain U.S. federal limitations. For
example, local franchising authorities cannot insist on franchise fees exceeding
5% of the system's gross revenues from the provision of cable services, cannot
dictate the particular technology used by the system, and cannot specify video
programming other than identifying broad categories of programming.
U.S. federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the franchise authority may seek to impose new and more onerous
requirements, such as significant upgrades in facilities and services or
increased franchise fees and funding for PEG access channels as a condition of
renewal. Similarly, if a franchise authority's consent is required for the
purchase or sale of a cable system or franchise, this authority may attempt to
impose more burdensome or onerous franchise requirements in connection with a
request for
VII-21
consent. Historically, franchises have been renewed for cable operators that
have provided satisfactory services and have complied with the terms of their
franchises. Since the 1992 adoption of the Cable Act, AT&T Broadband Group has
never had a final determination or denial of one of its franchises.
Proposed Changes in Regulation. The regulation of cable television systems
at the U.S. federal, state and local levels is subject to the political process
and has been in constant flux over the past decade. Material changes in the law
and regulatory requirements must be anticipated, and there can be no assurance
that AT&T Broadband Group's business will not be affected adversely by future
legislation, new regulations or by deregulation of AT&T Broadband Group's
competitors.
VII-22
AT&T BROADBAND GROUP MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
To understand and place in context AT&T Broadband Group Management's
Discussion and Analysis, we urge you to read the AT&T Corp. Management's
Discussion and Analysis on page .
OVERVIEW
Currently, AT&T Broadband Group is an integrated business of AT&T Corp. and
not a stand-alone entity. AT&T will assign and transfer substantially all of the
assets, liabilities and business of AT&T Broadband Group to AT&T Broadband
Corp., a newly formed holding company for AT&T's broadband business, which will
be subsequently merged with Comcast as discussed below. AT&T Broadband Group
consists primarily of the assets, liabilities and business of AT&T Broadband,
LLC (formerly TCI), acquired by AT&T on March 9, 1999 in the TCI merger and
MediaOne Group, Inc. ("MediaOne") acquired by AT&T on June 15, 2000 in the
MediaOne acquisition. AT&T Broadband Group is one of the nation's largest
broadband communications providers, providing cable television, high-speed cable
Internet and broadband telephone services.
Comcast and AT&T have agreed to a merger of Comcast and AT&T Broadband
Corp. The AT&T Comcast transaction is pursuant to, and subject to the terms and
conditions set forth in the Agreement and Plan of Merger, dated as of December
19, 2001. The AT&T Comcast transaction will occur in several steps, which are
expected to occur on the closing date of the AT&T Comcast transaction. First,
AT&T will assign and transfer to AT&T Broadband Corp., substantially all of the
assets and liabilities of AT&T's broadband business. Following the transfer,
AT&T will spin off AT&T Broadband Corp. to AT&T shareholders by distributing one
share of AT&T Broadband Corp. common stock for each share of AT&T common stock,
NYSE symbol "T", outstanding as of the close of business on the record date for
the AT&T Broadband Corp. spin-off. Immediately following the AT&T Broadband
spin-off, AT&T Broadband Corp. will merge with AT&T Broadband Acquisition Corp.,
a newly formed, wholly owned subsidiary of AT&T Comcast, with AT&T Broadband
Corp. continuing as the surviving corporation. At approximately the same time,
Comcast will merge with Comcast Acquisition Corp., a newly formed, wholly owned
shell subsidiary of AT&T Comcast, with Comcast continuing as the surviving
entity. As a result of these mergers, AT&T Comcast will become the parent
company of both AT&T Broadband Corp. and Comcast.
Consummation of the AT&T Comcast transaction is subject to the satisfaction
or wavier of several conditions, including but not limited to, approval by the
shareholders of AT&T and Comcast and receipt of all necessary governmental
consents and approvals. As a result, there can be no assurance that the AT&T
Comcast transaction will be consummated, or if the AT&T Comcast transaction is
consummated, as to the date of such consummation.
AT&T Broadband Group's revenue is derived primarily from the provision of
analog and digital video services, high-speed cable Internet services and
broadband telephone services. AT&T Broadband Group also charges customers for
installation of equipment into their homes. Additionally, AT&T Broadband Group
derives revenue from the sale of advertising time via ad avails on certain cable
networks. AT&T Broadband Group sells its services on an individual basis as well
as through packages or on a bundled basis. AT&T Broadband Group expects revenue
will continue to increase in the future as a result of increases in customers
for its various services as well as rate increases. AT&T Broadband Group
anticipates that the mix of its customers will change over time as the number of
customers receiving advanced services increases. Accordingly, AT&T Broadband
expects revenue from advanced services to increase as a percentage of total
revenue over time.
Operating expenses consist of service costs and selling, general and
administrative expenses attributable to management of its customer base. Service
costs include fees paid to programming suppliers, expenses related to copyright
fees, wages and salaries of technical personnel, franchise fees, plant operating
costs, high-speed data network transport and internet service costs, access and
interconnection costs and local and long-distance wholesale costs. Programming
fees have increased at a higher rate than inflation. AT&T Broadband Group
expects video programming costs will continue to increase. Competitive factors
VII-23
may limit AT&T Broadband Group's ability to recover increases in programming
costs through rate increases to video customers. Selling, general and
administrative expenses directly attributable to AT&T Broadband Group's cable
television systems include wages and salaries for customer service and
administrative personnel, and expenses related to billing, marketing,
advertising sales and office administration.
AT&T Broadband Group's operations have been dependent on cash infusions
from AT&T in order for AT&T Broadband Group to operate and execute on its
business and growth strategies. If, for any reason, AT&T is unwilling or cannot
provide the level of financing necessary to fund future operations, AT&T
Broadband Group will need to seek additional financing from third parties.
Debt attributed to AT&T Broadband Group includes the third party
obligations of AT&T Broadband, LLC (formerly TCI) and MediaOne and monetization
debt backed by assets held by AT&T Broadband Group. Additional intercompany debt
has been allocated to AT&T Broadband Group to achieve a total debt level based
on several factors, including prospective financing requirements, desired
stand-alone credit profile, working capital and capital expenditure
requirements, expected sources of future deleveraging, and comparable company
profiles. Changes in historical intercompany debt are based on historical cash
flows. Such cash flows include capital expenditures, operating activities, and
investments in cable companies. The historical interest expense on the allocated
intercompany debt was calculated based on a rate intended to be equivalent to
the rate AT&T Broadband Group would receive if it were a stand-alone entity.
AT&T's expected deleveraging activities that relate to AT&T Broadband Group
include, but may not be limited to, the following: proceeds that may result from
the exercise of AT&T's registration rights in Time Warner Entertainment ("TWE");
proceeds from the sale and monetization of shares of Cablevision Systems
Corporation ("Cablevision") and Rainbow Media Group which occurred in the fourth
quarter of 2001; and continued evaluation and sale of non-strategic cable
systems.
OPERATING RESULTS
The results of operations for AT&T Broadband Group begin on March 1, 1999,
the effective date of the TCI merger for accounting purposes. Accordingly, AT&T
Broadband Group's results of operations for 1999 include 10 months of operations
compared to 12 months of operations in 2000.
The comparison of the quarter and nine months ended September 30, 2001
results with the corresponding prior year periods and the comparison of the year
ended December 31, 2000 with the ten months ended December 31, 1999 were
significantly impacted by events, such as acquisitions and dispositions, that
occurred during 2000 and 2001. Effective June 15, 2000, AT&T completed the
acquisition of MediaOne. In addition AT&T Broadband Group completed dispositions
and exchanges that in the aggregate affect the comparability of financial
results between periods.
The comparison of third quarter and year-to-date 2001 results with the
corresponding periods in 2000 was also impacted by the consolidation by AT&T
Broadband Group of At Home Corporation ("Excite@Home") beginning September 1,
2000. The consolidation of Excite@Home was due to corporate-governance changes,
which gave AT&T a controlling interest. The consolidation of Excite@Home
resulted in the inclusion of 100% of its results in each line item of AT&T
Broadband Group's combined statement of operations for the three and nine months
ended September 30, 2001 and for the month of September 2000. Losses
attributable to the other shareholders of Excite@Home have been reflected within
minority interest income (expense) in the combined statement of operations and
minority interest in the combined balance sheet since September 1, 2000. As a
result of the significant losses incurred by Excite@Home, the minority interest
balance has been fully utilized, therefore, in the third quarter of 2001 AT&T
Broadband Group recognized more than its 23% of the losses of Excite@Home. On
September 28, 2001, Excite@Home filed for bankruptcy under Chapter 11 in the
U.S. Bankruptcy Court, for the Northern District of California. Excite@Home's
results remained consolidated in AT&T Broadband Group's statements of operations
and cash flows for the three and nine months ended September 30, 2001, however,
the assets and liabilities of Excite@Home were deconsolidated from AT&T
Broadband Group's balance sheet as of September 30, 2001 because of the
bankruptcy filing.
VII-24
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THE
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2000
Revenue. Revenue for the third quarter 2001 of $2,500 million remained
relatively consistent as compared to the third quarter of 2000. However, revenue
increased primarily as a result of increased revenue from advanced services
(broadband telephone and high-speed cable Internet) of $203 million, the
consolidation of Excite@Home of $34 million and an increase in basic-cable and
digital video revenue of approximately $73 million. Such increases were
primarily offset by a decrease in revenue of $343 million due to net
dispositions.
Revenue increased $1,990 million, or 35%, for the nine months ended
September 30, 2001 compared to the corresponding prior year period. This
increase was due in large part to the impact of the MediaOne acquisition of
$1,500 million and the consolidation of Excite@Home of $259 million. Also
contributing to the revenue increase was higher revenue from advanced services
(broadband telephone and high-speed cable Internet) of $446 million and an
increase in basic-cable and digital video revenue of approximately $233 million.
Such increases were partially offset by a decrease in revenue of $506 million
due to net dispositions.
At September 30, 2001, AT&T Broadband Group served approximately 13.7
million basic cable customers, passing approximately 24.6 million homes,
compared with 16.1 million basic cable customers, passing approximately 28.0
million homes at September 30, 2000. AT&T Broadband Group provided digital video
service to approximately 3.2 million customers, high-speed cable Internet
service to approximately 1.4 million customers, and broadband telephone service
to approximately 0.9 million customers at September 30, 2001. This compares with
approximately 2.5 million digital video customers, approximately 0.9 million
high-speed cable Internet service customers, and nearly 0.3 million broadband
telephone customers at September 30, 2000.
Cost of Services. Cost of services remained relatively consistent as
compared to the third quarter of 2000. Cost of services increased due to the
consolidation of Excite@Home of $67 million. Cost of services also increased as
a result of an increase of $71 million due to growth in broadband telephone and
high-speed cable Internet services, and an increase of $53 million in
programming costs associated with basic cable and digital video services. Such
increases were offset by a decrease in costs of $163 million due to net
dispositions.
Cost of services increased $1,140 million, or 37%, for the nine months
ended September 30, 2001 compared to the corresponding prior year period. This
increase was primarily due to the impact of the MediaOne acquisition of $782
million and the consolidation of Excite@Home of $268 million. The remaining
increase was primarily a result of an increase of $230 million in costs
associated with broadband telephone and high-speed cable Internet services due
to growth in these services and an increase of $142 million in programming costs
associated with basic cable and digital video services. Such increases were
partially offset by a decrease in costs of $236 million due to net dispositions.
Selling, General and Administrative. Selling, general and administrative
expenses decreased $60 million, or 9% for the third quarter of 2001 compared to
the third quarter of 2000. The decrease was primarily a result of the impact of
net dispositions of $43 million and cost control efforts partially offset by a
$27 million increase in advertising and marketing costs.
Selling, general and administrative expenses increased $497 million, or 34%
for the nine months ended September 30, 2001 compared to the corresponding prior
year period. This increase was primarily due to the impact of the MediaOne
acquisition of $264 million, an increase in video costs for advertising and
customer care of $174 million, an increase in expenses related to high-speed
cable internet and broadband telephone of $70 million due to growth in these
services and the consolidation of Excite@Home of $60 million. Such increases
were partially offset by the impact of net dispositions of $66 million and cost
control efforts.
Depreciation and Other Amortization. Depreciation and other amortization
expense increased $119 million, or 23%, for the third quarter of 2001 compared
to the third quarter of 2000. This increase was
VII-25
primarily due to the consolidation of Excite@Home of $41 million. The remaining
increase was primarily due to a higher asset base resulting from continued
infrastructure investment partially offset by the sale of cable systems. Total
capital expenditures for the third quarter of 2001 and 2000 were $746 million
and $1,238 million, respectively.
Depreciation and other amortization expense increased $879 million, or 82%,
for the nine months ended September 30, 2001 compared to the corresponding prior
year period. This increase was due in large part to the impact of the MediaOne
acquisition of $417 million and the consolidation of Excite@Home of $177
million. The remaining increase was primarily due to a higher asset base
resulting from continued infrastructure investment. Total capital expenditures
for the nine months ended September 30, 2001 and 2000 were $2,521 million and
$3,067 million, respectively.
Amortization of Goodwill, Franchise Costs and Other Purchased
Intangibles. Amortization expense decreased $204 million, or 28%, for the third
quarter of 2001 compared to the third quarter of 2000. This decrease was
primarily due to lower goodwill associated with Excite@Home resulting from an
impairment of goodwill recorded subsequent to September 30, 2000.
Amortization expense increased $455 million, or 37%, for the nine months
ended September 30, 2001 compared to the corresponding prior year period. This
increase was primarily due to the MediaOne acquisition. Such increase was
partially offset by lower goodwill associated with Excite@Home.
Asset Impairment, Restructuring and Other Charges. During the third
quarter of 2001, $399 million of asset impairment, restructuring and other
charges were recorded related to Excite@Home. Included in these charges were
$376 million of asset impairment charges and $23 million of restructuring and
exit costs, primarily due to continued weakness in the on-line media market and
the recent bankruptcy filing of Excite@Home. These charges included the
write-off of goodwill and other intangible assets, warrants granted in
connection with distributing the @Home service and property, plant and
equipment. Restructuring and exit costs consisted of $4 million for severance
costs, $14 million related to facility closings and $5 million related to
termination costs of contractual obligations. Since AT&T Broadband Group
consolidated Excite@Home through September 30, 2001, but only owned
approximately 23% of Excite@Home, a portion of the charges recorded by
Excite@Home has been eliminated in the September 30, 2001 statement of
operations as a component of minority interest income (expense).
Asset impairment, restructuring and other charges for the nine months ended
September 30, 2001, totaled $1,494 million. This charge includes $1,171 million
of asset impairment charges related to Excite@Home and $323 million for
restructuring and exit costs, which consisted of $151 million for severance
costs, $156 million for facilities closing and $16 million related to
termination costs of contractual obligations.
The asset impairment charges recorded during the nine months ended
September 30, 2001 included $1,032 million due to the write down of goodwill and
other intangible assets related to Excite@Home, warrants granted in connection
with distributing the @Home service, and property, plant and equipment of
Excite@Home. These write downs are primarily due to the continued weakness in
the online media market and the recent bankruptcy filing of Excite@Home. In
addition, AT&T Broadband Group recorded a related goodwill impairment charge of
$139 million associated with its acquisition goodwill of Excite@Home. Since AT&T
Broadband Group consolidated Excite@Home but only owned approximately 23% of
Excite@Home, a portion of the charges recorded by Excite@Home has been
eliminated in the statement of operations as minority interest income (expense).
The severance costs of $151 million, for approximately 7,700 employees,
resulted from synergies created by the MediaOne acquisition as well as cost
reduction efforts by Excite@Home. Approximately 36% of the affected employees
are management employees and 64% are non-management employees.
The restructuring initiative is projected to yield cash savings of
approximately $1 million in 2001 (net of severance benefit pay-outs of
approximately $151 million) and approximately $260 million per year thereafter.
The initiative will yield no operating expense savings, net of restructuring
charges in 2001, and is projected to yield approximately $260 million per year
thereafter. The cost savings, primarily attributable
VII-26
to reduced personnel-related expenses, will be realized in cost of services and
selling, general and administrative expenses.
During the third quarter of 2000, AT&T Broadband Group recorded $24 million
of asset impairment, restructuring and other charges. This charge resulted from
synergies associated with the MediaOne acquisition and related to cash
termination benefits associated with the involuntary separation of approximately
490 employees. Approximately one-half of the individuals were management
employees and one-half were non-management employees.
During the nine months ended September 30, 2000, AT&T Broadband Group
recorded $40 million of asset impairment, restructuring and other charges,
related to restructuring and exit costs resulting from synergies created by the
MediaOne acquisition and cost reduction efforts. The charge for the nine months
ended September 30, 2000 included cash termination benefits of $40 million
associated with the involuntary separation of approximately 525 employees.
Approximately half of the individuals were management employees and half were
non-management employees.
Other (Expense) Income. Other (expense) income changed from income of $67
million for the third quarter of 2000 to expense of $252 million for the third
quarter of 2001. The third quarter expense of $252 million was primarily driven
by a $392 million mark-to-market loss on Vodafone ADRs, which were used to
settle exchangeable notes that matured during the third quarter of 2001. This
loss was partially offset by net gains of $141 million related to ongoing fair
value adjustments of derivatives and "trading" securities. The income for the
third quarter of 2000 resulted primarily from the amortization of the premium on
collars associated with exchangeable notes acquired in the MediaOne acquisition.
Other (expense) income for the nine months ended September 30, 2001 was an
expense of $2,156 million compared to income of $547 million for the same period
in 2000. Effective January 1, 2001, in conjunction with the adoption of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," AT&T
Broadband Group reclassified certain investment securities, which support debt
that is indexed to those securities, from "available-for-sale" to "trading." As
a result, AT&T Broadband Group recorded a pre-tax loss of $1,154 million
reflecting the initial reclassification impact of the adoption of SFAS No. 133.
Also contributing to the change was a $838 million loss on the Excite@Home put
obligation settlement with Cox and Comcast, $512 million unfavorable change in
(losses) gains on sales of businesses and other investments, a $392 million
mark-to-market loss on Vodafone ADRs which were used to settle exchangeable
notes that matured during the third quarter of 2001 and net gains of $230
million related to ongoing investment and derivative revaluations under SFAS No.
133.
Interest Expense. Interest expense remained relatively consistent for the
third quarter of 2001 compared to the third quarter of 2000.
Interest expense increased $438 million to $1,347 million for the nine
months ended September 30, 2001 compared to the corresponding prior year period.
This increase was a result of an increase in debt due primarily to the MediaOne
acquisition and the monetization of investments in Microsoft and Comcast.
Benefit for Income Taxes. The benefit for income taxes for the third
quarter of 2001 was $1,036 million, compared with a benefit of $247 million for
the third quarter of 2000. The effective income tax rate for the third quarter
of 2001 was 64.3%, compared to 23.5% for the third quarter of 2000. The third
quarter 2001 effective tax rate was positively impacted by a net tax benefit
related to Excite@Home, including a benefit from deconsolidation, partially
offset by the prior consolidation of its operating losses, for which the company
was unable to record tax benefits. Such positive impacts were partially offset
by the amortization of non tax-deductible goodwill. The third quarter 2000
effective tax rate was negatively impacted by the non tax-deductible goodwill.
The benefit for income taxes for the nine months ended September 30, 2001,
was $3,214 million, compared with a benefit of $845 million for the
corresponding prior year period. The effective income tax rate for the nine
months ended September 30, 2001 was 45.5% compared to 56.6% for the
corresponding prior year. The 2001 effective tax rate was positively impacted by
a significant tax benefit related to
VII-27
Excite@Home, including a benefit from deconsolidation and the put obligation
settlement with Cox and Comcast, partially offset by the prior consolidation of
its operating losses for which the company was unable to record tax benefits.
The effective tax rate was also positively impacted by a tax-free gain resulting
from an exchange of AT&T stock for an entity owning certain cable systems and
other assets with Comcast. Such positive impacts were partially offset by the
amortization of non tax-deductible goodwill. The 2000 effective tax rate was
positively impacted by a tax-free gain resulting from an exchange of AT&T stock
for an entity owning certain cable systems and other assets with Cox. The 2000
effective tax rate is negatively impacted by non tax-deductible goodwill and non
tax-deductible losses from Excite@Home.
Net Losses from Equity Investments. Net losses from equity investments
which are recorded net of income taxes, decreased from $219 million for the
third quarter of 2000 to $53 million for the third quarter of 2001. The decrease
in losses is primarily due to lower losses related to TWE and Cablevision as a
result of these investments being accounted for under the equity method in the
third quarter 2000 and the cost method in the third quarter of 2001. TWE was
reclassified to an asset held for sale in the fourth quarter of 2000, and
accordingly earnings or losses including amortization of excess basis, were no
longer recorded. Likewise, in the second quarter of 2001, AT&T Broadband Group
began accounting for its investment in Cablevision as a cost method investment
as a result of its loss of representation on the board of directors of
Cablevision. The consolidation of Excite@Home in September 2000 also contributed
to the decrease. Also included in net losses from equity investments is
amortization of goodwill associated with non-consolidated investments. This
amortization totaled $19 million and $217 million for the third quarter of 2001
and 2000, respectively. The income tax (provision) benefit recorded on net
losses from equity investments for the third quarter of 2001 and 2000 was $(25)
million and $136 million, respectively.
Net losses from equity investments which are recorded net of income taxes,
decreased from $636 million for the nine months ended September 30, 2000 to $37
million for the nine months ended September 30, 2001. This decrease was
primarily due to the consolidation of Excite@Home and impacts associated with
AT&T Broadband Group's investment in Cablevision. Cablevision's earnings were
higher in 2001 as a result of a gain associated with the sale of cable
properties. In addition, in the second quarter of 2001, AT&T Broadband Group
began accounting for its investment in Cablevision as a cost method investment
as a result of its loss of representation on the board of directors of
Cablevision. The change in accounting treatment for TWE from an equity method
investment to a cost investment also contributed to the decrease. Amortization
of goodwill associated with non-consolidated investments totaled $120 million
and $428 million for the nine months ended September 30, 2001 and 2000,
respectively. The income tax (provision) benefit recorded on net losses from
equity investments was $(5) million and $394 million, for the nine months ended
September 30, 2001 and 2000, respectively.
Minority Interest Income (Expense). Minority interest income (expense),
which is recorded net of income taxes, represents an adjustment to AT&T
Broadband Group's net loss to reflect the less than 100% ownership of entities
attributed to AT&T Broadband Group as well as dividends on preferred stock
issued by subsidiaries of AT&T which have been attributed to AT&T Broadband
Group. AT&T Broadband Group recorded $169 million of minority interest income in
the third quarter of 2001 and $83 million in the third quarter of 2000. AT&T
Broadband Group recorded minority interest income of $905 million for the nine
months ended September 30, 2001 and minority interest expense of $21 million for
the nine months ended September 30, 2000. The changes primarily resulted from
the consolidation of Excite@Home effective September 1, 2000. The income tax
benefit recorded on minority interest income (expense) was $25 million for both
the third quarters of 2001 and 2000 and $75 million for both the nine months
ended September 30, 2001 and 2000.
Cumulative Effect of Accounting Change. Cumulative effect of accounting
change, net of applicable income taxes, was $229 million and recorded in the
first quarter of 2001. Such amount represents fair value adjustments of
derivative instruments as well as to the warrant portfolio, and the
reclassification of related securities to "trading" due to the adoption of SFAS
No. 133.
VII-28
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE TEN MONTHS ENDED DECEMBER 31,
1999
Revenue. Revenue increased $3,365 million, or 66%, in 2000 compared to
1999. This increase was due to the impact of the MediaOne acquisition of $1,730
million, an additional two months of revenue in 2000 of $1,035 million, and the
consolidation of Excite@Home of $248 million. The remaining increase was
primarily a result of an increase in basic cable and digital video revenue of
approximately $268 million and increased revenue from advanced services
(high-speed cable Internet service and broadband telephone) of $169 million.
Cable revenue increased primarily as a result of rate increases. Such increases
were partially offset by a decrease in revenue of $104 million due to the Cox
disposition.
At December 31, 2000, AT&T Broadband Group served approximately 16.0
million basic cable customers, while passing approximately 28.3 million homes,
compared with 11.4 million basic cable customers, while passing approximately
19.7 million homes at December 31, 1999. AT&T Broadband Group acquired systems
passing approximately 8.7 million homes with approximately 5.0 million basic
cable customers in the MediaOne acquisition. At December 31, 2000, AT&T
Broadband Group provided digital video service to approximately 2.8 million
customers, high-speed cable Internet service to approximately 1.1 million
customers, and broadband telephone service to approximately 547,000 customers.
This compares with approximately 1.8 million digital video customers,
approximately 207,000 high-speed cable Internet service customers, and nearly
8,300 cable telephone customers at December 31, 1999. The MediaOne acquisition
added 0.2 million digital video service customers, 0.3 million high-speed cable
Internet customers and 0.1 million cable telephone customers.
Cost of Services. Cost of services increased $1,914 million, or 71%, in
2000 compared with 1999. This increase was primarily due to the impact of the
MediaOne acquisition of $833 million, an additional two months of costs in 2000
of $576 million and the consolidation of Excite@Home of $195 million. The
remaining increase primarily is a result of $180 million of programming costs,
an increase of $142 million associated with high-speed cable Internet and
broadband telephone services and an increase in salary expense and other basic
cable costs of $138 million due to growth in business. Such increases were
offset by a decrease in costs of $48 million due to the Cox disposition.
Selling, General and Administrative. Selling, general and administrative
expenses increased $927 million, or 74%, in 2000 compared to 1999. This increase
was primarily due to the impact of the MediaOne acquisition of $458 million, an
additional two months in 2000 of $210 million, an increase in expenses related
to high-speed cable Internet and broadband telephone service of $232 million and
the consolidation of Excite@Home of $56 million.
Depreciation and Other Amortization. Depreciation and other amortization
increased $869 million, or 108%, in 2000 compared to 1999. The increase was
primarily due to the impact of the MediaOne acquisition of $473 million, the
consolidation of Excite@Home of $80 million, an additional two months in 2000 of
$157 million and a higher asset base resulting from continued infrastructure
investment. Total capital expenditures for 2000 and 1999 were $4,426 million and
$3,161 million, respectively.
Amortization of Goodwill, Franchise Costs and Other Purchased
Intangibles. Amortization increased $1,508 million, or 174%, in 2000 compared
to 1999. The increase was primarily due to the impact of the MediaOne
acquisition of $515 million, the consolidation of Excite@Home of $911 million,
and an additional two months in 2000 of $161 million.
Asset Impairment, Restructuring and Other Charges. Asset impairment,
restructuring and other charges increased $5,626 million in 2000 to $6,270
million. For the year ended 2000, the charge included $6,179 million of asset
impairment charges related to Excite@Home and $91 million related to
restructuring and exit costs.
The charges related to Excite@Home include $4,609 million of asset
impairment charges recorded by Excite@Home associated with the impairment of
goodwill from various acquisitions and a related goodwill impairment charge of
$1,570 million recorded by AT&T Broadband Group associated with goodwill from
the acquisition of its investment in Excite@Home. The impairments resulted from
a decision by Excite@Home to exit certain businesses, as well as significant
changes to the dynamics of the online
VII-29
media market that Excite@Home operates in, which necessitated a general
impairment review of Excite@Home's intangible assets. Since AT&T Broadband
Group, through AT&T Broadband, LLC, owned approximately 23% of Excite@Home, 77%
of the charge recorded by Excite@Home was not included as an increase of net
loss, but rather was eliminated through minority interest income (expense) in
the combined statements of operations.
The $91 million charge for restructuring and exit plans was primarily due
to headcount reductions as part of the integration of MediaOne, the
centralization of certain functions, and the consolidation of call center
facilities. This charge included $61 million of cash termination benefits
associated with the involuntary separation of 1,060 employees. Approximately 25%
of the employees were management while 75% were non-management employees.
Approximately 74% of the affected employees had left their positions as of
December 31, 2000. The $91 million charge also included a loss of $30 million
recognized on the disposition of facilities as a result of synergies created by
the MediaOne acquisition.
The 2000 restructuring initiatives are projected to yield cash savings of
approximately $80 million per year. It is expected that increased spending in
growth services will largely offset these cash and earnings before interest and
taxes, or operating expense savings of approximately $50 million. The operating
expense savings, primarily attributable to reduced personnel related expenses,
will be realized in cost of services and selling, general and administrative
expenses.
During 1999, AT&T Broadband Group recorded $644 million of asset
impairment, restructuring and other charges. This included an in-process
research and development charge of $594 million reflecting the estimated fair
value of research and development projects, as of the date of the TCI merger,
which had not yet reached technological feasibility or had alternative future
use. The projects identified related to efforts to offer voice-over-IP, product
integration efforts for advanced set-top devices, cost-savings efforts for
broadband telephone implementation, and in-process research and development
related to Excite@Home. The fair value of in-process research and development
was estimated for each project using an income approach, which was adjusted to
allocate fair value based on the project's percentage of completion. Under this
approach, the present value of the anticipated future benefits of the projects
was determined using a discount rate of 17%. For each project, the resulting net
present value was multiplied by a percentage of completion based on effort
expended to date versus projected costs to complete.
The charge associated with the voice-over-IP technology, which allows voice
telephone traffic to be digitalized and transmitted in IP data packets, was $225
million as of the date of the TCI merger. Current voice-over-IP equipment does
not yet support many of the features required to connect customer premises
equipment to traditional phone networks. Further technical development is also
needed to ensure voice quality that is comparable to conventional
circuit-switched telephone services and to reduce the power consumption of the
IP telephone services equipment. Testing of IP telephone services equipment in
the field was started in late 2000 and will continue throughout 2001.
The charge associated with product integration efforts for advanced set-top
devices, which will enable AT&T Broadband Group to offer next-generation digital
services, was $114 million as of the date of the TCI merger. The associated
technology consists of the development and integration work needed to provide a
suite of software tools to run on the digital set-top box hardware platform. It
is anticipated that field trials will begin in late 2001 for next generation
digital services.
The charge associated with cost-savings efforts for broadband telephone
services implementation was $101 million as of the date of the TCI merger.
Telephone services cost reductions primarily consist of cost savings from the
development of a "line of power switch," which allows cost effective power for
customer telephone equipment through the cable plant. This device will allow
AT&T Broadband Group to provide line-powered telephone service without burying
the cable line to each house. Trials related to the telephone services cost
reductions are complete and implementation has begun in certain markets.
Additionally, the in-process research and development charge related to
Excite@Home was valued at $154 million. This charge related to projects to allow
for self-provisioning of devices and the development of next-generation client
software, network and back-office infrastructure to enable a variety of network
devices beyond personal computers and improved design for the regional data
centers' infrastructure.
VII-30
Although there are technological issues to overcome to complete
successfully the acquired in-process research and development, successful
completion is expected. The costs to complete the identified projects will not
have a material impact on the results of operations. If, however, management of
AT&T Broadband Group is unable to establish technological feasibility and
produce commercially viable products/services, anticipated incremental cash
flows attributed to expected profits from such new products/services may not be
realized.
Also in 1999, the asset impairment, restructuring and other charges
included a $50 million loss related to a contribution agreement TCI entered into
with Phoenixstar, Inc. This agreement requires AT&T Broadband Group to satisfy
certain liabilities owed by Phoenixstar and its subsidiaries. The remaining
obligation under this contribution agreement and an agreement that MediaOne has
is $57 million, which was fully accrued at December 31, 2000.
Other (Expense) Income. Other (expense) income decreased from income of
$50 million in 1999 to expense of $39 million for 2000. Such decrease was
primarily a result of a $537 million charge resulting from the increase in the
fair value of the put options held by Comcast and Cox related to Excite@Home
stock and investment impairment charges of $240 million. This was offset by an
increase in gains on sales of businesses and investments of $577 million,
including the swap of cable systems with Comcast and Cox and the sale of the
investment in Lenfest, and an increase of $69 million in interest and dividend
income.
Interest Expense. Interest expense increased $618 million in 2000 to
$1,323 million compared to 1999. The increase was a result of an increase in
debt of $13.5 billion due primarily to the MediaOne acquisition and the
monetization of investments in Microsoft and Comcast. The remaining increase was
due to two additional months of interest in 2000 and an increase in the interest
rate charged from AT&T for intercompany debt.
Benefit for Income Taxes. The benefit for income taxes for the year ended
December 31, 2000, was $1,183 million, compared with a benefit of $465 million
for the ten months ended December 31, 1999. The effective income tax rate for
the year ended December 31, 2000 was 11.8%, compared to 25.3% for the ten months
ended December 31, 1999. The effective income tax rate for 2000 was impacted by
the inclusion of Excite@Home as a consolidated entity, and the Cox disposition.
The 1999 effective income tax rate was impacted by the non tax-deductible
write-off of in-process research and development.
Net Losses from Equity Investments. Net losses from equity investments
which are recorded net of income taxes decreased $110 million compared to 1999.
The decrease was due in part to a $185 million improvement in Cablevision's
results which was partially offset by additional equity losses of $64 million
from amortization of excess basis of equity investments acquired in the MediaOne
acquisition. The improvement in Cablevision's results is primarily due to gains
from cable system sales. The income tax benefit recorded on net losses from
equity investments was $370 million for the year ended December 31, 2000, and
$438 million for the ten months ended December 31, 1999. Amortization of
goodwill associated with non-consolidated investments totaled $485 million and
$476 million for the year ended December 31, 2000 and the ten months ended
December 31, 1999, respectively.
Minority Interest Income (Expense). Minority interest income (expense),
which is recorded net of income taxes, represents an adjustment to AT&T
Broadband Group's net loss to reflect the less than 100% ownership of entities
attributed to AT&T Broadband Group as well as dividends on preferred stock
issued by subsidiaries of AT&T which have been attributed to AT&T Broadband
Group. The increase of $4,188 million in 2000 primarily resulted from the
consolidation of Excite@Home effective September 1, 2000. The minority interest
in 2000 primarily reflects the losses generated by Excite@Home, including the
goodwill impairment charge, that were attributed to the approximate 77% of
Excite@Home not owned by AT&T Broadband Group. The income tax benefit recorded
on minority interest income (expense) was $100 million for the year ended
December 31, 2000 and $54 million for the ten months ended December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
AT&T Broadband Group has funded its operations through internally generated
funds, asset sales, capital contributions from AT&T and intercompany borrowings
from AT&T. Capital contributions from
VII-31
AT&T include acquisitions made by AT&T that have been attributed to AT&T
Broadband Group which are treated as non-cash.
Currently, financing activities for AT&T Broadband Group are managed by
AT&T on a centralized basis. Sources for AT&T Broadband Group's future financing
requirements may include borrowing of funds, including additional debt from AT&T
and/or third party debt. Loans from AT&T to any member of AT&T Broadband Group
have been made at interest rates and on other terms and conditions intended to
be substantially equivalent to the interest rates and other terms and conditions
that AT&T Broadband Group would be able to obtain from third parties, including
the public markets, as a non-affiliate of AT&T without the benefit of any
guaranty by AT&T.
AT&T performs cash management functions on behalf of AT&T Broadband Group.
Substantially all of AT&T Broadband Group's cash balances are swept to AT&T on a
daily basis, where they are managed and invested by AT&T. Transfers of cash to
and from AT&T, after giving consideration to the debt allocation methodology,
are reflected as a component of combined attributed net assets.
Net cash used in operating activities for the nine months ended September
30, 2001 was $779 million compared with cash provided by operations of $421
million for the nine months ended September 30, 2000. Net cash used in operating
activities for the nine months ended September 30, 2001 was due to net income of
$179 million, exclusive of non-cash items including adjustments for net losses
on sales of businesses and investments, offset by changes in other operating
assets and liabilities of $958 million. Net cash provided by operating
activities for the nine months ended September 30, 2000 was due to net income of
$1,251 million, exclusive of non-cash items including adjustments for net gains
on sales of businesses and investments, offset by net changes in other operating
assets and liabilities of $830 million.
Net cash provided by investing activities for the nine months ended
September 30, 2001 was $2,328 million compared with $3,208 million of cash used
in investing activities for the nine months ended September 30, 2000. For the
nine months ended September 30, 2001, AT&T Broadband Group's cash provided by
investing activities primarily resulted from $4,812 million cash received from
net acquisitions and dispositions of businesses offset by capital expended for
property and equipment, net of disposals, of $2,521 million. For the nine months
ended September 30, 2000, AT&T Broadband Group's cash used in investing
activities primarily resulted from capital expended for property and equipment,
net of proceeds from disposals of $3,067 million and $83 million of cash paid
for net acquisitions and dispositions.
Net cash used in financing activities for the nine months ended September
30, 2001 was $1,357 million compared to net cash provided by financing
activities for the nine months ended September 30, 2000 of $2,963 million. For
the nine months ended September 30, 2001, AT&T Broadband Group used cash of $807
million to retire long-term debt, net of proceeds, $190 million to pay dividends
on preferred securities, and $360 million to reduce short-term debt, net of cash
transfers from AT&T. Net proceeds from dispositions were used to reduce debt
levels. For the nine months ended September 30, 2000, AT&T Broadband Group used
cash of $1,422 million to retire long-term debt and redeemable securities, $399
million to pay other financing activities, and $147 million to pay dividends on
preferred securities. For the nine months ended September 30, 2000, AT&T
Broadband Group received $4,931 million in short-term debt and transfers from
AT&T. Funding from AT&T was received to cover capital expenditures and other
investing activities and the retirement of long-term debt and other financing
activities.
Net cash provided by operating activities for the year ended December 31,
2000 was $802 million, compared with $1,380 million for the ten months ended
December 31, 1999. Net cash provided by operating activities for the year ended
December 31, 2000 was due to net income of $1,260 million, exclusive of non-cash
items including adjustments for net gains on sales of businesses and
investments, offset by a change in other operating assets and liabilities of
$458 million. Net cash provided by operating activities for the ten months ended
December 31, 1999 was due to net income of $1,007 million, exclusive of non-cash
items including adjustments for net gains on sales of businesses and
investments, and a change in other operating assets and liabilities of $373
million.
VII-32
Net cash used in investing activities for the year ended December 31, 2000
was $4,511 million compared with $2,915 million for the ten months ended
December 31, 1999. For the year ended December 31, 2000, AT&T Broadband Group's
cash used in investing activities resulted from capital expended for property
and equipment, net of proceeds from disposals, of $4,426 million and $85 million
used in other investing activities. For the ten months ended December 31, 1999,
AT&T Broadband Group's cash used in investing activities resulted from capital
expended for property and equipment, net of proceeds from disposals of $3,161
million offset by $246 million provided by other investing activities. Capital
expenditures are primarily due to the continued expansion and upgrade of the
network to provide advanced services, including high-speed cable Internet
service and broadband telephone services.
Net cash provided by financing activities for the year ended December 31,
2000 was $3,770 million compared with $1,535 million for the ten months ended
December 31, 1999. For the year ended December 31, 2000, AT&T Broadband Group
received proceeds from the issuance of long-term debt, net of retirement of
long-term debt and redeemable securities, of $2,281 million and net cash from
AT&T through transfers and short-term debt borrowings of $2,298 million. This
was offset by $294 million of dividends paid on redeemable securities and $515
million of other financing activities. For the ten months ended December 31,
1999, AT&T Broadband Group received proceeds from the issuance of convertible
securities, net of retirements of long-term debt, of $2,607 million. This was
offset by cash transfers to AT&T, net of borrowings from AT&T, of $937 million
and $135 million of dividends paid on redeemable securities. The increase in
cash from financing activities was primarily due to the additional funding
needed for increased capital expenditures.
The continued expansion and upgrade of AT&T Broadband Group's network to
provide advanced services, including high-speed cable Internet service and
broadband telephone service will continue to require substantial capital. AT&T
Broadband Group anticipates that it will spend approximately $4.2 billion in
2002 primarily to expand and upgrade its network for the provision of advanced
services and to add new customers. AT&T has provided and it is anticipated that
AT&T will continue to provide funding to AT&T Broadband Group for capital
expenditures.
At September 30, 2001, AT&T Broadband Group had current assets of $1,427
million and current liabilities of $8,883 million. A significant portion of the
current liabilities, $5,962 million, relates to short-term debt of which $5,390
million was due to AT&T.
As of September 30, 2001, total debt was $23,274 million of which $5,760
million was monetized by investments, where such investments can be delivered in
full satisfaction of the underlying debt at the time of maturity. In January and
February 2002, AT&T announced that it will redeem $1,312 million of trust
preferred securities in February and March of 2002. These amounts are classified
as long-term debt in the combined balance sheet.
AT&T Broadband Group expects that it will retire a portion of the
short-term debt with other financing arrangements, including the monetization of
publicly-held securities and the sales of certain non-strategic assets and
investments.
In October 2001, AT&T Broadband Group sold 19.2 million shares of
Cablevision NY Group Class A common stock and, through a trust, 26.9 million
shares of a mandatorily exchangeable trust security that will be exchangeable
into up to 26.9 million shares of Cablevision NY Group Class A common stock at
maturity in three years. The offering generated approximately $1,422 million of
pretax net cash proceeds.
In December 2001, AT&T Broadband Group sold 14.7 million shares of
Cablevision's Rainbow Media Group Class A tracking stock and, through a trust,
9.8 million shares of a mandatorily exchangeable trust security that will be
exchangeable into up to 9.8 million shares of Rainbow Media Group Class A
tracking stock at maturity in three years. The offering generated approximately
$487 million of pretax net cash proceeds.
In addition, AT&T has exercised its registration rights in TWE and formally
requested TWE to begin the process of converting the limited partnership into a
corporation with registered equity securities. In
VII-33
May 2001, AT&T named Credit Suisse First Boston as its investment banker for the
registration process under the TWE partnership agreement.
AT&T Broadband Group has other commitments and contractual obligations that
will also impact its cash needs. AT&T Broadband Group's more significant
commitments and contractual obligations are as follows:
- In July 1997, AT&T Broadband LLC's predecessor, TCI, and AT&T Broadband
LLC's subsidiary, Satellite Services, Inc., entered into a 25 year
affiliation term sheet with Starz Encore Group (formerly Encore Media
Group) pursuant to which AT&T Broadband Group may be obligated to make
fixed monthly payments in exchange for unlimited access to Encore and
Starz! programming. Starz Encore Group is a subsidiary of Liberty Media
Group, a former subsidiary of AT&T. The commitment increases annually
from $288 million in 2001 to $315 million in 2003, and will increase
annually through 2022 with inflation. The affiliation term sheet further
provides that to the extent Starz Encore Group's programming costs
increase above certain levels, AT&T Broadband Group's payments under the
term sheet will be increased in proportion to the excess. Starz Encore
Group requested payment from AT&T Broadband Group of amounts it contends
are AT&T Broadband Group's proportionate share of what Starz Encore Group
reported as its excess programming costs during the first quarter of 2001
(which amount, approximately $40 million, Starz Encore Group indicated it
expected to represent the bulk of what it considered AT&T Broadband
Group's proportionate share of excess programming costs Starz Encore
Group considers to be payable for the year 2001). Excess programming
costs Starz Encore Group is expected to contend to be payable by AT&T
Broadband Group in future years are not presently estimable, and could be
significantly larger. By letter dated May 29, 2001, AT&T Broadband Group
disputed the enforceability of the excess programming pass through
provisions of the term sheet and questioned the validity of the term
sheet as a whole. AT&T Broadband Group also has raised certain issues
concerning the uncertainty of the provisions of the term sheet and the
contractual interpretation and application of certain of its provisions
to, among other things, the acquisition and disposition of cable systems.
In July 2001, Starz Encore Group filed suit seeking payment of the 2001
excess programming costs and a declaration that the term sheet is a
binding and enforceable contract. In October 2001, AT&T Broadband Group
and Starz Encore Group agreed to stay the litigation until August 31,
2002 to allow the parties time to continue negotiations toward a
potential business resolution of this dispute. The Court granted the stay
on October 30, 2001. The terms of the stay order allow either party to
petition the Court to lift the stay after April 30, 2002 and to proceed
with the litigation.
- AT&T Broadband Group is party to an agreement under which it purchases
certain billing services from an unaffiliated third party. Unless
terminated by either party pursuant to the terms of the agreement, the
agreement expires on December 31, 2012. The agreement calls for monthly
payments. Such payments are subject to adjustments and conditions
pursuant to the terms of the underlying agreement. Amounts included in
selling, general and administrative expenses that were incurred in
connection with these arrangements were approximately $143 million for
the year ended December 31, 2000.
- From time to time, AT&T Broadband, LLC and MediaOne may guarantee the
debt of their subsidiaries and certain unconsolidated joint ventures.
AT&T Broadband, LLC has taken certain steps to support debt compliance
with respect to obligations aggregating $1,461 million at December 31,
2000 of certain cable television partnerships in which AT&T Broadband,
LLC has a non-controlling ownership interest and which have been
attributed to AT&T Broadband Group. All guarantees of AT&T Broadband
Group totaled $1,486 million at December 31, 2000. Although there can be
no assurances, management believes that it will not be required to meet
its obligations under such guarantees.
VII-34
FINANCIAL CONDITION
Total assets were $104,261 million as of September 30, 2001, which
represented a decrease of $13,273 million compared to December 31, 2000. The
decrease primarily resulted from the net disposition of cable systems during
2001. Additional decreases resulted from the deconsolidation of Excite@Home; the
exchange of an investment in Vodafone Group plc for the settlement of
exchangeable notes; the transfer of investments to AT&T; the unfavorable
mark-to-market adjustments on investments and amortization of franchise costs
and goodwill. Such decrease was partially offset by capital expenditures, net of
depreciation.
Total liabilities were $52,828 million as of September 30, 2001,
representing a decrease of $12,258 million compared to December 31, 2000. The
decrease was due primarily to the dispositions and exchanges of cable systems;
the settlement of the Excite@Home put options; the deconsolidation of
Excite@Home; the settlement of exchangeable notes and other retirements of
long-term debt.
Minority interest decreased $1,102 million to $3,319 million at September
30, 2001 as compared to December 31, 2000. The decrease was primarily due to
Excite@Home. On September 28, 2001, Excite@Home filed for bankruptcy under
Chapter 11 in the U.S. Bankruptcy Court for the Northern District of California.
As a result, AT&T Broadband Group deconsolidated Excite@Home effective September
30, 2001.
Combined attributed net assets were $43,396 million as of September 30,
2001, which represented an increase of $79 million compared to December 31,
2000. The increase was primarily due to contributions from AT&T and an increase
in accumulated other comprehensive income due to the adoption of SFAS No. 133.
Such increases were partially offset by the net loss for the nine months ended
September 30, 2001.
AT&T, Comcast and AT&T Comcast have entered into an agreement with
Microsoft pursuant to which at the time of the AT&T Broadband spin-off,
Microsoft will exchange the $5 billion company-obligated convertible quarterly
income preferred securities for shares of AT&T Broadband Corp. common stock that
will be converted into, subject to adjustments, 115 million shares of AT&T
Comcast common stock in the AT&T Comcast transaction.
Total assets were $117,534 million as of December 31, 2000, which increased
$59,306 million compared to December 31, 1999. The increase was primarily due to
the impact of the MediaOne acquisition, which resulted in increased goodwill,
franchise costs, and investments including Time Warner Entertainment and
Vodafone Group plc and the impact of the consolidation of Excite@Home.
Additional increases resulted from capital expenditures, net of depreciation.
Such increases were partially offset by a decrease in the mark-to-market
valuation of certain investments.
Total liabilities were $65,086 million as of December 31, 2000, which
increased $28,774 million compared to December 31, 1999 primarily due to the
impact of the MediaOne acquisition, including the debt and deferred taxes, as
well as the consolidation of Excite@Home. Total debt also increased due to the
monetization of investments in Microsoft and Comcast. At December 31, 2000, $8.7
billion of total debt was monetized investments, where such investments can be
delivered in full satisfaction of the underlying debt at the time of maturity.
Minority interest increased $2,094 million to $4,421 million at December
31, 2000, primarily reflecting the minority interest in Excite@Home resulting
from the consolidation of Excite@Home beginning September 1, 2000 and the
outstanding preferred stock of a MediaOne subsidiary.
Combined attributed net assets were $43,317 million as of December 31,
2000, an increase of $28,428 million compared to December 31, 1999. The increase
was primarily due to the net transfers from AT&T for the MediaOne acquisition
and net transfers from AT&T to fund capital expenditures.
RISK MANAGEMENT
AT&T Broadband Group is exposed to market risk from changes in interest
rates, as well as changes in equity prices associated with affiliated companies.
In addition, AT&T Broadband Group is exposed to
VII-35
market risk from fluctuations in the prices of securities which have been
monetized through the issuance of debt. On a limited basis, certain derivative
financial instruments, including interest rate swaps and options are used to
manage these risks. Financial instruments are not used for trading or
speculative purposes. All financial instruments are used in accordance with AT&T
board-approved policies.
Interest rate swaps are used to manage the impact of interest rate changes
on earnings and cash flows and to lower overall borrowing costs. Option
contracts are used to reduce exposure to the risk of fluctuations in the prices
of securities that have been monetized. Interest rate risk is monitored on the
basis of changes in fair value. Assuming a 10% downward shift in interest rates,
the fair value of interest rate swaps and the underlying hedged debt would have
changed by $15 million and $1 million at December 31, 2000 and 1999,
respectively. In addition, certain debt is indexed to the market prices of
certain securities owned. Changes in the market price of these securities result
in changes in the fair value of this debt. Assuming a 10% downward change in the
market price of the securities, the fair value of the underlying debt and
securities would have decreased by $534 million at December 31, 2000. Assuming a
10% downward shift in interest rates at December 31, 2000 and 1999, the fair
value of unhedged debt would have increased by $563 million and $288 million,
respectively.
Equity hedges are used to manage exposure to changes in equity prices
associated with stock appreciation rights, or SARs. Assuming a 10% decrease in
equity prices of affiliated companies, the fair value of equity hedges would
have decreased by $29 million and $75 million at December 31, 2000 and 1999,
respectively. Because these contracts are entered into for hedging purposes,
it's believed that the decrease in fair value would be largely offset by gains
on the underlying transaction.
In order to determine the changes in fair value of the various financial
instruments, certain modeling techniques, namely Black-Scholes, are used for the
SARs and equity collars. Rate sensitivity changes are directly applied to
interest rate swap transactions.
The changes in fair value, as discussed above, assume the occurrence of
certain adverse market conditions. They do not consider the potential effect of
favorable changes in market factors and do not represent projected losses in
fair value expected to incur. Future impacts would be based on actual
developments in global financial markets. There are no significant foreseen
changes in the strategies used to manage interest rate risk or equity price risk
in the near future.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting standard No. 141, "Business Combinations,"
which supercedes Accounting Principles Board ("APB") Opinion No. 16. SFAS No.
141 requires all business combinations initiated after June 30, 2001 be
accounted for under the purchase method. In addition, SFAS No. 141 establishes
criteria for the recognition of intangible assets separately from goodwill.
These requirements are effective for fiscal years beginning after December 15,
2001, which for AT&T Broadband Group means January 1, 2002. AT&T Broadband Group
does not expect the adoption of SFAS No. 141 will have a material effect on AT&T
Broadband Group's results of operations, financial position or cash flow.
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which supercedes APB Opinion No. 17. Under SFAS No. 142
goodwill and indefinite lived intangible assets will no longer be amortized, but
rather will be tested for impairment upon adoption and at least annually
thereafter. In addition, the amortization period of intangible assets with
finite lives will no longer be limited to 40 years. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001, which for AT&T Broadband
Group means the standard will be adopted on January 1, 2002. In connection with
the adoption of this standard, AT&T Broadband Group's unamortized goodwill
balance will no longer be amortized, but will continue to be tested for
impairment. The goodwill balance as of September 30, 2001 was $19.4 billion with
related amortization expense for the nine months ended September 30, 2001 of
$534 million. The excess basis related to AT&T Broadband Group's equity method
investments as of September 30, 2001 was $8.6 billion with related amortization
of $120 million. In accordance with this statement these costs will no longer be
amortized beginning January 1, 2002. In addition, AT&T
VII-36
Broadband Group has determined that franchise costs are indefinite lived assets
and therefore, as of January 1, 2002 will no longer be subject to amortization,
but will continue to be tested for impairment. The franchise cost balance as of
September 30, 2001 was $43.3 billion with related amortization expense for the
nine months ended September 30, 2001 of $929 million. AT&T Broadband Group is
continuing to assess the adoption impairment impacts of such standard on AT&T
Broadband Group's results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This standard requires that obligations associated with
the retirement of tangible long-lived assets be recorded as liabilities when
those obligations are incurred, with the amount of the liability initially
measured at fair value. Upon initially recognizing a liability for an asset
retirement obligation, an entity must capitalize the cost by recognizing an
increase in the carrying amount of the related long-lived asset. Over time, this
liability is accreted to its present value, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. SFAS No. 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002, which for AT&T
Broadband Group means the standard will be adopted on January 1, 2003. AT&T
Broadband Group does not expect that the adoption of this statement will have a
material impact on AT&T Broadband Group's results of operations, financial
position or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS No. 144 applies to all long-lived assets, including
discontinued operations, and consequently amends APB Opinion No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." Based on SFAS No. 121, SFAS No. 144 develops one accounting model
for long-lived assets that are to be disposed of by sale, as well as addresses
the principal implementation issues. SFAS No. 144 requires that long-lived
assets that are to be disposed of by sale be measured at the lower of book value
or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
SFAS No. 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001, which for AT&T Broadband Group means the
standard will be adopted on January 1, 2002. AT&T Broadband Group does not
expect that the adoption of SFAS No. 144 will have a material impact on AT&T
Broadband Group's results of operations, financial position or cash flows.
SUBSEQUENT EVENTS
In October 2001, AT&T Broadband Group sold approximately 19.2 million
shares of Cablevision NY Group Class A common stock and, through a trust, 23.4
million shares of a mandatorily exchangeable trust security that will be
exchangeable into up to 23.4 million shares of Cablevision NY Group Class A
common stock at maturity in three years. The offering price was $36.05 per share
for both the common shares and the exchangeable securities. The offerings
generated approximately $1,323 million of pretax cash proceeds, net of
underwriting fees. The sale resulted in a pretax loss of approximately $271
million. In addition, the underwriters have exercised a portion of their
over-allotment options, which resulted in the sale of an additional 3.5 million
shares of the exchangeable securities through the trust. AT&T Broadband Group
received additional cash proceeds of approximately $99 million from this
transaction.
In December 2001, AT&T Broadband Group sold approximately 12.8 million
shares of Cablevision's Rainbow Media Group Class A tracking stock and, through
a trust, 8.5 million shares of a mandatorily exchangeable trust security that
will be exchangeable into up to 8.5 million shares of Rainbow Media Group Class
A tracking stock at maturity in three years. The offering price was $22.50 per
share for both the tracking stock shares and the exchangeable trust securities.
The offerings generated approximately $424 million of pretax cash proceeds, net
of underwriting fees. The sale resulted in a pretax gain of
VII-37
approximately $66 million. In addition, the underwriters have exercised their
over-allotment options, which resulted in the sale of an additional 1.9 million
tracking stock shares and, through the trust, 1.3 million shares of the
exchangeable securities. AT&T Broadband Group received additional proceeds of
approximately $63 million.
During the fourth quarter of 2001, AT&T Broadband Group recorded an
impairment charge of $450 million. The impairment charge primarily resulted from
management's conclusion that declines in market value were not temporary or the
investment could not be held for a period of time to allow for recoverability of
fair value as in the case of exchangeable notes due in late 2002 that can be
settled with shares of Vodafone ADRs.
In January and February 2002, AT&T announced that it will redeem $1,312
million of trust preferred securities in February and March of 2002. These
amounts are classified as long-term debt in the combined balance sheets.
VII-38
CHAPTER EIGHT
DESCRIPTION OF GOVERNANCE ARRANGEMENTS FOLLOWING
THE AT&T COMCAST TRANSACTION
AT&T COMCAST BOARD OF DIRECTORS
Upon completion of the transaction, the initial AT&T Comcast Board will
have twelve members, five of whom will be designated by Comcast from the
existing Comcast Board, five of whom will be designated by AT&T from the
existing AT&T Board and two of whom will be jointly designated by Comcast and
AT&T and will be independent persons. At all times, the AT&T Comcast Board will
consist of a majority of independent persons. Except for pre-approved designees,
the individuals designated by each of Comcast and AT&T will be mutually agreed
upon by Comcast and AT&T. Ralph J. Roberts, Brian L. Roberts, Sheldon M.
Bonovitz, Julian A. Brodsky and Decker Anstrom are pre-approved Comcast director
designees and C. Michael Armstrong is a pre-approved AT&T director designee. All
of the initial director designees will hold office until the 2005 annual meeting
of AT&T Comcast shareholders, or the "Initial Term," which will be held in April
2005. After the Initial Term, the entire AT&T Comcast Board will be elected
annually.
During the Initial Term, vacancies on the AT&T Comcast Board left by a
Comcast director designee will be filled by a majority of the remaining Comcast
director designees (provided that, at all times, one of the Comcast director
designees must be an independent person), vacancies on the AT&T Comcast Board
left by an AT&T director designee will be filled by a majority of the remaining
AT&T director designees and, subject to the prior approval of the AT&T Comcast
Board, vacancies on the AT&T Comcast Board left by a Comcast/AT&T joint director
designee will be filled by the remaining Comcast/AT&T joint director designee
(provided that any such replacement joint director designee must be an
independent person). After the Initial Term, the AT&T Comcast Board will fill
any vacancies on the AT&T Comcast Board that may arise.
For information concerning each of the pre-approved Comcast director
designees, see Comcast's proxy statement for its 2002 annual meeting of
shareholders. For information concerning the pre-approved AT&T director
designee, see "Information about the AT&T Annual Meeting and Voting -- Election
of Directors."
DIRECTORS NOMINATING COMMITTEE
Upon completion of the transaction, AT&T Comcast will have a Directors
Nominating Committee that will have the power to nominate individuals for
election as AT&T Comcast directors at the 2005 annual meeting of shareholders
and thereafter. The composition of the Directors Nominating Committee will
depend on whether Brian L. Roberts is the Chairman of the Board or CEO of AT&T
Comcast. During the Initial Term, if Brian L. Roberts is the Chairman of the
Board or the CEO, the Directors Nominating Committee will consist of Brian L.
Roberts, one Comcast director designee who is an independent person selected by
the Comcast director designees and three independent persons who are selected by
the Comcast director designees from the AT&T director designees and the
Comcast/AT&T joint director designees. During the Initial Term, if Brian L.
Roberts is not the Chairman of the Board or the CEO, the Directors Nominating
Committee will consist of two Comcast director designees (one of whom shall be
an independent person) who are selected by the Comcast director designees and
three independent persons who are selected by the Comcast director designees
from the AT&T director designees and the Comcast/AT&T joint director designees.
After the Initial Term, the Directors Nominating Committee will consist of
Brian L. Roberts, if he is the Chairman of the Board or the CEO, and four
directors who are independent persons selected by Brian L. Roberts; provided
that no director who was a Comcast director designee may be selected by Brian L.
Roberts as a member of the Directors Nominating Committee prior to the seventh
anniversary of the date that such director was initially elected to the AT&T
Comcast Board. After the Initial Term, if Brian L. Roberts is not the Chairman
of the Board or the CEO, the AT&T Comcast Board will determine
VIII-1
the composition of the Directors Nominating Committee. At any time that Brian L.
Roberts is a member of the Directors Nominating Committee, he will be the
chairman of that committee. Nominations of the Directors Nominating Committee
will be submitted directly to the AT&T Comcast shareholders without any
requirement of AT&T Comcast Board approval or ratification.
MANAGEMENT
Chairman of the Board. Upon the completion of the transaction, C. Michael
Armstrong, AT&T's Chairman of the Board, will be Chairman of the Board of AT&T
Comcast. C. Michael Armstrong will serve as Chairman of the Board until the 2005
annual meeting of AT&T Comcast shareholders, but he will serve as non-executive
Chairman of the Board after April 1, 2004. After the 2005 annual meeting of AT&T
Comcast shareholders, or if C. Michael Armstrong ceases to serve as Chairman of
the Board prior to that date, Brian L. Roberts will be the Chairman of the
Board.
The Chairman of the Board will preside at all meetings of the AT&T Comcast
shareholders and of the AT&T Comcast Board and will have the authority to call
special meetings of the AT&T Comcast Board. Removal of the Chairman of the Board
will require the vote of at least 75% of the entire AT&T Comcast Board until the
earlier to occur of (1) the date on which neither C. Michael Armstrong nor Brian
L. Roberts is Chairman of the Board and (2) the fifth anniversary of the 2005
annual meeting of AT&T Comcast shareholders.
Chief Executive Officer and President. Upon completion of the transaction,
Brian L. Roberts, Comcast's President, will be the CEO of AT&T Comcast. Brian L.
Roberts will also be President for as long as he is the CEO. The CEO's powers
and responsibilities will include:
- the supervision and management of AT&T Comcast's business and operations,
- all matters related to officers and employees, including hiring and
termination,
- all rights and powers typically exercised by a corporation's chief
executive officer and president, and
- the authority to call special meetings of the AT&T Comcast Board.
Removal of the CEO will require the vote of at least 75% of the entire AT&T
Comcast Board until the earlier to occur of (1) the date on which Brian L.
Roberts ceases to be the CEO and (2) the fifth anniversary of the 2005 annual
meeting of AT&T Comcast shareholders.
Senior Management. The CEO will select the initial senior management of
AT&T Comcast in consultation with the Chairman of the Board.
OFFICE OF THE CHAIRMAN
Upon completion of the transaction, AT&T Comcast will have an Office of the
Chairman comprised of the Chairman of the Board and the CEO from the completion
of the transaction until the earlier to occur of (1) the 2005 annual meeting of
AT&T Comcast shareholders and (2) the date on which C. Michael Armstrong ceases
to be the Chairman of the Board. The Office of the Chairman will be AT&T
Comcast's principal executive deliberative body with responsibility for
corporate strategy, policy and direction, governmental affairs and other
significant matters. While the Office of the Chairman is in effect, the Chairman
of the Board and the CEO will advise and consult with each other with respect to
those matters.
AMENDMENT AND TERMINATION
The AT&T Comcast charter provisions that implement the foregoing governance
arrangements may not be amended or changed except with the approval of 75% of
the entire AT&T Comcast Board until the
VIII-2
earlier to occur of (1) the date on which Brian L. Roberts is no longer serving
as Chairman of the Board or CEO and (2) the fifth anniversary of the 2005 annual
meeting of AT&T Comcast shareholders. If Brian L. Roberts is no longer serving
as either Chairman of the Board or CEO, with the exception of the provisions
regarding the Directors Nominating Committee and the requirement that the AT&T
Comcast Board be comprised of a majority of independent persons, the governance
arrangements described above will automatically terminate. Notwithstanding the
foregoing, if Brian L. Roberts ceases to serve as Chairman of the Board or CEO
prior to the 2005 annual meeting of AT&T Comcast shareholders, the provisions
relating to the AT&T Comcast Board, the Office of the Chairman, the Chairman of
the Board (other than the requirement that a removal of the Chairman of the
Board occur only with the approval of 75% of the entire AT&T Comcast Board) and
the Directors Nominating Committee will survive through the close of that
meeting.
VIII-3
CHAPTER NINE
EMPLOYEE BENEFITS MATTERS
INTERESTS OF DIRECTORS AND OFFICERS IN THE AT&T COMCAST TRANSACTION
GENERAL
In considering the respective recommendations of the Comcast Board and the
AT&T Board with regard to the AT&T Comcast transaction, you should be aware
that, as described below, several members of the respective managements and
boards of directors of Comcast and AT&T may have interests in the AT&T Comcast
transaction that are different from, or in addition to, your interests. The
Comcast Board and the AT&T Board were each aware of such interests and
considered them, among other matters, when voting to approve the AT&T Comcast
transaction.
COMCAST
Governance Structure and Management Positions. Pursuant to the terms of
the merger agreement, upon completion of the AT&T Comcast transaction:
- The AT&T Comcast Board will initially be comprised of twelve individuals,
five of whom will be existing Comcast directors designated by Comcast,
five of whom will be existing AT&T directors designated by AT&T and two
of whom will be independent persons jointly designated by Comcast and
AT&T;
- Brian L. Roberts, President of Comcast, will serve as CEO and President
of AT&T Comcast. Removal of the CEO requires the vote of at least 75% of
the entire AT&T Comcast Board until the earlier of the date when Brian L.
Roberts is not the CEO and the fifth anniversary of the 2005 annual
meeting of shareholders;
- The initial senior officers of AT&T Comcast will be designated by Brian
L. Roberts in consultation with C. Michael Armstrong; and
- Sural LLC will hold shares of AT&T Comcast Class B common stock
constituting 33 1/3% of the combined voting power of AT&T Comcast common
stock. Brian L. Roberts has sole voting power over stock representing a
majority of the voting power of all Sural LLC stock.
Employment Agreements. Pursuant to the terms of the merger agreement, AT&T
Comcast will offer to enter into employment agreements, effective as of the
completion of the AT&T Comcast transaction, with Brian L. Roberts (pursuant to
which he will serve as CEO and President of AT&T Comcast) and with Ralph J.
Roberts. Each of these employment agreements will have terms ending no earlier
than the date of the 2005 annual meeting of AT&T Comcast shareholders. Each of
these employment agreements will be on substantially the same terms as the
existing applicable employment agreement with Comcast. If the AT&T Comcast Board
establishes an Executive Committee, Ralph J. Roberts, Chairman of the Board of
Comcast, will serve as the Chairman of this committee.
Brian L. Roberts's existing employment agreement with Comcast provides for
the payment of base salary and an annual bonus of up to 150% of base salary for
the applicable year. Upon termination of his employment, Brian L. Roberts is
entitled to certain benefits as described in his agreement. Certain benefits
resulting from the occurrence of a change in control are described below. Under
his current agreement, he has agreed not to compete with Comcast during his
employment and for two years after any termination of his employment other than
a termination following a change in control.
Ralph J. Roberts's existing employment agreement with Comcast provides for
the payment of base salary and an annual bonus of up to 50% of base salary for
the applicable year. It also provides for maintenance of split-dollar life
insurance and the payment of a supplemental death benefit to the personal
representatives of Ralph J. Roberts within six months of his death. Upon
termination of his employment, Ralph J. Roberts is entitled to certain benefits
as described in his agreement. Certain benefits resulting from the occurrence of
a change in control are described below. Under his current agreement, he has
IX-1
agreed not to compete with Comcast during his employment and for five years
after termination of his employment. The employment agreement also provides that
Ralph J. Roberts may at any time, upon 30 days' notice to Comcast, elect to
change his position from that of an executive to that of a consultant. In such
event, he shall continue to receive all of the compensation provided under his
employment agreement, other than his annual bonus. If he elects to become a
consultant, his entitlement to retirement benefits under Comcast's supplemental
executive retirement plan will be adjusted annually to reflect 150% of his base
salary as consultant, but his benefits under such plan will not in any event
exceed the bonus he could have received under his employment agreement had he
continued to work as an executive. If you are interested in further information
about either of these agreements, see section [ ] of Comcast's proxy
statement used in connection with its 2002 annual meeting of shareholders.
Under each of the existing employment agreements with Brian L. Roberts and
Ralph J. Roberts, Comcast must establish and fund a grantor trust for each
individual prior to a change in control (as defined in such agreements). It is
anticipated that the AT&T Comcast transaction will constitute a change in
control under these agreements. With respect to Brian L. Roberts, the trust will
be established and funded for purposes of paying all deferred compensation,
retirement benefits and term life insurance premiums and bonuses then applicable
for Brian L. Roberts. With respect to Ralph J. Roberts, the trust will be
established and funded for purposes of paying all deferred compensation,
nonqualified retirement benefits and split-dollar term life insurance premiums
and bonuses then applicable for Ralph J. Roberts. The amount required to fund
such trusts is not expected to exceed $150 million. Upon a change in control,
each trust must become irrevocable and Comcast must continue to make payments
into each trust to maintain sufficient amounts in the trusts to fund all
benefits subject to the trusts.
Equity Awards. None of the stock-based awards granted under any of the
equity-based plans maintained by Comcast will vest as a result of the AT&T
Comcast transaction. For the treatment of Comcast stock options and equity
awards in the AT&T Comcast transaction, see "Description of the AT&T Comcast
Transaction Agreements -- The Merger Agreement."
Security Ownership of Officers and Directors. For information concerning
security ownership of directors and certain officers of Comcast, see Comcast's
proxy statement used in connection with its 2002 annual meeting of shareholders,
the relevant portions of which are incorporated by reference in this joint
document from Comcast's annual report on Form 10-K for the fiscal year ended
December 31, 2001.
AT&T
Governance Structure and Management Positions. Pursuant to the terms of
the merger agreement, upon completion of the AT&T Comcast transaction:
- The AT&T Comcast Board will initially be comprised of twelve individuals,
five of whom will be existing AT&T directors designated by AT&T, five of
whom will be existing Comcast directors designated by Comcast and two of
whom will be independent persons jointly designated by Comcast and AT&T;
and
- C. Michael Armstrong, Chairman of the Board and Chief Executive Officer
of AT&T, will serve as the Chairman of the Board of AT&T Comcast. C.
Michael Armstrong will serve as chairman of the Board until the 2005
annual meeting of AT&T Comcast shareholders, but he will serve as non-
executive Chairman of the Board after April 1, 2004. Removal of the
Chairman of the Board requires the approval of at least 75% of the entire
AT&T Comcast Board until the earlier of the date that neither C. Michael
Armstrong nor Brian L. Roberts is Chairman of the Board and the fifth
anniversary of the 2005 annual meeting of shareholders.
Employment Agreements. Pursuant to the employee benefits agreement and in
connection with the AT&T Broadband spin-off, AT&T Broadband will assume C.
Michael Armstrong's current employment agreement with AT&T and William T.
Schleyer's current employment agreement with AT&T.
Pursuant to the terms of the merger agreement, AT&T Comcast will offer to
enter into an employment agreement, effective as of the completion of the AT&T
Comcast transaction, with C. Michael
IX-2
Armstrong to serve as Chairman of the Board of AT&T Comcast. The term of this
employment agreement will end no earlier than the date of the 2005 annual
meeting of AT&T Comcast shareholders. This employment agreement will be on
substantially the same terms as C. Michael Armstrong's existing employment
agreement with AT&T.
See page [ ] of this document for a description of C. Michael
Armstrong's current employment agreement with AT&T and page [ ] of this
document for a description of William T. Schleyer's current employment agreement
with AT&T.
Severance Plan. Each AT&T executive officer who becomes employed by AT&T
Broadband prior to the completion of the AT&T Comcast transaction will be
entitled to receive the greater of the severance under his employment agreement,
if any, or the severance benefits under the terms of the applicable AT&T
Broadband severance plan if terminated as described below. Upon termination of
employment by AT&T Broadband without cause or for good reason within two years
following a change in control of AT&T Broadband (as such terms are defined in
the applicable plan), members of senior management will be eligible to receive,
in a lump sum payment, three times the sum of (1) annual base salary, (2) short-
term incentive (payable at 100% of target), and (3) in the case of senior
officers, the performance share target for the year in which the AT&T Comcast
transaction occurs, plus the amount necessary to compensate for any excise tax
due on any amounts payable under the plan. Upon a termination of employment
without cause or for good reason within the two years following a change in
control of AT&T Broadband, other participants in the plan are eligible to
receive benefits ranging from 12 weeks of base salary to 2 years of base salary
and 2 years of short term incentives (payable at 100% of target), depending on
job level and years of service, plus the amount necessary to compensate for any
excise tax due on any amounts payable under the plan. In addition, individuals
who terminate employment under the terms of the applicable plan will be entitled
to certain other post-termination benefits, including payment of the cost of
COBRA benefits for 12 months, subsidized health care coverage for six months,
and continuation of life insurance for 12 months post-termination. The AT&T
Comcast transaction will constitute a change in control under the applicable
AT&T Broadband severance plans.
Based on currently available information, if all executive officers of AT&T
expected to become employees of AT&T Broadband prior to completion of the AT&T
Comcast transaction were terminated without cause immediately following
completion of the AT&T Comcast transaction, such executive officers would
receive under their employment agreements or the applicable AT&T Broadband
severance plan, as applicable, severance payments approximately equal in the
aggregate to $[ ].
Equity Awards. Immediately prior to the AT&T Comcast transaction, as a
part of the AT&T Broadband spin-off, AT&T restricted stock and other
equity-based awards will be converted as described below. In connection with the
conversions, adjustments will be made to maintain the intrinsic value of the
original AT&T options and the fair market value of the original AT&T restricted
stock or other equity-based award immediately before and after the AT&T
Broadband spin-off:
- AT&T stock options held by current employees of AT&T (other than
employees of AT&T Broadband) will be converted into adjusted AT&T stock
options;
- AT&T restricted shares held by current employees of AT&T (other than
employees of AT&T Broadband) will be converted into (1) adjusted AT&T
restricted shares and (2) equity-based awards based on AT&T Broadband
common stock;
- AT&T stock options held by current employees of AT&T Broadband (including
any AT&T employees who become employees of AT&T Broadband in connection
with the AT&T Broadband spin-off) will be converted into AT&T Broadband
stock options;
- AT&T restricted shares held by current employees of AT&T Broadband
(including AT&T employees who become employees of AT&T Broadband in
connection with the AT&T Broadband spin-off) will be converted into (1)
adjusted AT&T restricted shares and (2) AT&T Broadband restricted shares;
IX-3
- AT&T stock options held by former employees of AT&T and AT&T Broadband
will be converted into (1) adjusted AT&T stock options and (2) AT&T
Broadband stock options; and
- Other equity-based awards based on AT&T common stock, regardless of by
whom held, will be converted into (1) adjusted equity-based awards based
on AT&T common stock and (2) equity-based awards based on AT&T Broadband
common stock.
As of the completion of the AT&T Comcast transaction, all outstanding AT&T
Broadband stock options held by current AT&T Broadband employees (including AT&T
executive officers who become employees of AT&T Broadband in connection with the
AT&T Broadband spin-off) will, by their terms, have vested and become fully
exercisable through the remainder of the original option period (except for
awards held by any AT&T executive officer who has waived rights to vesting of
certain equity awards as a result of the AT&T Comcast transaction) and will be
converted into AT&T Comcast stock options pursuant to the merger agreement. In
addition, all restricted shares and other equity-based awards based on either
AT&T or AT&T Broadband stock held by current and former employees of AT&T
Broadband (including any AT&T executive officer who becomes an employee of AT&T
Broadband in connection with the AT&T Broadband spin-off) will, by their terms,
have fully vested (except for awards held by any AT&T executive officer who has
waived rights to vesting of certain equity awards as a result of the AT&T
Comcast transaction). AT&T Broadband stock options, restricted shares and other
equity-based awards based on AT&T Broadband stock will be converted into AT&T
Comcast stock options, restricted shares and other equity-based awards based on
AT&T Comcast stock pursuant to the merger agreement. For the treatment of AT&T
Broadband stock options and equity awards in the AT&T Comcast transaction, see
"Description of the AT&T Comcast Transaction Agreements -- The Merger
Agreement."
As of [ ], 2002, the number of shares underlying unvested AT&T
stock options and shares of restricted AT&T common stock held by directors and
executive officers of AT&T currently expected to become employees of AT&T
Broadband in the AT&T Broadband spin-off totaled [ ]. AT&T
executive officers currently expected to become employees of AT&T Broadband
(other than any executive officer who has waived rights to vesting of certain
equity awards as a result of the AT&T Comcast transaction) are expected to hold,
based on certain assumptions and currently available information, (a) unvested
AT&T Broadband stock options that will have become vested as of the completion
of the AT&T Comcast transaction with an aggregate in-the-money value of
$[ ], (b) shares of AT&T and AT&T Broadband restricted stock that
will become unrestricted as a result of the AT&T Comcast transaction with an
aggregate value of $[ ], and (c) other equity-based awards (based
on AT&T or based on AT&T Broadband stock) that will vest as a result of the AT&T
Comcast transaction with an aggregate value of $[ ], in each case,
based on an AT&T common stock price of $[ ] (the closing price of
a share of AT&T common stock on [ ]).
In addition, after conversion of their original AT&T equity awards in the
AT&T Broadband spin-off, directors and officers of AT&T who do not become
employed by AT&T Broadband in the AT&T Broadband spin-off will hold in the
aggregate equity-based awards denominated with respect to [ ]
shares of AT&T Broadband common stock. These awards will not vest as a result of
the AT&T Comcast transaction, but will vest according to their original terms.
See "Employee Benefits Matters."
Security Ownership of Officers and Directors. For information concerning
security ownership of directors and certain officers of AT&T, see
[ ].
Other Executive Benefit Plans. Each executive officer of AT&T who becomes
employed by AT&T Broadband prior to the completion of the AT&T Comcast
transaction, including C. Michael Armstrong and William T. Schleyer, will
participate in benefit plans maintained by AT&T Broadband. These plans contain
provisions relating to a change in control, as summarized below:
- AT&T Broadband Pension Plan. Upon completion of the AT&T Comcast
transaction, the plan cannot be amended to reduce change in control
benefits for two years, and, if a participant's employment is terminated
either without cause by AT&T Broadband or for good reason by the
IX-4
participant within two years after the AT&T Comcast transaction, such
participant will be fully vested in his or her account, will have his or
her service bridged, and will be entitled to a special pension
enhancement payment.
- AT&T Broadband Nonqualified Pension Plan. Upon completion of the AT&T
Comcast transaction, the plan cannot be amended to reduce change in
control benefits for two years, the present value of the benefits under
the plan will be funded in trust, and, if a participant's employment is
terminated without cause by AT&T Broadband or for good reason by the
participant within two years after the AT&T Comcast transaction, such
participant will be fully vested in his or her account, and will have his
or her service bridged.
- AT&T Broadband Deferred Compensation Plan. Upon completion of the AT&T
Comcast transaction, the plan cannot be adversely amended or terminated
for three years, the present value of the benefits of the plan will be
funded in trust, participants in the plan will be completely vested in
their accounts, and the interest rates applied to participants' accounts
cannot be decreased for three years below the level they are at prior to
completion of the AT&T Comcast transaction.
- AT&T Broadband Long Term Savings Plan. Upon completion of the AT&T
Comcast transaction, participants in the plan will be fully vested in
their company matching contribution accounts and the plan cannot be
amended to reduce change in control benefits for two years.
INDEMNIFICATION AND INSURANCE
- AT&T Comcast has agreed to indemnify the present and former officers and
directors of AT&T, the AT&T subsidiaries, AT&T Broadband, the AT&T
Broadband subsidiaries, Comcast and the Comcast subsidiaries, and each
individual who prior to the completion of the transaction becomes such an
officer or director, from their acts or omissions in those capacities
occurring at or prior to the completion of the transaction to the maximum
extent permitted by law; provided, however, no such indemnification will
be required for officers or directors acting in a capacity for AT&T and
its subsidiaries other than in connection with either AT&T's broadband
business or the merger agreement and the transactions contemplated by the
merger agreement.
- AT&T (and not AT&T Broadband) will indemnify and hold harmless AT&T
Comcast for 50% of any losses described in the preceding paragraph
arising out of acts or omissions of the AT&T officers and directors in
connection with the merger agreement and the transactions contemplated by
the merger agreement.
- For six years after completion of the transaction, AT&T Comcast will
provide, or cause to be provided, officers' and directors' liability
insurance in respect of acts or omissions occurring prior to completion
of the transaction, covering each officer and director identified in the
first bullet point above (for officers and directors of AT&T and its
subsidiaries, only for acts or omissions of such person acting in
connection with AT&T's broadband business or the merger agreement and the
transactions contemplated by the merger agreement) currently covered by
the officers' and directors' liability insurance policy of AT&T or
Comcast, as the case may be, on terms no less favorable than those of
such policy in effect on December 19, 2001, except that AT&T Comcast will
only be obligated to pay up to 300% of the annual premium paid for such
insurance by either AT&T or Comcast as of December 19, 2001.
COMPENSATION OF DIRECTORS
In accordance with the existing practice of Comcast and AT&T, it is
expected that directors of AT&T Comcast who are not employees of AT&T Comcast
will receive compensation for service on the AT&T Comcast Board.
IX-5
COMPENSATION OF EXECUTIVE OFFICERS
AT&T Comcast has not yet paid any compensation to any other person expected
to become an executive officer of AT&T Comcast. The form and amount of
compensation to be paid to each of AT&T Comcast's executive officers in any
future period will be determined by the Chief Executive Officer in consultation
with the Chairman of the Board, the AT&T Comcast Board or a committee of the
AT&T Comcast Board.
For information concerning the compensation paid to, and the employment
agreements with, the President of Comcast and the four most highly compensated
executive officers of Comcast (other than the President) for the 2001 fiscal
year, see Comcast's proxy statement used in connection with its 2002 annual
meeting of shareholders, the relevant portions of which are incorporated by
reference in this document from Comcast's annual report on Form 10-K for the
fiscal year ended December 31, 2001.
For information concerning the compensation paid to, and the employment
agreements with, the CEO of AT&T and the four most highly compensated executive
officers of AT&T (other than the CEO) for the 2001 fiscal year, see
[ ].
OTHER BENEFITS MATTERS
Maintenance of Benefits for AT&T Broadband Employees. In the merger
agreement, AT&T Comcast has agreed to honor the terms of all AT&T Broadband
employee benefit plans and arrangements and to pay and provide the benefits
required thereunder, recognizing that the AT&T Comcast transaction is a change
in control under the plans, and to provide, until December 31, 2003, to
employees (other than those subject to collective bargaining obligations or
agreements) of AT&T Broadband and its subsidiaries aggregate employee benefits
and compensation that are substantially comparable in the aggregate to those
provided by AT&T Broadband and its subsidiaries as of the completion of the AT&T
Comcast transaction, other than benefits provided under severance or separation
plans of AT&T Broadband or its subsidiaries. Until December 31, 2003, AT&T
Comcast has agreed to continue certain severance plans of AT&T Broadband and its
subsidiaries without adverse change. If employees of AT&T Broadband or its
subsidiaries are included in any employee benefit plan sponsored by AT&T
Comcast, they will receive credit for past service and for deductible,
co-insurance and out-of-pocket expenses incurred prior to the AT&T Comcast
transaction, and shall waive all pre-existing condition, limitations or other
requirements. As soon as practicable after December 31, 2003, eligible AT&T
Broadband employees shall be allowed to participate in any retirement, medical
or life insurance benefit plan sponsored by AT&T Comcast or one of its
subsidiaries. With respect to AT&T Broadband employees who are subject to
collective bargaining obligations or agreements, their benefits will be governed
by the terms of such obligations or agreements.
One-Time Stock Option Grant. In the merger agreement, AT&T Comcast has
agreed to offer to each of its or any of its subsidiaries' full-time employees a
one-time grant of options to purchase a number of shares of AT&T Comcast common
stock equal to 300 multiplied by the AT&T Broadband exchange ratio. This grant
will be made as soon as practicable after the completion of the AT&T Comcast
transaction.
AT&T Stock Options. In the merger agreement, AT&T has agreed that, with
respect to AT&T stock options or other equity awards based on AT&T common stock
granted in the period beginning on the date the merger agreement was signed and
ending at the completion of the AT&T Comcast transaction, the AT&T Comcast
transaction will not constitute a "change in control" for purposes of
accelerating the vesting of such awards; provided that upon certain terminations
of employment following the completion of the AT&T Comcast transaction awards
will become fully vested upon termination and will remain exercisable for the
full extent of the original term of the award.
Employee Benefits Agreement. In connection with the AT&T Broadband
spin-off, AT&T and AT&T Broadband entered into an employee benefits agreement
dated as of December 19, 2001. The following summary of the employee benefits
agreement is qualified in its entirety by reference to the complete text of the
employee benefits agreement, which is attached as an exhibit to the registration
statement in which this
IX-6
document is included and is incorporated by reference in this document. The
employee benefits agreement covers a wide range of compensation and benefits
issues. In general, after the AT&T Broadband spin-off, AT&T Broadband will be
responsible for all obligations and liabilities relating to current and former
employees of AT&T Broadband and its subsidiaries and their dependents and
beneficiaries and AT&T will be responsible for all obligations and liabilities
relating to current and former employees of AT&T and its subsidiaries (other
than AT&T Broadband and its subsidiaries) and their dependents and
beneficiaries. Employees of AT&T Broadband or any of its subsidiaries are
referred to in this document as "AT&T Broadband employees." Employees of AT&T
who are transferred to AT&T Broadband prior to the AT&T Broadband spin-off are
referred to in this document as "AT&T Broadband transferees." Employees of AT&T
or any of its subsidiaries (other than AT&T Broadband employees or AT&T
Broadband transferees) are referred to in this document as "AT&T employees."
As of the date of the AT&T Broadband spin-off, all AT&T Broadband employees
and AT&T Broadband transferees will continue to be or be, as the case may be,
employed by AT&T Broadband or its subsidiaries. If any AT&T Broadband transferee
is on an approved leave of absence on the date of the AT&T Broadband spin-off,
this employee will become an employee of AT&T Broadband or one of its
subsidiaries upon return to active service.
As of the date of the AT&T Broadband spin-off, AT&T Broadband and its
subsidiaries will cease to participate in any benefit plan or trust under any
such plan sponsored or maintained by AT&T or its subsidiaries (other than AT&T
Broadband) and AT&T will cease to participate in any benefit plan or trust under
any such plan sponsored or maintained by AT&T Broadband or its subsidiaries.
With respect to employees who are transferred to or from AT&T or AT&T Broadband,
AT&T and AT&T Broadband will mutually recognize and credit service with the
other employer, except for purposes of benefit accruals under defined benefit
pension plans. Account balances of AT&T employees (excluding AT&T Broadband
transferees) in the 401(k) plan maintained by AT&T Broadband will vest as of the
date of the AT&T Broadband spin-off and account balances of AT&T Broadband
employees and AT&T Broadband transferees in the 401(k) plans maintained by AT&T
will vest as of the date of the AT&T Broadband spin-off. Each AT&T Broadband
employee and AT&T Broadband transferee will be allowed to make an election to
transfer his or her account to the 401(k) plan maintained by AT&T Broadband and
each AT&T employee will be allowed to make an election to transfer his or her
account to the 401(k) plans maintained by AT&T. AT&T shall provide Broadband
transferees with lost matching contributions for the year of the AT&T Comcast
transaction. Each AT&T Broadband employee and AT&T Broadband transferee will
vest in his or her accrued benefit under the AT&T pension plans as of the date
of the AT&T Broadband spin-off and each AT&T employee will vest in his or her
accrued benefit under the AT&T Broadband pension plans as of the date of the
AT&T Broadband spin-off, and will respectively be entitled to commence pension
under such plans. AT&T Broadband employees and AT&T Broadband transferees will
also be entitled to a distribution of their accounts under the AT&T Employee
Stock Purchase Plan.
If terminated during the one-year period after the AT&T Broadband spin-off,
AT&T Broadband transferees will be entitled to receive the greater of severance
under the applicable AT&T severance plan or, the applicable AT&T Broadband
severance plan. A Broadband transferee, however, may be entitled to greater
severance under the terms of his or her applicable employment agreement.
As a part of the AT&T Broadband spin-off, AT&T restricted stock and other
equity-based awards will be converted as described below. In connection with the
conversions, adjustments will be made to maintain the intrinsic value of the
original AT&T options and the fair market value of the original AT&T restricted
stock or other equity-based award immediately before and after the AT&T
Broadband spin-off:
- AT&T stock options held by AT&T employees will be converted into adjusted
AT&T stock options;
- AT&T restricted shares held by AT&T employees will be converted into (1)
adjusted AT&T restricted shares and (2) equity-based awards based on AT&T
Broadband common stock;
IX-7
- AT&T stock options held by AT&T Broadband employees and AT&T Broadband
transferees will be converted into AT&T Broadband stock options;
- AT&T restricted shares held by AT&T Broadband employees and AT&T
Broadband transferees will be converted into (1) adjusted AT&T restricted
shares and (2) AT&T Broadband restricted shares;
- AT&T stock options held by former AT&T employees and former AT&T
Broadband employees will be converted into (1) adjusted AT&T stock
options and (2) AT&T Broadband stock options; and
- Other equity-based awards based on AT&T common stock, regardless of by
whom held, will be converted into (1) adjusted equity-based awards based
on AT&T common stock and (2) equity-based awards based on AT&T Broadband
common stock.
Each adjusted AT&T stock option and AT&T Broadband stock option will
generally be subject to the same terms and conditions as set forth in the
original AT&T stock options, provided that, AT&T Broadband stock options held by
AT&T Broadband employees and AT&T Broadband transferees (except for any AT&T
executive officer who has waived rights to vesting of certain equity awards as a
result of the AT&T Comcast transaction) will have vested as of the completion of
the AT&T Comcast transaction and will remain exercisable through the remainder
of their original terms (except for options granted after the merger agreement
was signed). As of completion of the AT&T Comcast transaction, each AT&T
Broadband restricted share will have become free of restrictions and each
equity-based award (based on AT&T or AT&T Broadband common stock) held by
current and former AT&T Broadband employees (including AT&T Broadband
transferees) will have vested (in each case, except for awards held by any AT&T
executive officer who has waived rights to vesting of certain equity awards as a
result of the AT&T Comcast transaction).
IX-8
CHAPTER TEN
AT&T CONSUMER SERVICES GROUP TRACKING STOCK
THE CONSUMER SERVICES CHARTER AMENDMENT PROPOSAL
AT&T urges all AT&T shareholders to read the form of proposed charter
amendment, a copy of which we have attached as Annex M to this document.
GENERAL
AT&T is proposing the following amendment to its charter, which we refer to
as the Consumer Services charter amendment proposal:
Consumer Services Group tracking stock amendment -- an
amendment to create a new class of common stock called
Consumer Services Group common stock, par value $1.00 per
share, intended to reflect the financial performance and
economic value of AT&T's Consumer Services business. We refer
to this stock as "AT&T Consumer Services Group tracking
stock."
Approval of the Consumer Services charter amendment proposal requires a
majority of the voting power of all outstanding shares of AT&T common stock to
vote in its favor. THE AT&T BOARD RECOMMENDS THAT AT&T SHAREHOLDERS VOTE FOR
APPROVAL. Any shares of AT&T common stock not voted, whether by abstention,
broker non-vote or otherwise, have the effect of a vote against the Consumer
Services charter amendment proposal.
CONSUMER SERVICES GROUP TRACKING STOCK AMENDMENT
The Consumer Services Group tracking stock amendment would, among other
things:
- Define "AT&T Consumer Services Group," the financial performance and
economic value of which is intended to be reflected in AT&T Consumer
Services Group tracking stock. AT&T Consumer Services Group will consist
of the assets and liabilities shown in the combined balance sheets of
AT&T Consumer Services Group and will include:
- all Consumer Services long distance customers;
- all Consumer Services non-network support infrastructure, including
ordering, provisioning, billing and care; and
- all Consumer Services marketing operations.
- Establish the terms of AT&T Consumer Services Group tracking stock,
consisting of [ ] authorized shares and entitling the holders of
AT&T Consumer Services Group tracking stock to [ ] of a vote per
share, voting as one class with all other classes and series of common
stock and preferred stock of AT&T with respect to all matters to be voted
upon by AT&T shareholders, except as otherwise required by the New York
Business Corporation Law or by the terms of any other class or series of
AT&T's capital stock.
A more complete description of AT&T Consumer Services Group tracking stock
is included under "-- Terms of the Consumer Services Group Tracking Stock
Amendment."
RECOMMENDATION OF THE AT&T BOARD
THE AT&T BOARD HAS APPROVED THE CONSUMER SERVICES CHARTER AMENDMENT
PROPOSAL AND RECOMMENDS THAT AT&T SHAREHOLDERS VOTE FOR THE CONSUMER SERVICES
CHARTER AMENDMENT PROPOSAL.
X-1
TERMS OF THE CONSUMER SERVICES GROUP TRACKING STOCK AMENDMENT
GENERAL
If the Consumer Services Group tracking stock amendment is adopted, AT&T
will amend its charter to authorize [ ] shares of AT&T Consumer
Services Group tracking stock. Approval of the Consumer Services charter
amendment proposal will also allow the AT&T Board to amend AT&T's charter to
eliminate all references to AT&T Wireless Group tracking stock, Class A Liberty
Media Group common stock, Class B Liberty Media Group common stock, and AT&T
Wireless Group preferred tracking stock and to redesignate such series as shares
of common stock or preferred stock, as applicable, which would be available for
issuance. Currently, 16.5 billion shares of AT&T capital stock are authorized,
consisting of 100 million shares of preferred stock and 16.4 billion shares of
common stock. If the Consumer Services charter amendment proposal is approved,
the total number of authorized shares of AT&T common stock will be [ ]
billion, of which [ ] will be designated AT&T Consumer Services Group
tracking stock. As of [ ], 2002, AT&T had outstanding [ ]
shares of AT&T common stock. As of [ ], 2002, [ ] shares of a
series of preferred stock of AT&T were held by subsidiaries of AT&T.
AT&T CONSUMER SERVICES GROUP
AT&T intends AT&T Consumer Services Group tracking stock to reflect the
financial performance and economic value of AT&T Consumer Services Group. The
Consumer Services Group tracking stock amendment defines "AT&T Consumer Services
Group" generally as the interest of AT&T or any of its subsidiaries in all of
the businesses, assets and liabilities reflected in the unaudited combined
financial statements of AT&T Consumer Services Group, dated , , as
included in this document, including any successor to AT&T Consumer Services
Group by merger, consolidation or sale of all or substantially all of its
assets. The Consumer Services Group tracking stock amendment contains
adjustments to the definition of "AT&T Consumer Services Group" to reflect,
among other things, related assets and liabilities (including contingent
liabilities), net income and net losses arising after the date of these
financial statements, contributions and allocations of assets, liabilities and
businesses between the AT&T groups and acquisitions and dispositions.
AT&T Consumer Services Group is not a stand-alone entity, and in
considering the Consumer Services charter amendment proposal, AT&T shareholders
should keep in mind:
- the AT&T Board will govern AT&T Consumer Services Group and could make
operational and financial decisions or implement policies that
disproportionately affect the businesses of AT&T Consumer Services Group;
- the AT&T Board may transfer funds or reallocate assets, liabilities,
revenue, expenses and cash flows to or from AT&T Consumer Services Group
without the consent of shareholders;
- the Consumer Services Group tracking stock amendment provides that AT&T
Consumer Services Group allocation fraction may be adjusted by the AT&T
Board as it deems appropriate to reflect contributions or allocations
from AT&T Consumer Services Group to AT&T Business Services Group, or
vice versa;
- all actions by the AT&T Board are subject to the board members' fiduciary
duties under New York law to all AT&T shareholders as a group, not just
to holders of a particular class of tracking stock, and to AT&T's
charter, policy statements, bylaws and inter-company agreements; and
- the AT&T Board may redeem AT&T Consumer Services Group tracking stock
without the consent of any holder.
Any retained portion of the value of AT&T Consumer Services Group
represented by AT&T common stock will be included in AT&T Business Services
Group. See "-- AT&T Consumer Services Group Allocation Fraction."
X-2
AT&T CONSUMER SERVICES GROUP ALLOCATION FRACTION
Operation of the Allocation Fraction. If AT&T distributes to the public
shares of AT&T Consumer Services Group tracking stock intended to represent all
of AT&T Consumer Services Group, AT&T will not initially have any retained
portion of that group and the fraction discussed in this section will initially
equal one.
AT&T Consumer Services Group tracking stock issued to the public may not
represent all of the interest in the financial performance and economic value of
AT&T Consumer Services Group. The Consumer Services Group tracking stock
amendment defines the "AT&T Consumer Services Group allocation fraction" to
represent the interest in the financial performance and economic value of AT&T
Consumer Services Group reflected by AT&T Consumer Services Group tracking stock
distributed to the public.
To the extent that AT&T Consumer Services Group tracking stock issued to
the public does not represent all of the interest in the financial performance
and economic value of AT&T Consumer Services Group, the remaining interest in
the financial performance and economic value of AT&T Consumer Services Group
will be allocated to AT&T. If AT&T is allocated an interest in the financial
performance and economic value of AT&T Consumer Services Group, AT&T will have
the right to participate in any dividend, distribution or liquidation made to
holders of AT&T Consumer Services Group tracking stock. This right to
participate is AT&T's retained portion of value of AT&T Consumer Services Group.
If all of the interest in the financial performance and economic value of AT&T
Consumer Services Group is intended to be fully reflected by AT&T Consumer
Services Group tracking stock held by the public, none will be allocated to AT&T
and this fraction will equal one.
Adjustments. Because the AT&T Consumer Services Group allocation fraction
determines the relative percentage interest in AT&T Consumer Services Group of
public holders of AT&T Consumer Services Group tracking stock, on the one hand,
and AT&T, on the other hand, the AT&T Consumer Services Group allocation
fraction may be adjusted from time to time as the AT&T Board deems appropriate
for a number of reasons, including:
- to reflect the fair market value of contributions or allocations by AT&T
of cash, property or other assets or liabilities from AT&T or AT&T
Business Services Group to AT&T Consumer Services Group (or vice versa);
- to reflect the fair market value of contributions or allocations by AT&T
of cash, property or other assets or liabilities of AT&T or AT&T Business
Services Group to, or for the benefit of, employees of AT&T Consumer
Services Group in connection with employee benefit plans or arrangements
of AT&T or any of its subsidiaries (or vice versa);
- to reflect the number of shares of AT&T capital stock contributed to, or
for the benefit of, employees of AT&T Consumer Services Group in
connection with benefit plans or arrangements of AT&T or any of its
subsidiaries;
- to reflect repurchases by AT&T of shares of AT&T Consumer Services Group
tracking stock for the account of AT&T Consumer Services Group;
- to reflect issuances of AT&T Consumer Services Group tracking stock for
the account of AT&T Consumer Services Group;
- to reflect dividends or other distributions to holders of AT&T Consumer
Services Group tracking stock, to the extent no required payment is made
to AT&T;
- to reflect subdivisions and combinations of AT&T Consumer Services Group
tracking stock and stock dividends payable in shares of AT&T Consumer
Services Group tracking stock; and
- under other circumstances as the AT&T Board determines appropriate to
reflect the economic substance of any other event or circumstance.
X-3
In addition, in determining the percentage interest of holders of AT&T
Consumer Services Group tracking stock in any particular dividend or other
distribution, AT&T will reduce the economic interest of holders of AT&T Consumer
Services Group tracking stock to reflect dilution arising from shares of AT&T
Consumer Services Group tracking stock reserved for issuance upon conversion,
exercise or exchange of other securities that are entitled to participate in
this dividend or other distribution.
The Consumer Services Group tracking stock amendment provides that any
adjustment of this kind must be made in a manner that the AT&T Board determines
to be fair and equitable to holders of AT&T common stock and AT&T Consumer
Services Group tracking stock. In the event that any assets or other property
are acquired by AT&T or AT&T Business Services Group and allocated or
contributed to AT&T Consumer Services Group, the consideration paid by AT&T or
AT&T Business Services Group to acquire these assets or other property will be
presumed to be its "fair market value" as of its acquisition. Any adjustment to
the AT&T Consumer Services Group allocation fraction made by the AT&T Board in
good faith in accordance with these principles will be at the sole discretion of
the AT&T Board, and this good faith determination of the AT&T Board will be
final and binding on all AT&T shareholders.
VOTING RIGHTS
Currently, holders of AT&T common stock have one vote per share. Each
outstanding share of AT&T Consumer Services Group tracking stock initially will
have [ ] of a vote. The voting rights of AT&T Consumer Services Group
tracking stock will be subject to adjustments to reflect stock splits, reverse
stock splits, stock dividends or certain stock distributions with respect to
AT&T common stock, AT&T Consumer Services Group tracking stock or any other
class of AT&T common shares.
Except as otherwise required by New York law or any special voting rights
of any class or series of AT&T preferred stock or any other class of AT&T common
shares, holders of shares of AT&T common stock, AT&T Consumer Services Group
tracking stock, each other class of AT&T common shares, if any, that is entitled
to vote, and holders of shares of each class or series of AT&T preferred stock,
if any, that is entitled to vote, will vote as one class with respect to all
matters to be voted on by AT&T shareholders. No separate class vote of AT&T
Consumer Services Group tracking stock will be required, except as required by
the New York Business Corporation Law.
DIVIDENDS
General. Following any issuance of AT&T Consumer Services Group tracking
stock, it is currently expected that one-third of the current dividend payable
on AT&T common stock will be allocated to AT&T common stock and that two-thirds
of the dividend will be allocated to AT&T Consumer Services Group tracking
stock. In that event, the aggregate dividend payable to holders of AT&T common
stock and holders of AT&T Consumer Services Group tracking stock would be the
same as that payable to holders of AT&T common stock before the issuance of AT&T
Consumer Services Group tracking stock. The declaration of dividends by AT&T and
the amount thereof will, however, be in the discretion of the AT&T Board and
will depend upon each AT&T group's financial performance, the dividend policies
and capital structures of comparable companies, each AT&T group's ongoing
capital needs, and AT&T's results of operations, financial condition, cash
requirements and future prospects and other factors deemed relevant by the AT&T
Board. Payment of dividends also may be restricted by loan agreements,
indentures and other transactions that AT&T enters into from time to time.
Provided that AT&T has sufficient assets to pay a dividend under applicable
law, the Consumer Services Group tracking stock amendment provides that
dividends on AT&T Consumer Services Group tracking stock are limited to an
available dividend amount that is designed to be equivalent to the amount that
would legally be available for dividends on that stock if AT&T Consumer Services
Group were a stand-alone entity. Dividends on AT&T common stock are limited to
the amount of legally available funds for all of AT&T less the sum of the
available dividend amount for AT&T Consumer Services Group tracking stock.
X-4
Discrimination among classes of common shares. The Consumer Services Group
tracking stock amendment does not provide for mandatory dividends. The AT&T
Board will have the sole authority and discretion to declare and pay dividends
(or to refrain from declaring or paying dividends), in equal or unequal amounts,
on AT&T common stock, AT&T Consumer Services Group tracking stock, any other
class of AT&T common shares or any two or more of these classes. Subject to not
exceeding the applicable available dividend amount, the AT&T Board has this
power regardless of the relative available dividend amounts, prior dividend
amounts declared, liquidation rights or any other factor.
SHARE DISTRIBUTIONS
AT&T may declare and pay a distribution consisting of shares of AT&T common
stock, AT&T Consumer Services Group tracking stock or any other securities of
AT&T, any subsidiary of AT&T or any other person to holders of AT&T common stock
or AT&T Consumer Services Group tracking stock in accordance with the provisions
described below. We refer to this type of distribution as a "share
distribution."
Distributions on AT&T common stock or AT&T Consumer Services Group tracking
stock. AT&T may declare and pay a share distribution to holders of AT&T common
stock, AT&T Consumer Services Group tracking stock or any other class of AT&T
common shares consisting of any securities of AT&T, any subsidiary of AT&T, or
any other person. However, securities attributable to an AT&T group may be
distributed to holders of another AT&T group only for consideration. In the case
of shares of AT&T Consumer Services Group tracking stock distributed to holders
of AT&T common stock, the consideration may consist, in whole or in part, of a
decrease in the retained portion of the value, if any, held by AT&T in AT&T
Consumer Services Group.
Discrimination among classes of AT&T common shares. The Consumer Services
Group tracking stock amendment does not provide for mandatory share
distributions. The AT&T Board will have the sole authority and discretion to
declare and pay share distributions (or to refrain from declaring or paying
share distributions), in equal or unequal amounts, on AT&T common stock, AT&T
Consumer Services Group tracking stock, any other class of AT&T common shares or
any two or more of these classes. Subject to not exceeding the applicable
available dividend amounts, the AT&T Board has this power regardless of the
relative available dividend amounts, prior share distributions amounts declared,
liquidation rights or any other factor.
REDEMPTION
As described in this section, there are a number of different redemption
alternatives, more than one of which may be available at a given time or in
connection with a particular transaction. Holders could receive very different
treatment depending on which alternative the AT&T Board selects. The AT&T Board
is under no obligation to select the alternative that will treat holders of AT&T
Consumer Services Group tracking stock most favorably.
Redemption in exchange for shares of a new tracking stock of another
company. At any time, the AT&T Board may redeem all outstanding shares of AT&T
Consumer Services Group tracking stock for a new tracking stock of another
entity that owns, holds or is subject to, directly or indirectly, all or
substantially all of the assets and liabilities of AT&T Consumer Services Group
as of immediately prior to the time of the redemption. In order to effect a
redemption of this type, the new tracking stock must have substantially the same
terms as those governing AT&T Consumer Services Group tracking stock (except as
may result due to different law governing the other entity or as a result of
provisions of the other entity's governing documents that are generally
applicable to all classes of common stock), including with regard to the
definition of "AT&T Consumer Services Group." Also, the number of shares of the
new tracking stock issued per share of AT&T Consumer Services Group tracking
stock must be intended to represent the same proportionate interest in AT&T
Consumer Services Group as a share of AT&T Consumer Services Group tracking
stock. In the event of a redemption of this type, the voting rights of the new
tracking stock will be set based on the ratio, over a fixed measurement period,
of the initial
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trading prices of the new tracking stock to trading prices of the other common
stock of the entity issuing the new tracking stock.
Redemption in exchange for shares of AT&T common stock. At any time, the
AT&T Board, in its sole discretion, may redeem all outstanding shares of AT&T
Consumer Services Group tracking stock for shares of AT&T common stock. In this
event, each share of AT&T Consumer Services Group tracking stock will be
redeemed in exchange for that number of shares of AT&T common stock, calculated
to the nearest 1/10,000, equal to [ ]% of the ratio of the average market
price per share of AT&T Consumer Services Group tracking stock to the average
market price per share of AT&T common stock.
Redemption in exchange for stock of subsidiaries in connection with a
spin-off of AT&T Consumer Services Group. The Consumer Services Group tracking
stock amendment also provides that AT&T may, at any time, redeem all outstanding
shares of AT&T Consumer Services Group tracking stock in exchange for a
specified number of outstanding shares of common stock of a subsidiary of AT&T
that satisfies certain requirements under the Code and that holds all of the
assets and liabilities of AT&T Consumer Services Group. We refer to a subsidiary
that satisfies these requirements as a "qualifying subsidiary." This type of
redemption only may be made on a pro rata basis, and must be tax free to the
holders of AT&T Consumer Services Group tracking stock, except with respect to
any cash that holders receive in lieu of fractional shares.
In this case, AT&T would exchange each share of AT&T Consumer Services
Group tracking stock, on a pro rata basis, for an aggregate number of shares of
common stock of the qualifying subsidiary equal to the number of outstanding
shares of common stock of the qualifying subsidiary held by AT&T (or the number
of shares of such qualifying subsidiary as is proportionate to the portion of
the financial performance and economic value of AT&T Consumer Services Group
intended to be represented by AT&T Consumer Services Group tracking stock if the
AT&T Consumer Services Group allocation fraction is less than one).
Redemption in connection with significant dispositions. In the event of a
sale, transfer, assignment or other disposition by AT&T in a transaction or
series of related transactions, of all or substantially all of the properties
and assets of AT&T Consumer Services Group, AT&T generally is required to take
one of the following actions, which action will be selected in the sole
discretion of the AT&T Board:
- AT&T may redeem each outstanding share of AT&T Consumer Services Group
tracking stock in exchange for a number of shares of AT&T common stock
(calculated to the nearest 1/10,000) equal to [ ]% of the ratio of
the average market price per share of AT&T Consumer Services Group
tracking stock to the average market price per share of AT&T common
stock.
- Subject to limitations, AT&T may declare and pay a dividend in cash
and/or in securities (other than AT&T common stock) or other property to
holders of the outstanding shares of AT&T Consumer Services Group
tracking stock equally on a share-for-share basis in an aggregate amount
equal to the after-tax net proceeds of the disposition allocable to AT&T
Consumer Services Group tracking stock.
- Subject to limitations, if the disposition involves the disposition of
all, not merely substantially all, of the properties and assets of AT&T
Consumer Services Group, AT&T may redeem all outstanding shares of AT&T
Consumer Services Group tracking stock in exchange for cash and/or
securities or other property in an aggregate amount equal to the net
proceeds of the disposition allocable to AT&T Consumer Services Group
tracking stock.
- Subject to limitations, if the disposition involves substantially all,
but not all, of the properties and assets of AT&T Consumer Services
Group, AT&T may redeem a number of outstanding shares of AT&T Consumer
Services Group tracking stock in exchange for a redemption price equal to
the net proceeds of that disposition. The number of shares of AT&T
Consumer Services Group tracking stock to be redeemed would be equal to
the lesser of (1) a number determined by dividing the aggregate amount
allocated to the redemption of these shares by the average market value
of one share of AT&T Consumer Services Group tracking stock during the
ten trading-day period
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beginning on the 15th trading day following the completion of that
disposition and (2) the total number of outstanding shares of AT&T
Consumer Services Group tracking stock.
- Subject to limitations, AT&T may take a combination of the actions
described in the preceding bullets whereby AT&T may redeem some shares of
AT&T Consumer Services Group tracking stock in exchange for shares of
AT&T common stock at the exchange rate described in the first bullet
above, and use an amount equal to a portion of the net proceeds of the
disposition allocable to AT&T Consumer Services Group tracking stock to
either (1) declare and pay a dividend as described in the second bullet
above, or (2) redeem part or all of the remaining shares of AT&T Consumer
Services Group tracking stock as described in the third or fourth bullet
above.
For purposes of these provisions, "substantially all of the properties and
assets" of AT&T Consumer Services Group as of any date means a portion of these
properties and assets that represents at least 80% of the fair value of the
properties and assets attributed to AT&T Consumer Services Group as of that
date.
Exceptions. The provisions described under "-- Redemption in connection
with significant dispositions" will not apply, and AT&T will not be required to
redeem any securities or make any dividend or other distribution it would
otherwise be required to make, in some circumstances, including the following:
- if, in connection with the underlying transaction, the AT&T Board redeems
all outstanding shares of AT&T Consumer Services Group tracking stock for
a new tracking stock of another entity that owns all of the material
assets and liabilities of AT&T Consumer Services Group pursuant to
"-- Redemption in exchange for shares of new tracking stock of new
company;"
- if the underlying disposition is conditioned upon the affirmative vote of
a majority of holders of AT&T Consumer Services Group tracking stock,
voting as a separate class;
- if the disposition is in connection with a liquidation of AT&T;
- if the disposition is to a person or group of which AT&T is the majority
owner and AT&T Consumer Services Group receives in exchange primarily
equity securities of that person or group as consideration;
- if the disposition results in AT&T or its successor continuing to hold
directly or indirectly all or substantially all of the properties and
assets of AT&T Consumer Services Group;
- in connection with a spin-off or similar distribution of AT&T's entire
interest in AT&T Consumer Services Group to the holders of AT&T Consumer
Services Group tracking stock, including a distribution that is made in
connection with a mandatory redemption as described under "-- Redemption
in exchange for stock of subsidiaries in connection with a spin-off of
AT&T Consumer Services Group"; and
- in connection with a "related business transaction," which generally
means a disposition of all or substantially all of the assets attributed
to AT&T Consumer Services Group in which AT&T receives equity securities
of an entity that engages or proposes to engage primarily in one or more
businesses similar or complementary to the businesses conducted by AT&T
Consumer Services Group prior to that transaction.
Additionally, the provisions described under "-- Redemption in connection
with significant dispositions" will not apply with respect to any merger,
consolidation, sale of assets or stock, recapitalization or any other
transaction or series of transactions in which all or substantially all of the
properties and assets of AT&T are transferred to an entity not directly
controlled by AT&T or AT&T shareholders, if in such transaction or series of
transactions, each share of AT&T Consumer Services Group tracking stock is
entitled to receive the same consideration (both in type and amount) as such
share of AT&T Consumer Services Group tracking stock would have been entitled to
receive had it been redeemed.
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GENERAL PROCEDURES
Conditions. With regard to any redemption at the discretion of the AT&T
Board, the AT&T Board may, in its discretion, condition such redemption on the
occurrence or failure to occur of any events set forth in the applicable notice
of redemption. The AT&T Board will have the right to waive any of these
conditions in its sole discretion.
Public announcements; notices. The Consumer Services Group tracking stock
amendment provides that, in the case of specified dispositions or a redemption,
AT&T will publicly announce or otherwise provide specified information to
holders of AT&T Consumer Services Group tracking stock and, in the case of
redemption at the discretion of the AT&T Board, give the notice of redemption no
less than 15 days nor more than 90 days prior to the date of redemption. The
redemption date may be a specified date or a date determined by reference to the
occurrence of events.
Fractional shares. The AT&T Board will not have to issue or deliver any
fractional shares to any holder of AT&T Consumer Services Group tracking stock
upon any redemption, dividend or other distribution under the provisions
described under "-- Redemption." Instead of issuing fractional shares, AT&T will
pay cash for the fractional share in an amount equal to the fair market value of
the fractional share, without interest.
No adjustments for dividends or other distributions. No adjustments for
dividends will be made upon the exchange of any shares of AT&T Consumer Services
Group tracking stock; except that, if a redemption date with respect to AT&T
Consumer Services Group tracking stock comes after the record date for the
payment of a dividend or other distribution to be paid on AT&T Consumer Services
Group tracking stock but before the payment or distribution, the registered
holders of those shares of AT&T Consumer Services Group tracking stock at the
close of business on that record date will be entitled to receive the dividend
or other distribution on the payment date, notwithstanding the redemption of
those shares of stock or AT&T's default in payment of the dividend or
distribution.
Payment of taxes. If any person exchanging a certificate representing
shares of AT&T Consumer Services Group tracking stock wants AT&T to issue a
certificate in a different name than the registered name on the old certificate,
that person must pay any transfer or other taxes required by reason of the
issuance of the certificate in another name, or establish, to the satisfaction
of AT&T or its agent, that the tax has been paid or is not applicable.
LIQUIDATION RIGHTS
In the event of a liquidation, dissolution or winding up of AT&T, whether
voluntary or involuntary, AT&T will first pay or provide for payment of debts
and other liabilities of AT&T, including the liquidation preferences of any
class or series of AT&T preferred stock. Thereafter, holders of the shares of
AT&T common stock, AT&T Consumer Services Group tracking stock and any other
class of AT&T common shares will share in the funds of AT&T remaining for
distribution to its common shareholders in proportion to the aggregate market
capitalization of the outstanding shares of each class of stock, as applicable,
to the aggregate market capitalization of all the classes of AT&T common shares.
AT&T will calculate the market capitalizations based on the 20 trading-day
period ending on the trading day prior to the date of the public announcement of
the liquidation, dissolution or winding up of AT&T.
None of the following, by itself, will constitute a liquidation,
dissolution or winding up of AT&T:
- the consolidation or merger of AT&T with or into any other corporation or
corporations or the sale, transfer or lease of all or substantially all
of the assets of AT&T; or
- any transaction or series of related transactions that results in all of
the assets and liabilities included in AT&T Consumer Services Group being
held by one or more AT&T Consumer Services Group subsidiaries and the
distribution of AT&T Consumer Services Group subsidiaries, and no other
material assets or liabilities, to the holders of the outstanding AT&T
Consumer Services Group tracking stock.
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DETERMINATIONS BY THE AT&T BOARD
Any determinations made by the AT&T Board under any provision described in
this section "-- Terms of the Consumer Services Group Tracking Stock Amendment"
will be final and binding on all AT&T shareholders, except as may otherwise be
required by law. AT&T will prepare a statement of any determination by the AT&T
Board respecting the fair market value of any properties, assets or securities,
and will file the statement with AT&T's Corporate Secretary. To the maximum
extent permitted by law:
- the terms of AT&T Consumer Services Group tracking stock grant to the
AT&T Board discretion to select among different exchange, redemption or
other options, more than one of which may be available at a particular
time or in connection with a particular transaction,
- the selection of an alternative, if any, will be a matter solely within
the discretion of the AT&T Board and that the AT&T Board has no duty to
select the alternative that will result in the best economic treatment
for holders of either AT&T Consumer Services Group tracking stock or the
AT&T common stock, and
- no holder of any shares of AT&T Consumer Services Group tracking stock or
AT&T common stock will have any claim based on which alternative the AT&T
Board may elect, even if the holders of the classes of stock are not
treated equally.
NO PREEMPTIVE RIGHTS
Holders of AT&T common stock or AT&T Consumer Services Group tracking stock
do not have any preemptive rights to subscribe for any additional shares of
capital stock or other obligations convertible into or exercisable for shares of
capital stock that may hereafter be issued by AT&T.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Subject to the discussion under this section, neither the adoption of the
Consumer Services Group tracking stock amendment nor the distribution of AT&T
Consumer Services Group tracking stock to holders of AT&T common stock will be
taxable to AT&T or holders of AT&T common stock.
Holders of AT&T common stock who receive AT&T Consumer Services tracking
stock in a pro rata distribution will allocate their tax basis in AT&T common
stock between AT&T common stock and AT&T Consumer Services Group tracking stock
in accordance with the relative fair market values of such stocks on the date on
which AT&T Consumer Services Group tracking stock is distributed. A holder's
holding period for AT&T Consumer Services Group tracking stock will include such
holder's holding period of AT&T common stock with respect to which AT&T Consumer
Services Group tracking stock is distributed.
The conclusions in the two preceding paragraphs are not free from doubt.
These conclusions assume that AT&T Consumer Services Group tracking stock is
treated as a class of common stock of AT&T. The filing of consolidated income
tax returns by AT&T together with AT&T Consumer Services Group also assumes that
AT&T Consumer Services Group tracking stock is treated as a class of common
stock of AT&T. While AT&T believes that, under current law, AT&T Consumer
Services Group tracking stock will be treated as common stock of AT&T, there are
no authorities directly on point nor will AT&T receive an advance ruling from
the Internal Revenue Service. There is a risk that the Internal Revenue Service
could assert that AT&T Consumer Services Group tracking stock is property other
than common stock of AT&T. AT&T believes it is unlikely the Internal Revenue
Service would prevail on that view, but no assurance can be given that the views
expressed in the two preceding paragraphs, if contested, would be sustained by a
court.
The foregoing discussion under this section "-- Material Federal Income Tax
Consequences" is only a general summary of the material U.S. federal income tax
consequences of the issuance and distribution of AT&T Consumer Services Group
tracking stock. It is not a complete analysis of all potential tax effects
relevant to the issuance or distribution of AT&T Consumer Services Group
tracking stock. The discussion
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does not address consequences that may be relevant to a particular AT&T common
stock holder in light of this particular circumstances or to holders subject to
special treatment under U.S. federal income tax laws (such as dealers in
securities, banks, insurance companies, tax-exempt organizations, non-U.S.
persons, holders that acquired their AT&T common stock pursuant to the exercise
of options or otherwise as compensation and holders that do not hold such shares
as capital assets), nor any consequences arising under the laws of any state,
local or foreign jurisdiction. The discussion is based on the Code, Treasury
Regulations promulgated thereunder, judicial opinions, published positions of
the Internal Revenue Service, and all other applicable authorities as of the
date of this document, all of which are subject to change (possibly with
retroactive effect).
AT&T URGES AT&T SHAREHOLDERS TO CONSULT THEIR OWN TAX ADVISORS CONCERNING
THE U.S. FEDERAL, STATE AND LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE ISSUANCE
AND DISTRIBUTION OF AT&T CONSUMER SERVICES GROUP TRACKING STOCK TO THEM.
REASONS FOR AT&T CONSUMER SERVICES GROUP TRACKING STOCK
The AT&T Board recommends the Consumer Services charter amendment proposal
based on its view that the Consumer Services charter amendment proposal will
promote greater market recognition of the value of the various AT&T businesses.
The AT&T Board considered the following factors among others in approving and
recommending that AT&T shareholders approve the Consumer Services charter
amendment proposal.
GREATER MARKET RECOGNITION OF VALUE
AT&T believes that issuing securities intended to reflect the separate
performance of AT&T Consumer Services Group will result in greater market
recognition and realization of the value of AT&T and the distinct lines of
business represented by each of AT&T Consumer Services Group and AT&T Business
Services Group and allow the market to evaluate each of AT&T Consumer Services
Group's and AT&T Business Services Group's results against those of its
competitors.
GREATER FINANCIAL AND STRATEGIC FLEXIBILITY
AT&T believes that the creation of AT&T Consumer Services Group tracking
stock will provide AT&T with greater financial flexibility. AT&T expects that
AT&T Consumer Services Group tracking stock may assist AT&T in meeting its
capital needs by creating an additional publicly traded equity security that it
can use to raise capital. In addition, the creation of AT&T Consumer Services
Group tracking stock prior to the AT&T Comcast transaction will allow AT&T to
issue AT&T Consumer Services Group tracking stock in potential group-specific
acquisitions and investments. This would allow shareholders of an entity that
AT&T Consumer Services Group acquires the opportunity to participate more
directly in the success of the business in which that entity engages, rather
than participating in the larger and more diversified AT&T enterprise.
INCREASED SHAREHOLDER CHOICE
A corporation typically uses tracking stocks in situations where the
corporation has two or more businesses that have different investor profiles. In
this case, AT&T Consumer Services Group offers a particular set of services and
targets a particular type of customer, distinct from AT&T Business Services
Group. AT&T believes that the creation and issuance of AT&T Consumer Services
Group tracking stock will provide investors with greater choice among the
different types of investment currently embedded in AT&T.
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MORE FOCUSED AND FLEXIBLE MANAGEMENT TEAMS
AT&T believes that if the Consumer Services charter amendment proposal is
approved and implemented, management of each of AT&T Consumer Services Group and
AT&T Business Services Group would have a greater ability to focus on the
execution of strategic objectives in its particular business and on reacting to
changes in its competitive environment. AT&T believes that each of the AT&T
groups would be a smaller, but more focused and flexible, business unit, in a
better position to implement its respective business strategy and serve its
customers more effectively through quicker decision making, more efficient
deployment of resources, increased operational agility, and enhanced
responsiveness to customers and markets and technological changes.
MANAGEMENT INCENTIVES
AT&T believes the existence of AT&T Consumer Services Group tracking stock
will permit the creation of more effective management incentive and retention
programs. In particular, AT&T will be able to grant stock options and other
incentive awards to employees of each of AT&T Consumer Services Group and AT&T
Business Services Group that are tied more directly to the performance of each
respective AT&T group. AT&T will seek to develop compensation plans to incent
the delivery of services to benefit both groups.
TAX CONSIDERATIONS
In addition, the AT&T Board considered that AT&T expects that
implementation of the Consumer Services charter amendment will not be taxable
for U.S. federal income tax purposes to AT&T or to AT&T shareholders.
POTENTIAL NEGATIVE CONSEQUENCES OF THE PROPOSALS
The AT&T Board also considered the following potential adverse consequences
of the creation of AT&T Consumer Services Group tracking stock, including the
following:
- the market price of AT&T Consumer Services Group tracking stock may not
reflect the separate performance of AT&T Consumer Services Group,
- holders of AT&T common stock and of AT&T Consumer Services Group tracking
stock will continue to bear the risks associated with an investment in a
single corporation and all of AT&T's businesses, assets and liabilities,
and
- managing relationships between the groups may be more difficult than has
historically been the case as a result of potential conflicts between the
groups.
The AT&T Board also considered the risk factors related to the creation of
AT&T Consumer Services Group tracking stock, described under "Summary and
Overview -- Risk Factors Relating to AT&T Consumer Services Group Tracking
Stock."
The AT&T Board believes, however, that, on balance, the positive aspects of
AT&T Consumer Services Group tracking stock outweigh any potentially adverse
consequences.
RECOMMENDATION OF THE AT&T BOARD
The AT&T Board has approved the Consumer Services charter amendment
proposal and recommends that AT&T shareholders vote FOR the Consumer Services
charter amendment proposal.
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DESCRIPTION OF AT&T CONSUMER SERVICES GROUP
OVERVIEW
AT&T Consumer Services Group is the leading provider of domestic and
international long distance and transaction based services to residential
consumers in the United States with approximately 60 million customer
relationships. AT&T Consumer Services Group provides interstate and intrastate
long distance communications services throughout the continental United States,
and provides, or joins in providing with other carriers, communications services
to and from Alaska, Hawaii, Puerto Rico and the Virgin Islands and international
communications services to and from virtually all nations and territories around
the world.
AT&T Consumer Services Group provides a broad range of communications
services to consumers individually and in combination with other services,
including:
- inbound and outbound domestic and international long distance;
- transaction-based long distance services, such as operator-assisted
calling services and prepaid phone cards;
- local calling offers through an unbundled network elements platform; and
- dial-up Internet service through AT&T WorldNet Service.
In addition, AT&T Consumer Services Group offers combined long distance and
local services in selected locations and is developing a multi-service platform,
the AT&T Worldnet High Speed Service, based upon DSL technology for combined
voice, data and other broadband services.
For the nine-month period ended September 30, 2001, AT&T Consumer Services
Group had combined revenue of approximately $11.6 billion and combined EBITDA of
approximately $3.9 billion.
AT&T CONSUMER SERVICES GROUP
AT&T Consumer Services Group tracking stock is designed to reflect the
economic performance of AT&T Consumer Services Group, which includes the assets
and liabilities shown in the combined balance sheets of AT&T Consumer Services
Group. If AT&T acquires interests in other businesses, AT&T intends to attribute
those assets and any related liabilities to AT&T Consumer Services Group or to
AT&T Business Services Group in accordance with the AT&T Groups policy
statement. All net income and cash flows generated by the assets attributed to
AT&T Consumer Services Group will be attributed to AT&T Consumer Services Group
and all net proceeds from any disposition of these assets also will be
attributed to AT&T Consumer Services Group.
Except as described elsewhere in this document AT&T attributes all of
AT&T's current Consumer Services operations to AT&T Consumer Services Group,
including:
- all Consumer Services wireline long distance and local customers and AT&T
WorldNet Service consumer customers;
- all Consumer Services support non-network infrastructure, including
ordering, provisioning, billing and care; and
- all Consumer Services marketing operations.
AT&T Consumer Services Group does not include any network plant, nodes,
routing, switching or other transport infrastructure.
AGREEMENTS BETWEEN AT&T GROUPS
The AT&T Groups policy statement provides that AT&T will seek to manage the
AT&T Groups in a manner designed to give due consideration to the operations of
both of the AT&T Groups. Following the
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issuance of AT&T Consumer Services Group tracking stock, AT&T Consumer Services
Group will be able to:
- use the AT&T brand name in accordance with a brand agreement with AT&T,
- use AT&T's extensive network assets including its DSL assets in
accordance with a master carrier agreement,
- use AT&T's intellectual property and technology in accordance with an
intellectual property agreement, and
- participate in AT&T's purchasing contracts with major suppliers.
The relationship between AT&T Business Services Group and AT&T Consumer
Services Group will be governed by the AT&T Groups policy statement, including
the process of fair dealing described under "-- Relationship between the AT&T
Groups -- The AT&T Groups Policy Statement -- General Policy." Although the AT&T
Board has no present intention to do so, it may modify, suspend or rescind the
policies set forth in the AT&T Groups policy statement, adopt additional
policies or make exceptions to existing polices, at any time, without the
approval of AT&T shareholders, subject to limitations we describe under
"Relationship between the AT&T Groups -- The AT&T Groups Policy Statement" the
AT&T Board's fiduciary duties.
If AT&T Consumer Services Group tracking stock is issued prior to the AT&T
Broadband spin-off or if the spin-off does not occur, AT&T will include the
business and operations of AT&T Broadband Group.
STRATEGY
AT&T Consumer Services Group's goal is to maintain a leadership position in
the long distance market and develop complementary products and services to
maximize cash flow. Key strategic elements include:
Attract and retain high value customers. AT&T Consumer Services Group
focuses on acquiring and maintaining high value long distance customers with
targeted offers and solicitations. AT&T Consumer Services Group believes that
high value customers use AT&T's services more frequently and are more likely to
use multiple service offerings such as local toll, calling card, international
plans, AT&T WorldNet Service, local services and the AT&T Worldnet High Speed
Service. Through the greater utilization of services, high value customers
generate greater margins and hasten recuperation of marketing, sales and
provisioning expenses.
Increase operating efficiencies and reduce operating costs. AT&T Consumer
Services Group seeks to maximize the utilization of its assets and reduce
operating costs. In the three year period ended September 30, 2001, aggregate
selling, general and administrative expenses have been reduced by over $1
billion and overall costs and expenses have decreased by nearly $5 billion. AT&T
Consumer Services Group expects it will continue to reduce operating costs
through further outsourcing of care and billing functions.
Broaden its service lines. AT&T Consumer Services Group believes it can
generate additional revenue by bundling AT&T long distance with other
communications services including local services, AT&T WorldNet Services and
high-speed data services. By bundling value-added services, AT&T Consumer
Services Group believes it will substantially enhance its customers' reliance on
its services, improve customer satisfaction and retention levels and increase
sales of more profitable services.
In addition, AT&T Consumer Services Group continues to evaluate new growth
businesses that would provide additional services complementary to its current
suite of product offerings. AT&T Consumer Services Group believes additional
high value product offerings better enable it to attract new customers, migrate
existing customers to more profitable product offerings and better satisfy the
overall needs of its
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customers. New product and service offerings are evaluated and implemented in a
manner designed to be consistent with AT&T Consumer Services Group's overall
goal of maximizing cash flow.
Leverage the AT&T brand to attract new customers. AT&T Consumer Services
Group believes that the AT&T brand is very influential in consumers' purchasing
decisions and positively impacts consumer awareness of, and confidence in, AT&T
Consumer Services Group's products and services, as well as providing for an
enhanced ability to cross-sell consumer services with other AT&T services. In
addition, AT&T Consumer Services Group believes that its efforts to bundle
products and services will help to further strengthen the AT&T brand by
providing consumers with exposure to a broader range of AT&T Consumer Services
Group's services and an improved overall consumer experience.
Enhance customer satisfaction and loyalty. AT&T Consumer Services Group
believes that achieving a high level of customer satisfaction is critical to
successfully acquiring new customers and increasing retention of its existing
customer base. AT&T Consumer Services Group has historically strived to maintain
a high level of customer satisfaction through a portfolio of loyalty programs
such as its spot loyalty bonus program, its Continental Airlines rewards program
and its UPromise college education savings plan. AT&T Consumer Services Group
will continue to focus on improving the customer care experience through various
service enhancement initiatives including the introduction of convenience
features such as e-payment of bills as well as increasing its portfolio of
loyalty plans.
INDUSTRY OVERVIEW
The communications services industry continues to change competitively and
technologically both domestically and internationally, providing significant
opportunities and risks to the participants in these markets. In the United
States, the Telecommunications Act has had a significant impact on AT&T Consumer
Services Group's business by establishing a statutory framework for opening the
local service markets to competition and by allowing regional phone companies to
provide in-region long distance services bundled with their existing local
franchise. In addition, prices for long distance minutes and other basic
communications services have declined as a result of competitive pressures,
excess capacity as a result of substantial network build-out, the introduction
of more efficient networks and advanced technologies, product substitution, and
deregulation. In particular, consumer long distance voice usage is declining as
a result of substitution of wireless services, Internet access and
e-mail/instant messaging services. Competition in the provision of basic
communications services to consumers is based more on price and less on other
differentiating factors that appeal to the larger business market customers,
such as the range of services offered, bundling of products, customer service,
and communication quality, reliability and availability.
The consumer long distance market is characterized by rapid deregulation
and intense competition among long distance providers, and, more recently,
incumbent local exchange carriers. Under the Telecommunications Act, a regional
phone company may offer long distance services in a state within its region if
the FCC finds, first, that the regional phone company's service territory within
the state has been sufficiently opened to local competition, and second, that
allowing the regional phone company to provide these services is in the public
interest. As of January 30, 2002, regional phone companies have received
approval to offer long distance in nine states and AT&T Consumer Services Group
expects that regional phone companies will be successful in obtaining approval
to offer long distance in the majority of the remaining states by the end of
2002. The incumbent local exchange carriers presently have numerous advantages
as a result of their historic monopoly control over local exchanges. While these
dynamics are creating downward pressure on stand-alone long distance, new
opportunities are being created in the consumer industry, including local, data
and bundled offers.
The local voice market is currently dominated by the incumbent local
exchange carriers. The Telecommunications Act has established a statutory
framework for opening the local service markets to competition. AT&T Consumer
Services Group has already entered the local voice business in selected markets
and expects to expand its presence in this area.
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The data services market in the consumer segment is comprised primarily of
Internet access, utilizing either dial-up or high speed access technologies,
such as DSL and cable modems. Currently, AT&T Consumer Services Group offers
products in both narrowband and broadband data segments. Both narrowband and
broadband data services represent substantial revenue growth opportunities for
AT&T Consumer Services Group.
SERVICES AND PRODUCTS
LONG DISTANCE
AT&T Consumer Services Group provides interstate and intrastate long
distance telecommunications services throughout the continental United States
and provides, or joins in providing with other carriers, telecommunications
services to and from Alaska, Hawaii, Puerto Rico and the Virgin Islands and
international telecommunications services to and from virtually all nations and
territories around the world. Consumers can use AT&T Consumer Services Group's
domestic and international long distance services through traditional "one plus"
dialing of the desired call destination, through dial-up access or through use
of AT&T calling cards.
In the continental United States, AT&T Consumer Services Group provides
long distance telecommunications services over AT&T Business Services' backbone
network.
CALLING CARD
AT&T Consumer Services Group provides a vehicle for placing all "away from
home" calls. The AT&T calling card can be used to place domestic and
international calls in the U.S. and Canada by accessing 1-800CALLATT, 10-10-288
or 0+ the number dialed. Features include purchase limits, geographic
restrictions, native language preference, voice messaging and sequence dialing.
Customers can place calls over the AT&T network by using any of the following
options: AT&T calling cards, local exchange carrier cards and commercial credit
cards.
TRANSACTION-BASED SERVICES
AT&T Consumer Services Group offers a variety of transaction-based services
that are designed to provide customers with an alternative to access long
distance services as well as to provide assistance in completing long distance
communications.
Operator Services. Operator-assisted calling services include traditional
collect calls, third party billing, person to person and long distance pay phone
service.
Directory Assistance. Directory Assistance is provided to customers both
domestically and internationally, with an option to complete the call for a
nominal extra charge.
AT&T Direct Services. AT&T Consumer Services Group provides customers with
the ability to reach the AT&T network from outside the U.S. By dialing the
access code associated with the country of origin, customers can receive all the
benefits of AT&T Consumer Services Group's calling card and operator-assisted
calling services.
AT&T True Messages. AT&T True Messages is a voice store and forward
service. Using this service, callers can record a message in their own voice and
have it delivered to a telephone number that they called or they can access AT&T
True Messages directly and send a message.
Accessible Communication Service. AT&T Consumer Services Group provides
Telecommunications Relay Service for the deaf and hearing-impaired customers to
help them communicate with anyone in the world on the phone.
1-800CALLATT (Collect). 1-800CALLATT for collect calls continues to be
AT&T Consumer Services Group's lead discounted collect calling offer in the
operator services portfolio. 1-800CALLATT is a domestic, automated, flat-rate
collect calling service. The service is targeted at price conscious
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consumers and advertised nationally through multiple media channels. Optional
collect messaging capabilities exist as well.
AT&T PrePaid Card. AT&T PrePaid cards provide local, long distance and
international calls charged to an AT&T PrePaid card account maintained on AT&T's
PrePaid platform. The AT&T PrePaid card service is available 24 hours a day, 7
days a week. Currently, AT&T PrePaid cards are available in over 60,000 retail
locations of various types including grocery, drug, convenience, mass
merchandise, wholesale clubs, electronics/office and military/government.
10-10-345. 10-10-345 is a non-AT&T-branded dial-around service that allows
customers an alternative way to make a long distance call. The service is
targeted at price-sensitive dial-around and other common carriers' users
completing domestic and/or international calls from home. When customers dial
10-10-345, they pay a competitive per-minute rate, 24 hours a day, 7 days a week
with a minimal surcharge per call. Charges made for calls using 10-10-345 are
billed through the local exchange carrier.
AT&T WORLDNET HIGH SPEED SERVICE
AT&T Consumer Services Group is currently developing and testing an offer
that bundles AT&T long distance with local services (using incumbent local
exchange carrier network combinations), AT&T Worldnet Services and high-speed
Internet access services, which AT&T Consumer Services Group delivers using DSL
technology. The AT&T Worldnet High Speed Service would broaden AT&T Consumer
Services Group's franchise from long distance to a portfolio of voice, Internet,
high speed data, e-mail and messaging. In addition, AT&T Consumer Services Group
would offer competitively priced local and long distance packages to customers
with features such as voice mail and call waiting.
The AT&T Worldnet High Speed Service would be provided over traditional
telephone "twisted pair" copper lines leased from local exchange carriers. Using
electronics attached to a typical telephone line both at the customer premises
(through a modem) and at a point in the AT&T network, the AT&T Worldnet High
Speed Service provides customers with a continuous connection to the Internet,
featuring AT&T Worldnet Service. The typical residential offering would feature
connection speeds up to 12 times faster than 56k modem technology.
COMBINED LOCAL AND LONG DISTANCE
AT&T Consumer Services Group offers customers combined local (via unbundled
network elements platform) and long distance service in New York and Texas. AT&T
Consumer Services Group handles all aspects of the phone service for the
customer, including ordering, customer service, billing and inside wiring. AT&T
Consumer Services Group also offers many of the same local calling features as
the incumbent local exchange carriers, such as call waiting and caller ID.
AT&T WORLDNET SERVICE
AT&T offers dial-up Internet access to consumers through its AT&T WorldNet
Service, a leading provider of Internet access service in the United States.
AT&T WorldNet Service currently has dial-up subscribers that use IP
communication services within the AT&T WorldNet Service offer, such as e-mail,
calendar and alerting. AT&T Consumer Services Group's objective is to increase
usage by the long distance customer base of AT&T Consumer Services Group's
IP-based services and then migrate those customers to more advanced IP-based
services, such as voice mail.
MARKETING, SALES AND CUSTOMER CARE
AT&T Consumer Services Group develops customer awareness through its
marketing and promotion efforts. AT&T Consumer Services Group markets its
products and services to a broad spectrum of customers seeking to communicate
locally or globally. AT&T Consumer Services Group markets under the AT&T brand,
with the exception of its 10-10-345 service and certain prepaid card offerings,
and strives to provide superior customer care. AT&T Consumer Services Group
extensively utilizes direct marketing
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channels, including the Internet, direct mail, mass media, probe and transfer,
and outbound telemarketing to communicate with its existing customer base as
well as to market to prospective customers regarding the breadth of services
available to them. AT&T Consumer Services Group's marketing efforts focus on
offering its services to its customers based on their needs. These efforts
involve the selling of stand-alone services, such as long distance, local and
AT&T WorldNet Service, as well as bundled service offerings including long
distance/AT&T WorldNet Service, long distance/local, and long distance/calling
card.
AT&T Consumer Services Group relies on an integrated sales and service team
to solicit and handle customer contact opportunities. The customer care centers
consist of a network of internal and external vendors. The breadth of support
provided by the centers ranges from universal sales and service to specialized
services based on functional area or customer needs. AT&T Consumer Services
Group generally pays its vendors based on a contracted hourly rate and some on a
pay-for-performance scale methodology. AT&T Consumer Services Group has 22
service centers, of which ten are operated by AT&T and 12 are outsourced to
outside vendors. These service centers handle 9 million calls per month in 12
different languages.
AT&T Consumer Services Group also has begun to implement various
initiatives aimed at improving the overall quality of its sales channels as well
as lowering its costs of adding new subscribers. Recent initiatives targeted at
reducing costs and enhancing channel efficiencies have included the expansion of
AT&T Consumer Services Group's on-line capacity and capabilities (including
billing, sales and service) and the increased use of interactive voice response
technology.
AT&T Consumer Services Group is pursuing an e-enabling strategy designed to
create a more convenient, interactive relationship with the consumer, while
streamlining its existing processes and reducing the costs of providing
services. AT&T Consumer Services Group's electronic consumer strategy embodies
the entire business process from advertising and marketing through sales,
ordering, billing, fulfillment, customer service, and after-sales support. AT&T
Consumer Services Group is supplying a range of product information, bill
management utilities and customer care capabilities designed to attract and
retain its most valuable customers. AT&T Consumer Services Group's on-line
billing infrastructure enables customers to view, sort, adjust, investigate and
resolve questions regarding their billing statements. To further the
relationship with specific customer segments, AT&T Consumer Services Group
provides access to information in five languages other than English. These
transactions are designed to increase consumer satisfaction by providing a new
level of control and, in many cases, reduce time-consuming contacts with AT&T
Consumer Services Group's care and sales channels.
In January 2002, AT&T entered into a $2.6 billion, five-year agreement with
Accenture Ltd., for Accenture to provide management, new technology and training
for AT&T Consumer Services Group. Under the terms of the agreement, Accenture
will be responsible for providing new technology development and ongoing
management direction to improve AT&T Consumer Services Group's customer care
operations, with goals of reducing costs, raising productivity, and improving
sales and customer service. AT&T Consumer Services Group will continue to
develop and implement its overall business and marketing strategies and new
product offerings.
CUSTOMER OFFERS
AT&T Consumer Services Group offers long distance customers a family of
calling plans. These calling plans are simple and are consistently offered on
the web and over the telephone. Further, these plans offer customers a broad
choice of price points designed to meet their needs. Currently, the lead long
distance offer is the AT&T One Rate 7c Plan. For a monthly plan fee of $3.95,
customers pay 7c per minute for direct dialed state-to-state long distance calls
from home, at all times.
AT&T Consumer Services Group also offers various reward and partnership
programs for higher spending long distance customers. For example, customers
enrolled in AT&T rewards receive redemption options every six months based on
their long distance spending. AT&T Consumer Services Group relationships with
companies such as Continental Airlines, Inc., Starwood Hotels & Resorts
Worldwide Inc. and Cablevision, among others, provide customers with options
ranging from airline miles to hotel
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nights to premium cable channel upgrades. Recently, market research has
indicated consumer interest in college investment funds. Through an agreement
announced in January 2001 with UPromise Inc., a customer can receive a
contribution equal to 4% of the cost of residential long distance calls made
into a UPromise savings account to be used for college education. Consumers can
also invite family and friends to participate in collectively building the
UPromise savings account.
AT&T WorldNet Service seeks to build brand recognition and customer loyalty
and to make it easy for consumers to remain with AT&T WorldNet Service. In
addition to direct marketing through brand name mass advertising, direct mail
and magazine insert promotions and bundling offers, AT&T WorldNet Service
maintains a large indirect channel marketing effort. Through this indirect
channel, AT&T WorldNet Service software is bundled in new computers produced by
major manufacturers and is included in millions of copies of software titles
published by independent software vendors. AT&T WorldNet Service also has a
co-branded ISP offer that enables businesses to offer customers their own
branded, full-featured Internet access in affiliation with AT&T. AT&T WorldNet
Service currently offers AT&T WorldNet Service Plus for $16.95 per month, which
includes 150 hours of monthly usage (with additional hours billed at $.99/hour),
video e-mail, and live technical support.
RATES AND BILLING
AT&T Consumer Services Group generally continues to charge long distance
customers for jurisdictionally intrastate services based on applicable tariffs
filed with various individual states. However, effective as of August 1, 2001,
the rates for state-to-state and international calls are now generally set by
contract rather than by FCC tariffs as a result of an FCC de-tariffing order.
Customers select different services and various rate plans, which determine the
price per minute that customers pay on their long distance calls. Rates
typically vary based on a variety of factors, particularly the volume of usage
and the day and time that calls are made.
AT&T Consumer Services Group long distance charges may include fees per
minute for transporting a call, per call or per minute surcharges, monthly
recurring charges, minimums and price structures that offer a fixed number of
minutes each month for a specific price. The fees per minute for transporting a
call may vary by time of day or length of call and by whether the call is
domestic or international. Within the United States, in-state rates may vary
from interstate rates. These rate structures apply to customer dialed calls,
calling card calls, directory assistance calls, operator-assisted calls and
certain miscellaneous services. Customers also may be assessed a percentage of
revenue, or a fixed monthly fee, to satisfy AT&T Consumer Services Group's
obligations to recover U.S. federal- and state-mandated assessments and access
surcharges.
Customers for combined long distance and local services are charged a flat
rate per month for local service and usage fees for long distance. AT&T WorldNet
Service offers a variety of pricing plan options. Generally, customers are
charged a flat rate for a certain number of hours with charges for each
additional hour of usage. AT&T WorldNet Service also offers a plan without a
usage restriction. The AT&T WorldNet High Speed Service will offer integrated
high speed data combined with comprehensive voice services for one flat rate
each month, billed electronically to a credit card or through electronic funds
transfers.
AT&T Consumer Services Group generally provides billing via traditional
paper copy or on-line billing. The traditional paper bills provide call details
and are sent directly by AT&T or indirectly through local exchange carriers. An
additional fee is charged for customers receiving their bills through local
exchange carriers. In the case of on-line billing, the charges are billed to a
credit card or directly debited from a checking account; call details are
available via the AT&T website.
COMPETITION
Competition in communications services is based on price and pricing plans,
types of services offered, customer service, access to customer premises and
communications quality, reliability and availability. AT&T Consumer Services
Group's principal competitors include the MCI Group of Worldcom, Inc.,
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Sprint Corporation and regional phone companies. AT&T also experiences
significant competition in long distance from dial-around resellers. In
addition, long distance telecommunications providers have been facing
competition from non-traditional sources, including as a result of technological
substitutions, such as Internet telephony, high speed cable Internet service,
e-mail and wireless services. Providers of competitive high-speed data offerings
include cable television companies, fixed wireless companies, direct broadcast
satellite companies and DSL resellers.
Incumbent local exchange carriers own the only universal telephone
connection to the home, have very substantial capital and other resources,
long-standing customer relationships and extensive existing facilities and
network rights-of-way, and are AT&T Consumer Services Group's primary
competitors in the local services market. In addition, it is anticipated that a
number of long distance telecommunication, wireless and cable service providers
and others have entered or will enter the local services market in competition
with AT&T Consumer Services Group. Some of these potential competitors have
substantial financial and other resources. AT&T Consumer Services Group also
competes in the local services market with a number of competitive local
exchange carriers, a few of which have existing local networks and significant
financial resources. See "Summary and Overview of the Transactions -- Risk
Factors -- Risk Factors Relating to AT&T Consumer Services Group and AT&T
Business Services Group -- AT&T Consumer Services Group and AT&T Business
Services Group face substantial competition that may materially adversely impact
both market share and margins."
AT&T Consumer Services Group currently faces significant competition and
expects that the level of competition will continue to increase. As competitive,
regulatory and technological changes occur, including those occasioned by the
Telecommunications Act described under "-- Legislative and Regulatory
Developments -- Telecommunications Act of 1996," AT&T Consumer Services Group
anticipates that new and different competitors will enter and expand their
position in the communications services markets. These will include regional
phone company competitors in existing states and new states plus entrants from
other segments of the communications and information services industry or global
competitors seeking to expand their market opportunities. Many of these new
competitors are likely to enter with a strong market presence, well-recognized
names and pre-existing direct customer relationships.
The Telecommunications Act already has affected the competitive
environment. Anticipating changes in the industry, non-regional phone company
local exchange carriers, which are not required to implement the
Telecommunications Act's competitive checklist prior to offering long distance
in their home markets, have integrated their local service offerings with long
distance offerings in advance of AT&T Consumer Services Group offering combined
local and long distance service in these areas, adversely affecting AT&T
Consumer Services Group's revenues and earnings in these service regions.
In addition, the Telecommunications Act permits regional phone companies to
provide in-region interLATA interexchange services after demonstrating to the
FCC that providing these services is in the public interest and satisfying the
conditions for developing local competition established by the
Telecommunications Act. See "-- Legislative and Regulatory
Developments -- Telecommunications Act of 1996." Regional phone companies have
petitioned the FCC for permission to provide interLATA interexchange services in
one or more states within their home markets. In December 1999, Verizon became
the first regional phone company to obtain approval to provide long distance in
a state within its home territory, in New York, and was granted authorization to
provide long distance service in Massachusetts in April 2001, in Connecticut in
July 2001 and in Pennsylvania in September 2001. SBC was granted authorization
to provide long distance service in Texas in April 2000, in Kansas and Oklahoma
in January 2001, and, more recently, in Missouri and Arkansas. Applications are
currently pending with the FCC for the states of New Jersey, Rhode Island and
Vermont, and additional applications are expected to be filed in the future.
To the extent that regional phone companies obtain in-region interLATA
authority before the Telecommunications Act's checklist of conditions have been
fully or satisfactorily implemented and adequate facilities-based local exchange
competition exists, or before there is an ability to resell at fair and
competitive rates there is a substantial risk that AT&T Consumer Services Group
and other interexchange
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service providers, will be at a disadvantage to regional phone companies in
providing both local service and combined service packages. Because it is widely
anticipated that substantial numbers of long distance customers will seek to
purchase local, interexchange and other services from a single carrier as part
of a combined or full service package, any competitive disadvantage, inability
to profitably provide local service at competitive rates or delays or
limitations in providing local service or combined service packages could
materially adversely affect AT&T Consumer Services Group's future revenue and
earnings. In any event, the simultaneous entrance of numerous new competitors
for interexchange and combined service packages is likely to materially
adversely affect AT&T Consumer Services Group's future long distance revenue and
could affect materially adversely future earnings.
In addition to the matters referred to above, various other factors,
including technological hurdles, market acceptance, start-up and ongoing costs
associated with the provision of new services and local conditions and
obstacles, could materially adversely affect the timing and success of AT&T
Consumer Services Group's entrance into the local exchange services market and
AT&T Consumer Services Group's ability to offer combined service packages that
include local service.
EMPLOYEES
At September 30, 2001, AT&T Consumer Services Group employed approximately
15,000 individuals in its operations, virtually all of whom are located in the
United States. About 76% of the domestically located employees of AT&T Consumer
Services Group are represented by unions. Of those represented by unions, about
96% are represented by the Communications Workers of America and about 4% are
represented by the International Brotherhood of Electrical Workers, both of
which are affiliated with the AFL-CIO. Labor agreements with most of these
unions extend through May 2002.
LEGAL PROCEEDINGS
In the normal course of business, AT&T Consumer Services Group is subject
to proceedings, lawsuits and other claims, including proceedings under
government laws and regulations related to environmental and other matters. Such
matters are subject to many uncertainties and outcomes are not predictable with
assurance. Consequently, AT&T Consumer Services Group is unable to ascertain the
ultimate aggregate amount of monetary liability or financial impact with respect
to these matters at December 31, 2000. While these matters could affect
operating results of any one quarter when resolved in future periods, it is
management's opinion that after final disposition, any monetary liability or
financial impact to AT&T Consumer Services Group beyond that provided for at
year-end would not be material to AT&T Consumer Services Group's annual combined
financial statements.
For additional information on legal proceedings, please see the discussion
on legal proceedings under "Legal Proceedings" contained in AT&T's Annual Report
on Form 10-K, as amended, for the year ended December 31, 2000, which is
incorporated by reference in this document. See "Additional Information for
Shareholders -- Where You Can Find More Information."
LEGISLATIVE AND REGULATORY DEVELOPMENTS
Telecommunications Act of 1996. In February 1996, the Telecommunications
Act became law. The Telecommunications Act, among other things, was designed to
foster local exchange competition by establishing a regulatory framework to
govern new competitive entry in local and long distance telecommunications
services. The Telecommunications Act permits a regional phone company to provide
interexchange services originating in any state in its region after it
demonstrates to the FCC that this provision is in the public interest and it
satisfies the conditions for developing local competition established by the
Telecommunications Act.
In August 1996, the FCC adopted rules and regulations, including pricing
rules, to implement the local competition provisions of the Telecommunications
Act, including with respect to the terms and conditions of interconnection with
local exchange carrier networks and the standards governing the purchase of
unbundled network elements and wholesale services from local exchange carriers.
These rules
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and regulations rely on state public utility commissions, or PUCs, to develop
the specific rates and procedures applicable to particular states within the
framework prescribed by the FCC.
On July 18, 1997, the Eighth Circuit Court of Appeals issued a decision
holding that the FCC lacked authority to establish pricing rules to implement
the sections of the local competition provisions of the Telecommunications Act
applicable to interconnection with incumbent local exchange carrier networks and
the purchase of unbundled network elements and wholesale services from incumbent
local exchange carriers. Accordingly, the Eighth Circuit Court of Appeals
vacated the rules that the FCC had adopted in August 1996, and that had been
stayed by the Court since September 1996. On October 14, 1997, the Eighth
Circuit Court of Appeals vacated an FCC rule that prohibited incumbent local
exchange carriers from separating network elements that are combined in an
incumbent local exchange carrier's network, except at the request of the
competitor purchasing the elements. This decision increased the difficulty and
cost of providing competitive local service through the use of unbundled network
elements purchased from incumbent local exchange carriers.
On January 25, 1999, the Supreme Court issued a decision reversing the
Eighth Circuit Court of Appeals' holding that the FCC lacks jurisdiction to
establish pricing rules applicable to interconnection and the purchase of
unbundled network elements, and the Eighth Circuit Court of Appeals' decision to
vacate the FCC's rule prohibiting incumbent local exchange carriers from
separating network elements that are combined in an incumbent local exchange
carrier's network. The effect of the Supreme Court's decision was to reinstate
the FCC's rules governing pricing and the separation of unbundled network
elements. The pricing issues were then remanded to the Eighth Circuit Court of
Appeals to consider the incumbent local exchange carriers' claims that, although
the FCC has jurisdiction to adopt pricing rules, the rules it adopted are not
consistent with the applicable provisions of the Telecommunications Act. The
Supreme Court also vacated the FCC's rule identifying and defining the unbundled
network elements that incumbent local exchange carriers are required to make
available to new entrants, and directed the FCC to reexamine this issue in light
of the standards mandated by the Telecommunications Act.
In response to the Supreme Court's decision, in November 1999, the FCC
completed its reexamination of, and released an order identifying and defining,
the unbundled network elements that incumbent local exchange carriers are
required to make available to new entrants. That order re-adopted the original
list of elements, with certain limited exceptions. An association of incumbent
local exchange carriers has appealed the FCC's order to the District of Columbia
Circuit Court of Appeals, and has asked this Court to hear the appeal on an
expedited basis. A number of parties, including AT&T and other incumbent local
exchange carriers, have petitioned the FCC to reconsider and/or clarify its
order. The FCC has moved to hold the appeal in abeyance pending its disposition
of the reconsideration petitions. In addition, in December 2001 the FCC opened a
proceeding in which it proposes to review the availability of unbundled network
elements based on current market conditions. The FCC has proposed to respond to
issues raised in the earlier reconsideration petitions in this new docket.
In July 2000, the Eighth Circuit Court of Appeals issued a decision
addressing the incumbent local exchange carriers' claims that the FCC's pricing
rules are not consistent with the applicable provisions of the
Telecommunications Act. It rejected the incumbent local exchange carriers'
claims that the prices for network elements must be based on their "historical
costs" rather than, as the FCC had held, their "forward-looking" costs. It also
held, however, that the FCC rule providing that forward-looking costs should be
calculated on the basis of the cost of the most efficient alternatives was
contrary to the Telecommunications Act. The Eighth Circuit Court of Appeals then
stayed this ruling to enable the parties to seek review before the Supreme
Court, so the FCC's rules remain in effect until the Supreme Court decides the
case. The Supreme Court agreed to review the Eighth Circuit Court of Appeals'
decision, and a decision by the Supreme Court is anticipated by the end of June
2002. The Supreme Court will be considering the claims of AT&T, the FCC and
others that the Eighth Circuit Court of Appeals erred by invalidating the FCC
rule, and the claim by the incumbent local exchange carriers that the Eighth
Circuit Court of Appeals erred by not requiring prices to be based on their
historical cost. The Supreme Court is also considering the Eighth Circuit's
decision that incumbent local exchange carriers are not required to provide
competitors with "new" combinations of unbundled network elements.
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The Eighth Circuit Court of Appeals also invalidated the FCC's rules
setting the pricing methodology for resold local services. That aspect of its
decision was not stayed and will not be reviewed by the Supreme Court.
In view of the proceedings pending before the Supreme Court, the District
of Columbia Circuit Court of Appeals, the FCC and state PUCs and possible
legislation, there can be no assurance that the prices and other conditions
established in each state will provide for effective local service entry and
competition or provide AT&T Consumer Services Group with new market
opportunities. The effect of the most recent decision by the Eighth Circuit
Court of Appeals is to increase the risks, costs, difficulties, and uncertainty
of entering local markets through using the incumbent local exchange carriers'
facilities and services.
Regulation of Rates. AT&T Consumer Services Group is subject to the
jurisdiction of the FCC with respect to interstate and international rates,
lines and services, and other matters. From July 1989 to October 1995, the FCC
regulated AT&T Consumer Services Group under a system known as "price caps"
whereby AT&T Consumer Services Group's prices, rather than its earnings, were
limited. On October 12, 1995, recognizing a decade of enormous change in the
long distance market and finding that AT&T lacked market power in the interstate
long distance market, the FCC reclassified AT&T as a "non-dominant" carrier for
its domestic interstate services. Subsequently, the FCC determined that AT&T
Consumer Services Group's international services were also non-dominant. As a
result, AT&T Consumer Services Group became subject to the same regulations as
its long distance competitors for these services. Thus, AT&T Consumer Services
Group was no longer subject to price cap regulation for these services, was able
to file tariffs that are presumed lawful on one day's notice, and was free of
other regulations and reporting requirements that apply only to dominant
carriers.
In subsequent orders, the FCC decided to exercise its authority to forbear
from requiring non-dominant carriers to file tariffs for their services; first
for domestic interstate services and then for international services. As a
result, non-dominant carriers, including AT&T Consumer Services Group, have
implemented mechanisms other than tariffs to establish the terms and conditions
that apply both to domestic, interstate telecommunications services and
international services, effective August 1, 2001. Accordingly these mechanisms
apply to virtually all of AT&T Consumer Services Group's interstate and
international telecommunications services.
In May 1997, the FCC adopted orders relating to price caps, access reform
and universal service that substantially revised the level and structure of
access charges that AT&T Consumer Services Group, as a long distance carrier,
pays to incumbent local exchange carriers. Under the price cap order, local
exchange carriers were required to reduce their price cap indices by 6.5%
annually, less an adjustment for inflation, which has resulted in significant
reductions in access charges that long distance companies pay to local exchange
carriers. The access reform order permitted increased flat-rate assessments to
multiline business customers and to residential customers other than for the
primary telephone line. AT&T Consumer Services Group has agreed to pass through
to consumers any savings to AT&T Consumer Services Group as a result of these
access charge reforms. Consequently, AT&T Consumer Services Group's results
after June 1997 reflect lower revenue per minute of usage and lower access and
other interconnection costs per minute of usage.
In May 2000, the FCC adopted the CALLS order for the price cap local
exchange carriers, which made additional significant access and price cap
changes. The CALLS order reduced by $3.2 billion during 2000 the interstate
access charges that AT&T Consumer Services Group and other long distance
carriers paid to these local exchange carriers for access to their networks, and
established target access rates for the long distance carriers companies, which,
over the next two years, will result in further reductions, albeit of a much
smaller magnitude. Once the target rates are reached, the annual price
reductions required by the price cap order no longer apply. In addition, the
CALLS order removed implicit subsidies from access charges and converted them
into an explicit, portable subsidy administered as part of the universal service
program described below. Also, under the CALLS order, the caps on certain
line-based costs that do not vary with usage have been increased so that these
costs increasingly are recovered from end user customers. These restructurings
allowed the reduction in access charges assessed on long distance carriers on a
usage basis. As part of the CALLS order, AT&T Consumer Services Group agreed to
pass through to customers access charge reductions over the
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five-year life of the CALLS order and made certain other commitments regarding
the rate structure of certain residential long distance offerings. The FCC CALLS
order was recently reversed and remanded in part, and is the subject of ongoing
remand proceedings before the FCC.
Under the August 1999 local exchange carrier pricing flexibility order,
which was affirmed by the District of Columbia Circuit Court of Appeals in
February 2001, the FCC established certain triggers that enable the price cap
local exchange carriers to obtain pricing flexibility for their interstate
access services, including Phase II relief that permits them to remove these
services from price cap regulation. Although these triggers purportedly indicate
a competitive presence, they may allow for premature deregulation that could
force access rates upwards.
Finally, in the universal service order, the FCC adopted a new mechanism
for funding universal service, which includes programs that defray the costs of
telephone service in high-cost areas, for low-income consumers, and for schools,
libraries and rural health care providers. Specifically, the FCC expanded the
set of carriers that must contribute to support universal service from solely
long distance carriers to all carriers, including local exchange carriers, that
provide interstate telecommunications services. Similarly, the set of carriers
eligible for the universal service support has been expanded from only local
exchange carriers to any eligible carrier providing local service to a customer,
including AT&T Consumer Services Group as a new entrant in local markets. The
universal service order also adopted measures to provide discounts on
telecommunications services, Internet access and inside wiring for eligible
schools and libraries and on telecommunications services only for rural health
care providers.
AT&T Consumer Services Group remains subject to the statutory requirements
of Title II of the Communications Act of 1934, as amended. AT&T Consumer
Services Group must offer service under rates, terms and conditions that are
just, reasonable and not unreasonably discriminatory. It also is subject to the
FCC's complaint process, and it must give notice to the FCC and affected
customers prior to discontinuance, reduction or impairment of service.
In addition, legislation is currently pending before the United States
House of Representatives that would permit the regional phone companies to
provide certain long distance services without satisfying the Telecommunications
Act's checklist of conditions and also would substantially reduce the regional
phone companies' obligations to provide AT&T Consumer Services Group and other
local competitors with the faculties needed to provide competitive local
services, particularly high speed data services. Additionally, the Federal
Communications Commission proceeding referenced could limit the regional phone
companies obligations to provide facilities to AT&T Consumer Services Group and
other local competitors, and could accelerate the regional phone companies'
ability to provide long distance services.
In addition to the matters described above with respect to the
Telecommunications Act, PUCs or similar authorities having regulatory power over
intrastate rates, lines and services and other matters regulate AT&T Consumer
Services Group's local and intrastate communications services. The system of
regulation applied to AT&T Consumer Services Group's intrastate and local
communications services varies from state to state and generally includes
various forms of pricing flexibility rules. AT&T Consumer Services Group's
services are not regulated in the states through rate of return regulation.
X-23
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
To understand and place in context AT&T Consumer Services Group
Management's Discussion and Analysis, we urge you to read the AT&T Corp.
Management's Discussion and Analysis on page .
OVERVIEW
AT&T Consumer Services Group is an integrated business of AT&T and is not a
stand-alone entity. The combined financial statements included herein reflect
the results of the proposed AT&T Consumer Services Group tracking stock.
Separate financial statements are not required to be filed for tracking stocks.
However, AT&T Consumer Services Group has provided the financial statements as
an exhibit to this document to provide additional disclosures to investors to
allow them to assess the financial performance of AT&T Consumer Services Group.
Presenting separate financial statements for AT&T Consumer Services Group does
not indicate that AT&T has changed title to any assets or responsibility for any
liabilities, and does not purport to affect the rights of any of AT&T's
creditors. Holders of AT&T Consumer Services Group tracking stock do not have
claims against the assets of AT&T Consumer Services Group. Instead, AT&T
Consumer Services Group shareholders own a separate class of AT&T common stock
that is intended to reflect the financial performance and economic value of
AT&T's consumer services businesses. Since the tracking stocks are governed by a
common board of directors, AT&T's board of directors could make operational and
financial decisions or implement policies that affect disproportionately the
businesses of any group. For example, AT&T's board of directors may decide to
transfer funds or to reallocate assets, liabilities, revenue, expenses and cash
flows among groups, without the consent of shareholders. All actions by the
board of directors are subject to the board members' fiduciary duties to all
shareholders of AT&T as a group, not just to holders of a particular class of
tracking stock, and to AT&T's charter, policy statements, by-laws and
inter-company agreements.
AT&T's board of directors may change or supplement the policies set forth
in the tracking stock policy statements and AT&T's by-laws at the sole
discretion of AT&T's board of directors, subject to the provisions of any
inter-group agreement but without approval of AT&T's shareholders. In addition,
the fact that AT&T has separate classes of common stock could give rise to
occasions when the interests of the holders of the various classes of stock
diverge, conflict or appear to diverge or conflict. AT&T's board of directors
would make any change or addition to the policies set forth in the tracking
stock policy statements or AT&T's by-laws, and would respond to any actual or
apparent divergence of interest among AT&T's groups, in a manner consistent with
its fiduciary duties to AT&T and all of AT&T's shareholders after giving
consideration to the potentially divergent interests and all other relevant
interests of the holders of the separate classes of AT&T shares.
YOU SHOULD CONSIDER THAT AS A RESULT OF THE FLEXIBILITY PROVIDED TO AT&T'S
BOARD OF DIRECTORS, IT MAY BE DIFFICULT FOR INVESTORS TO ASSESS THE FUTURE
PROSPECTS OF A TRACKING STOCK GROUP BASED ON THAT GROUP'S PAST PERFORMANCE.
AT&T Consumer Services Group is a leading provider of domestic and
international long distance and transaction based services to residential
consumers in the United States with approximately 60 million customer
relationships. AT&T Consumer Services Group provides interstate and intrastate
long distance communications services throughout the continental United States
and provides, or joins in providing with other carriers, communications services
to and from Alaska, Hawaii, Puerto Rico and the Virgin Islands and international
communications services to and from virtually all nations and territories around
the world.
AT&T Consumer Services Group provides a broad range of communications
services to consumers individually and in combination with other services,
including: inbound and outbound domestic and international long distance through
the traditional "one plus" dialing of the desired call destination; local toll
calling; transaction-based long distance services such as calling cards and
prepaid phone cards; local
X-24
calling through unbundled network elements platform resale service offers; and
dial-up Internet service through AT&T WorldNet Service.
On October 25, 2000, AT&T announced a restructuring plan designed to fully
separate or issue separately tracked stocks intended to reflect the financial
performance and economic value of each of AT&T's four major operating units. On
December 19, 2001 AT&T reaffirmed its commitment to creating a tracking stock
designed to reflect the financial performance and economic value of AT&T
Consumer Services Group. If the Consumer Services charter amendment proposal is
approved, AT&T expects to distribute some or all of the tracking stock to AT&T
shareholders in 2002.
Debt has been allocated to AT&T Consumer Services Group based on AT&T's
future view of AT&T's debt position after taking into account the significant
deleveraging activities of AT&T. This allocation took into account the following
factors: prospective financing requirements, working capital and capital
expenditure requirements and comparable company profiles. Increases in
historical debt levels are based, in general, on historical cash flows generated
by AT&T Consumer Services Group in relation to total AT&T. Such cash outflows
include acquisitions, dividend payments and capital expenditures partially
offset by cash flow from operations. For purposes of this allocation, certain
"corporate" activities were deemed to be partially funded by this entity by
contributing proceeds to the parent for these activities. These activities
included the repurchase of common shares by AT&T and cash payments associated
with the TCI merger and the MediaOne acquisition. The interest expense on the
allocated debt was calculated based on a rate intended to be equivalent to the
rate AT&T Consumer Services Group would have received if it were a stand-alone
entity. Due to the expected positive operating cash flow of AT&T Consumer
Services Group, the level of debt of AT&T Consumer Services Group in the future
is expected to be significantly lower than the level at September 30, 2001.
COMBINED RESULTS OF OPERATIONS
The comparison of 2001 results with 2000 was impacted by events that
occurred during these two periods. For example, effective July 1, 2000, the FCC
eliminated Primary Interexchange Carrier Charges, or per-line charges, that AT&T
Consumer Services Group pays for residential and single-line businesses. The
elimination of these per-line charges resulted in lower access expense as well
as lower revenue, since AT&T Consumer Services Group has historically billed its
customers for these charges.
The comparison of 2000 results with 1999 was impacted by events that
occurred during these two years. For example, on January 5, 2000, AT&T launched
Concert, its global joint venture with BT. AT&T contributed all of its
international cross-border network facilities and the economic value of
approximately 270 AT&T Business Services Group multinational customers
specifically targeted for direct sales by Concert and substantially all
international traffic of AT&T Consumer Services Group. As a result, AT&T
Consumer Services Group's 2000 results do not include the revenue and expenses
associated with international traffic contributed to Concert.
In addition, comparison of 2000 results with 1999 was impacted by the
elimination of Primary Interexchange Carrier Charges.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2000
Revenue
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- -----------------
2001 2000 2001 2000
------ ------ ------- -------
(DOLLARS IN MILLIONS)
Revenue.......................................... $3,822 $4,651 $11,614 $14,651
AT&T Consumer Services Group revenue declined 17.8%, or $829 million, in
the third quarter of 2001 and declined 20.7%, or $3,037 million, for the first
nine months of 2001 compared with the
X-25
corresponding periods in 2000. The revenue decline in both periods reflects the
impacts of volume reductions, primarily in traditional voice services due to the
acceleration of wireless and e-mail substitution, the impacts of ongoing
competition and the continued migration of customers to lower-priced products
and optional calling plans. The revenue decline in the third quarter of 2001 was
slightly offset by an increase in the level of call volumes related to the
events of September 11, 2001. In addition, the revenue decline for the nine
months ended September 30, 2001, reflects the elimination of per-line charges in
July 2000 of approximately $496 million.
The calling volume declined at a low double-digit percentage rate in both
the third quarter of 2001 and the nine months ended September 30, 2001,
primarily due to product substitution and competition in the long distance
industry, which AT&T Consumer Services Group expects will continue to negatively
impact AT&T Consumer Services Group's revenue.
Operating Expenses
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
2001 2000 2001 2000
------ ------ ------ ------
(DOLLARS IN MILLIONS)
Access and other connection........................ $1,014 $1,185 $3,112 $4,126
Access and other connection expenses decreased 14.4%, or $171 million, in
the third quarter of 2001, compared with the third quarter of 2000. Included
within access and other connection expenses are costs that AT&T Consumer
Services Group pays to connect calls on the facilities of other service
providers. Approximately $129 million of the decrease was due to lower
international connection rates and lower per minute access rates and
approximately $96 million was due to lower volumes. Partially offsetting this
decline was an increase in local connectivity expense of $43 million primarily
due to the expansion of local service in New York and Texas.
Access and other connection expenses decreased 24.6%, or $1,014 million,
for the nine months ended September 30, 2001, compared with the same period in
2000. Approximately $911 million of the decrease was due to lower per-line
charges, mandated reductions in per minute access rates and lower international
connection rates. In July 2000 per line charges that AT&T paid for residential
customers were eliminated by the FCC. Also contributing to the decrease was $296
million due to lower volumes. Partially offsetting these declines was higher
local connectivity expense of $177 million primarily due to the expansion of
local service in New York and Texas.
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- ---------------
2001 2000 2001 2000
----- ----- ------ ------
(DOLLARS IN MILLIONS)
Selling, general and administrative................... $913 $979 $2,855 $3,195
Selling, general and administrative (SG&A) expenses decreased 6.7%, or $66
million, in the third quarter of 2001, compared with the third quarter of 2000.
SG&A expenses decreased 10.6%, or $340 million, for the nine months ended
September 30, 2001, compared with the same period in 2000. The decline in both
periods was primarily due to lower costs associated with customer care and
billing expenses and cost management efforts.
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- ---------------
2001 2000 2001 2000
----- ----- ------ ------
(DOLLARS IN MILLIONS)
Costs of services and products........................ $590 $661 $1,758 $1,957
Costs of services and products decreased 10.7%, or $71 million, in the
third quarter of 2001, compared with the third quarter of 2000. Approximately
$58 million of the decrease was due to lower costs for
X-26
utilizing AT&T's network, primarily as a result of lower volumes. An additional
$14 million of the decrease was due to lower operator services costs, also
related to lower volumes.
Costs of services and products decreased 10.2%, or $199 million, for the
nine months ended September 30, 2001, compared with the same period in 2000.
Approximately $142 million of the decrease was due to lower costs for utilizing
AT&T's network, primarily as a result of lower volumes. An additional $52
million of the decrease was due to lower operator services costs, also related
to lower volumes.
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- -------------
2001 2000 2001 2000
----- ----- ----- -----
(DOLLARS IN MILLIONS)
Depreciation and amortization............................ $49 $43 $145 $123
Depreciation and amortization expenses increased 14.0%, or $6 million,
compared with the third quarter of 2000. Depreciation and amortization expenses
increased 17.9%, or $22 million, for the nine months ended September 30, 2001
compared with the corresponding prior-year period. Capital expenditures and
additions to internal use software for the nine months ended September 30, 2001
and 2000 were $96 million and $104 million, respectively.
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
2001 2000 2001 2000
----- ----- ----- -----
(DOLLARS IN MILLIONS)
Net Restructuring & Other Charges......................... $-- $-- $-- $97
During the first quarter of 2000, AT&T Consumer Services Group recorded $97
million of net restructuring and other charges, which included $79 million for
restructuring and exit costs associated with AT&T's initiative to reduce costs
by the end of 2000.
Also included in restructuring and other charges was an asset impairment
charge of $18 million related to the write-down of unrecoverable assets in
certain businesses in which the carrying value was no longer supported by future
cash flows.
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
2001 2000 2001 2000
------ ------ ------ ------
(DOLLARS IN MILLIONS)
Operating income................................... $1,256 $1,783 $3,744 $5,153
Operating income decreased 29.6%, or $527 million, in the third quarter of
2001, compared with the same period in 2000. Operating income decreased 27.3%,
or $1,409 million, for the nine months ended September 30, 2001 compared with
the corresponding prior year period. The decrease in both periods was primarily
due to revenue declines partially offset by reductions in operating expenses.
Operating income margin (operating income as a percent of revenue) was 32.9% and
38.3% for the three months ended September 30, 2001 and 2000, respectively, and
32.2% and 35.2% for the nine months ended September 30, 2001 and 2000,
respectively.
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
2001 2000 2001 2000
----- ----- ----- -----
(DOLLARS IN MILLIONS)
Interest expense......................................... $28 $76 $134 $98
Interest expense decreased 63.2%, or $48 million, in third quarter of 2001
compared with the same period in 2000. The decrease was attributable to a
decrease in long-term debt due to AT&T.
X-27
Interest expense increased 36.7%, or $36 million, in the nine month period
ended September 30, 2001 compared with the corresponding prior year period. The
increase was attributable to an increase in the average long-term debt balance
due to AT&T.
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- ---------------
2001 2000 2001 2000
----- ----- ------ ------
(DOLLARS IN MILLIONS)
Provision for income taxes............................ $473 $655 $1,389 $1,957
The provision for income taxes decreased 27.8%, or $182 million, in the
third quarter of 2001, compared with the third quarter of 2000. The provision
for income taxes decreased 29.0%, or $568 million, in the nine month period
ended September 30, 2001 compared with the corresponding prior year period. The
decrease in both periods was primarily due to lower income before income taxes.
The effective tax rate for third quarter of 2001 was 38.3% compared with 38.2%
in the third quarter of 2000. The effective tax rate for the nine months ended
September 30, 2001 and 2000 was 38.2% for both periods. The effective tax rate
is higher than the 35% statutory federal tax rate principally due to state
income taxes, net of federal benefits.
THREE YEARS ENDED DECEMBER 31, 2000
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
Revenue............................................... $18,894 $21,753 $22,763
In 2000, AT&T Consumer Services Group's revenue decreased $2,859 million or
13.1%, on a mid-single-digit decline in volumes. Revenue in 1999 fell $1,010
million, or 4.4%, on a mid-single-digit decline in volumes. In 2000,
approximately $884 million of this decline was due to the elimination of per-
line charges and the impact of Concert. The remaining decline in both years
reflects the ongoing competitive nature of the consumer long distance industry,
which has resulted in pricing pressures and a loss of customers, which is
expected to continue. Also negatively impacting revenue growth was product
substitution and market migration away from direct dial wireline and
higher-priced calling card services to rapidly growing wireless services and
lower-priced prepaid card services. During 2000, the New York and Texas long
distance markets were opened up to competition by the RBOCs. The continued entry
of the RBOCs into the long distance market is expected to increase competitive
pressures in 2001.
AT&T Consumer Services Group has continued to focus on providing customers
with choice, simplicity and competitive rates. AT&T Consumer Services Group's
One Rate plans, which allow customers to make long distance calls 24 hours a
day, seven days a week for the same rate, have continued to be well received. As
of December 31, 2000, over 12 million customers were enrolled in these plans,
with more than 60% of those customers electing to bundle their long distance
with local toll (intraLATA) service. Over one-half of the customers enrolled in
the One Rate plans were new long distance customers.
AT&T WorldNet Service revenue increased 5.9% to $319 million in 2000, and
41.2% to $301 million in 1999. The increase in 2000 is due to stronger
subscription revenue in the first half of 2000 as well as increased advertising
revenue. Growth in 1999 was higher primarily due to increased marketing efforts
and the introduction of the premium $21.95 unlimited access price plan.
Competition within the ISP industry has recently increased. AT&T WorldNet
Service has remained competitive with the industry, and launched their i495 plan
in July 2000, which provides up to 150 hours of Internet service for $4.95 per
month.
X-28
AT&T WorldNet Service served 1.42 million residential customers as of
December 31, 2000, a decrease of 3.8% over 1999, due to the competitive nature
of the industry. At December 31, 1999, AT&T WorldNet Service served 1.48 million
residential customers, an increase of 29.5% over 1998.
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Access and other connection............................ $5,204 $6,223 $7,453
Access and other connection expenses declined $1,019 million, or 16.4%, in
2000 compared with 1999. Included within access and other connection expenses
are costs paid to connect domestic calls on the facilities of other service
providers. Approximately $932 million of this decline was driven by mandated
reductions in per-minute access rates in 2000 and decreased per-line charges.
Approximately $295 million of this decline was driven by volume declines in
2000. These decreases were partially offset by an increase in Universal Service
Fund contributions of $224 million. Since most of these charges are passed
through to the customer, the per-minute access-rate, the per-line charge
reductions and the increased Universal Service Fund contributions have generally
resulted in a corresponding impact on revenue. In addition, local connectivity
charges increased $173 million, reflecting growth in the local business.
Costs paid to telephone companies outside of the United States to connect
calls made to countries outside of the United States (international settlements)
also are included within access and other connection expenses. These costs
decreased $193 million in 2000, as a result of the commencement of operations of
Concert. Concert now incurs most of AT&T's international settlements as well as
earns most of AT&T's foreign-billed revenue, previously incurred and earned
directly by AT&T Consumer Services Group. In 2000, Concert billed AT&T Consumer
Services Group a net expense composed of international settlement
(interconnection) expense, administrative fees, and foreign-billed revenue. The
amount charged by Concert in 2000 was lower than interconnection expense
incurred in 1999, since AT&T Consumer Services Group recorded these transactions
as revenue and expense, as applicable.
Access and other connection expenses declined $1,230 million, or 16.5%, in
1999 compared with the prior year. Approximately $960 million of this decline
resulted from mandated reductions in per-minute access rates and lower
international settlement rates resulting from AT&T's negotiations with
international carriers. Approximately $236 million of this decline was driven by
volume declines in 1999. These reductions were partially offset by increased
per-line charges and Universal Service Fund contributions in the amount of $172
million.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Selling, general and administrative...................... $4,128 $4,688 $5,453
Selling, general and administrative, or SG&A, expenses decreased $560
million, or 11.9%, in 2000 compared with 1999. These reductions were primarily
attributed to cost control efforts such as targeted marketing, consolidation of
functions and reduction of support and corporate staff headcounts.
In 1999, SG&A expenses decreased $765 million, or 14.0% compared with the
prior year. This decrease was primarily due to AT&T Consumer Services Group's
focus on high-value customers, which led to lower spending on
customer-acquisition and retention programs.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Costs of services and products........................... $2,557 $3,316 $3,656
Costs of services and products expenses include such costs as the transport
costs for utilizing AT&T's network, operator service costs, and the provision
for uncollectible receivables. These costs decreased $759
X-29
million, or 22.9%, in 2000 and $340 million, or 9.3%, in 1999 compared with the
prior year. These declines are largely due to volume declines and network
cost-control initiatives, and the lower provision for uncollectible receivables.
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(DOLLARS IN MILLIONS)
Depreciation and amortization............................... $167 $184 $116
Depreciation and amortization expenses decreased $17 million, or 9.2%, in
2000. Depreciation and amortization expenses increased $68 million, or 58.6%, in
1999 compared with 1998. Total capital expenditures for 2000, 1999 and 1998 were
$148 million, $300 million and $98 million, respectively.
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(DOLLARS IN MILLIONS)
Net restructuring and other charges......................... $97 $7 $(19)
During 2000, AT&T Consumer Services Group recorded $97 million of net
restructuring and other charges. The charge for restructuring and exit plans was
primarily due to headcount reductions, including the consolidation of customer
care and call centers. Included in exit costs was $79 million of cash
termination benefits associated with the involuntary separation of about 1,300
employees. Approximately 65% of the individuals were management employees and
35% were non-management employees.
AT&T Consumer Services Group also recorded an asset impairment charge of
$18 million related to the write-down of unrecoverable assets in certain
businesses where the carrying value was no longer supported by estimated future
cash flows.
During 1999, AT&T Consumer Services Group recorded $7 million of net
restructuring and other charges. This $7 million charge for restructuring and
exit costs was recorded in conjunction with AT&T's initiative to reduce costs.
The restructuring and exit plans primarily focused on the maximization of
synergies through headcount reductions, including the consolidation of
customer-care and call centers.
The exit costs represent cash termination benefits associated with the
separation of approximately 164 employees as part of voluntary termination
plans. All of the terminations were nonmanagement employees.
During 1998, AT&T Consumer Services Group recorded a $19 million benefit to
net restructuring and other charges. This benefit represents the reversal of
1995 business restructuring reserves primarily resulting from the overlap of
AT&T's 1998 voluntary retirement incentive program, or VRIP, on certain 1995
projects.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Operating income......................................... $6,741 $7,335 $6,104
Operating income decreased 8.1% in 2000 compared with 1999. These results
primarily reflect a decline in revenues, partially offset by cost reductions,
primarily in SG&A, and costs of services and products. The decrease was also
attributed to higher net restructuring and other charges in 2000 of $90 million.
Operating income margin (operating income as a percent of revenue) was 35.7% in
2000 compared with 33.7% in 1999. Increased competition and migration of
customers to products which may have a lower margin will negatively impact
operating margins in the future.
In 1999, operating income increased 20.2% compared to the prior year. This
increase was primarily driven by reduced SG&A expenses, largely due to AT&T
Consumer Services Group's focus on high-value customers, which led to lower
spending on customer-acquisition and retention programs.
X-30
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(DOLLARS IN MILLIONS)
Other income, net........................................... $81 $208 $86
Other income decreased $127 million or 61.1% in 2000 compared with 1999.
Other income increased $122 million or 141.9% in 1999 compared with the prior
year. These results are primarily due to the 1999 sale of AT&T Consumer Services
Group's Language Line Services business, which resulted in a gain of $153
million.
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(DOLLARS IN MILLIONS)
Interest expense............................................ $164 $41 $27
In 2000, interest expense was $164 million compared to interest expense of
$41 million in 1999. This interest expense is primarily due to an increase in
long-term debt from AT&T.
In 1999, interest expense increased $14 million versus the prior year. This
is primarily due to the increase in long-term debt in 1999.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Provision for income taxes............................... $2,546 $2,869 $2,356
The effective income tax rate is the provision for income taxes as a
percent of income from continuing operations before income taxes. The effective
income tax rate for AT&T Consumer Services Group was 38.24%, 38.24%, and 38.22%,
in 2000, 1999, and 1998, respectively.
LIQUIDITY
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
2001 2000
--------- ---------
(DOLLARS IN MILLIONS)
Cash flows:
Provided by operating activities.......................... $ 3,099 $ 3,636
Used in investing activities.............................. (96) (104)
Used in financing activities.............................. (3,002) (3,537)
For the nine months ended September 30, 2001, net cash provided by
operating activities decreased $537 million, compared with the prior year
period. This decrease was primarily due to decreases in net income and accounts
payable, partially offset by an increase in income taxes payable and lower
accounts receivable.
Investing activities of $96 million in 2001 and $104 million in 2000
represented capital expenditures and other additions including internal use
software.
For the nine months ended September 30, 2001, net cash used in financing
activities decreased by $535 million over the same prior year period. This
decrease was due to lower contributions to AT&T as well as lower dividend
payments due to the reductions in the AT&T annual dividend rate from $0.88 per
share to $0.15 per share, two-thirds of which is funded by AT&T Consumer
Services Group. These decreases were partially offset by repayments of long-term
debt due to AT&T.
X-31
Due to the expected positive operating cash flow of AT&T Consumer Services
Group, the level of debt of AT&T Consumer Services Group in the future is
expected to be significantly lower than the level at September 30, 2001.
Accordingly, the interest payments on the debt are expected to significantly
decline.
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
CASH FLOWS:
Provided by operating activities.................... $ 4,787 $ 4,350 $ 4,141
(Used in)/provided by investing activities.......... (132) 1,398 (1,641)
Used in financing activities........................ (4,661) (5,742) (2,500)
In 2000, net cash provided by operating activities increased $437 million.
This increase is primarily due to changes in accounts receivable and accounts
payable. These increases in net cash were partially offset by a decrease in net
income, excluding the noncash impacts of depreciation and amortization, net
restructuring and other charges and provision for uncollectibles. The increase
in net cash provided by operating activities in 1999 compared with 1998 was
primarily due to an increase in net income.
Investing activities resulted in a net use of cash of $132 million for
2000. The primary use of cash in 2000 was for capital expenditures.
Net cash provided by investing activities in 1999 was $1,398 million,
compared with a net use of cash in 1998 of $1,641 million. In 1998, AT&T
Consumer Services Group made a short term loan to AT&T; this receivable was
collected in 1999.
In 2000, net cash used in financing activities decreased by $1,081 million.
This decrease is primarily due to an increase in long term debt due to AT&T,
partially offset by a higher transfer to AT&T and dividend payment in 2000.
In 1999, net cash used in financing activities increased $3,242 million.
This increase is primarily due to an increase in transfers to AT&T.
AT&T'S BOARD OF DIRECTORS HAS THE POWER TO MAKE DETERMINATIONS THAT MAY
IMPACT THE FINANCIAL AND LIQUIDITY POSITION OF EACH OF ITS TRACKING STOCK
GROUPS. THIS POWER INCLUDES THE ABILITY TO SET PRIORITIES FOR USE OF CAPITAL AND
DEBT CAPACITY, TO DETERMINE CASH MANAGEMENT POLICIES AND TO MAKE DECISIONS
REGARDING WHETHER TO MAKE CAPITAL EXPENDITURES AND AS TO THE TIMING AND AMOUNT
OF ANY CAPITAL EXPENDITURES. ALL ACTIONS BY THE BOARD OF DIRECTORS ARE SUBJECT
TO THE BOARD MEMBERS FIDUCIARY DUTIES TO ALL SHAREHOLDERS OF AT&T AS A GROUP,
NOT JUST TO HOLDERS OF A PARTICULAR CLASS OF TRACKING STOCK, TO AT&T'S POLICY
STATEMENTS, BY-LAWS AND INTER-COMPANY AGREEMENTS. AS A RESULT OF THIS DISCRETION
OF AT&T'S BOARD OF DIRECTORS, IT MAY BE DIFFICULT FOR INVESTORS TO ASSESS EACH
GROUP'S LIQUIDITY AND CAPITAL RESOURCE NEEDS AND IN TURN THE FUTURE PROSPECTS OF
EACH GROUP BASED ON PAST PERFORMANCE.
FINANCIAL CONDITION
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(DOLLARS IN MILLIONS)
Total assets.......................................... $2,833 $ 3,543
Total liabilities..................................... 3,659 6,084
Combined attributed net liabilities................... (826) (2,541)
Total assets decreased $710 million, or 20.0%, at September 30, 2001,
primarily due to lower receivables as a result of lower revenue.
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Total liabilities decreased $2,425 million, or 39.9%, at September 30,
2001. This decrease primarily resulted from a decrease in debt due to AT&T and a
decrease in accounts payable, partially offset by an increase in income taxes
payable due to the timing of the tax payments.
Total combined attributed net liabilities decreased $1,715 million, or
67.5%, at September 30, 2001, primarily due to net income partially offset by
dividends declared to AT&T and contributions to AT&T.
AT DECEMBER 31,
---------------------
2000 1999
-------- -------
(DOLLARS IN MILLIONS)
Total assets................................................ $ 3,543 $4,072
Total liabilities........................................... 6,084 3,002
Combined attributed net (liabilities) assets................ (2,541) 1,070
Total assets decreased $529 million, or 13.0%, during 2000. The decrease in
total assets was primarily associated with a decrease in accounts receivable,
reflecting lower revenue.
Total liabilities at December 31, 2000 increased $3,082 million or 102.7%
during 2000. This increase is primarily due to an increase in long-term debt due
to AT&T.
Total combined attributed net (liabilities) assets at December 31, 2000,
decreased $3,611 million from the previous year, reflecting dividends and
transfers to AT&T of $7.7 billion, partially offset by net income of $4.1
billion.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," which supercedes Accounting Principles Board
(APB) Opinion No. 16. SFAS No. 141 requires all business combinations initiated
after June 30, 2001 be accounted for under the purchase method. In addition,
SFAS No. 141 establishes criteria for the recognition of intangible assets
separately from goodwill. These requirements are effective for fiscal years
beginning after December 15, 2001, which for AT&T Consumer Services Group means
January 1, 2002. AT&T Consumer Services Group does not expect that the adoption
of SFAS No. 141 will have a material effect on AT&T Consumer Services Group's
results of operations, financial position or cash flows.
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which supercedes APB Opinion No. 17. Under SFAS No. 142
goodwill and indefinite lived intangible assets will no longer be amortized, but
rather will be tested for impairment upon adoption and at least annually
thereafter. In addition, the amortization period of intangible assets with
finite lives will no longer be limited to 40 years. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001, which for AT&T Consumer
Services Group means the standard will be adopted on January 1, 2002. In
connection with the adoption of this standard, AT&T Consumer Services Group's
unamortized goodwill balance will no longer be amortized, but will continue to
be tested for impairment. AT&T Consumer Services Group does not expect that the
adoption of SFAS No. 142 will have a material effect on AT&T Consumer Services
Group's results of operations, financial position or cash flows.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This standard requires that obligations associated with
the retirement of tangible long-lived assets be recorded as liabilities when
those obligations are incurred, with the amount of the liability initially
measured at fair value. Upon initially recognizing a liability for an asset
retirement obligation, an entity must capitalize the cost by recognizing an
increase in the carrying amount of the related long-lived asset. Over time, this
liability is accreted to its present value, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. SFAS No. 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002, which for AT&T
Consumer Services Group means the standard will be adopted on January 1, 2003.
AT&T Consumer Services Group does not
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expect that the adoption of this statement will have a material impact on AT&T
Consumer Services Group's results of operations, financial position or cash
flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." SFAS No. 144 applies to all long-lived assets, including
discontinued operations, and consequently amends APB Opinion No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." Based on SFAS No. 121, SFAS No. 144 develops one accounting model
for long-lived assets that are to be disposed of by sale, as well as addresses
the principal implementation issues. SFAS No. 144 requires that long-lived
assets that are to be disposed of by sale be measured at the lower of book value
or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
SFAS No. 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001, which for AT&T Consumer Services Group means
the standard will be adopted on January 1, 2002. AT&T Consumer Services Group
does not expect that the adoption of SFAS No. 144 will have a material impact on
AT&T Consumer Services Group's results of operations, financial position or cash
flows.
SUBSEQUENT EVENTS
On October 16, 2001, AT&T announced a decision to unwind Concert, its
global venture with British Telecommunications plc. Currently, Concert incurs
most of AT&T's international settlements and bills AT&T Consumer Services Group
a net expense composed of international settlement (interconnection) expense and
foreign-billed revenue to settle calls completed outside of the United States.
In conjunction with the unwinding of Concert, AT&T Consumer Services Group will
record both foreign-billed revenue and interconnection expense for these
transactions.
In January 2002, AT&T entered into a $2.6 billion five-year agreement with
Accenture Ltd. for Accenture to provide management, new technology and training
for AT&T Consumer Services Group. Under the terms of the agreement, Accenture
will be responsible for providing new technology development and ongoing
management direction to improve AT&T Consumer Services Group customer care
operations, with goals of reducing costs, raising productivity, and improving
sales and customer service. AT&T Consumer Services Group will continue to
develop and implement its overall business and marketing strategies and new
product offerings.
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RELATIONSHIP BETWEEN THE AT&T GROUPS
AT&T shareholders should read the by-law amendment relating to the AT&T
Groups capital stock committee and the AT&T Groups policy statement, copies of
which are attached as Annexes N and O, respectively, to this document.
THE AT&T GROUPS CAPITAL STOCK COMMITTEE
Upon creation and issuance of AT&T Consumer Services Group tracking stock,
AT&T will amend AT&T's by-laws to establish an AT&T Groups capital stock
committee of the AT&T Board to oversee the interaction among the businesses of
the AT&T groups. The members of the AT&T Groups capital stock committee will be
independent directors selected by the AT&T Board. The by-law amendment provides
that the AT&T Board will delegate to the AT&T Groups capital stock committee
authority to:
- interpret, make determinations under and oversee the implementation of
the policies described in the Policy Statement Regarding AT&T Groups
Tracking Stock Matters described under "-- The AT&T Groups Policy
Statement;"
- review the policies, programs and practices of AT&T relating to:
-- business and financial relationships of the AT&T groups, and
-- any matters arising in connection with any of the foregoing, all to the
extent the AT&T Groups capital stock committee may deem appropriate;
and
- recommend changes in the policies, programs and practices that the AT&T
Groups capital stock committee may deem appropriate.
The AT&T Groups capital stock committee will have and may exercise other
powers, authority and responsibilities as the AT&T Board may determine from time
to time.
However, there will not be a separate board of directors for AT&T Consumer
Services Group and the AT&T Groups capital stock committee will not function as
a board of directors for AT&T Consumer Services Group tracking stock. Under
existing law, neither the AT&T Board nor the AT&T Groups capital stock committee
owes a separate fiduciary duty to the holders of AT&T Consumer Services Group
tracking stock apart from the general duty that is owed to all AT&T
shareholders.
Although the AT&T Board has no present intention to do so, it may modify,
suspend or rescind the by-law amendment or adopt additional by-laws, at any
time, without the approval of AT&T shareholders, subject to the AT&T Board's
fiduciary duties.
THE AT&T GROUPS POLICY STATEMENT
In connection with the creation and issuance of AT&T Consumer Services
Group tracking stock, AT&T will, effective upon issuance of AT&T Consumer
Services Group tracking stock, adopt the AT&T Groups policy statement.
GENERAL POLICY
The AT&T Board has determined that all material matters in which holders of
AT&T common stock and AT&T Consumer Services Group tracking stock may have
divergent interests generally will be resolved in a manner that is in the best
interests of AT&T and all AT&T common shareholders as a whole after giving fair
consideration to the potentially divergent interests and all other relevant
interests of the holders of the separate classes of AT&T common shares. Under
the AT&T Groups policy statement, the relationships between AT&T groups and the
means by which the terms of any material transactions among them will be
determined will be governed by a process of fair dealing.
X-35
RELATIONSHIP BETWEEN AT&T GROUPS
The AT&T Groups policy statement provides that AT&T will seek to manage
AT&T groups in a manner that maximizes the operational performance and value of
all AT&T groups taken as a whole, even though in certain circumstances actions
could disproportionately impact an individual group; provided, however, that
such disproportionate actions will not, in the aggregate, have an adverse
material impact on the results of operations or financial position of either
group.
General. Subject to special arrangements or existing commercial
arrangements in effect at the time the AT&T Groups policy statement is adopted,
the AT&T Groups policy statement provides that, except as otherwise provided in
the AT&T Groups policy statement (and renewals or extensions thereof), all
material commercial transactions among the AT&T groups will be on commercially
reasonable terms taken as a whole, and will be subject to the review and
approval of the AT&T Groups capital stock committee.
The AT&T groups may make loans to each other on terms and conditions
substantially equivalent to the interest rates and terms and conditions that the
AT&T groups would be able to obtain from third parties without the benefit of
support or guarantee by AT&T. AT&T expects that AT&T Consumer Services Group
will make such loans from time to time to AT&T Business Services Group. For
example, AT&T Consumer Services Group may loan funds to AT&T Business Services
Group to continue to upgrade its network and make new functions and features
available on the network.
For shared corporate services that arise as a result of being part of a
combined entity, including securities filing and financial reporting services,
costs relating to these services will be:
- allocated directly to the AT&T group utilizing those services, and
- if not directly allocable to an AT&T group, allocated between the AT&T
groups on a fair and reasonable basis as the AT&T Board determines.
For other support services, the AT&T Groups policy statement provides that
the AT&T groups will seek to achieve enterprise efficiencies to reduce the
aggregate costs incurred by the AT&T groups on a combined basis.
CORPORATE OPPORTUNITIES
The AT&T Groups policy statement provides that the AT&T Board will allocate
any business opportunities and operations, any acquired assets and businesses
and any assumed liabilities between the AT&T groups, in whole or in part, as it
considers to be in the best interests of AT&T and AT&T shareholders as a whole
and as contemplated by the other provisions of the AT&T Groups policy statement.
If a business opportunity or operation, an acquired asset or business, or an
assumed liability would be suitable to be undertaken by or allocated to more
than one AT&T group, the AT&T Board will allocate it using its business judgment
or in accordance with procedures that the AT&T Board adopts from time to time to
ensure that decisions will be made in the best interests of AT&T and AT&T
shareholders as a whole. Any allocation of this type may involve the
consideration of a number of factors that the AT&T Board determines to be
relevant, including, without limitation, whether the business opportunity or
operation, the acquired asset or business, or the assumed liability is
principally within the existing scope of an AT&T group's business and whether an
AT&T group is comparatively better positioned to undertake or have allocated to
it the business opportunity or operation, acquired asset or business or assumed
liability.
Except under the AT&T Groups policy statement and any other policies
adopted by the AT&T Board, and except as may arise under branding agreements and
arrangements, neither AT&T group will have any duty, responsibility or
obligation to refrain from:
- engaging in the same or similar activities or lines of business as any
member of the other AT&T group;
X-36
- doing business with any potential or actual supplier, competitor or
customer of any member of the other AT&T group; or
- engaging in, or refraining from, any other activities whatsoever relating
to any of the potential or actual suppliers or customers of any member of
the other AT&T group.
In addition, except under the AT&T Groups policy statement and any other
policies adopted by the AT&T Board, neither AT&T group will have any duty,
responsibility or obligation:
- to communicate or offer any business or other corporate opportunity to
any other person, including any business or other corporate opportunity
that may arise that more than one AT&T group may be financially able to
undertake, and that is, from its nature, in the line of more than one
AT&T group's business and is of practical advantage to more than one AT&T
group;
- to provide financial support to the other AT&T group, or any member of
the other AT&T group, except as described under "-- Relationships with
AT&T Business Services Group -- Financing Arrangements;" or
- otherwise to assist the other AT&T group.
Under no circumstances will any members of either AT&T group be prevented
from entering into written agreements with the other AT&T group to define or
restrict any aspect of the relationship between the AT&T groups.
DIVIDEND POLICY
The AT&T Groups policy statement provides that, subject to the limitations
on dividends set forth in AT&T's charter, including any preferential rights of
any series of AT&T preferred stock, and to the limitations of applicable law,
holders of shares of any class of AT&T common stock will be entitled to receive
dividends on that AT&T stock when, as and if the AT&T Board authorizes and
declares dividends on that AT&T stock. The payment of dividends on any class of
AT&T common stock will be a business decision that the AT&T Board makes from
time to time based on the results of operations, financial condition, cash
requirements and future prospects of AT&T and other factors that the AT&T Board
considers relevant. Payment of dividends on any class of AT&T common stock also
may be restricted by loan agreements, indentures and other transactions that
AT&T enters into from time to time.
Following any issuance of AT&T Consumer Services Group tracking stock, it
is currently expected that one-third of the current dividend payable on AT&T
common stock will be allocated to AT&T common stock and that two-thirds will be
allocated to AT&T Consumer Services Group tracking stock in a manner to be
determined by the AT&T Board. The declaration of dividends by AT&T and the
amount of that dividend will, however, be in the discretion of the AT&T Board,
and will depend upon the AT&T groups' financial performance, the dividend
policies and capital structures of comparable companies and each AT&T group's
ongoing capital needs. If and when the AT&T Board determines to pay any
dividends on shares of AT&T Consumer Services Group tracking stock, the AT&T
Groups policy statement provides that this determination also will be subject to
factors similar to those described above with respect to the payment of
dividends on each class of AT&T common stock.
AT&T GROUPS CAPITAL STOCK COMMITTEE
AT&T's bylaws will provide for the AT&T Groups capital stock committee of
the AT&T Board. In making determinations in connection with the policies set
forth in the AT&T Groups policy statement, the members of the AT&T Board and the
AT&T Groups capital stock committee will act in a fiduciary capacity and in
accordance with legal guidance concerning their respective obligations under
applicable law. The delegation of responsibilities to the AT&T Groups capital
stock committee will be subject to changes the AT&T Board may determine.
X-37
AMENDMENT AND MODIFICATION TO THE AT&T GROUPS POLICY STATEMENT
The AT&T Board may modify, suspend or rescind the policies set forth in the
AT&T Groups policy statement, including any resolution implementing the
provisions of the AT&T Groups policy statement. The AT&T Board also may adopt
additional or other policies or make exceptions with respect to the application
of the policies described in the AT&T Groups policy statement in connection with
particular facts and circumstances, all as the AT&T Board may determine,
consistent with its fiduciary duties to AT&T and AT&T shareholders as a whole.
RELATIONSHIP WITH AT&T BUSINESS SERVICES GROUP
BRANDING
AT&T will continue to own and manage all AT&T brands, and AT&T Consumer
Services Group will have the right, on a royalty-free basis, to continue to use
certain of the AT&T brands, including the AT&T globe design and the AT&T trade
dress, which we collectively refer to as "AT&T Consumer Services brands," in
accordance with a brand agreement. Under the brand agreement, AT&T Consumer
Services Group will be entitled to use AT&T Consumer Services brands for the
provision of stand-alone residential long distance services, prepaid consumer
calling card services, consumer calling card services, operator-assisted
international telephone services for consumer travelers, certain DSL-based
communications services, residential local telephony services, consumer dial-up
narrow-band Internet access services and consumer high-speed Internet access
services, and certain portals, content, equipment and software, and for bundles
of the foregoing offered by AT&T Consumer Services Group. The rights of AT&T
Consumer Services Group under the brand agreement will remain in effect while
AT&T Consumer Services Group tracking stock remains outstanding.
Under the brand agreement, AT&T Consumer Services Group's rights to use the
AT&T Consumer Services brands in connection with the foregoing services provided
(directly or indirectly) and billed to consumers will be exclusive domestically
(subject to preexisting agreements, AT&T's right to use the brand with all
customers in Alaska, and any applicable legal requirements) and nonexclusive
internationally. The agreement will establish principles to delineate whether
particular customers for certain services are within the brand scope of AT&T
Business Services Group or AT&T Consumer Services Group.
The territory of the brand agreement generally will be worldwide, with
exceptions where AT&T already has granted brand license agreements or where
another AT&T unit has exclusive brand rights for competing services. Subject to
certain conditions set forth in the brand agreement, AT&T Consumer Services
Group also may extend certain rights to use the AT&T Consumer Services brands to
authorized dealers of AT&T Consumer Services Group's services. The brand
agreement will provide that AT&T Consumer Services Group must comply with
specified quality, customer care, graphics and marketing standards and
guidelines to avoid confusion in connection with the use of the AT&T Consumer
Services brands. It also will provide that, for so long as AT&T Consumer
Services Group uses the AT&T Consumer Services brands, it will pay AT&T a brand
maintenance fee for the administration, protection and promotion of the AT&T
Consumer Services brands.
INTELLECTUAL PROPERTY
Intellectual property will generally continue to be managed by the AT&T
group that has managed it historically. Each AT&T group will have the right to
use certain intellectual property managed by the other AT&T group, or with
respect to which either AT&T group has the power to grant these rights, in
accordance with an intellectual property agreement. Rights under future
intellectual property will be governed by sponsored development agreements that
may, or may not, be entered into by the AT&T groups. Pursuant to any sponsored
development agreement, the AT&T group that performed the work would own the
newly developed intellectual property and the funding group would be granted
perpetual, paid-up rights necessary to use the development on a worldwide basis
as well as certain rights designed to secure a competitive advantage.
X-38
The intellectual property agreement to be entered into by AT&T Consumer
Services Group will specify the ownership and license rights in existing
patents, patents that may result from pending patent applications, software,
copyrights and trade secrets. AT&T Consumer Services Group will have a
nonexclusive, fully paid-up, worldwide, perpetual license under such patents to
make, use and sell all products and services in the conduct of its present and
future business. AT&T Consumer Services Group also will have special rights
under those patents, for defensive protection, special affiliate licensing and
supplier licensing. Each AT&T group will own all of the software, trade secrets
and copyrights that it created prior to the effective date of the intellectual
property agreement. Each AT&T group will grant to the other AT&T group a
nonexclusive, fully paid-up, worldwide, perpetual license to use the AT&T
group's software, trade secrets (excluding customer information and other
commercial information that relates solely to one of the units) and copyrights
that the other AT&T group possesses as of the effective date of the intellectual
property agreement. Proprietary information related to an AT&T group's customers
will receive special protection under the intellectual property agreement.
COMMERCIAL TRANSACTIONS BETWEEN AT&T GROUPS
AT&T intends that, except as otherwise provided in the AT&T Groups policy
statement, all commercial transactions between the AT&T groups will be on
commercially reasonable terms taken as a whole. AT&T expects the AT&T groups
will negotiate and develop their arrangements over time, and that these
arrangements will be subject to the review and approval of the AT&T Groups
capital stock committee, either at the time of execution or as part of periodic
reviews.
There will be two network agreements between AT&T Consumer Services Group
and AT&T.
- Master Carrier Agreement. The master carrier agreement will specify the
rates, terms and conditions on which Network Services within AT&T
Business Services Group will provide voice, data, IP dial-up access and
other services to AT&T Consumer Services Group, both for internal
corporate purposes and for resale to other customers. AT&T Consumer
Services Group will procure all of its telecommunications needs during
the multi-year term of the agreement directly from Network Services
within AT&T Business Services Group. Pricing of such services will be
based on the costs to Network Services of providing those services,
unless otherwise agreed, and the agreement will contain provisions
assuring that AT&T Consumer Services Group is treated no less favorably
than AT&T Business Services Group with respect to the allocation of costs
between the units, including a fair allocation of any low cost capacity
that Network Services provides or obtains. In addition, in those
circumstances where substantial new investment is required, the
agreements will contain provisions covering the responsibility for
deploying assets and the mechanisms for recovering that investment.
- Intercarrier Compensation Agreement. The intercarrier compensation
agreement will specify the terms (including whether there shall be any
compensation) under which AT&T Business Services Group and AT&T Consumer
Services Group will provide each other services:
-- the originate and terminate interexchange traffic, and
-- exchange local traffic between each other's local customers.
In addition, there will be a number of other agreements governing the provision
of other services between AT&T Consumer Services Group and AT&T Business
Services Group.
REALLOCATION OF ASSETS AND LIABILITIES
AT&T may reallocate assets and liabilities between the AT&T groups in
exchange for an increase or decrease in the retained portion of value held by
AT&T Business Services Group. Any reallocations of assets and liabilities
between the AT&T groups that do not result in this adjustment, other than
X-39
reallocations made under a contract for the provision of goods or services
between the AT&T groups, will be accompanied by:
- the reallocation by one AT&T group to the other AT&T group of other
assets, liabilities or consideration,
- the creation of inter-group debt owed by one AT&T group to the other AT&T
group, or
- the reduction of inter-group debt owed by one AT&T group to the other
AT&T group,
in each case, in an amount having a fair market value, in the judgment of the
AT&T Board, equivalent to the fair market value of the assets or liabilities, as
applicable, reallocated.
FINANCING ARRANGEMENTS
Loans between AT&T groups will be made at interest rates and on other terms
and conditions designed to be substantially equivalent to the interest rates and
other terms and conditions that the borrowing AT&T group would be able to obtain
from third parties, including the public markets, as a non-affiliate of AT&T
without the benefit of any guaranty by AT&T or any member of either AT&T group.
This policy contemplates that these loans will be made on the basis set forth
above, regardless of the interest rates and other terms and conditions on which
AT&T or members of any AT&T group may have acquired the funds. If, however, an
AT&T group incurs any fees or charges in order to keep available funds for use
by the other AT&T group, those fees or charges will be allocated to the
borrowing AT&T group.
In the case of AT&T Consumer Services Group, the financial statements
included elsewhere in this document make no distinction between the inter-group
rate and the cost at which AT&T historically was able to raise funds in the
external market. AT&T believes that the inter-group rate is a reasonable
estimate of the rate of borrowing in the external market. However, in the
future, AT&T Consumer Services Group may be charged interest at a rate higher or
lower than its current rate. The actual rates of interest charged or paid by
AT&T Consumer Services Group in the future is uncertain, and will depend on a
variety of factors, including the credit profile of AT&T Consumer Services Group
and market conditions. As a result, future interest rates charged or paid by
AT&T Consumer Services Group may materially exceed those reflected in the
financial statements included elsewhere in this document.
Although AT&T may borrow funds and provide the proceeds to AT&T Consumer
Services Group on the terms and conditions described above, AT&T expects that
AT&T Consumer Services Group will from time to time loan or otherwise make
available funds to AT&T Business Services Group, on commercially reasonable
terms. AT&T expects that AT&T Business Services Group will use these funds to
repay debt and for other general corporate purposes, including to continue to
upgrade its network and make new features and functions available on the
network. To the extent that any of the cash flow of AT&T Consumer Services Group
is loaned or otherwise made available to AT&T Business Services Group, fewer
funds may be immediately available to support new activities of AT&T Consumer
Services Group.
ACCOUNTING MATTERS
Following the issuance of shares of AT&T Consumer Services Group tracking
stock, AT&T will continue to prepare financial statements in accordance with
generally accepted accounting principles, consistently applied, for AT&T
Consumer Services Group, as well as full consolidated financial statements of
AT&T. The financial statements and information for each of the AT&T groups
principally will reflect the financial position, results of operations and cash
flows of the businesses included in those AT&T groups, respectively.
Notwithstanding any allocation of assets or liabilities for dividend purposes or
the purpose of preparing AT&T group financial statements, holders of AT&T common
stock and holders of AT&T Consumer Services tracking stock will continue to be
subject to risks associated with an investment in a single corporation and all
of AT&T's businesses, assets and liabilities.
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TAX SHARING AGREEMENT
Prior to issuance of any shares of AT&T Consumer Services Group tracking
stock, AT&T Consumer Services Group and AT&T Business Services Group will enter
into a tax sharing agreement that will provide for tax sharing payments between
AT&T Consumer Services Group and AT&T Business Services Group based on the taxes
or tax benefits of a hypothetical affiliated group consisting of AT&T Consumer
Services Group and AT&T Business Services Group. Each of AT&T Consumer Services
Group and AT&T Business Services Group shall generally be responsible for the
taxes attributable to its lines of business and entities comprising its group as
of such date.
Under the tax sharing agreement between AT&T Consumer Services Group and
AT&T Business Services Group, the consolidated tax liability before credits of
the hypothetical group will be allocated to each of AT&T Consumer Services Group
and AT&T Business Services Group and based on each of AT&T Consumer Services
Group's and AT&T Business Services Group's contribution to consolidated taxable
income of the hypothetical group. This allocation will take into account losses,
deductions and other tax attributes, such as capital losses or charitable
deductions, that are utilized by the hypothetical group, even if these
attributes could not be utilized on a stand-alone basis. Tax sharing payments in
respect of the consolidated tax liability of the hypothetical group, after
allocation of consolidated tax credits, will be made between AT&T Consumer
Services Group and AT&T Business Services Group consistent with the allocations
under the tax sharing agreement. In addition, under the tax sharing agreement,
AT&T Consumer Services Group will be responsible for all tax items (and benefits
from all tax benefits) resulting from the attribution of assets or interests to
AT&T Consumer Services Group, or transfer to a legal entity that is a member of
such group of assets, as well as any tax items and benefits resulting from the
distribution of the stock of any company the assets of which are tracked by AT&T
Consumer Services Group tracking stock. Tax items or tax benefits arising from
or related to assets or interests that are not tracked by AT&T Consumer Services
Group tracking stock will be for the account of AT&T Business Services Group.
The tax sharing payments under the tax sharing agreement assume that the
members of AT&T Consumer Services Group and AT&T Business Services Group are
members of the same affiliated, consolidated, combined or unitary group for the
relevant U.S. federal, state or local or foreign income tax purposes with
respect to taxable periods ending after the issuance of the shares of AT&T
Consumer Services Group tracking stock. It is possible, however, that the
Internal Revenue Service may assert that AT&T Consumer Services Group tracking
stock is not stock of AT&T, in which case each of AT&T Consumer Services Group
and AT&T Business Services Group may not be members of the same U.S. federal
income tax affiliated group filing consolidated returns. AT&T believes that it
is unlikely that the Internal Revenue Service would prevail on that view, but no
assurance can be given in that regard. AT&T Consumer Services Group will be
responsible, under the tax sharing agreement, for any corporate-level taxes
resulting from the treatment of AT&T Consumer Services Group tracking stock as
not stock of AT&T, and any corporate-level taxes on the actual or deemed
disposition of assets caused by the issuance of AT&T Consumer Services Group
tracking stock.
Non-income tax liabilities generally will be allocated based on line of
business as of the issue date. As between AT&T Consumer Services Group and AT&T
Business Services Group, if the tax liability is associated with a particular
line of business, but the portion of the tax liability associated with the line
of business is not readily determinable, then the tax liability will be shared
between the businesses based on an allocation formula.
With respect to taxes resulting from audit adjustments, other than those
relating to characterization of tracking stock as not stock of AT&T, tax
liabilities generally will be allocated among AT&T Consumer Services Group and
AT&T Business Services Group based on line of business.
X-41
THE INCENTIVE PLAN PROPOSAL
GENERAL
AT&T currently issues stock-based awards to its employees and non-employee
directors under the AT&T 1997 Long Term Incentive Program. AT&T shareholders
approved this plan in 1997 and approved amendments to the plan in 1999 and 2000.
As of , 2002, this plan authorized a total of approximately
million shares of AT&T common stock for stock-based awards consisting of:
- stock options, including incentive stock options, or ISOs, under the
Code,
- stock appreciation rights, or SARs, in tandem with stock options or
free-standing,
- restricted stock,
- performance shares and performance units conditioned upon meeting
performance criteria, and
- other awards of stock or awards valued, in whole or in part, by reference
to, or otherwise based on, stock or other property of AT&T, or other
stock unit awards.
In connection with any award or any deferred award, payments also may be made
representing dividends or their equivalent.
In anticipation of the issuance of AT&T Consumer Services Group tracking
stock, the AT&T Board will approve the adoption of the AT&T Consumer Services
Group 2002 Long Term Incentive Program, or Consumer Services incentive plan,
subject to the approval of AT&T shareholders.
Approval of the Consumer Services incentive plan requires a majority of the
votes cast by all outstanding shares of AT&T common stock to vote in its favor.
THE AT&T BOARD RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE CONSUMER SERVICES
INCENTIVE PLAN. Any shares not voted, whether by abstention, broker non-vote or
otherwise, will have no effect on the approval of the Incentive Plan proposal.
The AT&T Board will not implement the Consumer Services incentive plan
unless its shareholders approve the corresponding Consumer Services charter
amendment proposal.
The 1997 incentive plan, and a number of additional compensation plans,
under which stock-based awards with respect to AT&T common stock are
outstanding, are administered by the Compensation and Employee Benefits
Committee of the AT&T Board, subject to delegations by the Compensation and
Employee Benefits Committee to AT&T's Chairman and Chief Executive Officer,
committees comprised of other AT&T senior officers or other compensation
committees that may be designated in the additional plans. If approved, the
Consumer Services incentive plan is expected to be administered in the same
manner.
DESCRIPTION OF THE CONSUMER SERVICES INCENTIVE PLAN
Administration and Eligibility. The Consumer Services incentive plan will
be administered by a committee, each of the members of which is a "non-employee
director" as defined in the Securities Exchange Act of 1934, as amended, and an
"outside director" as defined in the Code. Under the Consumer Services incentive
plan, the committee has the authority to select employees to whom awards are
granted, to determine the types of awards and the number of shares covered, and
to set the terms, conditions, and provisions of these awards and to cancel or
suspend awards. In each case, the committee is authorized to interpret the
incentive plan and to establish, amend, and rescind any rules and regulations
relating to the incentive plan, to determine the terms and provisions of any
agreements entered into under the incentive plan, and to make all other
determinations which may be necessary or advisable for the administration of the
plan. Prospectively, all active employees and non-employee directors and certain
former employees and former non-employee directors of AT&T and its subsidiaries
and other affiliates are eligible to be participants in the Consumer Services
incentive plan.
X-42
Shares Subject to Plan. Subject to adjustment as described below, the
following shares will be available for awards granted under the Consumer
Services incentive plan during its term:
- [ ]% of the total number of outstanding shares of AT&T Consumer Services
Group tracking stock.
- [ ]% of the total number of shares available for awards under the plan
will be reserved for adjustment awards to former employees and former
non-employee directors of AT&T who hold equity awards with respect to
AT&T common stock.
As defined in the plan, the term "outstanding" includes:
- the total issued and outstanding shares of AT&T Consumer Services Group
tracking stock, plus
- the number of shares of AT&T Consumer Services Group tracking stock
represented by the retained portion of the interest held by AT&T on the
particular reference date.
If another company is acquired by AT&T, or combines with AT&T, any shares
of AT&T Consumer Services Group tracking stock issued or reserved for issuance
as a result of the assumption or substitution of outstanding grants of the
acquired company would not be deemed issued under the incentive plan and would
not be subtracted from the shares of AT&T Consumer Services Group tracking stock
available for grant under the incentive plan. If any shares subject to any award
under the Consumer Services incentive plan are forfeited, or such award is
settled for cash, or expires, or is otherwise terminated without issuance of
shares, the shares subject to such award will again be available for grant under
that incentive plan. The number of shares available for awards under the
Consumer Services incentive plan will also increase by the number of shares AT&T
withholds or tenders in connection with the payment of the exercise price of an
option or other award under the Consumer Services incentive plan or the
satisfaction of tax withholding obligations. The shares of stock deliverable
under the Consumer Services incentive plan may consist in whole or in part of
authorized and unissued shares, treasury shares, or shares purchased in the open
market, or otherwise.
Stock Options. The price per share of stock purchasable under any stock
option will be determined by a committee, but will not be less than 100% of the
fair market value of the stock on the date of the grant of such option. The term
of each option will be fixed by the committee. Options will be exercisable at
such time or times as determined by the committee, but no stock option will be
exercisable after the expiration of ten years from the date the option is
granted.
Stock Appreciation Rights. An SAR may be granted free-standing or in
tandem with new options or after the grant of a related option that is not an
ISO. Upon exercise of an SAR, the holder of that SAR is entitled to receive the
excess of the fair market value of the shares for which the right is exercised,
calculated as of the exercise date or, if the committee shall so determine in
the case of any SAR, not related to an ISO, as of any time during a specified
period before the exercise date, over the grant price of the SAR. The grant
price, which will not be less than the fair market value of the shares on the
date of grant, and other terms of the SAR will be determined by the committee.
Payment by AT&T upon exercise of an SAR will be in cash, stock, other property
or any combination, as the committee determines. Unless otherwise determined by
the committee, any related option will no longer be exercisable to the extent
the SAR has been exercised and the exercise of an option will cancel the related
SAR to the extent of the exercise.
Restricted Stock. Restricted stock may not be disposed of by the recipient
until restrictions established by the committee lapse. Recipients of restricted
stock are not required to provide consideration other than the rendering of
services or the payment of any minimum amount required by law. The participant
will have, with respect to restricted stock, all of the rights of a shareholder
of AT&T, including the right to vote the shares, and the right to receive any
cash dividends, unless the committee determines otherwise. Upon termination of
employment during the restriction period, all restricted stock shall be
forfeited, subject to such exceptions, if any, as are authorized by the
committee.
X-43
Performance Awards. From time to time, the committee may select a period
during which performance criteria determined by the committee are measured for
the purpose of determining the extent to which a performance award has been
earned. Performance awards may be in the form of performance shares, which are
units valued by reference to shares of stock, or performance units, which are
units valued by reference to cash or property other than stock. Performance
awards may be paid in cash, stock, other property, or a combination thereof.
Recipients of performance awards are not required to provide consideration other
than the rendering of service or the payment of any minimum amount required by
law.
Other Stock Unit Awards. The committee is authorized to grant other stock
unit awards to participants, either alone or in addition to other awards granted
under the Consumer Services incentive plan. Other stock unit awards may be paid
in tracking stock, cash, or any other form of property as the committee
determines.
Performance Accelerated Restricted Stock Awards. The committee may grant
awards that combine the characteristics of restricted stock or other stock unit
awards with those of performance awards, for example by providing that the
vesting of a restricted stock unit award could be accelerated if specified
performance criteria determined by the committee are met.
Nonassignability of Awards. Unless the committee determines otherwise at
the time of an award, no award granted under the Consumer Services incentive
plan may be assigned, transferred, pledged or otherwise encumbered by a
participant, other than by will, by designation of a beneficiary after death, or
by the laws of descent and distribution. Each award will be exercisable, during
the participant's lifetime, only by the participant, or, if permissible under
applicable law, by the participant's guardian or legal representative.
Deferrals of Awards. The committee may permit participants to defer the
distribution of all or part of the specified stock, cash or other consideration
in accordance with the terms and conditions as the committee shall establish.
Adjustments. In the event of any change affecting the shares of AT&T
Consumer Services Group tracking stock subject to the Consumer Services
incentive plan by reason of any stock dividend or split, recapitalization,
reorganization, merger, consolidation, spin-off, combination, or exchange of
shares or other corporate change, or any distributions to common shareholders
other than cash dividends, the committee will substitute or adjust the aggregate
number or class of shares that may be distributed under the Consumer Services
incentive plan (including the substitution of similar options to purchase shares
of, or other awards denominated in shares of, another company) and substitute or
adjust the number, class, and option price or other price of shares subject to
the outstanding awards granted under the Consumer Services incentive plan as the
committee deems to be appropriate to maintain the purpose of the original grant.
The committee will be authorized to make adjustments in performance award
criteria or in the terms and conditions of other awards in recognition of
unusual or nonrecurring events affecting AT&T or AT&T's financial statements or
changes in applicable laws, regulations or accounting principles. The committee
may correct any defect, supply any omission or reconcile any inconsistency in
the Consumer Services incentive plan or any award in the manner and to the
extent it shall deem desirable to carry the incentive plan into effect.
Amendment and Termination. The AT&T Board may assume responsibilities
otherwise assigned to the committee under the Consumer Services incentive plan
and may amend, alter, or discontinue the Consumer Services incentive plan or any
portion of the Consumer Services incentive plan at any time. The committee may
amend the terms of any award granted under the Consumer Services incentive plan,
prospectively or retroactively.
Term. No awards will be granted under the Consumer Services incentive plan
after , 2011.
Plan Benefits. Because the Consumer Services incentive plan is
discretionary and based on AT&T's financial performance, it is not possible to
determine or to estimate the benefits or amounts that will be received in the
future by individual employees or groups of employees under the Consumer
Services incentive plan.
X-44
Section 162(m) of the Internal Revenue Code Performance-Based
Compensation. If the committee determines at the time restricted stock, a
performance award, or other stock unit award is granted under the Consumer
Services incentive plan to a participant who is, or is likely to be, as of the
end of the tax year in which AT&T would claim a tax deduction in connection with
such award, a "covered employee" under Section 162(m) of the Code, then the
committee may provide as to such award that the lapsing of restrictions thereon
and the distribution of cash, shares, or other property pursuant thereto, as
applicable, shall be subject to the achievement of one or more objective
performance goals established by the committee, which will be based on the
achievement of specified levels of one or any combination of the following: net
cash provided by operating activities, earnings per share from continuing
operations, operating income, revenues, cash flow, return on investment, gross
margin, return on operating assets, return on equity, economic value added,
stock price appreciation, total shareholder return, or cost control of AT&T or
the affiliate or division of AT&T for or within which the participant is
primarily employed. Performance goals also may be based on achievement of
specified levels of AT&T performance, or performance of the applicable affiliate
or division of AT&T, including of AT&T Consumer Services Group, under one or
more of the measures described above relative to the performance of other
corporations.
The Consumer Services incentive plan provides that, subject to any
adjustments described above, no participant may be granted options and/or SARs
in any -calendar-year period with respect to more than
million shares of AT&T Consumer Services Group tracking stock, and that the
maximum dollar value payable with respect to other performance units or other
stock unit awards that are valued with reference to property other than shares
of AT&T Consumer Services Group tracking stock, and granted to any participant
in any one calendar year is .
Change of Control. The Consumer Services incentive plan will contain
provisions requiring or permitting the vesting of awards or the acceleration of
options and similar adjustments in the event of a change of control of AT&T.
Tax Aspects of the Consumer Services Incentive Plan. AT&T believes that
under present law, the following are the federal tax consequences generally
arising with respect to awards granted under the Consumer Services incentive
plan. The grant of an option or SAR will create no tax consequences for an
employee or AT&T. The employee will have no taxable income upon exercising an
ISO (except that the alternative minimum tax may apply), and AT&T will receive
no deduction when an ISO is exercised. Upon exercising an SAR or an option other
than an ISO, the employee must recognize ordinary income equal to the difference
between the exercise price and the fair market value of the stock on the date of
exercise; AT&T will be entitled to a deduction for the same amount. The
treatment to an employee of a disposition of shares acquired through the
exercise of an option depends on how long the shares have been held and if such
shares were acquired by exercising an ISO or by exercising an option other than
an ISO. Generally, there will be no tax consequence to AT&T in connection with a
disposition of shares acquired under an option, except that AT&T may be entitled
to a deduction in the case of a disposition of shares acquired under an ISO
before the applicable ISO holding periods have been satisfied.
With respect to other awards granted under the Consumer Services incentive
plan that are settled either in cash or in stock or other property that is
either transferable or not subject to substantial risk of forfeiture, the
participant must recognize ordinary income equal to the cash or the fair market
value of shares or other property received; AT&T will generally be entitled to a
deduction for the same amount. With respect to awards that are settled in stock
or other property that is restricted as to transferability and subject to
substantial risk of forfeiture, the participant must recognize ordinary income
equal to the fair market value of the shares or other property received at the
first time the shares or other property become transferable or not subject to
substantial risk of forfeiture, whichever occurs earlier; AT&T will generally be
entitled to a deduction for the same amount.
RECOMMENDATION OF THE AT&T BOARD
THE AT&T BOARD HAS APPROVED THE INCENTIVE PLAN PROPOSAL AND RECOMMENDS THAT
YOU VOTE FOR THE INCENTIVE PLAN PROPOSAL.
X-45
THE EMPLOYEE STOCK PURCHASE PLAN PROPOSAL
GENERAL
AT&T's 1996 Employee Stock Purchase Plan was initially adopted in 1996 and
authorized the issuance of 50,000,000 shares of AT&T common stock (which was
later adjusted for AT&T's three-for-two stock split paid on April 15, 1999). The
employee stock purchase plan was restated effective July 1, 2001 authorizing an
additional 30,000,000 shares for issuance under this plan. The AT&T Board has
approved, subject to the approval of the AT&T shareholders, an AT&T Amended 1996
Employee Stock Purchase Plan. If approved by AT&T shareholders this plan will
provide eligible employees with an opportunity to purchase AT&T common stock,
and effective [January 1, 2003,] AT&T Consumer Services Group tracking stock,
through payroll deductions. This plan is intended to assist eligible employees
in acquiring a stock ownership interest in AT&T pursuant to a plan that is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Code. This plan also includes a component not intended to qualify under
Section 423 of the Code, or the "Non-423 Component," which will permit
participation by certain eligible employees based outside the United States. A
description of this plan is outlined below.
SHARES RESERVED FOR THIS PLAN
The aggregate number of shares of AT&T common stock, which may be purchased
under the plan during the period from July 1, 2001 through June 30, 2006, will
not exceed 30 million, subject to adjustment. Additionally, any shares remaining
as of June 30, 2001 of the shares previously reserved to the AT&T 1996 Employee
Stock Purchase Plan will continue to be available for issuance under this plan
through June 30, 2006. On January 1, 2001, 18,474,247 shares remained available
for issuance under the AT&T 1996 Employee Stock Purchase Plan. Of the 30 million
shares that were newly authorized effective July 1, 2001, one million are
reserved for the Non-423 Component.
The aggregate number of shares of AT&T Consumer Services Group tracking
stock that may be purchased under the plan during the period of [January 1,
2003] through June 30, 2006, will not exceed [ ] million shares per year. Of
the newly authorized shares of AT&T Consumer Services Group tracking stock, [ ]
are reserved for the Non-423 Component.
Shares issued under this plan may consist, in whole or in part, of
authorized and unissued shares, treasury shares, or shares bought on the market.
ELIGIBLE PARTICIPANTS
All employees of AT&T (and those of a subsidiary designated by AT&T) are
eligible if they meet certain conditions. To be eligible, the employee must have
completed one month of continuous employment. Part-time employees are eligible
to participate.
Approximately 160,000 employees would have been eligible to participate as
of December 31, 2000.
On the first day of each month beginning [July 1, 2002,] except as
otherwise determined by the committee, AT&T will grant options as permitted
under this plan. The term of each option will end on the last day of the month
containing the date on which the option was granted.
Each eligible employee on a date of exercise will be entitled to purchase
shares of common stock at a purchase price equal to 85% of the average of the
reported highest and lowest sale prices of shares of common stock on the NYSE on
the applicable date of exercise. Dates of exercise will take place on the last
day of each month common stock is traded on the NYSE during the applicable
option period. The eligible employee will elect the allocation of AT&T common
stock and AT&T Consumer Services Group tracking stock to be purchased.
Payment for shares of common stock purchased under this plan will be made
by authorized payroll deductions from an eligible employee's total regular
compensation payable from AT&T or a participating
X-46
subsidiary of AT&T during an option period or, when authorized by the Committee,
an eligible employee may pay an equivalent amount for such shares.
Eligible employees who elect to participate in this plan will designate a
stated whole percentage equaling at least 1%, but no more than 10% of their
eligible compensation, to be deposited into a periodic deposit account. On each
date of exercise, the entire periodic deposit account of each participant in the
plan is used to purchase whole and/or fractional shares of common stock. AT&T
will maintain a stock purchase account for each participant to reflect the
shares of common stock purchased under the plan by each participant. No
participant in this plan is permitted to purchase common stock under this plan
at a rate that exceeds $25,000 in fair market value of common stock, determined
at the time options are granted, for each calendar year. For purposes of making
this determination, all of the AT&T common stock and AT&T Consumer Services
Group tracking stock purchased by a participant will be aggregated.
All funds received by AT&T from the sale of common stock under this plan
may be used for any corporate purpose.
NEW PLAN BENEFITS
It is not possible to determine how many eligible employees will
participate in this plan in the future. Therefore, it is not possible to
determine with certainty the dollar value or number of shares of common stock
that will be distributed under this plan. On the average, approximately 5
million shares of AT&T common stock have been distributed annually during the
prior five-year term of this plan.
The following table sets forth certain information with respect to shares
purchased under the 1996 AT&T Employee Stock Purchase Plan during 2000 by all
current executive officers as a group, and all employees as a group (excluding
executive officers):
NUMBER OF SHARES
NAME AND POSITION DOLLAR VALUE(1) PURCHASED
----------------- --------------- ----------------
All current executive officers as a group............. $ 38,120.32 2,246.336
All employees as a group (excluding current executive
officers)........................................... $84,874,074.73 5,001,418.664
---------------
(1) Based upon $16.97 per share, the fair value of AT&T common stock on December
29, 2000.
TAX TREATMENT
This plan (other than the Non-423 Component) is intended to qualify as an
employee stock purchase plan within the meaning of Section 423 of the Code.
Under the Code, an employee who elects to participate in an offering under this
plan will not realize income at the time the offering commences or when the
shares purchased under this plan are transferred to him or her. If an employee
disposes of such shares after two years from the date the offering of such
shares commences and after one year from the date of the transfer of such shares
to him or her, the employee will be required to include in income, as
compensation for the year in which such disposition occurs, an amount equal to
the lesser of (1) the excess of the fair market value of such shares at the time
of disposition over the purchase price, or (2) 15% of the fair market value of
such shares at the time the offering commenced. The employee's basis in the
shares disposed of will be increased by an amount equal to the amount so
includable in his or her income as compensation, and any gain or loss computed
with reference to such adjusted basis which is recognized at the time of the
disposition will be a capital gain or loss, either short-term or long-term,
depending on the holding period for such shares. In such event, AT&T (or the
subsidiary by which the employee is employed) will not be entitled to any tax
deduction from income.
If any employee disposed of the shares purchased under this plan within
such two-year or one-year period, the employee will be required to include in
income, as compensation for the year in which such disposition occurs, an amount
equal to the excess of the fair market value of such shares on the date of
purchase over the purchase price. The employee's basis in such shares disposed
of will be increased by an
X-47
amount equal to the amount includable in his or her income as compensation, and
any gain or loss computed with reference to such adjusted basis which is
recognized at the time of disposition will be a capital gain or loss, either
short-term or long-term, depending on the holding period for such shares. In the
event of a disposition within such two-year or one-year period, AT&T (or the
subsidiary by which the employee is employed) will be entitled to a tax
deduction from income equal to the amount the employee is required to include in
income as a result of such disposition.
An AT&T employee who is a non-resident of the United States will generally
not be subject to the U.S. federal income tax rules described above with respect
to the shares of common stock purchased under this plan.
PLAN ADMINISTRATION AND TERMINATION
The AT&T Board, or its delegate, will appoint a committee, which will be
composed of one or more employees, to administer the plan on behalf of AT&T.
This committee may delegate any or all of the administrative functions under the
plan to such individuals, subcommittees, or entities, as the committee considers
appropriate. The committee may adopt rules and procedures not inconsistent with
the provisions of this plan for its administration. The committee's
interpretation and construction of this plan is final and conclusive.
The AT&T Board may at any time, or from time to time, alter or amend this
plan in any respect, except that, without approval of the AT&T shareholders, no
amendment may increase the number of shares reserved for purchase, or reduce the
purchase price per share under this plan, other than as described above.
The AT&T Board will have the right to terminate this plan or any offering
at any time for any reason. The plan may continue in effect through June 30,
2006.
RECOMMENDATION OF THE AT&T BOARD
THE AT&T BOARD RECOMMENDS A VOTE FOR THE ADOPTION OF THE AT&T AMENDED 1996
EMPLOYEE STOCK PURCHASE PLAN.
X-48
CHAPTER ELEVEN
DESCRIPTION OF AT&T BUSINESS SERVICES GROUP
OVERVIEW
AT&T Business Services is one of the nation's largest business services
communications providers, offering a variety of global communications services
to over 4 million customers, including large domestic and multinational
businesses, small and medium-sized businesses and government agencies. AT&T
Business Services operates one of the largest telecommunications networks in the
United States and, through AT&T's Global Network Services and other investments
and affiliates, provides an array of services and customized solutions in 60
countries and 850 cities worldwide.
AT&T Business Services provides a broad range of communications services
and customized solutions, including:
- long distance, international and toll-free voice services;
- local services, including private line, local data and special access
services;
- data and IP services, including frame relay and ATM;
- managed networking services and outsourcing solutions; and
- wholesale transport services.
STRATEGY
AT&T Business Services intends to leverage its existing leadership position
in communications connectivity and substantial customer base to become a leading
provider of value-added managed communications services and outsourcing
solutions. The following strategic objectives are critical to this
transformation:
Offer comprehensive enterprise networking solutions to large business
customers. AT&T Business Services provides integrated communications services
to enterprise customers, bundling an array of communications and data services
to create customized end-to-end solutions. AT&T Business Services offers large
domestic and U.S.-based multinational corporations solutions comprised of local
voice and data, long-distance voice and data, IP, virtual private networks,
hosting and managed network services. AT&T Business Services believes it has a
well-established reputation for reliability, restoration and overall customer
satisfaction, and that this provides it with critical competitive advantages in
offering enterprise networking solutions.
Increase sales of new services. AT&T Business Services focuses on
increasing sales of high-growth communications services, including local voice
and data, IP connectivity and managed services. AT&T Business Services is
focused on increasing sales on its extensive existing local, long distance and
IP networks. With substantial infrastructure already in place, AT&T Business
Services believes that future capital expenditures will be focused primarily on
meeting specific customer demands for incremental capabilities and capacity.
AT&T Business Services believes that increased sales of high-growth services
will help increase asset utilization and expand operating margins for these new
services.
Lower operating costs and increase efficiencies. AT&T Business Services
believes it is imperative to maintain a cost leadership position. AT&T Business
Services continuously evaluates its operations on an ongoing basis to streamline
core processes and reduce costs, focusing on key operational areas including
access, network operations, provisioning, billing, customer care and sales. In
particular, AT&T focuses on providing its customers direct access to its network
to enhance service quality and to reduce AT&T's access charge cost. AT&T
Business Services routinely evaluates its performance relative to competitors
through benchmarking studies. AT&T Business Services also reviews best-of-class
companies across all industries to identify new process improvements and
additional cost reduction opportunities.
XI-1
Improve asset utilization. AT&T Business Services plans to continue to
improve network asset utilization. AT&T Business Services has invested
substantial capital to create an end-to-end network that supports
next-generation communication services, such as IP-enabled virtual private
networks. AT&T Business Services will selectively invest as market demand and
asset utilization levels warrant in order to achieve competitive returns on
capital.
Develop and offer new innovative customer solutions. AT&T Business
Services believes its market and technological leadership positions enable it to
develop and offer new advanced communications services and managed service
solutions. AT&T Business Services evaluates and launches new products and
services on an ongoing basis to accelerate bundling of transport and
connectivity services with other communications products, such as managed
network services and outsourcing solutions. AT&T Business Services aims to
develop and integrate new advanced applications in a manner that ensures
effortless customer migration; for example, to transition from voice private
networks to IP-enabled virtual private networks that support voice as an
application. AT&T Business Services believes its leadership in voice services
coupled with the technological leadership of AT&T Labs in developing IP and
enterprise networking solutions will help attract new enterprise network
customers and generate incremental revenue among AT&T's existing enterprise
customers while increasing network utilization and improving margins.
INDUSTRY OVERVIEW
The communications services industry continues to evolve, both domestically
and internationally, providing significant opportunities and risks to the
participants in these markets. Factors that have been driving this change
include:
- entry of new competitors and investment of substantial capital in
existing and new services, resulting in significant price competition;
- technological advances resulting in a proliferation of new services and
products and rapid increases in network capacity;
- the Telecommunications Act; and
- deregulation of communications services markets in selected countries
around the world.
One factor affecting the communications services industry is the rapid
development of data services. The development of frame relay, ATM and IP
networks as modes of transmitting information electronically has dramatically
transformed the array and breadth of services offered by telecommunications
carriers.
Use of the Internet, including intranets and extranets, has grown rapidly
in recent years. This growth has been driven by a number of factors, including
the large and growing installed base of personal computers, improvements in
network architectures, increasing numbers of network-enabled applications,
emergence of compelling content and commerce-enabling technologies, and easier,
faster and cheaper Internet access. Consequently, the Internet has become an
important new global communications and commerce medium. The Internet represents
an opportunity for enterprises to interact in new and different ways with both
existing and prospective customers, employees, suppliers and partners.
Enterprises are responding to this opportunity by substantially increasing their
investment in Internet connectivity and services to enhance internal voice and
data networks.
In the United States, the Telecommunications Act has had a significant
impact on AT&T Business Services' business by establishing a statutory framework
for opening the local service markets to competition and by allowing regional
phone companies to provide in-region long distance services. In addition, prices
for long distance minutes and other basic communications services have declined
as a result of increased competitive pressures, governmental deregulation,
introduction of more efficient networks and advanced technologies, and product
substitution. Competition in these basic communications services segments has
more recently been based more on price and less on other differentiating factors
that
XI-2
appeal to the larger business market customers, including range of services
offered, bundling of products, customer service, and communications quality,
reliability and availability.
SERVICES AND PRODUCTS
VOICE SERVICES
Long Distance Voice Services. AT&T Business Services' long distance voice
communication offerings include the traditional "one plus" dialing of domestic
and international long distance for customers that select AT&T Business Services
as their primary long distance carrier.
AT&T Business Services offers toll-free (for example, 800, 888 or 877)
inbound services, where the receiving party pays for the call. These services
are used in a wide variety of applications, including sales, reservation centers
or customer service centers. AT&T Business Services also offers a variety of
value-added features to enhance customers' toll-free services, including call
routing by origination point and time-of-day routing. In addition, AT&T Business
Services provides virtual private network applications, including dedicated
outbound facilities.
AT&T Business Services also offers audio and video teleconferencing
services, as well as web-based video conferencing. These services offer
customers the ability to establish automated teleconference lines, as well as
teleconferences moderated by an AT&T representative. Customers can also
establish a dedicated audio conference number that can be used at any time
without the necessity of a reservation.
AT&T Business Services also offers a variety of calling cards that allow
the user to place calls from virtually anywhere in the world. Additional
features include prepaid phone cards, conference calling, international
origination, information service access (such as weather or stock quotes), speed
dialing and voice messaging.
Business Local Services. AT&T Business Local provides a wide range of
local voice and data telecommunications services in major metropolitan markets
throughout the United States. Services include basic local exchange service,
Centrex, exchange access, private line, high speed data and video services. AT&T
Business Local typically offers local service as part of a package of services
that can include any combination of other AT&T Business Services offerings.
Integrated Voice/Data/IP Offers. AT&T Business Services provides a variety
of integrated service offers targeted at business customers. For small
businesses, AT&T's All in One service offering provides both local and long
distance services through a single bill, providing discounts based on volume and
term commitments. The AT&T Business Network service offers a wide range of voice
and data services through a single service package. Among the features of the
integrated services offering is the ability to enable customers to
electronically order new services, perform maintenance and manage administrative
functions.
AT&T also has a number of integrated voice and data services, such as
Integrated Network Connections, that provide customers the ability to integrate
access for their voice and data services and thereby qualify for lower prices.
DATA AND INTERNET SERVICES
Private Line Services. AT&T Business Services' data services include
private line and special access services that use high-capacity digital circuits
to carry voice, data and video (or multimedia) transmission from point-to-point
in multiple configurations. These services provide high-volume customers with a
direct connection to an AT&T Business Services switch instead of switched access
shared by many users. These services permit customers to create internal
computer networks and to access external computer networks and the Internet,
thereby reducing originating access costs.
Packet Services. Packet services consist of data networks utilizing packet
switching and transmission technologies. Packet services include frame relay,
ATM and IP connectivity services. Packet services enable customers to transmit
large volumes of data economically and securely. Packet services are utilized
XI-3
for local area network interconnection, remote site, point of sale and branch
office communications solutions. While frame relay and ATM Services are widely
deployed as private data networks, AT&T Business Services offers customers the
ability to connect these networks to the Internet through services such as
IP-enabled frame relay. High speed packet services, including IP-enabled frame
relay service, are utilized extensively by enterprise customers for an expanding
range of applications.
AT&T Business Internet Services. AT&T Business Services provides IP
connectivity and managed IP services, messaging, and electronic commerce
services to businesses. AT&T offers managed Internet services, which give
customers dedicated, high-speed access to the Internet for business applications
at a variety of speeds and types of access, as well as business dial service, a
dial-up version of Internet access designed to meet the needs of small- and
medium-sized businesses. AT&T's web services consist of a family of hosting and
transactional services and platforms serving the web needs of thousands of
businesses; these offers include AT&T Small Business Hosting Services.
MANAGED SERVICES AND OUTSOURCING SOLUTIONS
AT&T Business Services provides clients with an array of managed networking
services, professional services and outsourcing solutions intended to satisfy
clients' complete networking technology needs-ranging from managing individual
network components such as routers and frame relay networks to managing entire
complex global networks. AT&T Business Services is engaged in: designing,
developing and delivering integrated and interoperable global services, allowing
enterprises to optimize networking-based mission-critical and electronic
commerce applications. AT&T Business Services also works selectively with
qualified partners to offer enhanced services to customers.
Enterprise Networking Services. With a global scale and reach in 60
countries and 850 different cities, AT&T Business Services' enterprise
networking services strive to provide comprehensive support from network design,
implementation and installation to ongoing network operations and lifecycle
management of Local Area Network, Wide Area Network, and Virtual Private Network
solutions. These managed enterprise networking services enable customers to
accommodate specific business applications (e.g., e-mail, voice over IP, order
entry systems, employee directories, human resource transaction and other
database applications); to create secure remote access intranet and extranet
solutions with controlled access to employees, business partners and customers;
and, to use Intelligent Content Distribution Services to accelerate delivery of
content to any Internet user.
Web Services. AT&T Business Services' continuum of managed web hosting
services supports clients' hosted infrastructure needs from the network layer
all the way up through managing the performance of their business applications.
With 18 Internet Data Centers located on three continents and with a capacity of
more than 1.8 million square feet of web hosting space, AT&T's hosting services
provide a fully flexible, managed environment of network, server and security
infrastructure as well as built-in data storage. AT&T's full suite of managed
hosting services includes application performance management, database
management, hardware and operating system management, intelligent content
distribution services, high availability data and computing services, storage
services, managed security and firewall services. AT&T's web hosting services
also include a range of business tools, including client portal services that
provide managed hosting customers with personalized, secure access to detailed
reporting information about their infrastructure and applications.
High Availability and Security Services. AT&T Business Services' high
availability and security services deliver enterprise-class, high-end integrated
solutions to ensure the continuous operations of clients' critical business
processes and availability of critical data by leveraging the core competencies
of AT&T's end-to-end professional services; world-class global networks; global
management and monitoring; Internet Data Centers and conditioned facilities. In
addition, AT&T's high availability and security services include business
continuity and disaster recovery services that provide core network disaster
recovery, information technology, work center, and risk management/business
continuity analysis, planning and operational capabilities.
XI-4
Outsourcing Solutions. AT&T Business Services provides customers with
outsourcing solutions designed to manage customers' highly complex voice and
data networks. These services range from consulting to outsourcing and
management of highly complex global data networks. AT&T Business Services
designs, engineers and implements seamless solutions for clients that are
designed to maximize the competitive advantage of networking-based electronic
commerce applications.
Transport. AT&T Business Services considers itself one of the leaders in
providing wholesale networking services to other carriers, providing both
network capacity and switched services. AT&T Business Services offers a
combination of high-volume transmission capacity, conventional dedicated line
services and dedicated switched services on a regional and national basis to
ISPs and facility-based and switchless resellers. AT&T Business Services'
wholesale customers are primarily large tier-one ISPs, competitive local
exchange carriers, regional phone companies, interexchange carriers, cable
companies and systems integrators. AT&T Business Services focuses on ensuring
optimal network utilization through the sale of off-peak capacity. Further,
wholesale switched services are priced to reflect the cost of access incurred.
In limited circumstances, AT&T Business Services also has sold network capacity
through indefeasible rights-of-use agreements under which capacity is furnished
for contract terms as long as 25 years.
SALES AND MARKETING
AT&T Business Services markets its suite of voice and data communications
services through its global sales and marketing organization. The sales and
marketing organization is primarily organized by customer type and targets
retail, wholesale and government organizations throughout the United States and
the rest of the world. AT&T Business Services' direct sales and marketing force
consists of approximately 6,800 sales representatives. In addition, the sales
and marketing group works in connection with several outside telemarketing firms
to target small businesses in a cost efficient manner. For small businesses with
more sophisticated service needs, AT&T Business Services uses a direct sales
force of approximately over 450 representatives trained to market the full suite
of products and services and customized services solutions. In addition, the
AT&T Solution Center provides a centralized resource designed to respond rapidly
to complex customer requirements. For many large and multinational clients, a
senior AT&T officer is responsible for maintaining a continuous relationship
with the senior management of the customer, helping to ensure a continuous and
effective marketing effort.
CUSTOMER CARE AND SUPPORT
AT&T Business Services places a high priority on ensuring all customers
receive the highest level of customer care, including contracting, ordering,
provisioning, maintenance and collections. AT&T's customer care organization
places particular emphasis on the ordering, provisioning and maintenance
processes. Customer care and support group monitors these functions and responds
to inbound customer inquiries in a manner intended to ensure customer orders for
new services, service changes and maintenance requests are completed on-time and
accurately. Customer care and support has approximately 10,000 customer care
associates world-wide at 27 customer care centers, of which 24 are company-owned
and three are operated by outside customer care firms.
AT&T Business Services determines the appropriate customer care program
based on the size and sophistication of the customer and its communications
needs. For larger and multinational customers and government agencies, AT&T
Business Services provides customer care services and support through dedicated
account teams designed to provide support on a rapid and personalized basis.
AT&T Business Services believes that the web has greatly enhanced AT&T
Business Services' customer care programs. Through a dedicated customer care
website, www.iadvantgage@att.com, customers may submit questions or initiate
service requests, including ordering new services or submitting maintenance
requests. Customer care delivered via the web is often quicker and more
convenient for customers and reduces errors.
XI-5
RATES AND BILLING
AT&T Business Services provides the majority of its services through
long-term contracts. General descriptions of AT&T Business Services' services,
applicable rates, warranties, limitations on liability, user requirements and
other material service provisioning information are outlined in service guides
that are provided directly to prospective clients or are available on AT&T's
website. Clients enter into contracts, based on the service guides, detailing
customer-specific terms and information, including volume discounts, service
bundling, extended warranties and other customized terms. Through combined
offerings, AT&T Business Services also provides customers with such features as
single billing, unified services for multi-location companies and customized
calling plans. Most intrastate services are provided in accordance with
applicable tariffs filed with the states. Revenue subject to government tariffs
accounted for approximately 25% of AT&T Business Services' 2000 revenue.
Most domestic and international switched voice services originating in the
United States are billed in 1 or 6 second increments after a fixed initial
period. Switched voice services originating in international markets are also
billed in increments, subject to local market conditions and interconnect
agreements. Switched long distance and local services are billed in arrears,
with monthly billing statements itemizing date, time, duration and charges. Data
services are billed generally in advance, based on a fixed circuit charge, with
rates that vary according to speed of transmission and service type.
NETWORK
AT&T Business Services' U.S. network comprises 46,500 route miles of
long-haul backbone fiber-optic cable, plus another 17,000 route miles of local
metro fiber, capable of carrying OC-192 (10 billion bits, or 10 gigabits per
second) traffic. In addition, AT&T Business Services has recently completed
installation of over 10,000 new route miles of the latest generation fiber-optic
cable capable of carrying OC-768 (40 gigabits per second) when that standard is
ready for deployment. This new fiber capacity presently connects 22 of the
largest U.S. cities, and provides AT&T substantial capacity for future growth of
network traffic with minimal incremental capital expenditure requirements. AT&T
Business Services was the first in the industry with a coast-to-coast OC-192
backbone, connecting Boston, New York, Chicago, St. Louis, San Francisco and Los
Angeles. In addition to this state-of-the-art 10 gigabits per second backbone,
AT&T Business Services also has over 400 Synchronous Optical Network points-of-
presence in the continental U.S., offering high-speed data connectivity to the
majority of U.S. business centers. Currently, 78 of these points-of-presence are
tariffed with OC-48 service.
AT&T Business Services' network, which also supports AT&T Consumer Services
Group's services, carries over 300 million voice calls every business day and
more than 2,175 trillion bytes (terabytes) of data each day. AT&T Business
Services carries more frame relay and ATM traffic than any other U.S. carrier.
On the voice network, AT&T Business Services employs its patented Real Time
Network Routing to automatically complete domestic voice calls through more than
100 possible routes. The reliability of certain portions of the network is
maximized by using Synchronous Optical Network rings that can restore service on
a severed fiber optic cable within 50 to 60 milliseconds by sending traffic in
the other direction on the ring. On other routes, AT&T uses its patented FASTAR
technology to route traffic around a cable cut by automatically transferring
traffic to alternative spare capacity. AT&T Business Services stands behind its
reliability claims with service level agreements. For example, on its IP
backbone, AT&T Business Services guarantees business customers no more than 60
milliseconds of latency, or delay in the transmission of a packet of
information, and 0.7% packet loss per month.
AT&T Business Services has been a leader in deploying Dense Wavelength
Division Multiplexing, or DWDM, technology that divides an optical fiber into
multiple channels, each carrying up to 10 gigabits per second of information
today. When DWDM was introduced in 1996, the technology could put only eight
wavelengths on a fiber strand. Today, AT&T Business Services is deploying 64-and
80-wavelength DWDM systems, as well as systems capable of carrying 160
wavelengths. When installed with OC-192 capabilities, a 160-wavelength DWDM
system will enable 1.6 terabits (trillion bits per second) on a single fiber
strand.
XI-6
Since digital switching was introduced in the late 1970s, the heart of the
AT&T voice network has been the 4ESS, a circuit switch specifically designed for
long distance use, and currently AT&T Business Services has 143 of these
switches in the network. AT&T Business Services has recently installed nearly 60
standard tandem switches that allow AT&T to accommodate the transition from
circuit-switched to packet networks. While AT&T Business Services will continue
to have both circuit and packet switching technologies for some time,
significant future capital expenditures are not planned for circuit switching.
In addition to its long distance network, AT&T Business Services has an
extensive local network serving business customers in 80 U.S. cities. AT&T
Business Services has expanded its local network so that it now includes 118
local switches and reaches more than 6,200 buildings. This network provides
voice service to business users, as well as data connections up to OC-48
capacity. In order to maximize asset utilization, AT&T's local network also
handles consumer traffic, providing most of the dial-in numbers for AT&T
WorldNet Service, as well as switching cable telephony calls for customers of
AT&T Broadband.
AT&T Business Services also operates one of the largest IP networks in the
United States. As a Tier 1 provider, AT&T has direct peering relationships with
other Tier 1 providers, providing service to carriers that go through public
peering sites. AT&T offers multiple access choices to the IP network, including
dial-up, dedicated private line, cable modem and DSL, as well as IP-enabled
access through ATM and frame relay networks.
AT&T Business Services is deploying Internet Data Centers across the U.S.,
offering web hosting services. Currently, AT&T Business Services has 18 Internet
Data Centers, with an aggregate 1.8 million square feet of space, all directly
connected to AT&T Business Services' high-speed IP backbone.
Over the next few years, AT&T Business Services plans to evolve its network
to an all-optical facility. The first element of the optical network is AT&T
Business Services' existing fiber-optic backbone. The next step is the
Intelligent Optical Switch, which was introduced by the end of 2001. The
Intelligent Optical Switch switches wavelengths of light, and can communicate
and establish a connection with other switches automatically when a customer
requests a new service. The third element is the Multi-Service Platform, located
in either the AT&T local network or on the customer premise, that aggregates
low-speed and high-speed services and sends the information to the Intelligent
Optical Switch for routing.
INTERNATIONAL
AT&T Business Services has entered into a number of agreements and
alliances with international communications companies, and has made strategic
investments in several countries in order to provide customers end-to-end
network management capabilities and highly customized solutions.
Concert. On January 5, 2000 AT&T and BT created a global venture to serve
the communications needs of multinational companies and the international
calling needs of businesses around the world. On October 16, 2001 AT&T and BT
announced that they had reached binding agreements to unwind Concert. Under the
Concert dissolution agreement with BT, AT&T will reclaim customer contracts and
assets that were initially contributed to the venture, including international
transport facilities and gateway assets. In addition, AT&T Business Services
will obtain ownership of certain frame relay assets located in the Asia Pacific
region that BT initially contributed to the venture. AT&T Business Services
expects to combine these assets with its existing international networking and
other assets. AT&T Business Services will honor all contracts and service level
agreements that it will assume from Concert. AT&T Business Services and BT have
agreed to enter into transitional commercial agreements enabling them to provide
existing Concert services for a period of three years. Under these agreements,
AT&T Business Services and BT will pay each other market-based prices.
AT&T Canada. On June 1, 1999, AT&T Canada Corp. merged with MetroNet
Communications Corp., Canada's largest competitive local exchange carrier. Under
the terms of the merger agreement, AT&T Business Services received 31% of the
equity interest and 23% of the voting interest in AT&T Canada in exchange for
AT&T Canada Corp. and ACC TelEnterprises Ltd. AT&T Canada is Canada's leading
facilities-based end-to-end competitive carrier, covering 25 cities. AT&T Canada
is focused on
XI-7
serving large enterprise and international customers. AT&T Canada currently
connects over 3,300 buildings, with over 510,000 local access lines in service.
AT&T Canada owns over 11,500 route miles of fiber, and has six fiber
interconnection points to AT&T's U.S. network at the U.S.-Canada border.
As part of the merger, AT&T agreed to purchase all of the remaining shares
of AT&T Canada upon the removal of Canadian foreign ownership restrictions at
the greater of the then appraised fair market value or the accreted minimum
price, which initially was C$37.50 per share accreting after June 30, 2000 at a
rate of 4% per quarter.
AT&T also has the right at any time to trigger the purchase of such shares.
AT&T may acquire the AT&T Canada shares or designate another party to acquire
such shares prior to a change in the ownership restrictions by developing a
structure that addresses these ownership restrictions. If the foreign ownership
restrictions have not been removed and AT&T has not triggered the purchase by
June 30, 2003, those shares, along with AT&T's AT&T Canada shares, would be sold
through an auction process and AT&T will make whole the other shareowners for
the amount they would have been entitled to if AT&T Business Services had
purchased all of the remaining shares of AT&T Canada. At its sole option, AT&T
can fulfill its obligation either with cash or AT&T common stock. On August 16,
1999, AT&T completed its sale to BT of 30% of AT&T's stake in AT&T Canada. In
addition, BT had agreed to purchase 30% of the shares of AT&T Canada that AT&T
will be acquiring from the other shareholders, subject to BT's right to cap its
purchase at C$1.65 billion. As part of the formation agreement of Concert and as
a result of dissolution of Concert, AT&T will acquire BT's investment in AT&T
Canada and will assume BT's obligation to purchase additional AT&T Canada
shares.
AT&T currently owns approximately 21% of the outstanding equity of AT&T
Canada and has the right to acquire BT's 9% interest in the outstanding equity
of AT&T Canada. Accordingly, AT&T does not currently consolidate AT&T Canada
into its results. AT&T has agreed to purchase all the outstanding shares of AT&T
Canada that it does not own in the event that Canadian foreign ownership
restrictions are removed. Prior to such removal, AT&T also has the right at any
time to trigger the purchase of such shares through a structure that complies
with such ownership restrictions, including designating a Canadian investor to
purchase such shares. In the event AT&T acquires more than 50% of the equity
interest in or the total voting power of AT&T Canada, AT&T Canada's results
would be consolidated into AT&T's and AT&T Communications Services' results. At
September 30, 2001, AT&T Canada had C$4.756 billion of indebtedness. Neither
AT&T nor AT&T Communications Services has guaranteed any of the indebtedness of
AT&T Canada.
AT&T Latin America Corp. On August 28, 2000, AT&T Business Services
established AT&T Latin America in connection with the merger of Netstream, a
competitive local exchange carrier in Brazil, and FirstCom Corporation. AT&T
Latin America provides voice, data and Internet access services in five
countries, Argentina, Brazil, Chile, Colombia and Peru. AT&T Latin America owns
over 3,800 route miles of fiber connecting over 5,400 buildings. AT&T Business
Services owns a 62.5% economic interest (94% voting interest) in AT&T Latin
America.
Alestra. S. de R.L. de C.V. AT&T Business Services also owns a 49%
economic interest in Alestra S. de R.L. de C.V., a competitive
telecommunications company in Mexico. Alestra offers voice, data and Internet
services throughout Mexico to residential, small business and enterprise
customers. Alestra's state-of-the-art network comprises approximately 3,500
route miles, with four interconnection points to AT&T's network at the
U.S.-Mexico border.
COMPETITION
AT&T Business Services faces the same competition issues applicable
generally to the communications services industry that are discussed with
respect to AT&T Consumer Services Group. See "AT&T Consumer Services Group
Tracking Stock -- Description of AT&T Consumer Services Group -- Competition"
and "Summary and Overview of the Transactions -- Risk Factors -- Risk Factors
Relating to AT&T Consumer Services Group and AT&T Business Services
Group -- AT&T Consumer Services
XI-8
Group and AT&T Business Services Group face substantial competition that may
materially adversely impact both market share and margins."
EMPLOYEES
At December 31, 2000, AT&T Business Services employed approximately 66,400
individuals in its operations. Of those employees, approximately 61,900 are
located domestically. About 19,400 of the domestically located employees of AT&T
Business Services are represented by unions. Of those so represented, about 94%
are represented by the Communications Workers of America and about 5% are
represented by the International Brotherhood of Electrical Workers, both of
which are affiliated with the AFL-CIO. In addition, there is a very small
remainder of domestic employees represented by other unions. Labor agreements
with most of these unions extend through May 2002.
LEGAL PROCEEDINGS
In the normal course of business, AT&T Business Services is subject to
proceedings, lawsuits and other claims, including proceedings under government
laws and regulations related to environmental and other matters. Such matters
are subject to many uncertainties and outcomes are not predictable with
assurance. Consequently, AT&T Business Services is unable to ascertain the
ultimate aggregate amount of monetary liability or financial impact with respect
to these matters at December 31, 2000. While these matters could affect
operating results of any one quarter when resolved in future periods, it is
management's opinion that after final disposition, any monetary liability or
financial impact to AT&T Business Services beyond that provided for at year-end
would not be material to AT&T Business Services' annual consolidated financial
position or results of operations.
For additional information on legal proceedings, please see the discussion
on legal proceedings under "Legal Proceedings" contained in AT&T's Annual Report
on Form 10-K for the year ended December 31, 2000, which is incorporated by
reference in this document. See "Additional Information for
Shareholders -- Where You Can Find More Information."
AT&T LABS
AT&T Labs conducts research and development for AT&T. AT&T Labs' scientists
and engineers conduct research in a variety of areas, including IP and future
broadband technologies; advanced network design and architecture; network
operations systems; data mining technologies and advanced speech technologies.
AT&T Labs works with the other business units within AT&T to create new services
and invent tools and systems to manage secure and reliable networks for AT&T and
its customers. With a heritage that extends from fundamental advances such as
the development of the transistor, AT&T Labs has made numerous recent advances
in the areas of IP communications infrastructure, data mining and wireless
networks.
PATENTS AND TRADEMARKS
AT&T actively pursues patents and trademarks to protect its intellectual
property within the United States and abroad. AT&T has developed a focused law
practice to prepare and prosecute its patent and trademark applications. On
average, AT&T receives over 300 U.S. patents per year and maintains a portfolio
of over 2,500 trademark and service mark registrations.
LEGISLATIVE AND REGULATORY DEVELOPMENTS
Legislative and regulatory developments discussed with respect to AT&T
Consumer Services Group also apply to AT&T Business Services. See "AT&T Consumer
Services Group Tracking Stock -- Description of AT&T Consumer Services
Group -- Legislative and Regulatory Developments."
XI-9
CHAPTER TWELVE
INFORMATION ABOUT THE COMCAST SPECIAL MEETING AND VOTING
The Comcast Board is using this document to solicit proxies from the
holders of Comcast common stock for use at the Comcast special meeting. Comcast
is first mailing this document to Comcast shareholders, and the accompanying
form of proxy to holders of Comcast Class A common stock, on or about
[ ], 2002. THE INFORMATION AND INSTRUCTIONS CONTAINED IN THIS CHAPTER
ARE ADDRESSED TO COMCAST SHAREHOLDERS, AND ALL REFERENCES TO "YOU" IN THIS
CHAPTER SHOULD BE UNDERSTOOD TO BE ADDRESSED TO COMCAST SHAREHOLDERS.
MATTERS RELATING TO THE COMCAST SPECIAL MEETING
----------------------------------------------------------------------------------------------------
Date, Time and Place: [ ], 2002
[ ] a.m. (Eastern Time)
1500 Market Street,
West Tower, 9th Floor
Philadelphia, Pennsylvania 19102-2148
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Purpose of Special Meeting is to Vote on - To approve and adopt the merger agreement and the
the Following Items: transactions contemplated by the merger agreement
- To approve and adopt an amendment to the Comcast
charter to allow the implementation of the Preferred
Structure
- To vote on such other business which may properly come
before the meeting
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Record Date: The record date for shares entitled to vote is
[ ], 2002.
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Outstanding Shares Held on Record Date: As of the record date, there were outstanding
approximately [ ] shares of Comcast Class
A common stock, [ ] shares of Comcast
Class A Special common stock and [ ]
shares of Comcast Class B common stock.
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Votes Necessary to Approve the The affirmative vote of a majority of the votes cast by
Proposals:* the holders of the outstanding shares of Comcast Class A
common stock and Comcast Class B common stock, voting
together as a single class, is required to approve the
Comcast transaction proposal. Approval of this proposal
is assured because Sural LLC, which holds approximately
86.7% of the combined voting power of the Comcast stock,
has agreed in the support agreement to vote its shares
in favor of the Comcast transaction proposal.
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XII-1
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It is a condition to implementation of the Preferred
Structure that a majority of the votes cast by the
holders of the outstanding shares of Comcast Class A
common stock, voting as a single class, and holders of
outstanding shares of Comcast Class A common stock and
Comcast Class B common stock, voting together as a
single class, approve the preferred structure proposal.
If holders of Comcast Class A common stock, voting as a
single class, approve the preferred structure proposal,
the Preferred Structure will be implemented upon
completion of the AT&T Comcast transaction because Sural
LLC which holds approximately 86.7% of the combined
voting power of the Comcast Class A common stock and
Comcast Class B common stock has indicated that it will
vote in favor of the preferred structure proposal
thereby assuring approval of the proposal by holders of
Comcast Class A common stock and Comcast Class B common
stock, voting together as a single class.
Each holder of Comcast Class B common stock is entitled
to 15 votes per share, and each holder of Comcast Class
A common stock is entitled to one vote per share. The
holders of the Comcast Class A Special common stock do
not have any voting rights.
Abstentions will have no effect on the outcome of either
of the Comcast proposals.
Shares held by Comcast in its treasury are not voted.
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Quorum Requirements: A quorum of shareholders is necessary to hold a valid
meeting.
With respect to each of the Comcast proposals, the
presence in person or by proxy at the Comcast special
meeting of holders of shares representing a majority of
the voting power of the outstanding shares of Comcast
common stock entitled to vote on such proposal is a
quorum.
Abstentions and broker "non-votes" count as present for
establishing a quorum.
Shares held by Comcast in its treasury do not count
toward a quorum.
A broker non-vote occurs on an item when a broker is not
permitted to vote on that item without instruction from
the beneficial owner of the shares and no instruction is
given.
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XII-2
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Shares Beneficially Owned by Comcast As of the record date, approximately [ ]
Directors and Executive Officers as of shares of Comcast Class A common stock and
the record date: [ ] shares of Comcast Class B common
stock, including exercisable options and including
shares beneficially owned by Sural LLC, holder of all of
the outstanding Comcast Class B common stock were
beneficially owned by Comcast directors and executive
officers.
These shares represent in total approximately [ ]%
of the outstanding shares of Comcast Class A common
stock and [ ]% of the aggregate voting power
represented by the outstanding shares of Comcast Class A
common stock and Comcast Class B common stock, in each
case as of the record date.
These individuals have indicated or agreed that they
will vote to approve the Comcast transaction proposal
and preferred structure proposal.
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* Under The Nasdaq Stock Market rules, if your broker holds your shares in its name, your broker
may not vote your shares absent instructions from you. Without your voting instructions, a broker
non-vote will occur. However, a broker non-vote will have no effect on the outcome of the Comcast
proposals.
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PROXIES
Voting the Comcast Proxy. You may vote in person at the Comcast special
meeting or by proxy. Comcast recommends that you vote by proxy even if you plan
to attend the Comcast special meeting. You can always change your vote at the
Comcast special meeting.
Voting instructions are included on your proxy card. If you properly give
your proxy and submit it to Comcast in time to vote, one of the individuals
named as your proxy will vote your shares as you have directed. You may vote for
or against any or all of the proposals submitted at the Comcast special meeting
or abstain from voting.
HOW TO VOTE BY PROXY
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COMCAST SHAREHOLDERS
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By Telephone:* Call toll-free [ ] and follow the instructions.
You will need to give the personal identification number
contained on your proxy card.
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By Internet:* Go to http://www.[ ] and follow the instructions.
You will need to give the personal identification number
contained on your proxy card.
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In Writing:* Complete, sign, date and return your proxy card in the
enclosed envelope.
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* If you hold shares through a broker or other custodian, please check the voting form used by
that firm to see if it offers telephone or Internet voting.
----------------------------------------------------------------------------------------------------
If you submit a proxy but do not make specific choices, your proxies will
follow the Comcast Board's recommendations and vote these shares:
- "FOR" the approval and adoption of the merger agreement and the
transactions contemplated by the merger agreement
- "FOR" the approval and adoption of an amendment to the Comcast charter to
allow the implementation of the Preferred Structure
XII-3
- In its discretion as to any other business as may properly come before
the Comcast special meeting
Revoking your proxy. You may revoke your proxy before it is voted by:
- submitting a new proxy with a later date, including a proxy given by
telephone or Internet,
- notifying Comcast's Secretary in writing before the Comcast special
meeting that you have revoked your proxy, or
- voting in person at the Comcast special meeting.
Voting In Person. If you plan to attend the Comcast special meeting and
wish to vote in person, Comcast will give you a ballot at the Comcast special
meeting. However, if your shares are held in the name of your broker, bank or
other nominee, you must bring an account statement or letter from the nominee
indicating that you are the beneficial owner of the shares on [ ],
2002, the record date for voting.
People With Disabilities. Comcast can provide reasonable assistance to
help you participate in the Comcast special meeting if you tell Comcast about
your disability and your plan to attend. Please call or write the Comcast
Secretary at least two weeks before the Comcast special meeting at the number or
address under "Summary and Overview of the Transactions -- Summary -- The
Companies."
Confidential Voting. Independent inspectors count the votes. Each Comcast
shareholder's individual vote is kept confidential from Comcast unless special
circumstances exist. For example, a copy of your proxy card will be sent to
Comcast, as applicable, if you write comments on the card.
Proxy Solicitation. Comcast and AT&T will equally share the expenses
incurred in connection with the printing and mailing of this document. Comcast
has retained Innisfree M&A Incorporated, for a fee of [ ] plus additional
charges related to telephone calls and other services, to assist in the
solicitation of proxies. AT&T has retained [ ], for a fee of
[ ] plus additional charges related to telephone calls and other services,
to assist in the solicitation of proxies. Comcast, AT&T and their respective
proxy solicitors will also request banks, brokers and other intermediaries
holding shares of Comcast or AT&T common stock beneficially owned by others to
send this document to, and obtain proxies from, the beneficial owners and will
reimburse the holders for their reasonable expenses in so doing. Solicitation of
proxies by mail may be supplemented by telephone, telegram and other electronic
means, advertisements and personal solicitation by the directors, officers and
employees of Comcast and AT&T. No additional compensation will be paid to
directors, officers or employees for such solicitation.
The extent to which these proxy soliciting efforts will be necessary
depends entirely upon how promptly proxies are submitted. You should send in
your proxy by mail, telephone or Internet without delay.
Stock Certificates. You should not send in any stock certificates with
your proxy card. A transmittal letter with instructions for the surrender of
your Comcast stock certificates will be mailed to you as soon as practicable
after completion of the AT&T Comcast transaction.
Other Business; Adjournments. Comcast is not currently aware of any other
business to be acted upon at the Comcast special meeting. If, however, other
matters are properly brought before the meeting, or any adjourned meeting, your
proxies will have discretion to vote or act on those matters according to their
best judgment, including to adjourn the meeting.
Adjournments may be made for the purpose of, among other things, soliciting
additional proxies. Any adjournment may be made from time to time by approval of
the holders of shares representing a majority of the votes present in person or
by proxy at the Comcast special meeting, whether or not a quorum exists, without
further notice other than by an announcement made at the meeting. Comcast does
not currently intend to seek an adjournment of its meeting.
XII-4
CHAPTER THIRTEEN
INFORMATION ABOUT THE AT&T ANNUAL MEETING AND VOTING
This document and the accompanying AT&T proxy card were mailed to holders
of voting shares of AT&T in connection with the solicitation of proxies by the
AT&T Board for the 2002 Annual Meeting of Shareholders in [ ],
[ ]. Proxies are solicited to give all AT&T shareholders of record at
the close of business on [ ], 2002 an opportunity to vote on matters
that come before the AT&T annual meeting. This procedure is necessary because
AT&T shareholders live in all states and abroad and most will not be able to
attend. Shares of AT&T common stock can be voted only if the shareholder is
present in person or is represented by proxy.
THE INFORMATION AND INSTRUCTIONS CONTAINED IN THIS CHAPTER ARE ADDRESSED TO
AT&T SHAREHOLDERS, AND ALL REFERENCES TO "YOU" IN THIS CHAPTER SHOULD BE
UNDERSTOOD TO BE ADDRESSED TO AT&T SHAREHOLDERS.
Registered AT&T shareholders (those who hold AT&T shares directly or
through AT&T plans rather than a bank or broker) can simplify their voting and
save AT&T expense by calling 1-800-273-1174 or voting via the Internet at
http://att.proxyvoting.com/. Telephone and Internet voting information is
provided on the AT&T proxy card. A Control Number is designed to verify AT&T
shareholders' identities and allow them to vote their shares and confirm that
their voting instructions have been properly recorded. It is located above the
shareholder's name and address in the lower left section of the AT&T proxy card.
If an AT&T shareholder holds shares through a bank or broker, the shareholder
will receive separate instructions on the form he or she receives. Although most
banks and brokers now offer telephone and Internet voting, availability and
specific processes will depend on their voting arrangements.
MATTERS RELATING TO THE AT&T ANNUAL MEETING
----------------------------------------------------------------------------------------------------
Date, Time and Place: [ ], 2002
[Time]
[Address]
----------------------------------------------------------------------------------------------------
Purpose of AT&T Annual Meeting is to Vote - to elect directors for the ensuing year;
on the Following Items: - to ratify the appointment of auditors to examine
AT&T's accounts for the year 2002;
- to approve and adopt the merger agreement between AT&T
Corp., AT&T Broadband Corp., and Comcast Corporation
and the other parties thereto, whereby AT&T Broadband,
a new holding company that consists of AT&T's
broadband businesses, will be spun off and combined
with Comcast in a new Pennsylvania corporation called
AT&T Comcast Corporation, and the transactions
contemplated by the merger agreement, including the
AT&T Broadband spin-off;
- to approve and adopt an amendment to AT&T's charter to
authorize the creation of AT&T Consumer Services Group
tracking stock;
- to approve a new incentive plan to enable AT&T to
grant incentive awards based on shares of AT&T Consumer
Services Group tracking stock to officers and
employees of AT&T and its subsidiaries;
- to approve an amendment to AT&T's employee stock
purchase plan to permit the issuance of AT&T Consumer
Services Group tracking stock under the plan; and
- to act upon such other matters as may properly come
before the AT&T annual meeting or any adjournment or
postponement thereof.
----------------------------------------------------------------------------------------------------
XIII-1
----------------------------------------------------------------------------------------------------
Record Date: The record date for AT&T shares entitled to vote is
[ ], 2002.
----------------------------------------------------------------------------------------------------
Outstanding Shares Held on Record Date As of the record date there were outstanding
approximately [ ] shares of AT&T common stock.
----------------------------------------------------------------------------------------------------
Votes Necessary to Approve the With respect to the election of directors, the nominees
Proposals:* who receive the most votes of holders of AT&T common
stock will be elected.
The affirmative vote of a majority of the outstanding
shares of AT&T common stock entitled to vote at the AT&T
annual meeting is required to approve the AT&T
transaction proposal and the Consumer Services charter
amendment proposal.
The affirmative vote of a majority of the votes cast by
the holders of the outstanding shares of AT&T common
stock is required to approve any of the proposals to be
voted upon at the AT&T annual meeting other than the
election of directors, the AT&T transaction proposal and
the Consumer Services charter amendment proposal.
Each holder of AT&T common stock is entitled to one vote
per share on each of the AT&T proposals.
An abstention with respect to the AT&T transaction
proposal or the Consumer Services charter amendment
proposal will have the effect of a vote against such
proposal.
Shares held by AT&T in its treasury are not voted.
----------------------------------------------------------------------------------------------------
Quorum Requirements: A quorum of shareholders is necessary to hold a valid
meeting.
The presence in person or by proxy at the meeting of
holders of 40% of the outstanding shares of AT&T common
stock entitled to vote at the meeting is a quorum.
Abstentions and broker "non-votes" count as present for
establishing a quorum.
A broker non-vote occurs on an item when a broker is not
permitted to vote on the item without instruction from
the beneficial owner of the shares and no instruction is
given.
----------------------------------------------------------------------------------------------------
Shares Beneficially Owned by AT&T As of the record date, approximately [ ] of
Directors and Executive Officers as of the outstanding shares of AT&T common stock, including
the record date: exercisable options, were beneficially owned by AT&T
directors and executive officers.
These shares represent in total approximately [ ]%
of the outstanding shares of AT&T common stock as of the
record date.
These individuals have indicated or agreed that they
will vote to approve the AT&T transaction proposal.
----------------------------------------------------------------------------------------------------
* Under NYSE Rules, if your broker holds your shares in its name, your broker may not vote your
shares with respect to certain types of proposals absent instructions from you. Specifically,
absent instructions from you, your broker may not vote your shares on the AT&T transaction
proposal, the Consumer Services charter amendment proposal, the incentive plan proposal or the
employee stock purchase plan proposal. Broker non-votes will have the effect of a vote against
the AT&T transaction proposal and the Consumer Services charter amendment proposal. If you do not
provide instructions to your broker, the broker may still vote your shares with respect to the
election of directors, the ratification of auditors and other matters that may come before the
AT&T annual meeting, including shareholder proposals.
----------------------------------------------------------------------------------------------------
XIII-2
ELECTRONIC ACCESS TO AT&T PROXY MATERIALS AND ANNUAL REPORT
AT&T shareholders can access AT&T's Notice of Meeting and Proxy Statement
and annual report via the Internet on the AT&T Investor Relations website at
http://www.att.com/ir/. For future shareholder meetings, AT&T's registered
shareholders can further save AT&T expense by consenting to access their proxy
statement and annual report electronically. AT&T shareholders can choose this
option by marking the "Electronic Access" box on the proxy card or by following
the instructions provided when voting by telephone or via the Internet. If you
choose this option, prior to each shareholder meeting you will receive in the
mail your proxy card that provides a notice of meeting with a business reply
envelope. You do not need to select this option each year; however, you may want
to choose this option for more than one account held in your name. Your choice
will remain in effect unless you revoke it by contacting AT&T's transfer agent,
EquiServe, at 1-800-348-8288 or visiting the AT&T Investor Relations website at
http://www.att.com/ir/.
DELIVERY OF PROXY MATERIALS TO HOUSEHOLDS
The SEC recently implemented a new rule regarding the delivery of proxy
materials to households (annual reports, proxy statements, proxy statements
combined with a prospectus, or any information statement to shareholders). This
new method of delivery, often referred to as "householding," permits AT&T and
other companies to mail a single set of proxy materials to any household in
which two or more different shareholders reside and are members of the same
household or in which one shareholder has multiple accounts. For voting
purposes, a separate proxy card will be included for each account at the shared
address.
In January 2002, AT&T mailed each registered shareholder (those who hold
shares directly or through AT&T plans) at the shared address a separate notice
of its intention to household proxy materials. Beneficial shareholders (those
who hold shares through a bank, broker or other record holder) were notified in
2001 of the householding process. Those beneficial shareholders who are eligible
and have not opted-out of the householding process will receive one set of proxy
materials this year.
Registered shareholders who reside at such a household and would like to
receive a separate annual report and proxy statement, or have questions
regarding the householding process, may contact AT&T's transfer agent,
EquiServe, by calling 1-800-348-8288, forwarding a written request addressed to
EquiServe, Post Office Box 43007, Providence, RI 02940-3007, or via e-mail to
att@equiserve.com. Beneficial shareholders should contact their broker or
financial institution for specific information on this matter.
PROXY VOTING
AT&T shareholders who do not vote by telephone or the Internet may still
return their proxy cards, properly signed, and the shares represented will be
voted in accordance with their directions. AT&T shareholders can specify their
choices by marking the appropriate boxes on the proxy card. IF AN AT&T PROXY
CARD IS SIGNED AND RETURNED WITHOUT SPECIFYING ANY CHOICES, THE SHARES WILL BE
VOTED AS RECOMMENDED BY THE AT&T BOARD. Abstentions marked on the proxy card are
voted neither "for" nor "against," but are counted in the determination of a
quorum for each of the proposals. IF YOU VOTE BY TELEPHONE OR THE INTERNET, IT
IS NOT NECESSARY TO RETURN YOUR PROXY CARD.
If you wish to give your proxy to someone other than the AT&T Proxy
Committee, all names that appear on the proxy card must be crossed out and the
name of another person or persons (not more than ) inserted. The signed card
must be presented at the meeting by the person or persons representing you. You
may revoke your proxy at any time before it is voted at the meeting by executing
a later-voted proxy by telephone, the Internet, or mail, by voting by ballot at
the meeting, or by filing an instrument of revocation with the inspector of
election in care of the Vice President -- Law and Secretary of AT&T.
YOUR VOTE IS IMPORTANT. ACCORDINGLY, AT&T SHAREHOLDERS ARE ENCOURAGED TO
VOTE BY TELEPHONE, THE INTERNET, OR BY SIGNING AND RETURNING THE ACCOMPANYING
PROXY CARD WHETHER OR NOT THEY PLAN TO ATTEND THE
XIII-3
MEETING. If you do attend, you may vote by ballot at the AT&T annual meeting,
thereby canceling any proxy previously voted.
CONFIDENTIAL VOTING
For many years, AT&T has had a confidential voting policy. AT&T has
formalized its policy by amending its bylaws so that all proxies and other
voting materials, including telephone and Internet voting, are kept confidential
and are not disclosed to AT&T or its officers and directors, subject to standard
exceptions. Such documents are available for examination only by the inspector
of election and certain personnel associated with processing proxy cards and
tabulating the vote. This bylaw provision cannot be amended, rescinded, or
waived except by a shareholder vote. AT&T's independent inspector of election,
an officer of [ ], has been appointed.
VOTING SHARES HELD IN DIVIDEND REINVESTMENT AND SAVINGS PLANS
For participants in the AT&T Shareowner Dividend Reinvestment and Stock
Purchase Plan or the AT&T 1996 Employee Stock Purchase Plan, your shares will be
voted as specified on your proxy card and will not be voted if the proxy card is
not returned. For employee shareholders participating in the AT&T Long Term
Savings Plan for Management Employees, the AT&T Long Term Savings and Security
Plan, the AT&T Retirement Savings and Profit Sharing Plan, the AT&T of Puerto
Rico, Inc. Long Term Savings Plan for Management Employees, the AT&T of Puerto
Rico, Inc. Long Term Savings and Security Plan, the Liberty Media 401(k) Savings
Plan, the Liberty Media 401(k) Savings Plan of Puerto Rico, the AT&T Broadband
Long Term Savings Plan, or the AT&T Wireless Services 401(k) Retirement Plan,
your shares will be voted as specified on your proxy card. If the proxy cards
are not returned, the Trustee of the plan will vote those shares in the same
proportion as the shares for which instructions were received from all other
participants in that plan. If you wish to abstain from voting on a shareholder
matter, you must indicate this when you vote by telephone, the Internet or by
mail.
ANNUAL MEETING ADMISSION
IF YOU ARE A REGISTERED AT&T SHAREHOLDER AND PLAN TO ATTEND THE AT&T
MEETING IN PERSON, PLEASE DETACH AND RETAIN THE ADMISSION TICKET THAT IS
ATTACHED TO YOUR PROXY CARD. IF YOU WILL ATTEND THE MEETING, PLEASE BE SURE TO
RESPOND TO THE "I/WE PLAN TO ATTEND THE ANNUAL MEETING" QUESTION WHEN YOU VOTE.
A BENEFICIAL OWNER OF AT&T SHARES WHO PLANS TO ATTEND THE MEETING MAY OBTAIN AN
ADMISSION TICKET IN ADVANCE BY SENDING A WRITTEN REQUEST, WITH PROOF OF
OWNERSHIP, SUCH AS A BANK OR BROKERAGE FIRM ACCOUNT STATEMENT, TO:
MANAGER -- PROXY, AT&T CORP., 295 NORTH MAPLE AVENUE, ROOM 1216L2, BASKING
RIDGE, NEW JERSEY 07920-1002. ADMITTANCE TO THE ANNUAL MEETING WILL BE BASED
UPON AVAILABILITY OF SEATING.
AT&T shareholders who do not present admission tickets at the meeting will
be admitted upon verification of ownership at the admissions counter.
The is fully accessible to disabled persons, and sign
interpretation and wireless headsets will be available for hearing-impaired AT&T
shareholders.
Highlights of the meeting will be available on the AT&T Investor Relations
website at http://www.att.com/ir/ and will also be included in a midyear report
to AT&T shareholders.
THE AT&T BOARD
The AT&T Board is responsible for establishing broad corporate policies and
monitoring the overall performance of AT&T. However, in accordance with
corporate legal principles, the AT&T Board is not involved in day-to-day
operating matters. Members of the AT&T Board are kept informed of AT&T's
business by participating in AT&T Board and committee meetings, by reviewing
analyses and reports sent to them each month, and through discussions with the
Chairman and other officers.
XIII-4
The AT&T Board held [ ] meetings and the committees held
[ ] meetings in 2001. The average attendance in the aggregate of the
total number of meetings of the AT&T Board and the total number of committee
meetings was [ ]%.
COMMITTEES OF THE AT&T BOARD
The AT&T Board has established a number of committees, including the Audit
Committee, the Compensation and Employee Benefits Committee, the Finance
Committee, and the Governance and Nominating Committee, each of which is briefly
described below. Another committee of the AT&T Board is the Proxy Committee
(that votes the shares represented by proxies at the annual meeting of
shareholders).
The Audit Committee meets with AT&T management to consider the adequacy of
the internal controls and the objectivity of financial reporting. The committee
also meets with the independent auditors and with appropriate AT&T financial
personnel and internal auditors concerning these matters. The committee
recommends to the AT&T Board the appointment of the independent auditors,
subject to ratification by the shareholders at the annual meeting. Both the
internal auditors and the independent auditors periodically meet alone with the
committee and always have unrestricted access to the committee. The committee,
which consists of non-employee directors, met times in 2001.
The Compensation and Employee Benefits Committee administers incentive
compensation plans, including stock option plans, and keeps informed and advises
the AT&T Board regarding employee benefit plans. The committee establishes the
compensation structure for senior managers of AT&T and makes recommendations to
the AT&T Board with respect to compensation of the officers as listed on page
. The committee, which consists of non-employee directors, met
times in 2001.
The Finance Committee meets with AT&T management to review the financial
policy and procedures of AT&T, including AT&T's Financing Plan, Capital and
Investment Program, and Dividend Policy. The committee advises the AT&T Board on
AT&T's financial condition and makes recommendations concerning the dividend
policy and payments of AT&T. The committee, which consists of non-employee
directors, met times in 2001.
The Governance and Nominating Committee advises and makes recommendations
to the AT&T Board on all matters concerning directorship and corporate
governance practices, including compensation of directors and the selection of
candidates as nominees for election as directors, and it provides guidance with
respect to matters of public policy. The committee, which consists of
non-employee directors, met times in 2001. The committee
recommended this year's director candidates at the [ ], 2002 AT&T
Board Meeting.
In recommending AT&T Board candidates, the Governance and Nominating
Committee seeks individuals of proven judgment and competence who are
outstanding in their respective fields. The committee considers such factors as
experience, education, employment history, special talents or personal
attributes, anticipated participation in AT&T Board activities, and geographic
and other diversity factors. Shareholders who wish to recommend qualified
candidates should write to: Vice President -- Law and Secretary, AT&T Corp., 32
Avenue of the Americas, New York, New York 10013-2412, stating in detail the
qualifications of such persons for consideration by the committee.
COMPENSATION OF DIRECTORS
In 2001, directors who were not AT&T employees received an annual cash
retainer of $ and AT&T common stock units with a then-current market
value of $ , which were deferred automatically and credited to a
portion of a deferred compensation account, pursuant to AT&T's Deferred
Compensation Plan for Non-Employee directors. The chairpersons of the Audit
Committee, Compensation and Employee Benefits Committee, and Finance Committee
each received an additional annual retainer of $ . The chairperson of
the Governance and Nominating Committee received an additional annual retainer
of $ . No fees are paid for attendance at regularly scheduled AT&T
Board and committee
XIII-5
meetings. Directors received a fee of $ for each special AT&T Board or
committee meeting attended. In addition, non-employee directors received a stock
option grant to purchase shares of AT&T common stock.
Directors may elect to defer the receipt of all or part of their cash
retainer and other compensation into the AT&T common stock portion or the cash
portion of the deferred compensation account. The AT&T common stock portion (the
value of which is measured from time to time by the market value of AT&T common
stock) is credited on each dividend payment date for AT&T common stock with a
number of deferred shares of AT&T common stock equivalent in market value to the
amount of the quarterly dividend on the shares then credited in the accounts.
The cash portion of the deferred compensation account, representing amounts
deferred prior to January 1, 2002, earns interest, compounded quarterly, at an
annual rate equal to the average interest rate for ten-year United States
Treasury Notes for the previous quarter, plus %. Thereafter, amounts
deferred to the cash portion of the deferred compensation account earn interest,
compounded quarterly, at an annual rate equal to the average interest rate for
ten-year United States Treasury Notes for the previous quarter, plus %.
Effective December 31, 1996, AT&T terminated its Pension Plan for
Non-Employee Directors. The Pension Plan now covers only those non-employee
directors who retired prior to December 31, 1996. Benefits accrued for
then-active directors were valued and converted into a deferred annuity. AT&T
also provides non-employee directors with travel accident insurance when on AT&T
business. A non-employee director may purchase life insurance sponsored by AT&T.
AT&T will share the premium expense with the director; however, all AT&T
contributions will be returned to AT&T at the earlier of (a) the director's
death or (b) the later of age 70 or 15 years from the policy's inception. This
benefit will continue after the non-employee director's retirement from the AT&T
Board.
Effective December 1997, the AT&T Board adopted AT&T stock ownership
targets equal to five times the total value of the annual cash retainer and
annual stock unit amounts. Directors generally have five years to attain the
ownership goal. of the non-employee directors have met their
targets. Directors who are employees of AT&T receive no compensation for serving
as directors, but also have ownership targets.
ELECTION OF DIRECTORS
(ITEM 1 ON PROXY CARD)
The AT&T Proxy Committee intends to vote for the election of the
nominees listed on the following pages. These nominees have been selected
by the AT&T Board on the recommendation of the Governance and Nominating
Committee. If you do not wish your shares to be voted for particular nominees,
please identify the exceptions in the designated space provided on the proxy
card or, if you are voting by telephone or the Internet, follow the system
instructions. Directors will be elected by a plurality of the votes cast. Any
shares not voted (whether by abstention, broker non-vote, or otherwise) have no
impact on the vote.
If at the time of the meeting one or more of the nominees have become
unavailable to serve, shares represented by proxies will be voted for the
remaining nominees and for any substitute nominee or nominees designated by the
Governance and Nominating Committee or, if none, the size of the AT&T Board will
be reduced. Except as noted below in cases of directors moving to new boards in
conjunction with restructuring activities, the Governance and Nominating
Committee knows of no reason why any of the nominees will be unavailable or
unable to serve.
Directors elected at the AT&T annual meeting will hold office until the
next annual meeting or until their successors have been elected and qualified,
except as noted below for those directors moving to new boards in conjunction
with restructuring activities. For each nominee there follows a brief listing of
XIII-6
principal occupation for at least the past five years, other major affiliations,
and age as of [ (Record Date)].
NOMINEES FOR ELECTION AS DIRECTORS
STOCK OWNERSHIP OF MANAGEMENT AND DIRECTORS
The following table sets forth information concerning the beneficial
ownership of AT&T common stock as of January 1, 2002 for (a) each current
director elected to the AT&T Board in 2001 and each nominee for election as a
director in 2002; (b) each of the officers named in the Summary Compensation
Table herein ("Named Officers") not listed as a director; and (c) directors and
executive officers as a group. No director or executive officer owns any AT&T
preferred shares. Except as otherwise noted, the nominee or family members had
sole voting and investment power with respect to such securities.
NUMBER OF SHARES
------------------------------------------
BENEFICIALLY DEFERRAL PERCENT
NAME OWNED PLANS(1) TOTAL OF CLASS
---- ------------ -------- ----- --------
(A)
C. Michael Armstrong...................................... -- -- -- *
J. Michael Cook........................................... -- -- -- *
Kenneth T. Derr........................................... -- -- -- *
M. Kathryn Eickhoff....................................... -- -- -- *
George M. C. Fisher....................................... -- -- -- *
Amos B. Hostetter, Jr. ................................... -- -- -- *
Shirley A. Jackson........................................ -- -- -- *
Donald F. McHenry......................................... -- -- -- *
Louis A. Simpson.......................................... -- -- -- *
Michael I. Sovern......................................... -- -- -- *
Sanford I. Weill.......................................... -- -- -- *
BENEFICIALLY DEFERRAL PERCENT
NAME OWNED PLANS(1) TOTAL OF CLASS
---- ------------ -------- ----- --------
(B)
BENEFICIALLY DEFERRAL PERCENT
NAME OWNED PLANS(1) TOTAL OF CLASS
---- ------------ -------- ----- --------
(C)
Directors and Executive Officers as a group............... -- -- -- *
---------------
* Less than one percent
FOOTNOTES
1. Share units held in deferred compensation accounts that do not constitute
beneficially owned securities.
OWNERSHIP OF VOTING SECURITIES IN EXCESS OF FIVE PERCENT BY BENEFICIAL OWNERS
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires AT&T's
directors and executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities, to file with the SEC and
the NYSE, initial reports of ownership and reports of changes in beneficial
ownership of such equity securities of AT&T.
XIII-7
To AT&T's knowledge, based upon the reports filed and written
representations that no other reports were required, during the fiscal year
ended December 31, 2001, none of its directors and executive officers failed to
file on a timely basis reports required by Section 16(a) with the following
exceptions:
RATIFICATION OF APPOINTMENT OF AUDITORS
(ITEM 2 ON PROXY CARD)
Subject to shareholder ratification, the AT&T Board, upon recommendation of
the Audit Committee, has reappointed the firm of PricewaterhouseCoopers LLP as
the independent auditors to examine AT&T's financial statements for the year
2002. PricewaterhouseCoopers has audited AT&T's books for many years. THE AT&T
BOARD RECOMMENDS THAT AT&T SHAREHOLDERS VOTE FOR SUCH RATIFICATION. Ratification
of the appointment of auditors requires a majority of the votes cast. Any shares
not voted (whether by abstention, broker non-vote, or otherwise) have no impact
on the vote. If the shareholders do not ratify this appointment, other
independent auditors will be considered by the AT&T Board upon recommendation of
the Audit Committee.
Representatives of PricewaterhouseCoopers are expected to attend the AT&T
meeting and will have the opportunity to make a statement if they desire and to
respond to appropriate questions.
For the year 2001, PricewaterhouseCoopers also examined the financial
statements of AT&T's subsidiaries and provided other audit services to AT&T and
its subsidiaries in connection with SEC filings, review of financial statements,
and audits of pension plans.
DIRECTORS' PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT AMONG AT&T CORP.,
AT&T BROADBAND CORP., COMCAST CORPORATION AND THE OTHER PARTIES THERETO, WHEREBY
AT&T BROADBAND, A NEW HOLDING COMPANY THAT CONSISTS OF AT&T'S BROADBAND
BUSINESSES, WILL BE SPUN OFF AND COMBINED WITH COMCAST IN A NEW PENNSYLVANIA
CORPORATION CALLED "AT&T COMCAST CORPORATION" AND THE TRANSACTIONS CONTEMPLATED
BY THE MERGER AGREEMENT, INCLUDING THE AT&T BROADBAND SPIN-OFF
(ITEM 3 ON PROXY CARD)
For information regarding the AT&T transaction proposal, please see
Chapters I-IX and Chapter XIV of this document.
DIRECTORS' PROPOSAL TO APPROVE AND ADOPT AN AMENDMENT TO AT&T'S CHARTER TO
AUTHORIZE THE CREATION OF AT&T CONSUMER SERVICES GROUP TRACKING STOCK
(ITEM 4 ON PROXY CARD)
For information regarding the Consumer Services charter amendment proposal,
please see Chapter I and Chapter X of this document.
DIRECTORS' PROPOSAL TO APPROVE A NEW INCENTIVE PLAN TO ENABLE AT&T TO GRANT
INCENTIVE AWARDS BASED ON SHARES OF AT&T CONSUMER SERVICES GROUP TRACKING STOCK
(ITEM 5 ON PROXY CARD)
For information regarding the incentive plan proposal, please see Chapter X
of this document.
DIRECTORS' PROPOSAL TO APPROVE AN AMENDMENT TO AT&T'S EMPLOYEE STOCK PURCHASE
PLAN TO PERMIT THE ISSUANCE OF AT&T CONSUMER SERVICES GROUP TRACKING STOCK UNDER
THE PLAN
(ITEM 6 ON PROXY CARD)
For information regarding the employee stock purchase plan proposal, please
see Chapter X of this document.
XIII-8
SHAREHOLDER PROPOSALS
AT&T receives many suggestions from shareholders, some as formal
shareholder proposals. All are given careful consideration and adopted, if
appropriate. After discussion with AT&T representatives and clarification of
AT&T's position, many proposals are withdrawn.
Proponents of shareholder proposals have stated that they
intend to present the following proposals at the annual meeting. Information on
the shareholdings of the proponents is available by writing to:
MANAGER -- PROXY, AT&T CORP., 295 NORTH MAPLE AVENUE, ROOM 1216L2, BASKING
RIDGE, NEW JERSEY 07920-1002. The proposals and supporting statements are quoted
below. The AT&T Board has concluded it cannot support these proposals for the
reasons given.
SHAREHOLDER PROPOSAL #1
(ITEM 7 ON PROXY CARD)
SHAREHOLDER PROPOSAL #2
(ITEM 8 ON PROXY CARD)
SHAREHOLDER PROPOSAL #3
(ITEM 9 ON PROXY CARD)
SHAREHOLDER PROPOSAL #4
(ITEM 10 ON PROXY CARD)
SUBMISSION OF SHAREHOLDER PROPOSALS
For information regarding the submission of shareholder proposals, see
"Additional Information for Shareholders -- Future Shareholder
Proposals -- AT&T."
ADVANCE NOTICE PROCEDURES; NOMINATION OF DIRECTORS
Under AT&T's bylaws, no nominations of individuals for election as
directors or other business may be brought before an AT&T annual meeting except
as specified in the notice of the meeting (which notice includes shareholder
proposals that AT&T is required to set forth in its proxy statement under SEC
Rule 14a-8) or as otherwise brought before the meeting by or at the direction of
the AT&T Board or by a shareholder entitled to vote who has delivered written
notice to AT&T (containing certain information specified in the bylaws) not less
than 90 or more than 120 days prior to the first anniversary of the preceding
year's annual meeting. These requirements are separate and apart from and in
addition to the SEC's requirements that a shareholder must meet to have a
shareholder proposal included in AT&T's proxy statement under SEC Rule 14a-8.
A copy of the full text of the bylaw provisions discussed above may be
obtained by writing to AT&T's Office of the Corporate Secretary.
OTHER MATTERS TO COME BEFORE THE AT&T ANNUAL MEETING
In addition to the matters described above, there will be an address by the
Chairman of the Board of AT&T and a general discussion period during which
shareholders will have an opportunity to ask questions about the business. In
the event that any matter not described herein may properly come before the
meeting, or any adjournment thereof, the Proxy Committee will vote the shares
represented by it in accordance with its best judgment. At the time this
document went to press, AT&T knew of no other matters that might be presented
for shareholder action at the AT&T annual meeting.
XIII-9
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
REPORT OF THE AUDIT COMMITTEE OF THE AT&T BOARD
FIVE-YEAR PERFORMANCE COMPARISON ON AT&T COMMON STOCK
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------- -------------------------------------
AWARDS PAYOUTS
OTHER ----------------------- -----------
ANNUAL RESTRICTED ALL OTHER
NAMED OFFICERS AND COMPEN- STOCK OPTIONS/ LTIP COMPEN-
PRINCIPAL POSITION(1) YEAR SALARY ($) BONUS ($) SATION ($) AWARD(S) ($) SARS(#) PAYOUTS ($) SATION ($)
--------------------- -------- ---------- --------- ---------- ------------ -------- ----------- ----------
C. Michael
Armstrong..........
Chairman of the
Board and CEO
FOOTNOTES
1. Includes Chairman of the Board and Chief Executive Officer and the four other
most highly compensated individuals who were executive officers of AT&T at
the end of 2001, as measured by salary and bonus.
AGGREGATED OPTION/STOCK APPRECIATION RIGHTS
("SAR") EXERCISES IN 2001 AND YEAR-END VALUES
AT&T COMMON STOCK
EXERCISABLE/UNEXERCISABLE
---------------------------
NUMBER OF $ VALUE
SHARES UNEXERCISED IN-THE-MONEY
ACQUIRED $ VALUE OPTIONS/SARS OPTIONS/SARS
NAME(1) ON EXERCISE REALIZED AT YEAR END AT YEAR END
------- ----------- -------- ------------ ------------
C. Michael Armstrong.........................
FOOTNOTES
1. Includes Chairman of the Board and Chief Executive Officer and the four other
most highly compensated individuals who were executive officers of AT&T at
the end of 2001, as measured by salary and bonus.
LONG-TERM INCENTIVE PLANS -- AWARDS IN 2001
ESTIMATED FUTURE PAYOUTS UNDER
PERFORMANCE NON-STOCK PRICE BASED PLANS
NUMBER OF PERIOD UNTIL -------------------------------
PERFORMANCE MATURATION THRESHOLD TARGET MAXIMUM
NAME(1) SHARES OR PAYOUT (#) (#) (#)
------- ----------- ------------ --------- -------- --------
C. Michael Armstrong..................
FOOTNOTES
1. Includes Chairman of the Board and Chief Executive Officer and the four other
most highly compensated individuals who were executive officers of AT&T at
the end of 2001, as measured by salary and bonus.
XIII-10
OPTION/SAR GRANTS IN 2001
INDIVIDUAL GRANTS
--------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT
NAME(1) GRANTED FISCAL YEAR ($/SH) DATE VALUE ($)
------- ------------ ------------ ----------- ---------- ----------
C. Michael Armstrong................
FOOTNOTES
1. Includes Chairman of the Board and Chief Executive Officer and the four other
most highly compensated individuals who were executive officers of AT&T at
the end of 2001, as measured by salary and bonus.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
AT&T entered into an employment agreement with Mr. Armstrong dated October
17, 1997. The agreement provided for an initial base salary of $1,400,000 per
year. It also provided for a guaranteed annual incentive award for the 1998
performance year of no less than 100% of his then base salary, and for 1998 and
1999 performance shares/stock units granted under the 1997 LTIP, a guaranteed
grant value equivalent to no less than 100% of his base salary at the time of
grant. Mr. Armstrong was eligible for annual stock option awards commencing in
1998 in accordance with the Committee-approved compensation structure for such
years.
To address certain forfeitures experienced when Mr. Armstrong left his
previous employer, the Company paid a premium of $2,050,000 to purchase a
split-dollar survivorship insurance policy insuring Mr. Armstrong and his
spouse. Such policy will, upon the death of the last surviving insured, provide
insurance proceeds equal to the sum of the face amount of the policy and the
policy's cash value. An amount equal to the policy face amount shall be payable
to Mr. Armstrong's beneficiaries or to a trust which may be established to own
Mr. Armstrong's interest in such policy. The balance of the proceeds will be
paid to the Company, and, from its share of the death benefit, the Company will
pay a Company-paid death benefit to Mr. Armstrong's beneficiaries equal to the
death benefit received by the Company, minus the Company-paid premium. The face
amount of such split-dollar survivorship insurance policy will be determined in
accordance with the underwriting requirements of the insurance company providing
such coverage based on the Company's premium payment of $2,050,000 and
additional premium payments, if any, that Mr. Armstrong may become eligible for
under any similar program adopted by the Company for its senior executives and
in which Mr. Armstrong elects to participate.
In accordance with his employment agreement, Mr. Armstrong was also granted
AT&T restricted stock, AT&T restricted stock units, and AT&T stock options under
the 1997 LTIP to replace similar grants forfeited from his prior employer and to
provide strong incentives to create shareholder value for AT&T shareowners.
Details of these grants follow:
1. Mr. Armstrong was granted 142,877* shares of AT&T restricted
stock. These shares vested in years 1998, 1999, 2000 and became fully
vested on October 26, 2001.
2. Mr. Armstrong was also granted 446,179* AT&T restricted stock
units, which vest on October 1, 2003, assuming continued employment, with a
guarantee that, in the event the fair market value of the AT&T shares
furnished to Mr. Armstrong on October 1, 2003 is less than $10,000,000,
such shortfall will be made up in cash by the Company. In the event of (a)
a Change in Control (as defined) on or before April 1, 2002 and a
subsequent (within 3 years) Company-initiated termination
---------------
* Adjusted for April 1999 3:2 stock split and July 2001 split-off of AT&T
wireless.
XIII-11
for other than "cause" (as defined) or Constructive Termination Without
Cause (as defined) or (b) Mr. Armstrong's death, special vesting rules
apply.
3. Mr. Armstrong was granted an option to purchase, within ten years,
1,124,699* shares of AT&T common stock, with a purchase price of $22.4125*
per share. These options vest one-third each on October 17, 2000, 2001, and
2002, based on continued employment.
As part of his employment agreement, the Company entered into a
supplemental pension arrangement with Mr. Armstrong. Pursuant to such
arrangement, Mr. Armstrong will receive an annual benefit (as defined in the
employment agreement) commencing at his retirement at or after age 65. Such
benefit will vest 20% per year on each of the first five anniversaries of his
hire, and will be payable in actuarially-reduced amounts for retirement and
commencement prior to age 65. Pension benefits payable under this arrangement
will be paid out of the Company's operating income, and will be offset by (1)
all amounts actually received by Mr. Armstrong under any other Company qualified
or non-qualified retirement plan or arrangement, and (2) the greater of (a)
$655,642 or (b) the actual pension benefits to be paid to Mr. Armstrong with
respect to that year by his prior employers under their qualified and
non-qualified defined benefit plans. In addition, Mr. Armstrong will be entitled
to certain other post-retirement benefits that are generally made available from
time to time to retired executive officers and service-pension-eligible senior
managers.
Mr. Armstrong's agreement provides for certain entitlements in the event of
his termination from AT&T under specified circumstances. Pursuant to his
agreement, in the event of Mr. Armstrong's death, his beneficiaries or estate
will be entitled to his base salary through the end of his month of death, his
target annual incentive award for the year of death, a lump sum payout at target
for each open long-term incentive program performance cycle, and payment of
survivor benefits under his supplemental pension arrangement which vests 100% at
his death. All outstanding unvested stock options will vest and together with
already vested options will be exercisable for the remainder of the original
term of each grant; restrictions on the restricted stock granted as part of his
agreement will lapse; restricted stock units granted in his agreement will be
payable in accordance with the schedule established in his Restricted Stock Unit
Award Agreement (20% to 100% of units granted will be payable, depending on the
date of death) in the event of his death prior to the vesting of such restricted
stock units on October 1, 2003.
Mr. Armstrong's agreement also provides that in the event his employment is
terminated as a result of disability (as defined), he shall be entitled to
receive disability benefits in accordance with the long-term disability program
then in effect for senior managers. In addition, base salary, annual incentive,
stock options, restricted stock, and restricted stock units shall be treated in
the same manner as described above in the case of death. Treatment of long-term
incentives will be as described above in the case of death, provided, however,
payment will be in accordance with the terms of the plan instead of a lump sum.
Pension benefits under his supplemental pension arrangement will vest and will
be offset by any Company-provided disability benefits.
In the event of a termination for "cause" (as defined) or in the event of a
voluntary resignation, other than a termination due to death or disability or a
Constructive Termination (as defined) without "cause" or retirement on October
31, 2003, Mr. Armstrong will forfeit all restricted stock and restricted stock
units as to which restrictions have not lapsed, long-term incentives with
respect to uncompleted performance cycles, outstanding stock options which are
not exercisable, and any pension benefit not yet vested under his supplemental
pension arrangement. He will receive base salary through his date of
termination, and vested stock options shall remain exercisable for 90 days after
termination or until the originally scheduled expiration date, if earlier.
In the event of a Company-initiated termination for other than "cause" or
in the event of a Constructive Termination without "cause," neither of which
follow within three years of a Change in Control (as defined), Mr. Armstrong
will be provided the following: base salary through the date of termination, a
prorated annual incentive award at target for the year of termination, a
24-month continuation of monthly base salary, or at his option, the lump-sum
present value of such payments (using the short-term Treasury bill rate for the
month of termination); two times the target annual incentive
XIII-12
award for the year of termination payable over 24 months, or at his option, the
lump-sum present value of such payments (using the short-term Treasury bill rate
for the month of termination); and payout at target for each open long-term
incentive program performance cycle in accordance with the plan or in a lump sum
as described above. In addition, all outstanding unvested stock options will
vest and together with already vested options will be exercisable for the
remainder of the original term of each grant; restrictions on the restricted
stock granted as part of his agreement will lapse; and his supplemental pension
benefit shall fully vest. For a period of 24 months following his termination,
or, if earlier, until he receives equivalent coverage and benefits from another
employer, Mr. Armstrong will be entitled to continued participation in AT&T's
benefit plans and programs.
In the event of Mr. Armstrong's retirement as of October 31, 2003, he will
be entitled to payment of his supplemental pension and will be treated in
accordance with the plans, programs, and practices applicable to retired senior
managers.
Mr. Armstrong's agreement provides that in the event of a Change in
Control, all amounts and benefits to which he is entitled but are not yet vested
(except with respect to his restricted stock unit grant which is governed by the
terms of the grant agreement) shall become fully vested. In addition, in the
event of a Company-initiated termination or a Constructive Termination without
"cause" following a Change in Control, he shall be entitled to the benefits
described above in connection with a Company-initiated termination without
"cause" or a Constructive Termination without "cause" not associated with a
Change in Control provided, however: (1) the number of months associated with
salary, annual incentive, and benefits continuation shall be 48 months, and such
amounts will be payable as a lump sum as soon as practicable after his
termination; and (2) restricted stock units granted in his agreement will be
payable in accordance with the schedule established in his Restricted Stock Unit
Award Agreement (25% to 100% of units granted will be payable, depending on date
of termination). In the event the payments in this paragraph are determined to
constitute a payment under Section 280G(b)(2) of the Internal Revenue Code and
such payment is subject to an excise tax under Section 4999 of the Code, the
Company will provide Mr. Armstrong with a tax gross-up payment to negate the
excise tax. It is not anticipated that the AT&T Comcast transaction will
constitute a change in control under his agreement.
In the event of any termination described above, Mr. Armstrong or his
estate shall also be entitled to the unpaid balance of any incentive awards for
completed performance periods, any expense reimbursements due him, and other
benefits in accordance with applicable plans and programs.
AT&T entered into an employment agreement with Mr. Schleyer dated October
25, 2001. The employment agreement provided for an initial base salary of
$925,000 per year. It also provided for a guaranteed annual incentive award for
the 2002 performance year of no less than 100% of his then base salary and
$154,000 with respect to the 2001 calendar year. Mr. Schleyer was also provided
under the AT&T 1997 Long Term Incentive Plan an option to purchase, within 10
years, 430,800 shares of AT&T common stock with a purchase price of $16.0150 per
share and 114,450 AT&T restricted shares in accordance with the
Committee-approved compensation structure for 2001. The stock options vest in
four equal annual installments, beginning on October 25, 2001 and the AT&T
restricted shares vest in three equal annual installments, beginning on October
25, 2001, in each case, based on continued employment.
To address certain forfeitures experienced when Mr. Schleyer left his
previous employer and to incent him to join the Company, the employment
agreement provided for (i) a special one time grant of an option to purchase,
within 10 years, 277,000 shares of AT&T common stock with a purchase price of
$16.0150 per share and 56,200 AT&T restricted shares. The stock options vest in
three equal annual installments, beginning on October 25, 2001 and the AT&T
restricted shares vest in two equal annual installments, beginning on October
25, 2001, in each case, based on continued employment.
Mr. Schleyer is entitled to participate in the benefit programs that are
generally made available to other AT&T executives. Mr. Schleyer's employment
agreement also provides that if AT&T separated itself from AT&T Broadband, Mr.
Schleyer will cease participating in AT&T's benefit plans and will become a
participant in the applicable benefit plans of AT&T Broadband.
XIII-13
Mr. Schleyer's employment agreement provides that if AT&T separates itself
from AT&T Broadband, his AT&T equity awards will be treated in accordance with
the plan developed and approved by AT&T's Board.
In the event of a termination of Mr. Schleyer's employment initiated by
AT&T for "cause" or by Mr. Schleyer without "good reason" (as defined), he will
forfeit all unvested AT&T stock options and all AT&T restricted shares as to
which restrictions have not lapsed.
In the event of an AT&T-initiated termination without cause or a good
reason termination, Mr. Schleyer will be provided severance benefits under the
applicable AT&T Broadband severance plan. In addition, unvested AT&T
contributions to its savings and pension plans on Mr. Schleyer's behalf will be
paid to him after termination. In the event of an AT&T initiated termination
without cause or a good reason termination within two years after a change in
control of AT&T, Mr. Schleyer will be entitled to receive severance benefits
under the applicable AT&T severance arrangements.
PENSION PLANS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
OTHER INFORMATION
XIII-14
CHAPTER FOURTEEN
CERTAIN LEGAL INFORMATION
COMPARISON OF AT&T, COMCAST AND AT&T COMCAST
SHAREHOLDER RIGHTS
This section of this document describes the material differences between
the current rights of AT&T shareholders and Comcast shareholders, on the one
hand, and the rights those shareholders are expected to have as AT&T Comcast
shareholders after completion of the transaction, on the other hand. This
section is limited to the changes arising in connection with the AT&T Comcast
transaction and does not address AT&T Consumer Services Group tracking stock.
See "AT&T Consumer Services Group Tracking Stock." As of the date of this
document, the rights of Comcast shareholders are governed by Pennsylvania law,
the Comcast charter and the Comcast bylaws and the rights of AT&T shareholders
are governed by New York law, the AT&T charter and the AT&T bylaws. Upon
completion of the transaction, Comcast shareholders will become AT&T Comcast
shareholders, AT&T shareholders will become AT&T Comcast shareholders (and will
also remain AT&T shareholders) and the rights of Comcast and AT&T shareholders
who become AT&T Comcast shareholders will be governed by Pennsylvania law, the
AT&T Comcast charter and AT&T Comcast bylaws. This section is not meant to be
complete and is qualified in its entirety by reference to the relevant
provisions of Pennsylvania and New York corporate law, the Comcast charter and
bylaws and the AT&T charter and bylaws, in each case as currently in effect, and
the AT&T Comcast charter and bylaws that will be in effect upon completion of
the transaction, which are more detailed than the information provided below.
A copy of the AT&T Comcast charter that will be in effect upon completion
of the transaction if the Preferred Structure is implemented is attached to this
document as Annex C. A copy of the term sheet describing the differences between
the AT&T Comcast charter that will be in effect upon completion of the
transaction if the Preferred Structure is implemented and the AT&T Comcast
charter that will be in effect upon completion of the transaction if the
Alternative Structure is implemented is attached to this document as Annex D. A
copy of the AT&T Comcast bylaws that will be in effect upon completion of the
transaction is attached to this document as Annex F. Copies of the charter and
bylaws of AT&T and the charter and bylaws of Comcast, in each case as currently
in effect, will be sent to AT&T shareholders and Comcast shareholders, as
applicable, upon request. See "Additional Information for Shareholders -- Where
You Can Find More Information."
SUMMARY OF MATERIAL DIFFERENCES BETWEEN THE CURRENT RIGHTS OF AT&T SHAREHOLDERS
AND THE RIGHTS THOSE SHAREHOLDERS WILL HAVE AS AT&T COMCAST SHAREHOLDERS
FOLLOWING THE COMPLETION OF THE TRANSACTION
AT&T SHAREHOLDER RIGHTS AT&T COMCAST SHAREHOLDER RIGHTS
Authorized The authorized capital stock of AT&T Under the Preferred Structure, the
Capital Stock: consists of 16.4 billion shares of authorized capital stock of AT&T
common stock and 100 million shares of Comcast would consist of 7.5 billion
preferred stock. shares of Class A common stock, 7.5
billion shares of Class A Special
If AT&T Consumer Services Group common stock, 75 million shares of
tracking stock is approved and issued, Class B common stock and 20 million
AT&T will have a new class of AT&T shares of preferred stock.
common stock. For information on this
new class, see "AT&T Consumer Services Under the Alternative Structure, the
Group Tracking Stock." authorized capital stock of AT&T
Comcast would consist of 200 million
shares of Class A common stock, 7.5
billion shares of Class A Special
common stock, 75 million shares of
Class B common stock, 7.5 billion
shares of Class C
XIV-1
AT&T SHAREHOLDER RIGHTS AT&T COMCAST SHAREHOLDER RIGHTS
common stock and 20 million shares of
preferred stock.
Voting Rights: AT&T common stock is the only class of
AT&T capital stock with voting rights
(other than shares of a series of
preferred stock held by subsidiaries of
AT&T).
If the Consumer
Services charter
amendment proposal is
approved and shares of
AT&T Consumer Services
Group tracking stock
are issued, that class
would have votes per
share.
AT&T Comcast Class A common stock, AT&T
Comcast Class B common stock and, under
The voting interest of the Alternative Structure, AT&T Comcast
the AT&T common stock Class C common stock will initially be
may be diluted by the only classes of AT&T Comcast
issuances of other capital stock with voting rights.
classes of AT&T
capital stock with
voting rights.
Unlike the other
classes of AT&T
Comcast voting stock,
subject to specified
exceptions, the voting
interests of the AT&T
Comcast Class B common
stock (33 1/3%) and,
under the Alternative
Structure, the AT&T
Comcast Class A common
stock (5.14%) will not
be diluted by
issuances of other
classes of AT&T
Comcast capital stock
with voting rights.
See "-- Description of
AT&T Comcast Capital
Stock."
XIV-2
AT&T SHAREHOLDER RIGHTS AT&T COMCAST SHAREHOLDER RIGHTS
Approval Rights: No class of AT&T capital stock has Under the Preferred Structure, the
approval rights over any corporate holders of AT&T Comcast Class B common
actions, other than charter amendments stock, voting as a single class, would
and other fundamental changes, as have approval rights over numerous
required by law. specified corporate actions.
Under the Alternative
Structure, the holders
of AT&T Comcast Class
A common stock and
AT&T Comcast Class B
common stock, voting
together as a single
class, would have
approval rights over
numerous specified
corporate actions.
See "-- Description of
AT&T Comcast Capital
Stock -- AT&T Comcast
Class B Common
Stock -- Approval
Rights."
Conversions: The shares of AT&T common stock are not Each share of AT&T Comcast Class B
convertible into any other class of common stock will be convertible into
AT&T capital stock. one share of AT&T Comcast Class A
common stock, AT&T Comcast Class A
Special common stock or, under the
Alternative Structure, AT&T Comcast
Class C common stock.
Election of The entire AT&T Board is elected The term of the initial AT&T Comcast
Directors: annually. Board will expire on the date of the
2005 annual meeting of AT&T Comcast
shareholders, which will be the first
annual meeting of AT&T Comcast
shareholders held after completion of
the transaction. Thereafter, the
entire AT&T Comcast Board will be
elected annually. See "Description of
Governance Arrangements Following the
AT&T Comcast Transaction -- AT&T
Comcast Board of Directors."
Number The AT&T Board currently consists of 11 From the completion of the transaction
of Directors: directors. The AT&T Board may fix the until the 2005 annual meeting of
number of directors at any number shareholders, the AT&T Comcast Board
between 10 and 25. will consist of 12 directors. See
"Description of Governance
Arrangements Following the AT&T
Comcast
XIV-3
AT&T SHAREHOLDER RIGHTS AT&T COMCAST SHAREHOLDER RIGHTS
Transaction -- AT&T Comcast Board of
Directors." Thereafter, the AT&T
Comcast Board will determine the
number of directors on the AT&T
Comcast Board.
Vacancies: Vacancies on the AT&T Board may be From the completion of the transaction
filled by the remaining AT&T directors until the 2005 annual meeting of AT&T
or by the AT&T shareholders. Comcast shareholders, vacancies on the
AT&T Comcast Board will be filled as
described above in "Description of
Governance Arrangements Following the
AT&T Comcast Transaction -- AT&T
Comcast Board of Directors." After the
2005 annual meeting of AT&T Comcast
shareholders, vacancies on the AT&T
Comcast Board may be filled by the
remaining AT&T Comcast directors or by
the AT&T Comcast shareholders.
Nominations of Nominations of individuals for election Nominations of individuals for
Directors: to the AT&T Board may be made by the election to the AT&T Comcast Board
AT&T Board (or a committee of the AT&T will be made by the Directors
Board) or by any AT&T shareholder who Nominating Committee. See "Description
is entitled to vote and follows the of Governance Arrangements Following
proper notice procedures. the AT&T Comcast
Transaction -- Directors Nominating
Committee." In addition, any AT&T
Comcast shareholder who follows the
proper notice procedures will be able
to nominate individuals for election
to the AT&T Comcast Board.
Quorum: The holders of 40% of the outstanding The holders of shares of AT&T Comcast
shares of AT&T common stock constitute capital stock entitled to cast a
a quorum for the transaction of majority of the votes that all AT&T
business at a meeting of AT&T Comcast shareholders are entitled to
shareholders. cast will constitute a quorum for the
transaction of business at a meeting
of AT&T Comcast shareholders.
Shareholder Subject to certain exceptions, a merger Subject to certain exceptions, a
Approval of a involving AT&T or a sale of all or merger involving AT&T Comcast or a
Merger or Sale of substantially all of AT&T's assets sale of all or substantially all of
All or Substantially generally requires approval of a AT&T Comcast's assets generally will
All Assets: majority of the AT&T Board present and require the approval of a majority of
voting (assuming a quorum) and the the AT&T Comcast Board present and
holders of a majority of the voting (assuming a quorum) and the
outstanding shares of AT&T common stock holders of a majority of the votes
(assuming a quorum). cast by the holders of AT&T Comcast
capital stock entitled to vote
(assuming a quorum).
In addition, subject to certain
exceptions, a merger or other
transaction involving AT&T Comcast, in
each case that requires AT&T Comcast
shareholder approval, will also
require the approval of (1) holders of
AT&T Comcast Class B common stock,
voting as a single class, under the
Preferred Structure, and (2) holders
of AT&T
XIV-4
AT&T SHAREHOLDER RIGHTS AT&T COMCAST SHAREHOLDER RIGHTS
Comcast Class A common stock and AT&T
Comcast Class B common stock, voting
together as a single class, under the
Alternative Structure. See
"-- Description of AT&T Comcast
Capital Stock -- AT&T Comcast Class B
Common Stock -- Approval Rights."
Furthermore, Sural LLC is not
permitted to support a merger
involving AT&T Comcast until the tenth
anniversary of the completion of the
transaction unless the merger is
approved by disinterested AT&T Comcast
shareholders. See "Description of the
AT&T Comcast Transaction
Agreements -- The Support Agreement --
Covenants."
Shareholder An AT&T shareholder who wants to bring An AT&T Comcast shareholder who wants
Notice: business before, or nominate directors to bring business before, or nominate
for election at, an annual meeting of directors for election at, an annual
shareholders generally must deliver meeting of shareholders generally will
written notice to AT&T not less than 90 be required to deliver written notice
days but not more than 120 days prior to AT&T Comcast not less than 60 days
to the first anniversary of the but not more than 90 days prior to the
preceding year's annual meeting of first anniversary of the preceding
shareholders. year's annual meeting of shareholders.
Action by AT&T shareholders may not act by Except as described below, AT&T
Written Consent: written consent in lieu of a Comcast shareholders will not be able
shareholder meeting (unless such to act by written consent in lieu of a
consent is unanimous). shareholder meeting.
Holders of AT&T Comcast Class B common
stock and, under the Alternative
Structure, AT&T Comcast Class A common
stock will be permitted to act by
written consent in lieu of a
shareholder meeting to exercise their
specific approval rights over certain
matters. See "-- Description of AT&T
Comcast Capital Stock."
Calling of Special The Chairman of the Board and the AT&T The AT&T Comcast Board will have the
Meetings of Board have the right to call special right to call special meetings of
Shareholders: meetings of shareholders. shareholders.
Amendment of The AT&T charter may be amended with The AT&T Comcast charter will be able
Charter and the approval of a majority of the AT&T to be amended with the approval of a
Bylaws: Board present and voting (assuming a majority of the AT&T Comcast Board
quorum) and holders of a majority of present and voting (assuming a quorum)
the outstanding shares of AT&T common and the holders of a majority of the
stock (assuming a quorum). votes cast by AT&T Comcast
shareholders entitled to vote
(assuming a quorum). However, AT&T
Comcast charter amendments that affect
the director, officer
XIV-5
AT&T SHAREHOLDER RIGHTS AT&T COMCAST SHAREHOLDER RIGHTS
The AT&T bylaws may be amended by the and committee arrangements implemented
AT&T Board or the AT&T shareholders. in connection with the AT&T Comcast
transaction will require the approval
of 75% of the entire AT&T Comcast
Board until the earlier to occur of
(1) the date on which Brian L. Roberts
is no longer Chairman of the AT&T
Comcast Board or CEO of AT&T Comcast,
and (2) April 2010, as well as the
shareholder approval referred to in
the preceding sentence.
The AT&T Comcast bylaws will be able to
be amended only by the AT&T Comcast
Board or by AT&T Comcast shareholders
with the approval of the AT&T Comcast
Board.
Notwithstanding the foregoing, AT&T
Comcast charter and bylaw amendments
that adversely affect the rights of the
holders of the AT&T Comcast Class B
common stock will require the approval
of the holders of the AT&T Comcast
Class B common stock, voting as a
single class, under the Preferred
Structure and the holders of the AT&T
Comcast Class A common stock and AT&T
Comcast Class B common stock, voting
together as a single class, under the
Alternative Structure. See
"-- Description of AT&T Comcast Capital
Stock -- AT&T Comcast Class B Common
Stock -- Approval Rights."
Shareholder AT&T does not have a shareholder rights AT&T Comcast will have a shareholder
Rights Plan: plan. rights plan. See "-- Description of
AT&T Comcast Shareholder Rights Plan."
The existence of this plan may deter
potential acquirors from making an
unsolicited takeover proposal or
tender offer. See "-- Description of
AT&T Comcast Shareholder Rights
Plan -- Anti-Takeover Effects."
Business AT&T has not opted out of New York's AT&T Comcast has opted out of
Combinations business combinations statute, which Pennsylvania's business combinations
Statute: restricts a corporation's ability to statute, which restricts a
engage in certain business combinations corporation's ability to engage in
with holders of shares of capital stock certain business combinations with
representing more than 20% of the holders of shares of capital stock
combined voting power, in an election representing more than 20% of the
of directors, of a corporation's combined voting power, in an election
capital stock. of directors, of a corporation's
capital stock.
XIV-6
SUMMARY OF MATERIAL DIFFERENCES BETWEEN THE CURRENT RIGHTS OF COMCAST
SHAREHOLDERS AND THE RIGHTS THOSE SHAREHOLDERS WILL HAVE AS AT&T COMCAST
SHAREHOLDERS FOLLOWING THE COMPLETION OF THE TRANSACTION
COMCAST SHAREHOLDER RIGHTS AT&T COMCAST SHAREHOLDER RIGHTS
Authorized Capital The authorized capital stock of Comcast Under the Preferred Structure, the
Stock: consists of 200 million shares of Class authorized capital stock of AT&T
A common stock, 2.5 billion shares of Comcast would consist of 7.5 billion
Class A Special common stock, 50 shares of Class A common stock, 7.5
million shares of Class B common stock billion shares of Class A Special
and 20 million shares of preferred common stock, 75 million shares of
stock. Class B common stock and 20 million
shares of preferred stock.
Under the Alternative Structure, the
authorized capital stock of AT&T
Comcast would consist of 200 million
shares of Class A common stock, 7.5
billion shares of Class A Special
common stock, 75 million shares of
Class B common stock, 7.5 billion
shares of Class C common stock and 20
million shares of preferred stock.
Voting Rights: Comcast Class A common stock and AT&T Comcast Class A common stock,
Comcast Class B common stock are the AT&T Comcast Class B common stock and,
only classes of Comcast capital stock under the Alternative Structure, AT&T
with voting rights (1 vote per share Comcast Class C common stock will
and 15 votes per share, respectively). initially be the only classes of AT&T
Comcast capital stock with voting
The voting interests of the holders of rights.
the Comcast Class A common stock and
Comcast Class B common stock (currently Unlike the other classes of AT&T
approximately 13.4% and 86.6%, Comcast voting stock, subject to
respectively) may be diluted by specified exceptions, the voting
issuances of other classes of Comcast interests of the AT&T Comcast Class B
capital stock with voting rights. common stock (33 1/3%) and, under the
Alternative Structure, the AT&T
Comcast Class A common stock (5.14%)
will not be diluted by issuances of
other classes of AT&T Comcast capital
stock with voting rights.
See "-- Description of AT&T Comcast
Capital Stock."
Approval Rights: No class of Comcast capital stock has Under the Preferred Structure, the
approval rights over any corporate holders of AT&T Comcast Class B common
actions, except as required by law. stock, voting as a single class, would
have approval rights over numerous
specified corporate actions.
Under the Alternative Structure, the
holders of AT&T Comcast Class A common
stock and AT&T Comcast Class B common
stock, voting together as a single
class, would have approval rights over
numerous specified corporate actions.
See "-- Description of AT&T Comcast
XIV-7
COMCAST SHAREHOLDER RIGHTS AT&T COMCAST SHAREHOLDER RIGHTS
Capital Stock -- AT&T Comcast Class B
Common Stock -- Approval Rights."
Conversions: Each share of Comcast Class B common Each share of AT&T Comcast Class B
stock is convertible into one share of common stock will be convertible into
Comcast Class A common stock or Comcast one share of AT&T Comcast Class A
Class A Special common stock. common stock, AT&T Comcast Class A
Special common stock or, under the
Alternative Structure, AT&T Comcast
Class C common stock.
Election of Directors: The entire Comcast Board is elected The term of the initial AT&T Comcast
annually. Board will expire on the date of the
2005 annual meeting of AT&T Comcast
shareholders, which will be the first
annual meeting of AT&T Comcast
shareholders held after completion of
the transaction. Thereafter, the
entire AT&T Comcast Board will be
elected annually. See "Description of
Governance Arrangements Following the
AT&T Comcast Transaction -- AT&T
Comcast Board of Directors."
Removal of Directors: Comcast directors may be removed, with AT&T Comcast directors will be able to
or without cause, by the Comcast be removed only for cause by AT&T
shareholders. Comcast shareholders.
Number of Directors: The Comcast Board currently consists of From the completion of the transaction
ten directors. The Comcast Board may until the 2005 annual meeting of
change the number of directors at any shareholders, the AT&T Comcast Board
time. will consist of 12 directors. See
"Description of Governance
Arrangements Following the AT&T
Comcast Transaction -- AT&T Comcast
Board of Directors." Thereafter, the
AT&T Comcast Board will determine the
number of directors on the AT&T
Comcast Board.
Vacancies: Vacancies on the Comcast Board may be From the completion of the transaction
filled by the remaining Comcast until the 2005 annual meeting of AT&T
directors or by the Comcast Comcast shareholders, vacancies on the
shareholders. AT&T Comcast Board will be filled as
described above in "Description of
Governance Arrangements Following the
AT&T Comcast Transaction -- AT&T
Comcast Board of Directors." After the
2005 annual meeting of AT&T Comcast
shareholders, vacancies on the AT&T
Comcast Board may be filled by the
remaining AT&T Comcast directors or by
the AT&T Comcast shareholders.
Nominations of Nominations of individuals for election Nominations of individuals for
Directors: to the Comcast Board may be made by the election to the AT&T Comcast Board
Comcast Board (or will be made by the Directors
Nominating Committee. See
XIV-8
COMCAST SHAREHOLDER RIGHTS AT&T COMCAST SHAREHOLDER RIGHTS
a committee of the Comcast Board) or by "Description of Governance
any Comcast shareholder who follows the Arrangements Following the AT&T
proper notice procedures. Comcast Transaction -- Directors
Nominating Committee." In addition,
any AT&T Comcast shareholder who
follows the proper notice procedures
will be able to nominate individuals
for election to the AT&T Comcast
Board.
Shareholder Approval Subject to certain exceptions, a merger Subject to certain exceptions, a
of a Merger or Sale of involving Comcast or a sale of all or merger involving AT&T Comcast or a
All or Substantially substantially all of Comcast's assets sale of all or substantially all of
All Assets: generally requires the approval of a AT&T Comcast's assets generally will
majority of the Comcast Board present require the approval of a majority of
and voting (assuming a quorum) and the the AT&T Comcast Board present and
holders of a majority of the votes cast voting (assuming a quorum) and holders
by the holders of Comcast capital stock of a majority of the votes cast by
entitled to vote (assuming a quorum). holders of AT&T Comcast capital stock
entitled to vote (assuming a quorum).
In addition, subject to certain
exceptions, a merger or other
transaction involving AT&T Comcast, in
each case that requires AT&T Comcast
shareholder approval, will also
require the approval of (1) holders of
AT&T Comcast Class B common stock,
voting as a single class, under the
Preferred Structure, and (2) holders
of AT&T Comcast Class A common stock
and AT&T Comcast Class B common stock,
voting together as a single class,
under the Alternative Structure. See
"-- Description of AT&T Comcast
Capital Stock -- AT&T Comcast Class B
Common Stock -- Approval Rights."
Furthermore, Sural LLC is not
permitted to support a merger
involving AT&T Comcast until the tenth
anniversary of the completion of the
transaction unless the merger is
approved by disinterested AT&T Comcast
shareholders. See "-- Description of
the AT&T Comcast Transaction
Agreements -- The Support Agreement --
Covenants."
Action by Written Comcast shareholders may not act by Except as described below, AT&T
Consent: written consent in lieu of a Comcast shareholders will not be able
shareholder meeting (unless such to act by written consent in lieu of a
consent is unanimous). shareholder meeting.
XIV-9
COMCAST SHAREHOLDER RIGHTS AT&T COMCAST SHAREHOLDER RIGHTS
Holders of AT&T Comcast Class B common
stock and, under the Alternative
Structure, AT&T Comcast Class A common
stock will be permitted to act by
written consent in lieu of a
shareholder meeting to exercise their
specific approval rights over certain
matters. See "-- Description of AT&T
Comcast Capital Stock."
Calling of Special The Chairman of the Board, the The AT&T Comcast Board will have the
Meetings of President and the Comcast Board have right to call special meetings of
Shareholders: the right to call special meetings of shareholders.
shareholders.
Amendment of Charter The Comcast charter may be amended with The AT&T Comcast charter will be able
and Bylaws: the approval of a majority of the to be amended with the approval of a
Comcast Board present and voting majority of the AT&T Comcast Board
(assuming a quorum) and the holders of present and voting (assuming a quorum)
a majority of the votes cast by the and the holders of a majority of the
shareholders entitled to vote (assuming votes cast by AT&T Comcast
a quorum). shareholders entitled to vote
(assuming a quorum). However, AT&T
The Comcast bylaws may be amended by Comcast charter amendments that affect
the Comcast Board or the Comcast the director, officer and committee
shareholders. arrangements implemented in connection
with the AT&T Comcast transaction will
require the approval of 75% of the
entire AT&T Comcast Board until the
earlier to occur of (1) the date on
which Brian L. Roberts is no longer
Chairman of the AT&T Comcast Board or
CEO of AT&T Comcast, and (2) April
2010, as well as the shareholder
approval referred to in the preceding
sentence.
The AT&T Comcast bylaws will be able
to be amended only by the AT&T Comcast
Board or by the AT&T Comcast
shareholders with the approval of the
AT&T Comcast Board.
Notwithstanding the foregoing, AT&T
Comcast charter and bylaw amendments
that adversely affect the rights of
the holders of the AT&T Comcast Class
B common stock will require the
approval of the holders of the AT&T
Comcast Class B common stock, voting
as a single class, under the Preferred
Structure and the holders of the AT&T
Comcast Class A common stock and AT&T
Comcast Class B common stock, voting
together as a single class, under the
Alternative Structure. See
"-- Description of AT&T Comcast
Capital Stock -- AT&T Comcast Class B
Common Stock -- Approval Rights."
XIV-10
COMCAST SHAREHOLDER RIGHTS AT&T COMCAST SHAREHOLDER RIGHTS
Shareholder Rights Comcast does not have a shareholder AT&T Comcast will have a shareholder
Plan: rights plan. rights plan. See "-- Description of
AT&T Comcast Shareholder Rights Plan."
The existence of this plan may deter
potential acquirors from making an
unsolicited takeover proposal or
tender offer. See "-- Description of
AT&T Comcast Shareholder Rights
Plan -- Anti-Takeover Effects."
Business Combinations Comcast has not opted out of AT&T Comcast has opted out of
Statute: Pennsylvania's business combinations Pennsylvania's business combinations
statute, which restricts a statute, which restricts a
corporation's ability to engage in corporation's ability to engage in
certain business combinations with certain business combinations with
holders of shares of capital stock holders of shares of capital stock
representing more than 20% of the representing more than 20% of the
combined voting power, in an election combined voting power, in an election
of directors, of a corporation's of directors, of a corporation's
capital stock. capital stock.
DESCRIPTION OF AT&T COMCAST CAPITAL STOCK
This section of this document describes the material terms of the capital
stock of AT&T Comcast that will be issued in the transaction under the charter
and bylaws that will be in effect after the completion of the transaction. This
section is not meant to be complete and is qualified in its entirety by
reference to the AT&T Comcast charter and AT&T Comcast bylaws that will be in
effect upon the completion of the transaction, which are more detailed than the
information provided below. A copy of the AT&T Comcast charter that will be in
effect upon completion of the transaction if the Preferred Structure is
implemented is attached to this document as Annex C. A copy of the term sheet
describing the differences between the AT&T Comcast charter that will be in
effect upon completion of the transaction if the Preferred Structure is
implemented and the AT&T Comcast charter that will be in effect upon completion
of the transaction if the Alternative Structure is implemented is attached to
this document as Annex D. A copy of the AT&T Comcast bylaws that will be in
effect upon completion of the transaction is attached to this document as Annex
F.
AUTHORIZED CAPITAL STOCK
Under the Preferred Structure, the authorized capital stock of AT&T Comcast
will consist of 7.5 billion shares of Class A common stock, 7.5 billion shares
of Class A Special common stock, 75 million shares of Class B common stock and
20 million shares of preferred stock.
Under the Alternative Structure, the authorized capital stock of AT&T
Comcast will consist of 200 million shares of Class A common stock, 7.5 billion
shares of Class A Special common stock, 75 million shares of Class B common
stock, 7.5 billion shares of Class C common stock and 20 million shares of
preferred stock.
AT&T COMCAST CLASS A COMMON STOCK
AT&T Comcast Class A Common Stock Outstanding. The outstanding shares of
AT&T Comcast Class A common stock will be duly authorized, validly issued, fully
paid and nonassessable.
Voting Rights. Under the Preferred Structure, on all matters submitted for
a vote of the holders of all classes of AT&T Comcast voting stock, the holders
of the AT&T Comcast Class A common stock in the aggregate will hold 66 2/3% of
the combined voting power of the AT&T Comcast capital stock upon
XIV-11
completion of the transaction. Unlike the AT&T Comcast Class B common stock
under the Preferred Structure, the aggregate voting interest of the AT&T Comcast
Class A common stock under the Preferred Structure will be dilutable and will
decrease upon the issuance of shares of any other class of AT&T Comcast capital
stock with voting rights (other than any issuance of additional shares of AT&T
Comcast Class B common stock). Based on the number of shares of AT&T Comcast
Class A common stock anticipated to be outstanding upon completion of the AT&T
Comcast transaction if the Preferred Structure is implemented, each share of
AT&T Comcast Class A common stock will have [ ] of a vote upon completion of
the AT&T Comcast transaction.
Under the Alternative Structure, subject to the following two sentences, on
all matters submitted for a vote of the holders of all classes of AT&T Comcast
voting stock, the holders of the AT&T Comcast Class A common stock and AT&T
Comcast Class B common stock in the aggregate will hold 5.14% and 33 1/3%,
respectively, of the combined voting power of the AT&T Comcast capital stock
upon completion of the transaction, regardless of the number of shares of AT&T
Comcast Class C common stock or any other class of AT&T Comcast capital stock
outstanding at any time. If the number of shares of AT&T Comcast Class A common
stock or AT&T Comcast Class B common stock outstanding upon completion of the
transaction is reduced for any reason (e.g., by repurchase or, in the case of
the AT&T Comcast Class B common stock only, conversion) after the completion of
the transaction, the aggregate voting power of the applicable class of AT&T
Comcast capital stock will be proportionately reduced. If additional shares of
AT&T Comcast Class A common stock or AT&T Comcast Class B common stock are
issued in disproportionate amounts after the completion of the transaction, the
relative aggregate voting percentages of the two classes of AT&T Comcast common
stock will change (based on the principle that each share of AT&T Comcast Class
B common stock will be entitled to 15 times the vote of each share of AT&T
Comcast Class A common stock) but the combined aggregate voting percentage of
the two classes of stock will remain constant at approximately 38 47/100%
(except to the extent there has been a reduction in the aggregate voting power
of either class of stock as described in the preceding sentence). Under the
Alternative Structure, each share of AT&T Comcast Class A common stock will have
one vote and each share of AT&T Comcast Class B common stock will have 15 votes,
in each case upon completion of the AT&T Comcast transaction.
Approval Rights. Under the Preferred Structure, except as required by law,
holders of AT&T Comcast Class A common stock will have no specific approval
rights over any AT&T Comcast corporate actions. Under the Alternative Structure,
holders of AT&T Comcast Class A common stock and holders of AT&T Comcast Class B
common stock, voting together as a single class, will have the approval rights
described under "-- AT&T Comcast Class B Common Stock -- Approval Rights."
Conversion Rights. The shares of AT&T Comcast Class A common stock will
not be convertible into shares of any other class of AT&T Comcast capital stock.
Preemptive Rights. The holders of AT&T Comcast Class A common stock will
have no preemptive rights to purchase, subscribe for or otherwise acquire any
unissued or treasury shares or other securities.
AT&T COMCAST CLASS B COMMON STOCK
AT&T Comcast Class B Common Stock Outstanding. The outstanding shares of
AT&T Comcast Class B common stock will be duly authorized, validly issued, fully
paid and nonassessable.
Voting Rights. Under the Preferred Structure, subject to the next
sentence, on all matters submitted for a vote of holders of all classes of AT&T
Comcast voting stock, holders of AT&T Comcast Class B common stock in the
aggregate will hold 33 1/3% of the combined voting power of AT&T Comcast capital
stock upon completion of the AT&T Comcast transaction, regardless of the number
of shares of AT&T Comcast Class A common stock or any other class of AT&T
Comcast capital stock outstanding at any time. If the number of shares of AT&T
Comcast Class B common stock outstanding upon completion of the transaction is
reduced for any reason (e.g., by repurchase or conversion) after the completion
of the transaction, the aggregate voting power of the AT&T Comcast Class B
common stock will be
XIV-11
proportionately reduced. Under the Preferred Structure, each share of AT&T
Comcast Class B common stock will have 15 votes upon completion of the AT&T
Comcast transaction.
Under the Alternative Structure, the voting rights of AT&T Comcast Class B
common stock will be as described above in the second paragraph under "-- AT&T
Comcast Class A Common Stock -- Voting Rights."
Approval Rights. Under the Preferred Structure, the holders of AT&T
Comcast Class B common stock will have an approval right over (1) any merger of
AT&T Comcast with another company or any other transaction, in each case that
requires AT&T Comcast shareholder approval under applicable law, or any other
transaction that would result in any person or group owning shares representing
in excess of 10% of the combined voting power of the resulting or surviving
corporation, or any issuance of securities (other than pursuant to director or
officer stock option or purchase plans) requiring AT&T Comcast shareholder
approval under the rules and regulations of any stock exchange or quotation
system; (2) any issuance of AT&T Comcast Class B common stock or any securities
exercisable or exchangeable for or convertible into AT&T Comcast Class B common
stock; and (3) charter amendments (such as a charter amendment to opt in to any
of the Pennsylvania antitakeover statutes) and other actions (such as the
adoption, amendment or redemption of a shareholder rights plan) that limit the
rights of holders of AT&T Comcast Class B common stock or any subsequent
transferee of AT&T Comcast Class B common stock to transfer, vote or otherwise
exercise rights with respect to AT&T Comcast capital stock.
Under the Alternative Structure, holders of AT&T Comcast Class B common
stock and AT&T Comcast Class A common stock, voting together as a single class,
will have the same approval rights that holders of AT&T Comcast Class B common
stock have under the Preferred Structure. In addition, under the Alternative
Structure, the approval of holders of AT&T Comcast Class B common stock and AT&T
Comcast Class A common stock, voting together as a single class, will also be
required to issue any AT&T Comcast Class A common stock or any securities
exercisable or exchangeable for or convertible into AT&T Comcast Class A common
stock.
Conversion Rights. Each share of AT&T Comcast Class B common stock will be
convertible into one share of AT&T Comcast Class A common stock, AT&T Comcast
Class A Special common stock or, under the Alternative Structure, AT&T Comcast
Class C common stock.
Preemptive Rights. The holders of AT&T Comcast Class B common stock will
have no preemptive rights to purchase, subscribe for or otherwise acquire any
unissued or treasury shares or other securities.
AT&T COMCAST CLASS A SPECIAL COMMON STOCK
AT&T Comcast Class A Special Common Stock Outstanding. The outstanding
shares of AT&T Comcast Class A Special common stock will be duly authorized,
validly issued, fully paid and nonassessable.
Voting Rights. Except as required by law, the holders of AT&T Comcast
Class A Special common stock will not be entitled to vote.
Approval Rights. Except as required by law, holders of AT&T Comcast Class
A Special common stock will have no specific approval rights over any AT&T
Comcast corporate actions.
Conversion Rights. The shares of AT&T Comcast Class A Special common stock
will not be convertible into shares of any other class of AT&T Comcast capital
stock.
Preemptive Rights. Holders of AT&T Comcast Class A Special common stock
will have no preemptive rights to purchase, subscribe for or otherwise acquire
any unissued or treasury shares or other securities.
XIV-12
AT&T COMCAST CLASS C COMMON STOCK
AT&T Comcast Class C common stock will be authorized and issued only if the
Alternative Structure is implemented.
AT&T Comcast Class C Common Stock Outstanding. The outstanding shares of
AT&T Comcast Class C common stock will be duly authorized, validly issued, fully
paid and nonassessable.
Voting Rights. On all matters submitted for a vote of the holders of all
classes of AT&T Comcast voting stock, holders of AT&T Comcast Class C common
stock in the aggregate will hold approximately 61 53/100% of the combined voting
power of AT&T Comcast capital stock upon completion of the transaction. Unlike
AT&T Comcast Class A common stock and AT&T Comcast Class B common stock under
the Alternative Structure, the aggregate voting interest of AT&T Comcast Class C
common stock will be dilutable and will decrease upon the issuance of shares of
any other class of AT&T Comcast capital stock with voting rights (other than any
issuance of additional shares of AT&T Comcast Class A common stock or AT&T
Comcast Class B common stock). Based on the number of shares of AT&T Comcast
Class C common stock anticipated to be outstanding upon completion of the AT&T
Comcast transaction, each share of AT&T Comcast Class C common stock will have
[ ] of a vote upon completion of the AT&T Comcast transaction.
Approval Rights. Except as required by law, holders of AT&T Comcast Class
C common stock will have no specific approval rights over any AT&T Comcast
corporate actions.
Conversion Rights. The shares of AT&T Comcast Class C common stock will
not be convertible into shares of any other class of AT&T Comcast capital stock.
Preemptive Rights. Holders of AT&T Comcast Class C common stock will have
no preemptive rights to purchase, subscribe for or otherwise acquire any
unissued or treasury shares or other securities.
AT&T COMCAST PREFERRED STOCK
AT&T Comcast Preferred Stock Outstanding. It is not anticipated that any
shares of AT&T Comcast preferred stock will be outstanding upon completion of
the transaction.
Blank Check Preferred Stock. Under the AT&T Comcast charter, the AT&T
Comcast Board will have the authority, without shareholder approval, to create
and issue one or more series of preferred stock, without par value, in whole or
fractional shares, with full, limited, multiple, fractional, or no voting
rights, and with such designations, preferences, qualifications, privileges,
limitations, restrictions, options, conversion rights, and other special or
relative rights as it so chooses. Acting under this authority, the AT&T Comcast
Board could create and issue a class or series of preferred stock with rights,
privileges or restrictions, and adopt a shareholder rights plan, having the
effect of discriminating against an existing or prospective holder of securities
as a result of that shareholder beneficially owning or commencing a tender offer
for a substantial amount of AT&T Comcast voting capital stock. One of the
effects of authorized but unissued and unreserved shares of capital stock may be
to render more difficult or discourage an attempt by a potential acquiror to
obtain control of AT&T Comcast by means of a merger, tender offer, proxy contest
or otherwise, and thereby protect the continuity of AT&T Comcast's management.
The issuance of such shares of capital stock may have the effect of delaying,
deferring or preventing a change in control of AT&T Comcast without any further
action by the shareholders of AT&T Comcast.
Pursuant to the authority described in the preceding paragraph, prior to
the completion of the transaction the AT&T Comcast Board will designate a series
of preferred stock in connection with the adoption of the AT&T Comcast
shareholder rights plan described below. See "-- Description of AT&T Comcast
Shareholder Rights Plan."
DIVIDEND RIGHTS
The holders of AT&T Comcast Class A common stock, AT&T Comcast Class A
Special common stock, AT&T Comcast Class B common stock and, under the
Alternative Structure, AT&T Comcast
XIV-13
Class C common stock will be entitled to receive, from time to time, when, as
and if declared, in the discretion of the AT&T Comcast Board, such cash
dividends as the AT&T Comcast Board may from time to time determine, out of such
funds as are legally available therefor, in proportion to the number of shares
held by them, respectively, without regard to class.
The holders of AT&T Comcast Class A common stock, AT&T Comcast Class A
Special common stock, AT&T Comcast Class B common stock and, under the
Alternative Structure, AT&T Comcast Class C common stock will also be entitled
to receive, from time to time, when, as and if declared by the AT&T Comcast
Board, such dividends of stock of AT&T Comcast or other property as the AT&T
Comcast Board may determine, out of such funds as are legally available
therefor. However, stock dividends on, or stock splits of, any class of common
stock will not be paid or issued unless paid or issued on all classes of AT&T
Comcast common stock, in which case they will be paid or issued only in shares
of that class; provided, however, that stock dividends on, or stock splits of,
AT&T Comcast Class B common stock may also be paid or issued in shares of AT&T
Comcast Class A Special common stock.
RIGHTS UPON LIQUIDATION
In the event of any liquidation, dissolution or winding up (either
voluntary or involuntary) of AT&T Comcast, holders of AT&T Comcast Class A
common stock, AT&T Comcast Class A Special common stock, AT&T Comcast Class B
common stock and, under the Alternative Structure, AT&T Comcast Class C common
stock will be entitled to receive the assets and funds of AT&T Comcast in
proportion to the number of shares held by them, respectively, without regard to
class.
TRANSFER AGENT AND REGISTRAR
EquiServe is the transfer agent and registrar for Comcast common stock and
AT&T common stock as of the date of this document. [ ] is expected to be
the transfer agent and registrar for AT&T Comcast common stock.
STOCK EXCHANGE LISTINGS
It is a condition to the mergers that the shares of AT&T Comcast Class A
common stock, AT&T Comcast Class A Special common stock and, under the
Alternative Structure, AT&T Comcast Class C common stock to be issued in the
mergers have been approved for listing on The Nasdaq Stock Market, subject to
official notice of issuance.
XIV-14
DESCRIPTION OF AT&T COMCAST SHAREHOLDER RIGHTS PLAN
Upon completion of the transaction, AT&T Comcast will adopt a shareholder
rights plan pursuant to a rights agreement the material terms of which are set
forth below.
The Rights. The AT&T Comcast rights agreement will provide for the
declaration by the AT&T Comcast Board of a dividend of one preferred stock
purchase right (the "Rights") for each outstanding share of AT&T Comcast Class A
common stock, AT&T Comcast Class A Special common stock, AT&T Comcast Class B
common stock and, under the Alternative Structure, AT&T Comcast Class C common
stock. The dividend will be payable to holders of record as of the close of
business on the record date selected by the AT&T Comcast Board, which date will
occur no later than ten days after the closing date of the transaction.
The Rights will not entitle the holders to any rights of a shareholder of
AT&T Comcast, such as voting and dividend rights, but the rights agreement will
include standard antidilution provisions to protect the effectiveness of the
Rights.
The transferability and exercisability of the Rights will depend on whether
a "Distribution Date" has occurred. A Distribution Date generally means the
earlier of (1) the tenth day after a public announcement that any person or
group has become an "Acquiring Person" and (2) the tenth business day after the
date of the commencement of a tender or exchange offer by any person that could
result in such person becoming an Acquiring Person. An Acquiring Person
generally means any person or group (other than any holder of AT&T Comcast Class
B common stock or any of such holder's affiliates) who becomes the beneficial
owner of AT&T Comcast voting capital stock that represents 10% or more of the
total number of votes that the holders of AT&T Comcast capital stock are
entitled to cast with respect to any matter presented for a shareholder vote.
Transferability. Prior to the Distribution Date, (1) the Rights will be
evidenced by the certificates of the relevant underlying common stock and the
registered holders of the common stock shall be deemed the registered holders of
the associated Rights and (2) the Rights will be transferable only in connection
with transfers of shares of the underlying common stock. After the Distribution
Date, the rights agent will mail separate certificates evidencing the Rights to
each holder of the relevant underlying common stock as of the close of business
on the Distribution Date. Thereafter, the Rights will be transferable separately
from the common stock.
Exercisability. The Rights will not be exercisable prior to the
Distribution Date. After the Distribution Date, but prior to the occurrence of
an event described below under "-- 'Flip In' Feature" or "-- 'Flip Over'
Feature," each Right will be exercisable to purchase for a price equal to
approximately five times the market price for a share of AT&T Comcast Class A
common stock (under the Preferred Structure) or AT&T Comcast Class C common
stock (under the Alternative Structure) at the time of adoption of the
shareholder rights plan one one-thousandth of a share of AT&T Comcast Series A
Participating Cumulative Preferred Stock.
"Flip In" Feature. If any person becomes an Acquiring Person, each holder
of a Right, except for the Acquiring Person or certain affiliated persons, will
have the right to acquire, instead of one one-hundredth of a share of AT&T
Comcast Series A Participating Cumulative Preferred Stock, a number of shares of
AT&T Comcast Class A common stock (under the Preferred Structure) or AT&T
Comcast Class C common stock (under the Alternative Structure), in each case
having a market value equal to twice the exercise price of the Right. For
example, if an initial purchase price of $200 were in effect on the date that
the flip in feature of the Rights were exercised, any holder of a Right, except
for the person that has become an Acquiring Person or certain affiliated
persons, could exercise his or her Right by paying to AT&T Comcast $200 in order
to receive shares of AT&T Comcast Class A common stock (under the Preferred
Structure) or AT&T Comcast Class C common stock (under the Alternative
Structure) having a value equal to $400.
"Exchange" Feature. At any time after a person becomes an Acquiring Person
(but before any person becomes the beneficial owner of AT&T Comcast voting
capital stock representing 50% or more of
XIV-15
the total number of votes which the holders of AT&T Comcast capital stock are
entitled to cast with respect to any matter presented for a shareholder vote),
the AT&T Comcast Board may exchange all or some of the Rights, except for those
held by any Acquiring Person or certain affiliated persons, for AT&T Comcast
Class A common stock (under the Preferred Structure) at an exchange ratio of one
share of AT&T Comcast Class A common stock for each Right or for AT&T Comcast
Class C common stock (under the Alternative Structure) at an exchange ratio of
one share of AT&T Comcast Class C common stock for each Right. Use of this
exchange feature means that eligible Rights holders would not have to pay cash
before receiving shares of either AT&T Comcast Class A common stock or AT&T
Comcast Class C common stock, as applicable.
"Flip Over" Feature. If, after a person becomes an Acquiring Person, (1)
AT&T Comcast is involved in a merger or other business combination in which it
is not the surviving corporation or any of its common stock is exchanged for
other securities or assets or (2) AT&T Comcast and/or one or more of its
subsidiaries sell or transfer assets or earning power aggregating 50% or more of
the assets or earning power of AT&T Comcast and/or its subsidiaries, then each
Right will entitle the holder, except for any Acquiring Person or certain
affiliated persons, to purchase a number of shares of common stock of the other
party to the transaction having a value equal to twice the exercise price of the
Right.
Redemption of Rights. The AT&T Comcast Board may redeem all of the Rights
at a price of $0.001 per Right at any time prior to the time that any person
becomes an Acquiring Person. The right to exercise will terminate upon
redemption, and at that time, the holders of the Rights will have the right to
receive only the redemption price for each Right they hold.
Amendment of Rights. At any time before a person becomes an Acquiring
Person, the terms of the rights agreement may be amended in any respect by AT&T
Comcast without the approval of the holders of the Rights. However, after the
date any person becomes an Acquiring Person, the rights agreement may not be
amended in any manner that would adversely affect the interests of the holders
of the Rights (other than any person who has become an Acquiring Person and
certain affiliated persons) or cause the Rights to be redeemable at that time.
Expiration of Rights. If not previously exercised or redeemed, the Rights
will expire on the tenth anniversary of the completion of the transaction,
unless earlier exchanged or redeemed.
Anti-Takeover Effects. The Rights have anti-takeover effects. Once the
Rights have become exercisable, in most cases they will cause substantial
dilution to a person who attempts to acquire or merge with AT&T Comcast.
Accordingly, the existence of the Rights may deter potential acquirors from
making a takeover proposal or a tender offer. The Rights should not interfere
with any merger or other business combination approved by the AT&T Comcast Board
because the Board may either redeem the Rights or amend the rights agreement so
that a transaction it approves would not cause the Rights to become exercisable.
Taxation. The dividend of the Rights will not be taxable to AT&T Comcast
shareholders, but shareholders may recognize taxable income if the Rights become
exercisable as set forth above.
Series A Preferred Stock. In connection with the creation of the Rights,
the AT&T Comcast Board will authorize the issuance of shares of AT&T Comcast
preferred stock designated as AT&T Comcast Series A Participating Cumulative
Preferred Stock. AT&T Comcast will design the dividend, liquidation, voting and
redemption features of the AT&T Comcast Series A Participating Cumulative
Preferred Stock so that the value of one-thousandth of a share of AT&T Comcast
Series A Participating Cumulative Preferred Stock approximates the value of one
share of AT&T Comcast Class A common stock (under the Preferred Structure) or
one share of AT&T Comcast Class C common stock (under the Alternative
Structure). Shares of AT&T Comcast Series A Participating Cumulative Preferred
Stock will be purchasable only after the Rights have become exercisable. The
rights of the AT&T Comcast Series A Participating Cumulative Preferred Stock as
to dividends, liquidation and voting, and in the event of mergers or
consolidations, are protected by customary antidilution provisions.
XIV-16
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This document contains "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements may be
made directly in this document referring to Comcast, AT&T and AT&T Comcast, and
they may also be made a part of this document by reference to other documents
filed with the SEC by Comcast and AT&T, which is known as "incorporation by
reference." These statements may include statements regarding the period
following completion of the transaction.
Words such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe" and words and terms of similar substance used in connection
with any discussion of future operating or financial performance, or the
transaction, identify forward-looking statements. All forward-looking statements
are management's present expectations of future events and are subject to a
number of factors and uncertainties that could cause actual results to differ
materially from those described in the forward-looking statements. In addition
to the risks related to the businesses of Comcast and AT&T, the factors relating
to the transaction discussed under "Summary and Overview of the
Transactions -- Risk Factors," among others, could cause actual results to
differ materially from those described in the forward-looking statements.
Shareholders are cautioned not to place undue reliance on the forward-looking
statements, which speak only as of the date of this document or as of the date
of any document incorporated by reference in this document, as applicable. None
of Comcast, AT&T or AT&T Comcast is under any obligation, and each expressly
disclaims any obligation, to update or alter any forward-looking statements,
whether as a result of new information, future events or otherwise.
For additional information about factors that could cause actual results to
differ materially from those described in the forward-looking statements, please
see the annual reports on Form 10-K and the quarterly reports on Form 10-Q that
Comcast and AT&T have filed with the SEC.
All subsequent forward-looking statements attributable to Comcast, AT&T or
AT&T Comcast or any person acting on their behalf are expressly qualified in
their entirety by the cautionary statements contained or referred to in this
section.
LEGAL MATTERS
The validity of the shares of AT&T Comcast common stock to be issued to
Comcast shareholders and AT&T Broadband shareholders in the mergers will be
passed upon for AT&T Comcast by Wolf, Block, Schorr and Solis-Cohen LLP and
Drinker Biddle & Reath LLP. Davis Polk & Wardwell, counsel for Comcast, and
Wachtell, Lipton, Rosen & Katz, counsel for AT&T, will pass upon certain federal
income tax consequences of the transaction for Comcast and AT&T, respectively.
EXPERTS
The financial statements and the related financial statement schedules of
Comcast incorporated in this document by reference from Comcast's Annual Report
on Form 10-K for the year ended December 31, 2000 have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports, which are
incorporated herein by reference, and have been so incorporated in reliance upon
the reports of such firm given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of QVC, Inc. and subsidiaries for the
year ended December 31, 1998 have been audited by KPMG LLP, independent
auditors, as stated in their report, which is incorporated herein by reference,
and has been so incorporated in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The balance sheet of AT&T Comcast as of December 7, 2001 included in this
document has been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report, appearing herein, and is so included in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
XIV-17
The financial statements of AT&T Corp. included in this Registration
Statement, except as they relate to Liberty Media Group, have been audited by
PricewaterhouseCoopers LLP, independent accountants, whose report thereon
appears herein, and insofar as they relate to Liberty Media Group, by KPMG LLP,
independent accountants, whose report thereon is incorporated by reference. Such
financial statements have been so included in reliance on the reports of such
independent accountants, given on the authority of such firms as experts in
auditing and accounting.
The financial statements of AT&T Broadband Group as of December 31, 2000
and 1999, and for the year ended December 31, 2000 and for the ten-month period
ended December 31, 1999 included in this Registration Statement have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of AT&T Consumer Services Group as of December 31,
2000 and 1999 and for each of the three years in the period ended December 31,
2000 included in this Registration Statement have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
The combined balance sheets of Liberty Media Group ("New Liberty or
Successor") as of December 31, 2000 and 1999, and the related combined
statements of operations and comprehensive earnings, net attributed assets, and
cash flows for the year ended December 31, 2000 and for the period from March 1,
1999 to December 31, 1999 (Successor periods) and from January 1, 1999 to
February 28, 1999 and for the year ended December 31, 1998 (Predecessor periods)
which appear as an exhibit to the Annual Report on Form 10-K/A, dated April 17,
2001, of AT&T, have been incorporated by reference herein in reliance upon the
report, dated February 26, 2001, of KPMG LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
The KPMG LLP report dated February 26, 2001 refers to the fact that the
financial statements should be read in conjunction with the consolidated
financial statements of AT&T.
In addition, the KPMG LLP report contains an explanatory paragraph that
states that, effective March 9, 1999, AT&T, the owner of the assets comprising
New Liberty, acquired Tele-Communications, Inc., the owner of the assets
comprising Old Liberty, in a business combination accounted for as a purchase.
As a result of the acquisition, the combined financial information for the
periods after the acquisition is presented on a different cost basis than that
for the periods before the acquisition and, therefore, is not comparable.
The consolidated balance sheets of Tele-Communications, Inc. and its
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations and comprehensive earnings, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1998, which appear in the Current Report on Form 8-K, dated March 28, 2001, of
AT&T have been incorporated by reference herein in reliance upon the report
dated March 9, 1999, of KPMG LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
The consolidated balance sheets of MediaOne Group, Inc. as of December 31,
1999 and 1998, and the related consolidated statements of operations,
shareowners' equity and cash flows for each of the three years in the period
ended December 31, 1999, filed in AT&T's Form 8-K dated March 28, 2001,
incorporated by reference in this registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are incorporated by reference herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said report.
XIV-18
CHAPTER FIFTEEN
ADDITIONAL INFORMATION FOR SHAREHOLDERS
FUTURE SHAREHOLDER PROPOSALS
COMCAST
Comcast will hold an annual meeting of shareholders in the year 2003 only
if the transaction has not already been completed. If such meeting is held, the
deadline for receipt of a proposal to be considered for inclusion in Comcast's
proxy statement for the 2003 annual meeting is . Notice of a
proposal to be considered by shareholders at the 2003 annual meeting but not
included in Comcast's proxy statement must be received between
and (however, if the date of the annual meeting is more than 30
days before or after , then such notice must be received not later than
ten days following the day on which notice of the date of the meeting was mailed
or on which public announcement of the date of the meeting was made, whichever
occurs first). Any such notice of a proposal should be directed to the attention
of Stanley Wang, Executive Vice President and Secretary, Comcast Corporation,
1500 Market Street, 35th floor, Philadelphia, Pennsylvania 19102-2148.
AT&T
The deadline for receipt of a proposal to be considered for inclusion in
AT&T's proxy statement for the 2003 annual meeting is . Notice of
a proposal to be considered by shareholders at the 2003 annual meeting but not
included in AT&T's proxy statement must be received no later than 5:00 p.m.
E.S.T. on . Any such notice of a proposal should be sent via
registered, certified or express mail to Vice President - Law and Secretary,
AT&T Corp., 32 Avenue of the Americas, New York, New York 10013-2412.
WHERE YOU CAN FIND MORE INFORMATION
Comcast and AT&T file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information Comcast and AT&T file at the SEC's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
room. Comcast's and AT&T's SEC filings are also available to the public from
commercial document retrieval services and at the web site maintained by the SEC
at http://www.sec.gov.
AT&T Comcast filed a registration statement on Form S-4 to register with
the SEC the AT&T Comcast common stock to be issued to Comcast and AT&T Broadband
shareholders in the mergers. This document is a part of that registration
statement and constitutes a prospectus of AT&T Comcast in addition to being a
proxy statement of Comcast and AT&T for their respective meetings. As allowed by
SEC rules, this document does not contain all the information you can find in
the registration statement or the exhibits to the registration statement.
The SEC allows Comcast and AT&T to "incorporate by reference" information
into this document, which means that Comcast and AT&T can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be part of this
document, except for any information superseded by information in, or
incorporated by reference in, this document. This document incorporates by
reference the documents set forth below that Comcast and AT&T have previously
filed with the SEC. These documents contain important information about the
companies and their finances.
XV-1
COMCAST SEC FILINGS (FILE NO. 1-15471) PERIOD
--------------------------------------------- ---------------------------------------------
Annual Report on Form 10-K Year ended December 31, 2000
Quarterly Report on Form 10-Q Quarters ended March 31, 2001, June 30, 2001
and September 30, 2001
Current Reports on Form 8-K Filed on January 4, 2001, July 9, 2001 and
December 20, 2001
AT&T SEC FILINGS (FILE NO. 1-1105) PERIOD
--------------------------------------------- ---------------------------------------------
Annual Report on Form 10-K Year ended December 31, 2000
Quarterly Report on Form 10-Q Quarters ended March 31, 2001, June 30, 2001
and September 30, 2001
Current Reports on Form 8-K Filed on February 16, 2001, March 1, 2001,
March 28, 2001, March 29, 2001 (as amended on
April 11, 2001), April 19, 2001, April 27,
2001, May 22, 2001, June 19, 2001, July 19,
2001, July 24, 2001, September 24, 2001,
October 23, 2001, December 21, 2001, January
4, 2002 and February 5, 2002
Comcast and AT&T are also incorporating by reference into this document
additional documents that Comcast and AT&T have filed with the SEC between the
date of this document and the date of the meetings.
Comcast has supplied all information contained or incorporated by reference
in this document relating to Comcast and AT&T has supplied all information
contained or incorporated by reference in this document relating to AT&T, AT&T
Broadband or AT&T's broadband business.
If you are a shareholder, Comcast and AT&T may have sent you some of the
documents incorporated by reference, but you can obtain any of them through
Comcast, AT&T or the SEC. Documents incorporated by reference in this document
are available from Comcast and AT&T without charge, excluding all exhibits
unless Comcast and AT&T have specifically incorporated by reference an exhibit
in this document. Shareholders may obtain documents incorporated by reference in
this document by requesting them in writing or by telephone from the Secretary
of the appropriate company at the following address:
Comcast Corporation AT&T Corp.
1500 Market Street 32 Avenue of the Americas
Philadelphia, Pennsylvania 19102-2148 New York, New York 10013-2412
Tel: (215) 665-1700 Tel: (212) 387-5400
Attn: Office of the Corporate Attn: Office of the Corporate
Secretary Secretary
IF YOU WOULD LIKE TO REQUEST DOCUMENTS FROM COMCAST OR AT&T, PLEASE DO SO
BY [ ], 2002 TO RECEIVE THEM BEFORE YOUR MEETING.
You can also get more information by visiting Comcast's web site at
www.comcast.com and AT&T's web site at www.att.com. Web site materials are not
part of this document.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS DOCUMENT TO VOTE ON THE TRANSACTION AT YOUR MEETING. COMCAST
AND AT&T HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS
DIFFERENT FROM WHAT IS CONTAINED IN THIS DOCUMENT. THIS DOCUMENT IS DATED
[ ], 2002. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN
THIS DOCUMENT IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE, AND NEITHER THE
MAILING OF THIS DOCUMENT TO SHAREHOLDERS NOR THE ISSUANCE OF AT&T COMCAST COMMON
STOCK IN THE MERGERS OR AT&T CONSUMER SERVICES GROUP TRACKING STOCK AS A
DIVIDEND TO AT&T SHAREHOLDERS OR OTHERWISE SHALL CREATE ANY IMPLICATION TO THE
CONTRARY.
XV-2
---------------------
ANNEXES
---------------------
ANNEX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF
DECEMBER 19, 2001
BY AND AMONG
AT&T CORP.,
AT&T BROADBAND CORP.,
COMCAST CORPORATION,
AT&T BROADBAND ACQUISITION CORP.,
COMCAST ACQUISITION CORP.
AND
AT&T COMCAST CORPORATION
TABLE OF CONTENTS
------------------------
PAGE
----
ARTICLE 1 DEFINITIONS
Section
1.01. Definitions................................................. A-1
ARTICLE 2 PARENT AND MERGER SUBS
Section
2.01. Organization of Parent...................................... A-15
Section
2.02. Directors and Officers of Parent............................ A-15
Section
2.03. Organization of Merger Subs................................. A-15
Section
2.04. Actions of Comcast and AT&T................................. A-15
Section
2.05. Rights Plan................................................. A-16
ARTICLE 3 THE MERGERS
Section
3.01. The AT&T Broadband Merger................................... A-16
Section
3.02. The Comcast Merger.......................................... A-16
Section
3.03. Certificate and Articles of Incorporation; Bylaws........... A-16
Section
3.04. Directors and Officers of the Surviving Corporations........ A-17
Section
3.05. Alternative Structure....................................... A-17
ARTICLE 4 CONVERSION OF SECURITIES
Section
4.01. Conversion of Securities.................................... A-17
Section
4.02. Exchange of Certificates.................................... A-20
Section
4.03. Section 355(e) Top-up....................................... A-25
Section
4.04. Additional Payment.......................................... A-25
Section
4.05. Additional Exchange Arrangements............................ A-26
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF COMCAST
Section
5.01. Corporate Existence and Power............................... A-26
Section
5.02. Corporate Authorization..................................... A-26
Section
5.03. Governmental Authorization.................................. A-26
Section
5.04. Non-contravention........................................... A-27
Section
5.05. Capitalization.............................................. A-27
Section
5.06. Subsidiaries................................................ A-28
Section
5.07. SEC Filings................................................. A-28
Section
5.08. Financial Statements........................................ A-29
Section
5.09. Information Supplied........................................ A-29
Section
5.10. Absence of Certain Changes.................................. A-29
Section
5.11. No Undisclosed Material Liabilities......................... A-29
Section
5.12. Compliance with Laws and Court Orders....................... A-30
Section
5.13. Litigation.................................................. A-30
Section
5.14. Finders' Fees............................................... A-30
Section
5.15. Opinion of Financial Advisor................................ A-30
Section
5.16. Taxes....................................................... A-30
Section
5.17. Tax Opinions................................................ A-31
Section
5.18. Employee Benefit Plans and Labor Matters.................... A-31
Section
5.19. Environmental Matters....................................... A-32
Section
5.20. Intellectual Property....................................... A-33
A-i
PAGE
----
Section
5.21. Contracts................................................... A-33
Section
5.22. Vote Required............................................... A-34
Section
5.23. Antitakeover Statutes; Charter and Bylaw Provisions......... A-34
Section
5.24. AT&T Securities............................................. A-34
Section
5.25. Transactions with Affiliates................................ A-34
Section
5.26. Investments................................................. A-34
Section
5.27. No Approval Rights.......................................... A-34
ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF AT&T
Section
6.01. Corporate Existence and Power............................... A-34
Section
6.02. Corporate Authorization..................................... A-35
Section
6.03. Governmental Authorization.................................. A-35
Section
6.04. Non-contravention........................................... A-36
Section
6.05. Capitalization.............................................. A-36
Section
6.06. AT&T Broadband and AT&T Broadband Subsidiaries.............. A-37
Section
6.07. SEC Filings................................................. A-38
Section
6.08. Financial Statements........................................ A-38
Section
6.09. Information Supplied........................................ A-38
Section
6.10. Absence of Certain Changes.................................. A-39
Section
6.11. No Undisclosed Material Liabilities......................... A-39
Section
6.12. Compliance with Laws and Court Orders....................... A-39
Section
6.13. Litigation.................................................. A-39
Section
6.14. Finders' Fees............................................... A-40
Section
6.15. Opinion of Financial Advisor................................ A-40
Section
6.16. Taxes....................................................... A-40
Section
6.17. Tax Opinions................................................ A-40
Section
6.18. Employee Benefit Plans and Labor Matters.................... A-40
Section
6.19. Environmental Matters....................................... A-42
Section
6.20. Intellectual Property....................................... A-43
Section
6.21. Contracts................................................... A-43
Section
6.22. AT&T Shareholder Vote....................................... A-44
Section
6.23. Antitakeover Statutes....................................... A-44
Section
6.24. Comcast Securities.......................................... A-44
Section
6.25. TWE; At Home................................................ A-44
Section
6.26. Intercompany Transactions................................... A-45
Section
6.27. Sufficiency of Transferred Assets........................... A-45
Section
6.28. Investments................................................. A-46
ARTICLE 7 COVENANTS OF COMCAST
Section
7.01. Comcast Interim Operations.................................. A-46
Section
7.02. Comcast Shareholders' Meeting; Proxy Material............... A-48
Section
7.03. Voting Agreement............................................ A-48
ARTICLE 8 COVENANTS OF AT&T
Section
8.01. AT&T Broadband Interim Operations........................... A-49
Section
8.02. AT&T Shareholders' Meeting; Proxy Material.................. A-53
Section
8.03. No Solicitation............................................. A-53
A-ii
PAGE
----
Section
8.04. Ancillary Agreements........................................ A-55
Section
8.05. Neutrality Agreement........................................ A-55
Section
8.06. Broadband Employees......................................... A-56
Section
8.07. AT&T Post-Signing Equity Awards............................. A-56
Section
8.08. Redemption of TCI Pacific Preferred Stock................... A-56
Section
8.09. Note Consent Process........................................ A-56
ARTICLE 9 COVENANTS OF AT&T, COMCAST AND PARENT
Section
9.01. Best Efforts................................................ A-56
Section
9.02. Joint Proxy Statement; Registration Statement............... A-57
Section
9.03. Public Announcements........................................ A-58
Section
9.04. Further Assurances.......................................... A-58
Section
9.05. Access to Information....................................... A-58
Section
9.06. Tax-free Transactions....................................... A-59
Section
9.07. Affiliates.................................................. A-59
Section
9.08. Governance and Other Matters................................ A-59
Section
9.09. Notices of Certain Events................................... A-59
Section
9.10. Section 16 Matters.......................................... A-60
Section
9.11. Director and Officer Liability.............................. A-60
Section
9.12. Listing of Stock............................................ A-61
Section
9.13. Employee Matters............................................ A-61
Section
9.14. Employment Agreements....................................... A-62
Section
9.15. Interim Finance Committee................................... A-62
Section
9.16. TOPRS....................................................... A-63
Section
9.17. Consideration............................................... A-63
Section
9.18. QUIPS....................................................... A-64
Section
9.19. Index Stock................................................. A-66
Section
9.20. Use of Name and Logo........................................ A-66
Section
9.21. Exchange Agreement.......................................... A-66
Section
9.22. Significant Excepted Transactions........................... A-66
Section
9.23. Comcast's AT&T Stock........................................ A-67
ARTICLE 10 CONDITIONS TO THE MERGERS
Section
10.01. Conditions to the Obligations of Each Party................. A-68
Section
10.02. Conditions to the Obligations of AT&T....................... A-69
Section
10.03. Conditions to the Obligations of Comcast.................... A-70
ARTICLE 11 TERMINATION
Section
11.01. Termination................................................. A-70
Section
11.02. Effect of Termination....................................... A-71
Section
11.03. Fees and Expenses........................................... A-72
ARTICLE 12 MISCELLANEOUS
Section
12.01. Notices..................................................... A-73
Section
12.02. Survival.................................................... A-74
Section
12.03. Amendments; No Waivers...................................... A-74
Section
12.04. Successors and Assigns...................................... A-74
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PAGE
----
Section
12.05. Governing Law............................................... A-75
Section
12.06. Jurisdiction................................................ A-75
Section
12.07. WAIVER OF JURY TRIAL........................................ A-75
Section
12.08. Counterparts; Effectiveness................................. A-75
Section
12.09. Entire Agreement; No Third Party Beneficiaries.............. A-75
Section
12.10. Severability................................................ A-75
Section
12.11. Specific Performance........................................ A-75
Section
12.12. Schedules................................................... A-76
EXHIBITS AND SCHEDULES
Exhibit A -- Form of Support Agreement
Exhibit B -- Form of Rule 145 Affiliate Letter
Exhibit C -- Form of Separation and Distribution Agreement
Exhibit D-1 -- Form of Parent Charter (Preferred Structure)
Exhibit D-2 -- Term Sheet for Parent Charter (Alternative Structure)
Exhibit D-3 -- Form of Parent Bylaws
Exhibit D-4 -- Form of Comcast Articles Amendment
Exhibit E -- AT&T Broadband Financial Statements (12/31/00 and 9/30/01)
Exhibit F -- Admission Agreement
AT&T Disclosure Schedule
Comcast Disclosure Schedule
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "AGREEMENT"), dated as of December 19,
2001, by and among AT&T Corp., a New York corporation ("AT&T"), AT&T Broadband
Corp., a Delaware corporation and a wholly owned subsidiary of AT&T ("AT&T
BROADBAND"), Comcast Corporation, a Pennsylvania corporation ("COMCAST"), AT&T
Comcast Corporation, a Pennsylvania corporation ("PARENT"), AT&T Broadband
Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of
Parent ("AT&T BROADBAND MERGER SUB"), and Comcast Acquisition Corp., a
Pennsylvania corporation and a wholly owned subsidiary of Parent ("COMCAST
MERGER SUB").
WHEREAS, AT&T Broadband is a newly formed wholly owned subsidiary of AT&T
that will hold, directly or indirectly, all of the assets and liabilities of the
AT&T Broadband Group in accordance with the terms and conditions of the
Separation and Distribution Agreement (as defined below);
WHEREAS, the Boards of Directors of AT&T, AT&T Broadband and Comcast and
each of the other parties hereto have approved this Agreement and deem it
advisable and in the best interests of their respective shareholders to
consummate the transactions contemplated hereby on the terms and conditions set
forth herein;
WHEREAS, immediately prior to the execution and delivery of this Agreement,
as a condition and inducement to AT&T's willingness to enter into this
Agreement, each of Sural LLC ("COMCAST SHAREHOLDER"), Mr. Brian L. Roberts,
Comcast and Parent has executed and delivered to AT&T the support agreement,
dated as of the date hereof, in the form attached as Exhibit A (the "SUPPORT
AGREEMENT");
WHEREAS, it is intended that, for United States federal income tax
purposes, the Mergers (as defined below) shall qualify as tax-free exchanges
described in Section 351 of the Internal Revenue Code of 1986, as amended (the
"CODE"), and the rules and regulations promulgated thereunder;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, the
parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions. (a) The following terms, as used herein, have
the following meanings:
"1933 ACT" means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
"1934 ACT" means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.
"A SHAREHOLDER APPROVAL" means the approval, by a majority of the votes
cast, of the holders of the Comcast Class A Common Stock (voting as a class at a
meeting at which a quorum is present) of this Agreement and the transactions
contemplated by this Agreement and the Articles Amendment.
"ADDITIONAL COMMERCIAL AGREEMENTS" has the meaning set forth in the
Separation and Distribution Agreement.
"ADMISSION AGREEMENT" means the Instrument of Admission, in the form
attached hereto as Exhibit F, pursuant to which AT&T and Parent will become
parties to the Exchange Agreement.
"AFFILIATE" means, with respect to any Person, any other Person, directly
or indirectly, controlling, controlled by, or under common control with such
Person.
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"AGGREGATE FORMER EMPLOYEE BROADBAND OPTION AMOUNT" means:
(a) if the AT&T Common Stock trades "ex-distribution" or "when issued
(to give effect to the Distribution)" on the NYSE on or immediately prior
to the Distribution Date, the excess of (i) the product of the aggregate
number of shares of AT&T Broadband Common Stock subject to Broadband
Options granted pursuant to Section 5.3(b) of the Employee Benefits
Agreement, multiplied by the Broadband Common Stock Value (as defined in
the Employee Benefits Agreement), over (ii) the aggregate exercise price of
such Broadband Options; and
(b) if the AT&T Common Stock does not trade "ex-distribution" or "when
issued (to give effect to the Distribution)" on the NYSE on or immediately
prior to the Distribution Date, the product of
(i) a fraction, the numerator or which is the product of the
Comcast Stock Price multiplied by the Preliminary Exchange Ratio, and
the denominator of which is the AT&T Closing Stock Value; times
(ii) the excess of (i) the product of the aggregate number of
shares of AT&T Common Stock subject to unexercised AT&T Options held by
Former Employees (both as defined in the Employee Benefits Agreement)
immediately prior to the Distribution Date, times the AT&T Closing Stock
Value, over (ii) the aggregate exercise price of such AT&T Options.
"ANCILLARY AGREEMENTS" has the meaning set forth in the Separation and
Distribution Agreement.
"AOL" means AOL Time Warner Inc., a Delaware corporation.
"ARTICLES AMENDMENT" mean the articles of amendment to the articles of
incorporation of Comcast in the form attached as Exhibit D-4.
"AT HOME" means At Home Corporation, a Delaware corporation and/or its
bankruptcy estate, as the case may be.
"AT&T 10-K" means AT&T's annual report on Form 10-K for the fiscal year
ended December 31, 2000.
"AT&T BALANCE SHEET" means the consolidated balance sheet of AT&T and its
consolidated Subsidiaries as of December 31, 2000 and the footnotes thereto, as
set forth in the AT&T 10-K.
"AT&T BROADBAND ACQUISITION PROPOSAL" means any offer or proposal for, or
any indication of interest in (i) a merger, consolidation, share exchange,
business combination, reorganization, recapitalization or other similar
transaction involving AT&T, the AT&T Broadband Group, AT&T Broadband or any AT&T
Significant Broadband Subsidiary, (ii) the acquisition, directly or indirectly,
of (A) an equity interest representing greater than 25% of the voting securities
of AT&T, the AT&T Broadband Group, AT&T Broadband or any AT&T Significant
Broadband Subsidiary or (B) assets, securities or ownership interests
representing an amount equal to or greater than 25% of the consolidated assets
or EBITDA generating power of the AT&T Broadband Group, or (iii) any transaction
(x) the entering into or the consummation of which would reasonably be expected
to be inconsistent in any material respect with the consummation of the
transactions contemplated by this Agreement and the other Transaction
Agreements, on the terms set forth in this Agreement and the other Transaction
Agreements, as the case may be, or (y) that would reasonably be expected to
prevent or materially delay, impede or adversely affect the consummation of the
transactions contemplated by this Agreement and the other Transaction Agreements
other than (X) in the case of (i) or (ii), (I) the transactions contemplated by
this Agreement, (II) transactions permitted pursuant to Section 8.01 or (III)
transactions that would not directly or indirectly (other than indirectly by
virtue of the ownership of securities of AT&T) include any of the businesses,
assets or liabilities of, or materially affect the business of, AT&T (to the
extent relating to the AT&T Broadband Group), the AT&T Broadband Group, AT&T
Broadband or any AT&T Broadband Subsidiary and (Y) in the case of (i), (ii) or
(iii), a transaction that does not involve the AT&T Broadband Group, AT&T
Broadband or any AT&T Broadband Subsidiary (except to the extent
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relating to (A) the transactions contemplated by this Agreement and the other
Transaction Agreements or (B) a spin-off of the AT&T Broadband Group
substantially pro rata to the holders of AT&T Common Stock not in connection
with any other transaction involving the AT&T Broadband Group) that in any such
case is consistent in all material respects with the consummation of the
transactions contemplated by this Agreement and the other Transaction
Agreements, on the terms set forth in this Agreement and the other Transaction
Agreements, as the case may be; provided that each of the parties to such
transaction agrees that AT&T and AT&T Broadband shall honor the terms and
conditions of this Agreement (any transaction referred to in this clause (Y), an
"EXCEPTED TRANSACTION").
"AT&T BROADBAND ASSETS" has the meaning set forth in the Separation and
Distribution Agreement.
"AT&T BROADBAND BALANCE SHEET" means the unaudited combined balance sheet
of the AT&T Broadband Group as of September 30, 2001 and the footnotes thereto,
as attached as Exhibit E.
"AT&T BROADBAND BALANCE SHEET DATE" means September 30, 2001.
"AT&T BROADBAND BUSINESS" has the meaning set forth in the Separation and
Distribution Agreement.
"AT&T BROADBAND COMMON STOCK" means the Common Stock, par value $0.01 per
share, of AT&T Broadband, which, subject to the terms of the Separation and
Distribution Agreement, will be distributed on a one-for-one basis on the
Distribution Date to holders of shares of AT&T Common Stock.
"AT&T BROADBAND ENTITIES" has the meaning set forth in the Separation and
Distribution Agreement.
"AT&T BROADBAND FINANCIAL STATEMENTS" means the unaudited combined
financial statements of the AT&T Broadband Group as of and for the periods
ending December 31, 2000 and September 30, 2001 and the footnotes thereto, as
attached as Exhibit E.
"AT&T BROADBAND GROUP" has the meaning set forth in the Separation and
Distribution Agreement.
"AT&T BROADBAND MATERIAL ADVERSE EFFECT" means a material adverse effect on
the financial condition, assets or results of operations of the AT&T Broadband
Group, taken as a whole, excluding any such effect resulting from or arising in
connection with (i) changes or conditions generally affecting the industries in
which the AT&T Broadband Group (including AT&T Broadband and all the AT&T
Broadband Subsidiaries) operate, (ii) changes in general economic, regulatory or
political conditions, or (iii) the announcement of this Agreement or of the
transactions contemplated hereby.
"AT&T BROADBAND SUBSIDIARY" has the meaning set forth in the Separation and
Distribution Agreement.
"AT&T CLOSING STOCK VALUE" has the meaning set forth in the Employee
Benefits Agreement.
"AT&T COMMON STOCK" means the Common Stock, par value $1.00 per share, of
AT&T.
"AT&T COMMUNICATIONS BUSINESS" has the meaning set forth in the Exchange
Agreement.
"AT&T COMMUNICATIONS GROUP" has the meaning set forth in the Separation and
Distribution Agreement.
"AT&T CONFIDENTIALITY AGREEMENT" means the confidentiality letter
agreement, dated September 28, 2001, as amended, by and between AT&T and Comcast
providing for, among other things, confidential treatment of information
provided by AT&T to Comcast.
"AT&T DISCLOSURE SCHEDULE" means the AT&T disclosure schedule delivered to
Comcast concurrently herewith.
"AT&T EMPLOYEES" has the meaning set forth in the Separation and
Distribution Agreement.
"AT&T ESPP" means the AT&T Employee Stock Purchase Plan.
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"AT&T EXCHANGEABLE PREFERRED STOCK" has the meaning set forth in the
definition of Exchange Amount.
"AT&T GROUP" means AT&T together with the AT&T Subsidiaries.
"AT&T REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement dated as of June 11, 2001 between Comcast PC Investments Inc. and
AT&T.
"AT&T SIGNIFICANT BROADBAND SUBSIDIARY" means any AT&T Broadband Subsidiary
that would have constituted a "significant subsidiary" (within the meaning of
Rule 1-02 of Regulation S-X of the SEC) of the AT&T Broadband Group as of
December 31, 2000 if, as of such date, the AT&T Broadband Group were a reporting
company under the 1934 Act; provided that for purposes hereof, the phrase
"EBITDA" will be substituted for the phrase "income from continuing operations
before income taxes, extraordinary items and cumulative effect of a change in
accounting principle" in Rule 1-02(w)(3).
"AT&T SIGNIFICANT SUBSIDIARY" means any AT&T Subsidiary that would
constitute a "significant subsidiary" (within the meaning of Rule 1-02 of
Regulation S-X of the SEC) as of December 31, 2000; provided that for purposes
hereof, the phrase "EBITDA" will be substituted for the phrase "income from
continuing operations before income taxes, extraordinary items and cumulative
effect of a change in accounting principle" in Rule 1-02(w)(3).
"AT&T SUBSIDIARY" means a Subsidiary of AT&T; provided that notwithstanding
the Distribution, AT&T Broadband and the AT&T Broadband Subsidiaries will be
treated as AT&T Subsidiaries through the Effective Time but not thereafter.
"AVERAGE CLASS A PRICE" means the average (rounded to the nearest 1/10,000)
of the Trading Values for the 10 Trading Days randomly selected by lot by AT&T
and Comcast from the Trading Days occurring during the Pricing Period, which 10
Trading Days shall be the same as the 10 Trading Days used to calculate the
Average Class A Special Price.
"AVERAGE CLASS A SPECIAL PRICE" means the average (rounded to the nearest
1/10,000) of the Trading Values for the 10 Trading Days randomly selected by lot
by AT&T and Comcast from the Trading Days occurring during the Pricing Period.
"AVERAGE CLASS C PRICE" means the average (rounded to the nearest 1/10,000)
of the Trading Values for the 10 Trading Days randomly selected by lot by AT&T
and Comcast from the Trading Days occurring during the Pricing Period, which 10
Trading Days shall be the same as the 10 Trading Days used to calculate the
Average Class A Special Price.
"BENEFIT ARRANGEMENT" means, with respect to any Person, any employment,
severance or similar contract or arrangement (whether or not written) or any
plan, policy, fund, program or arrangement or contract providing for
compensation, bonus, profit-sharing, stock option, or other stock-related rights
or other forms of incentive or deferred compensation, vacation benefits,
insurance coverage (including any self-insured arrangements), health or medical
benefits, disability benefits, workers' compensation, supplemental unemployment
benefits, severance benefits and post-employment or retirement benefits
(including compensation, pension, health, medical or life insurance or other
benefits) that (i) is not an Employee Plan, (ii) is entered into, maintained,
administered or contributed to or required to be contributed to, as the case may
be, by such Person or any of its Affiliates and (iii) covers any employee or
former employee of such Person or any of its Subsidiaries employed in the United
States.
"BROADBAND BENEFIT ARRANGEMENT" means a Benefit Arrangement that is a
Broadband Benefit Plan as defined in the Employee Benefits Agreement.
"BROADBAND DEFERRED COMPENSATION PLAN" means a Deferred Compensation Plan
that is a Broadband Plan as defined in the Employee Benefits Agreement.
"BROADBAND EMPLOYEE" has the meaning set forth in the Employee Benefits
Agreement, except that for purposes of this Agreement, "Broadband Employee"
shall include any Broadband Transferee, and for
A-4
purposes of Section 9.13, "Broadband Employee" shall not include any current or
former non-employee director of AT&T Broadband with respect to service as a
director.
"BROADBAND EMPLOYEE PLAN" means an Employee Plan that is a Broadband
Benefit Plan as defined in the Employee Benefits Agreement.
"BROADBAND INTERNATIONAL PLAN" means an International Plan that is a
Broadband Benefit Plan as defined in the Employee Benefits Agreement.
"BROADBAND OPTIONS" has the meaning set forth in the Employee Benefits
Agreement.
"BROADBAND PENSION PLAN" means a Pension Plan that is a Broadband Benefit
Plan as defined in the Employee Benefits Agreement.
"BROADBAND TRANSFEREE" has the meaning set forth in the Employee Benefits
Agreement.
"BROADBAND VALUE" means the product of the Exchange Ratio multiplied by the
average (rounded to the nearest 1/10,000) of the Trading Values of Comcast Class
A Common Stock for the 10 Combined Trading Days randomly selected by lot by AT&T
and Comcast from the Combined Trading Days occurring during the 20 consecutive
Combined Trading Days following the Closing Date.
"BUSINESS DAY" means a day other than a Saturday, Sunday or other day on
which commercial banks in New York City are authorized or required by law to
close.
"CLASS A LIBERTY MEDIA GROUP COMMON STOCK" means the Class A Liberty Media
Group Common Stock, par value $1.00 per share, of AT&T.
"CLASS B LIBERTY MEDIA GROUP COMMON STOCK" means the Class B Liberty Media
Group Common Stock, par value $1.00 per share, of AT&T.
"CLOSING DATE" means the date on which the Effective Time occurs.
"COMBINED TRADING DAY" means any day which is both a Trading Day and a NYSE
Trading Day.
"COMCAST 10-Q" means Comcast's annual report on Form 10-Q for the fiscal
quarter ended September 30, 2001.
"COMCAST AFFILIATE" means an Affiliate of Comcast.
"COMCAST BALANCE SHEET" means the unaudited consolidated balance sheet of
Comcast and its consolidated Subsidiaries as of September 30, 2001 and the
footnotes thereto, as set forth in the Comcast 10-Q.
"COMCAST BALANCE SHEET DATE" means September 30, 2001.
"COMCAST BENEFIT ARRANGEMENTS" means the Benefit Arrangements of Comcast or
any Comcast Subsidiary.
"COMCAST CLASS A COMMON STOCK" means the Class A Common Stock, par value
$1.00 per share, of Comcast.
"COMCAST CLASS A SPECIAL COMMON STOCK" means the Class A Special Common
Stock, par value $1.00 per share, of Comcast.
"COMCAST CLASS B COMMON STOCK" means the Class B Common Stock, par value
$1.00 per share, of Comcast.
"COMCAST COMMON STOCK" means the Comcast Class A Common Stock, the Comcast
Class A Special Common Stock and the Comcast Class B Common Stock.
"COMCAST CONFIDENTIALITY AGREEMENT" means the confidentiality letter
agreement, dated September 28, 2001, as the same may be amended from time to
time, by and between AT&T and
A-5
Comcast providing for, among other things, confidential treatment of information
provided by Comcast to AT&T.
"COMCAST DEFERRED COMPENSATION PLAN" means a Deferred Compensation Plan of
Comcast or any Comcast Affiliate for the benefit of any current or former
employee or director of Comcast or any Comcast Subsidiary.
"COMCAST DISCLOSURE SCHEDULE" means the Comcast disclosure schedule
delivered to AT&T concurrently herewith.
"COMCAST EMPLOYEE PLAN" means an Employee Plan of Comcast or any Comcast
Subsidiary.
"COMCAST ESPP" means the Comcast Employee Stock Purchase Plan.
"COMCAST GROUP" means Comcast together with the Comcast Subsidiaries.
"COMCAST INTERNATIONAL PLAN" means an International Plan of Comcast or any
Comcast Subsidiary.
"COMCAST MATERIAL ADVERSE EFFECT" means a material adverse effect on the
financial condition, assets or results of operations of the Comcast Group taken
as a whole, excluding any such effect resulting from or arising in connection
with (i) changes or conditions generally affecting the industries in which
Comcast and the Comcast Subsidiaries, operate, (ii) changes in general economic,
regulatory or political conditions, or (iii) the announcement of this Agreement
or of the transactions contemplated hereby.
"COMCAST PENSION PLAN" means a Pension Plan of Comcast or any of its ERISA
Affiliates.
"COMCAST SIGNIFICANT SUBSIDIARY" means any Comcast Subsidiary that would
constitute a "significant subsidiary" (within the meaning of Rule 1-02 of
Regulation S-X of the SEC) as of December 31, 2000; provided that for purposes
hereof, the phrase "EBITDA" will be substituted for the phrase "income from
continuing operations before income taxes, extraordinary items and cumulative
effect of a change in accounting principle" in Rule 1-02(w)(3).
"COMCAST STOCK PRICE" means the average (rounded to the nearest 1/10,000)
of the Trading Values of Comcast Class A Common Stock for the five consecutive
Trading Days immediately preceding the Distribution Date.
"COMCAST SUBSIDIARY" means a Subsidiary of Comcast.
"COMMUNICATIONS ACT" means the Communications Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"COMMUNICATIONS VALUE" means the average (rounded to the nearest 1/10,000)
of the Trading Values of AT&T Common Stock for the 10 Combined Trading Days
randomly selected by lot by AT&T and Comcast from the Combined Trading Days
occurring during the 20 consecutive Combined Trading Days following the Closing
Date, which shall be the same 10 Combined Trading Days as used for the
calculation of Broadband Value.
"CONFIDENTIALITY AGREEMENTS" means the AT&T Confidentiality Agreement and
the Comcast Confidentiality Agreement.
"DEBENTURES" means the 5% Junior Convertible Subordinated Debentures due
2029 of AT&T.
"DEFERRED COMPENSATION PLAN" means, with respect to any Person, any plan,
agreement or arrangement that (i) is described under Sections 4(b)(5) or
401(a)(1) of ERISA (or similar plan covering one or more non-employee directors
of a Person), (ii) is maintained, administered or contributed to or required to
be contributed to or required to be contributed to by such Person or any of its
Affiliates and (iii) covers any current or former employee or director of such
Person or any of its Subsidiaries.
"DGCL" means the Delaware General Corporation Law.
"DISTRIBUTION" has the meaning set forth in the Separation and Distribution
Agreement.
A-6
"DISTRIBUTION DATE" has the meaning set forth in the Separation and
Distribution Agreement.
"DIVIDEND STOCK" has the meaning set forth in the definition of Exchange
Amount.
"EBITDA" means operating income plus depreciation plus amortization, in
each case as determined in accordance with GAAP.
"EMPLOYEE BENEFITS AGREEMENT" has the meaning set forth in the Separation
and Distribution Agreement.
"EMPLOYEE PLAN" means, with respect to any Person, any "employee benefit
plan" (as defined in Section 3(3) of ERISA) that (i) is subject to any provision
of ERISA, (ii) is maintained, administered or contributed to or required to be
contributed to by such Person or any of its Affiliates and (iii) covers any
employee or former employee of such Person or any of its Subsidiaries.
"ENVIRONMENTAL LAWS" means any United States federal, state or local,
foreign or supranational law (including common law), treaty, judicial decision,
regulation, rule, judgment, order, decree, injunction, permit or governmental
restriction or requirement or any agreement with any Governmental Authority or
other third party, relating to human health and safety, the environment or to
pollutants, contaminants, wastes or chemicals or any toxic, radioactive,
ignitable, corrosive, reactive or otherwise hazardous substances, wastes or
materials.
"ENVIRONMENTAL PERMITS" means, with respect to any Person, all permits,
licenses, franchises, certificates, approvals and other similar authorizations
of any Governmental Authority relating to or required by Environmental Laws and
affecting, or relating in any way to, the business of such Person or any of its
Subsidiaries as currently conducted.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations promulgated thereunder.
"ERISA AFFILIATE" of any Person means any other Person that, together with
such Person, would be treated as a single employer under Section 414 of the
Code.
"EXCEPTED TRANSACTION" has the meaning set forth in the definition of AT&T
Broadband Acquisition Proposal.
"EXCHANGE AGREEMENT" means the Exchange Agreement dated as of December 7,
2001 between Comcast and Microsoft.
"EXCHANGE AMOUNT" means an amount "K" where "K" is derived from the
following equation:
K = (Tx (B + C))/C
provided that in no event shall K exceed the product of 10.0% multiplied by
the total number of shares of AT&T Common Stock that would be outstanding
immediately after giving effect to the exchange of the AT&T Exchangeable
Preferred Stock.
The variables used to calculate K pursuant to the foregoing formula are
defined as follows:
"T" is the number of shares of AT&T Common Stock held by Comcast and
any Comcast Subsidiary immediately prior to the Distribution.
"B" is the Broadband Value.
"C" is the Communications Value.
"EXCHANGE DATE" has the meaning set forth in Section 9.23.
"EXCHANGE RATIO" means the value, "X", as defined below (and rounded to the
nearest 1/10,000). The purpose of the Exchange Ratio is to determine the number
of shares of Parent Common Stock that will be delivered in exchange for each
outstanding share of AT&T Broadband Common Stock at the
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Effective Time, and to adjust for the value of certain employee options and
stock appreciation rights to be assumed by Parent as of the Effective Time.
"X" is defined according to the following formula:
1,235,000,000 - (I + F)/C
X = -------------------------
O
The variables used in calculating X pursuant to the foregoing formula are
defined as follows:
"C" is the Comcast Stock Price.
"O" is (i) the number of shares of AT&T Broadband Common Stock
outstanding immediately prior to the AT&T Broadband Merger excluding any
shares issued pursuant to the QUIPS Exchange and any shares held by any
wholly owned AT&T Broadband Subsidiary plus (ii) the number of shares, if
any, of AT&T Common Stock in respect of which rights pursuant to Section
910 of the NYBCL have purportedly been exercised and not withdrawn. For
purposes of this definition and for the avoidance of doubt, any restricted
shares of AT&T Broadband Common Stock that have been awarded prior to the
date of this Agreement and not forfeited prior to the Closing Date shall be
considered "outstanding", regardless of whether an election has been made
with respect to such shares pursuant to Section 83(b) of the Code.
"I" is the aggregate "in-the-money" amount for all unexercised AT&T
Stock Options outstanding as of the date of this Agreement and held by
Broadband Employees immediately prior to the Closing Date whose exercise
price, as of the Closing Date, is less than the AT&T Closing Stock Value,
calculated with respect to each such AT&T Stock Option as the product of:
(A) the excess of the AT&T Closing Stock Value over the exercise
price, as of the Closing Date, for such option, times
(B) the number of shares of AT&T Common Stock subject to such
option.
For this purpose, a stock appreciation right with respect to AT&T Common
Stock shall be treated as an AT&T Stock Option. In addition, for purposes
of this definition, AT&T Stock Options granted after the date hereof shall
be disregarded.
"F" means the aggregate "in-the-money" amount for AT&T Stock Options
held by Former Employees (as defined in the Employee Benefits Agreement) to
the extent converted into options to purchase AT&T Broadband Common Stock,
calculated as equal to the Aggregate Former Employee Broadband Option
Amount.
"EXPENSE AGREEMENT" means the Expense Agreement dated as of June 16, 1999
between AT&T and the Issuer Trust.
"FCC" means the United States Federal Communications Commission.
"FRANCHISE" means a written "franchise" (within the meaning of Section
602(8) of the Communications Act).
"FRANCHISING AUTHORITY" means "franchising authority" (within the meaning
of Section 602(9) of the Communications Act).
"GUARANTEE AGREEMENT" means the Guarantee Agreement dated as of June 16,
1999 between AT&T, as Guarantor, and The Bank of New York, as Guarantor Trustee,
relating to the Issuer Trust.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the rules and regulations promulgated thereunder.
"INDEBTEDNESS" has the meaning set forth in the Separation and Distribution
Agreement.
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"INDENTURE" means the Indenture dated as of June 16, 1999, as amended or
supplemented, between AT&T and The Bank of New York, as Trustee, relating to the
Debentures.
"INDEPENDENT PERSON" has the meaning set forth in the Parent Charter.
"INDEX" means the Standard and Poors' 500 Index.
"INTERIM FINANCE COMMITTEE" means the committee described in Section 9.15.
"INTERNATIONAL PLAN" means, with respect to any Person, any employment,
severance or similar contract or arrangement (whether or not written) or any
plan, policy, fund, program or arrangement or contract providing for severance,
insurance coverage (including any self-insured arrangements), workers'
compensation, disability benefits, supplemental unemployment benefits, vacation
benefits, pension or retirement benefits or for deferred compensation,
profit-sharing, bonuses, stock options, stock appreciation rights or other forms
of incentive compensation or post-retirement insurance, compensation or benefits
that (i) is not an Employee Plan or a Benefit Arrangement, (ii) is entered into,
maintained, administered or contributed to or required to be contributed to by
such Person or any of its Affiliates and (iii) covers any employee or former
employee of such Person or any of its Subsidiaries.
"IRS" means the United States Internal Revenue Service.
"ISSUER TRUST" means AT&T Finance Trust I, a Delaware business trust.
"K/A PRICE DIFFERENTIAL" means the number equal to the excess, if any, of
(i) the quotient obtained by dividing (A) the Average Class A Special Price by
(B) the Average Class A Price over (ii) 1; provided that the K/A Price
Differential shall in no event be less than 0 or more than .03.
"K/C PRICE DIFFERENTIAL" means the number equal to the excess, if any, of
(i) the quotient obtained by dividing (A) the Average Class A Special Price by
(B) the Average Class C Price over (ii) 1; provided that the K/C Price
Differential shall in no event be less than 0 or more than .03.
"KNOWLEDGE" means, with respect to any fact, the conscious awareness of
such fact by an "executive officer" (as defined under the 1933 Act) of the
relevant Person or, in the case of AT&T, any Person who would be considered an
"executive officer" (as so defined) of the AT&T Broadband Group.
"LIEN" means, with respect to any property or asset, any mortgage, lien,
pledge, charge, security interest, encumbrance or other adverse claim of any
kind in respect of such property or asset. For purposes of this Agreement, a
Person shall be deemed to own subject to a Lien any property or asset that it
has acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement
relating to such property or asset.
"MERGERS" means the AT&T Broadband Merger and the Comcast Merger.
"MICROSOFT" means Microsoft Corporation, a Washington corporation.
"MULTIEMPLOYER PLAN" means each Employee Plan that is a "multiemployer
plan" (as defined in Section 3(37) of ERISA).
"NASDAQ" means The Nasdaq Stock Market.
"NOTE CONSENT" means, with regard to any given series of securities issued
under the Notes Indenture, the receipt of the irrevocable consent to the
transactions contemplated by the Separation and Distribution Agreement of the
holders of at least a majority in aggregate principal amount of such series.
"NOTES INDENTURE" means the Indenture dated as of September 7, 1990, as
amended or supplemented, between American Telephone & Telegraph Company and The
Bank of New York, as trustee.
"NYSE" means the New York Stock Exchange.
"NYSE TRADING DAY" means any day on which securities of AT&T are traded on
the NYSE.
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"NYSE TRADING VALUE" means, with respect to any equity security on any
given NYSE Trading Day, the volume weighted average trading price (rounded to
the nearest 1/10,000) of such security on the NYSE, as reported by Bloomberg
Financial Markets (or such other source as AT&T and Comcast shall agree in
writing) for that NYSE Trading Day.
"NYBCL" means the New York Business Corporation Law.
"PARENT CLASS A COMMON STOCK" means the Class A Common Stock, par value
$0.01 per share, of Parent.
"PARENT CLASS A SPECIAL COMMON STOCK" means the Class A Special Common
Stock, par value $0.01 per share, of Parent.
"PARENT CLASS B COMMON STOCK" means the Class B Common Stock, par value
$0.01 per share, of Parent.
"PARENT CLASS C COMMON STOCK" means the Class C Common Stock, par value
$0.01 per share, of Parent.
"PARENT COMMON STOCK" means the Parent Class A Common Stock, the Parent
Class A Special Common Stock, the Parent Class B Common Stock and the Parent
Class C Common Stock.
"PARENT INDEXED STOCK" means the class of Parent Common Stock that is
included in the Index on the first Trading Day after the Effective Time.
"PARENT MATERIAL ADVERSE EFFECT" means a material adverse effect on the
financial condition, assets or results of operations of the AT&T Broadband Group
and the Comcast Group, taken as a whole, excluding any such effect resulting
from or arising in connection with (i) changes or conditions generally affecting
the industries in which the AT&T Broadband Group and the Comcast Group operate,
(ii) changes in general economic, regulatory or political conditions or (iii)
the announcement of this Agreement or of the transactions contemplated hereby.
"PBCL" means the Pennsylvania Business Corporation Law of 1988.
"PBGC" means the Pension Benefit Guaranty Corporation.
"PENSION PLAN" means, with respect to any Person, any plan (other than a
Multiemployer Plan) that is subject to Title IV of ERISA and is maintained,
administered or contributed to or required to be contributed to by such Person
or any of its ERISA Affiliates.
"PERSON" means an individual, corporation, partnership, limited liability
company, association, trust or other entity or organization, including a
government or political subdivision or an agency or instrumentality thereof.
"PRELIMINARY EXCHANGE RATIO" is defined as follows:
1,235,000,000 - I/C
X = -------------------
O
where "I", "C" and "O" have the same meanings as in the definition of Exchange
Ratio.
"PRICING PERIOD" means the 20 consecutive Trading Days commencing on the
first full Trading Day after the later to occur of (i) the fifth Trading Day
after the first date on which Standard & Poors' reweights the Index in respect
of the transactions contemplated hereby and (ii) the 30th calendar day after the
Closing Date; provided that in no event shall the Pricing Period commence later
than the first full Trading Day occurring after the 45th calendar day after the
Closing Date.
"PRIMARY COMMERCIAL AGREEMENTS" has the meaning set forth in the Separation
and Distribution Agreement.
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"PRIMARY TRANSACTION AGREEMENTS" has the meaning set forth in the
Separation and Distribution Agreement.
"PRISMS CONTRACTS" means each of the PrISM Variable Prepaid Forward
Securities Contracts dated as of December 1, 2000 among AT&T, TCI Lenfest, Inc.
and Morgan Guaranty Trust Company of New York, relating to shares of Comcast
Class A Special Common Stock.
"QUIPS" means the 5% Convertible Quarterly Income Preferred Securities
issued pursuant to the Trust Agreement.
"QUIPS EXCHANGE" means the issuance of shares of AT&T Broadband Common
Stock in exchange for the QUIPS pursuant to the Exchange Agreement.
"RECORD DATE" has the meaning set forth in the Separation and Distribution
Agreement.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement
dated as of June 16, 1999 between AT&T and Microsoft.
"SAILS CONTRACTS" means the SAILS Mandatorily Exchangeable Securities
Contracts dated as of October 27, 2000, November 6, 2000 and November 10, 2000
among AT&T, TCI Lenfest, Inc., Credit Suisse First Boston International and
Credit Suisse First Boston Corporation, relating to shares of Comcast Class A
Special Common Stock.
"SEC" means the United States Securities and Exchange Commission.
"SENIOR NOTES" means any of the securities issued pursuant to the Indenture
dated as of November 21, 2001 between AT&T and The Bank of New York, as Trustee.
"SEPARATION" has the meaning set forth in the Separation and Distribution
Agreement.
"SEPARATION AND DISTRIBUTION AGREEMENT" means the Separation and
Distribution Agreement dated as of the date hereof by and between AT&T and AT&T
Broadband, in the form attached as Exhibit C.
"SIGNIFICANT EXCEPTED TRANSACTION" means any Excepted Transaction providing
for the sale or disposition of at least 50% of the AT&T Communications Group.
"SPECIFIED AT&T SEC DOCUMENTS" means each of (i) AT&T's annual report on
Form 10-K for its fiscal year ended December 31, 2000, (ii) AT&T's quarterly
reports on Form 10-Q filed since December 31, 2000, (iii) AT&T's periodic
reports on Form 8-K filed since December 31, 2000, (iv) AT&T's proxy statement
relating to its 2001 annual meeting of shareholders and (v) AT&T's preliminary
proxy statement filed on July 3, 2001 regarding, among other things, the
creation of a tracking stock reflecting the AT&T Broadband Group.
"SPECIFIED COMCAST SEC DOCUMENTS" means each of (i) Comcast's annual report
on Form 10-K for its fiscal year ended December 31, 2000, (ii) Comcast's
quarterly reports on Form 10-Q filed since December 31, 2000, (iii) Comcast's
periodic reports on Form 8-K filed since December 31, 2000 and (iv) Comcast's
proxy statement relating to its 2001 annual meeting of shareholders.
"SUBSIDIARY" means, with respect to any Person, any entity of which
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other body performing similar functions
are at any time, directly or indirectly, owned by such Person.
"SUBSIDIARY TRUSTS" means (i) TCI Communications Financing I, (ii) TCI
Communications Financing II, (iii) TCI Communications Financing IV, (iv)
MediaOne Finance Trust I, (v) MediaOne Finance Trust II, (vi) MediaOne Finance
Trust III, (vii) MediaOne Financing A and (viii) MediaOne Financing B, each a
Delaware business trust.
"SURVIVING CORPORATIONS" means the AT&T Broadband Surviving Corporation and
the Comcast Surviving Corporation.
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"SYSTEM" means a "cable television system" (within the meaning of Section
602(7) of the Communications Act).
"T-HOLDINGS" means AT&T Broadband T-Holdings, Inc. (f/k/a TCI Telephony
Holdings, Inc), a Delaware corporation.
"TAX SHARING AGREEMENT" has the meaning set forth in the Separation and
Distribution Agreement.
"TOPRS" means (i) the 8.72% Trust Originated Preferred Securities of TCI
Communications Financing I; (ii) the 10% Trust Preferred Securities of TCI
Communications Financing II; (iii) the 9.72% Trust Preferred Securities of TCI
Communications Financing IV; (iv) the 9.50% Trust Originated Preferred
Securities of MediaOne Finance Trust II; (v) the 9.04% Trust Originated
Preferred Securities of MediaOne Finance Trust III; (vi) the 7.96% Trust
Originated Preferred Securities of MediaOne Financing A; and (vii) the 8.25%
Trust Originated Preferred Securities of MediaOne Financing B.
"TRADING DAY" means any day on which securities of Comcast or Parent are
traded on Nasdaq.
"TRADING VALUE" means, with respect to any equity security on any given
Trading Day, the volume weighted trading price (rounded to the nearest 1/10,000)
of such security on Nasdaq, as reported by Bloomberg Financial Markets (or such
other source as AT&T and Comcast shall agree in writing) for that Trading Day.
"TRANSACTION AGREEMENTS" means this Agreement, the Support Agreement and
each of the Ancillary Agreements.
"TRUST AGREEMENT" means the Trust Agreement dated as of June 16, 1999 among
AT&T, as Depositor, The Bank of New York, as Property Trustee, The Bank of New
York (Delaware), as Delaware Trustee, and the administrative trustees named
therein, relating to the Issuer Trust.
"TRUST COMMON SECURITIES" means the common securities of the Issuer Trust
issued pursuant to the Trust Agreement.
"TWE" means Time Warner Entertainment Company, L.P., a Delaware limited
partnership.
"TWE OPTION" means the option of MediaOne of Colorado, Inc. to purchase up
to an additional 8.5% participating percentage share in TWE pursuant to the TWE
Option Agreement.
"TWE OPTION AGREEMENT" means the Option Agreement, dated as of September
15, 1993, by and between TWE and US West, Inc.
"TWE PARTNERSHIP AGREEMENT" means the Agreement of Limited Partnership
dated as of October 29, 1991, as amended.
"TWE SUBSIDIARY" means a Subsidiary of TWE.
"WIRELESS GROUP COMMON STOCK" means the Wireless Group Common Stock, par
value $1.00 per share, of AT&T.
(b) Each of the following additional terms is defined in the Section set
forth opposite such term:
TERM SECTION
---- --------
351 Transactions............................................ 9.06(a)
Agreement................................................... Preamble
AT&T........................................................ Preamble
AT&T Broadband.............................................. Preamble
AT&T Broadband Merger....................................... 3.01(a)
AT&T Broadband Merger Sub................................... Preamble
AT&T Broadband Rule 145 Affiliate........................... 9.07(a)
AT&T Broadband Surviving Corporation........................ 3.01(a)
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TERM SECTION
---- --------
AT&T Broadband Surviving Corporation Common Stock........... 4.01(a)
AT&T Converted SARs......................................... 4.02(g)
AT&T Converted Stock Options................................ 4.02(g)
AT&T Converted Equity Awards................................ 4.02(g)
AT&T Equity Awards.......................................... 4.02(g)
AT&T Franchise Consents..................................... 6.03
AT&T Intellectual Property.................................. 6.20
AT&T License Consents....................................... 6.03
AT&T Marks.................................................. 9.20(a)
AT&T PUC Consents........................................... 6.03
AT&T SARs................................................... 4.02(g)
AT&T SEC Documents.......................................... 6.07(a)
AT&T Securities............................................. 6.05(b)
AT&T Shareholders' Approval................................. 6.22
AT&T Shareholders' Meeting.................................. 5.09
AT&T Stock Options.......................................... 4.02(g)
AT&T Subsidiary Preferred Stock............................. 6.05(a)
AT&T Superior Proposal...................................... 8.03(b)
AT&T Termination Fee........................................ 11.03(d)
Certificates................................................ 4.02(b)
Code........................................................ Recitals
Comcast..................................................... Preamble
Comcast Converted Equity Awards............................. 4.02(h)
Comcast Converted Stock Options............................. 4.02(h)
Comcast Equity Awards....................................... 4.02(h)
Comcast Franchise Consents.................................. 5.03
Comcast Intellectual Property............................... 5.20
Comcast License Consents.................................... 5.03
Comcast Merger.............................................. 3.02(a)
Comcast Merger Sub.......................................... Preamble
Comcast PUC Consents........................................ 5.03
Comcast Rule 145 Affiliate.................................. 9.07(b)
Comcast SEC Documents....................................... 5.07(a)
Comcast Securities.......................................... 5.05(b)
Comcast Shareholder......................................... Preamble
Comcast Shareholders' Approval.............................. 5.22
Comcast Shareholders' Meeting............................... 5.09
Comcast Stock Options....................................... 4.02(h)
Comcast Surviving Corporation............................... 3.03
Comcast Surviving Corporation Common Stock.................. 4.01(b)
Comcast Termination Fee..................................... 11.03(b)
Common Stock Trust.......................................... 4.02(e)
DE Certificate of Merger.................................... 3.01(b)
Effective Time.............................................. 3.01(b)
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TERM SECTION
---- --------
End Date.................................................... 11.01(b)
Excess Shares............................................... 4.02(e)
Exchange Agent.............................................. 4.02(a)
Exchange Fund............................................... 4.02(a)
Financing................................................... 9.15
Franchise Consents.......................................... 6.03(a)
GAAP........................................................ 5.08
Governmental Authority...................................... 5.03
Indemnified Losses.......................................... 7.04(a)
Indemnified Person.......................................... 7.04(a)
Joint Proxy Statement....................................... 5.09
K/A Security................................................ 4.04(a)
K/C Security................................................ 4.04(b)
Letter of Credit............................................ 9.16(d)
License Consents............................................ 6.03
Mandatory Residual Conditions............................... 8.02(a)
Neutrality Agreement........................................ 8.05
Original Award.............................................. 4.02(g)
PA Articles of Merger....................................... 3.02(b)
Parent...................................................... Preamble
Parent Charter.............................................. 2.01
PUC Consents................................................ 6.03
Qualified Holders........................................... 4.03(c)
QUIPS Failure Date.......................................... 9.18(a)
QUIPS Fair Market Value..................................... 9.18(f)
QUIPS Transfer.............................................. 9.18(j)
Purchase Rights............................................. 9.01(a)
Registration Statement...................................... 5.09
S-8......................................................... 4.02(g)
Series E Preferred Stock.................................... 6.05(a)
Successor Plan.............................................. 9.13(b)
Support Agreement........................................... Recitals
Tax Returns................................................. 5.16
Taxes....................................................... 5.16
TCI Pacific Preferred Stock................................. 6.05(a)
Transferred Broadband Employees............................. 9.13(a)
Transferred Comcast Employees............................... 9.13(a)
TWE Contracts............................................... 6.25
Warrants.................................................... 6.05(a)
Wireless Preferred Stock.................................... 6.05(a)
(c) Interpretation. In this Agreement, unless otherwise specified or where
the context otherwise requires:
(i) a reference to a Recital is to the relevant Recital to this
Agreement, to a Section is to the relevant Section of this Agreement and to
an Exhibit is to the relevant Exhibit to this Agreement;
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(ii) words importing any gender shall include other genders;
(iii) words importing the singular only shall include the plural and
vice versa;
(iv) the words "include", "includes" or "including" shall be deemed to
be followed by the words "without limitation";
(v) the words "hereof", "herein" and "herewith" and words of similar
import shall, unless otherwise stated, be construed to refer to this
Agreement as a whole and not to any particular provision of this Agreement,
and Article, clause and Exhibit references are to the Articles, clauses and
Exhibits to this Agreement unless otherwise specified;
(vi) references to any party hereto or any other agreement or document
shall include such party's successors and permitted assigns; and
(vii) the parties hereto have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of
intent or interpretation arises, this Agreement shall be construed as if
drafted jointly by the parties hereto, and no presumption or burden of
proof shall arise favoring or disfavoring any party hereto by virtue of the
authorship of any provisions of this Agreement.
(d) Headings. In this Agreement the headings to Sections are inserted for
convenience only and shall not affect the construction of this Agreement.
ARTICLE 2
PARENT AND MERGER SUBS
SECTION 2.01. Organization of Parent. Comcast and AT&T have caused Parent
to be organized under the laws of the Commonwealth of Pennsylvania. The
authorized capital stock of Parent consists of 100 shares of Common Stock, par
value $0.01 per share, of which one share has been issued to Comcast and one
share has been issued to AT&T. Comcast and AT&T shall take, and shall cause
Parent to take, all requisite action to cause (i) if the A Shareholder Approval
is obtained, the articles of incorporation of Parent (the "PARENT CHARTER") to
be in the form of Exhibit D-1 at the Effective Time, (ii) if the A Shareholder
Approval is not obtained, the Parent Charter to be on the terms set forth in
Exhibit D-2 at the Effective Time and (iii) whether or not the A Shareholder
Approval is obtained, the bylaws of Parent to be in the form of Exhibit D-3 at
the Effective Time.
SECTION 2.02. Directors and Officers of Parent. Prior to the Effective
Time, the directors and officers of Parent shall consist of equal numbers of
representatives of Comcast and AT&T as designated and elected by Comcast and
AT&T. Comcast and AT&T shall take all requisite action to cause the directors
and officers of Parent as of the Effective Time to be as provided in Section
9.08.
SECTION 2.03. Organization of Merger Subs. Parent has caused AT&T
Broadband Merger Sub and Comcast Merger Sub to be organized for the sole purpose
of effectuating the Mergers. The authorized capital stock of AT&T Broadband
Merger Sub consists of 100 shares of Common Stock, par value $0.01 per share,
all of which shares have been issued to Parent at a price of $1.00 per share.
The authorized capital stock of Comcast Merger Sub consists of 100 shares of
Common Stock, par value $0.01 per share, all of which shares have been issued to
Parent at a price of $1.00 per share.
SECTION 2.04. Actions of Comcast and AT&T. Comcast and AT&T, as the
holders of all the outstanding shares of Parent capital stock, have approved and
adopted this Agreement and the transactions contemplated hereby and have caused
Parent, as the sole stockholder of each of the Merger Subs, to approve and adopt
this Agreement and the transactions contemplated hereby. Each of Comcast and
AT&T shall cause Parent to perform its obligations under this Agreement, and
Parent shall cause the Merger Subs to perform their respective obligations under
this Agreement.
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SECTION 2.05. Rights Plan. Parent shall adopt a shareholder rights plan,
effective as of the Effective Time, on the terms and conditions set forth in the
Comcast Disclosure Schedule.
ARTICLE 3
THE MERGERS
SECTION 3.01. The AT&T Broadband Merger. (a) At the Effective Time, AT&T
Broadband Merger Sub shall be merged with and into AT&T Broadband (the "AT&T
BROADBAND MERGER") in accordance with the DGCL and upon the terms set forth in
this Agreement, whereupon the separate existence of AT&T Broadband Merger Sub
shall cease and AT&T Broadband shall be the surviving corporation (the "AT&T
BROADBAND SURVIVING CORPORATION").
(b) As soon as practicable (and, in any event, within five Business Days)
after satisfaction or, to the extent permitted hereunder, waiver of all
conditions to the Mergers set forth in Article 10, other than conditions that by
their nature are to be satisfied at the Effective Time and will in fact be
satisfied at the Effective Time, a certificate of merger shall be duly prepared,
executed and acknowledged by AT&T Broadband Merger Sub and AT&T Broadband and
thereafter delivered to and filed with the Secretary of State of the State of
Delaware pursuant to the DGCL (the "DE CERTIFICATE OF MERGER"). The AT&T
Broadband Merger shall become effective at the Effective Time. As used herein,
the term "Effective Time" means such time as is mutually agreeable to Comcast
and AT&T on the date of filing of the DE Certificate of Merger, or on such other
date or time as may be agreed by Comcast and AT&T. The Separation shall occur on
the Closing Date prior to the Distribution which shall occur at the close of
business in New York, New York on the Closing Date. With the consent of Comcast,
which consent shall not be unreasonably withheld, AT&T may effect the Separation
and/or the Distribution on different dates or different times than provided for
in the preceding sentence.
(c) From and after the Effective Time, the AT&T Broadband Surviving
Corporation shall possess all the rights, powers, privileges and franchises, and
be subject to all of the obligations, liabilities, restrictions and
disabilities, of AT&T Broadband Merger Sub and AT&T Broadband, all as provided
under the DGCL.
SECTION 3.02. The Comcast Merger. (a) At the Effective Time, Comcast
Merger Sub shall be merged with and into Comcast (the "COMCAST MERGER") in
accordance with the PBCL, and upon the terms set forth in this Agreement,
whereupon the separate existence of Comcast Merger Sub shall cease and Comcast
shall be the surviving corporation (the "COMCAST SURVIVING CORPORATION").
(b) As soon as practicable (and, in any event, within five Business Days)
after satisfaction or, to the extent permitted hereunder, waiver of all
conditions to the Mergers set forth in Article 10, other than conditions that by
their nature are to be satisfied at the Effective Time and will in fact be
satisfied at the Effective Time, an articles of merger shall be duly prepared,
executed and acknowledged by Comcast Merger Sub and Comcast and thereafter
delivered to and filed with the Department of State of the Commonwealth of
Pennsylvania pursuant to the PBCL (the "PA ARTICLES OF MERGER"). The Comcast
Merger shall become effective at the Effective Time.
(c) From and after the Effective Time, the Comcast Surviving Corporation
shall possess all the rights, powers, privileges and franchises, and be subject
to all of the obligations, liabilities, restrictions and disabilities, of
Comcast Merger Sub and Comcast, all as provided under the PBCL.
SECTION 3.03. Certificate and Articles of Incorporation; Bylaws. The
certificate of incorporation of AT&T Broadband in effect at the Effective Time
shall be the certificate of incorporation of the AT&T Broadband Surviving
Corporation and the bylaws of AT&T Broadband Merger Sub in effect at the
Effective Time shall be the bylaws of the AT&T Broadband Surviving Corporation,
in each case, until amended in accordance with applicable law. Immediately prior
to the Effective Time, if the A Shareholder Approval shall have been obtained,
Comcast shall file the Articles Amendment with the Department of State of the
Commonwealth of Pennsylvania pursuant to the PBCL. The articles of incorporation
of
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Comcast in effect at the Effective Time shall be the articles of incorporation
of the Comcast Surviving Corporation and the bylaws of Comcast Merger Sub in
effect at the Effective Time shall be the bylaws of the Comcast Surviving
Corporation, in each case, until amended in accordance with applicable law.
SECTION 3.04. Directors and Officers of the Surviving Corporations. From
and after the Effective Time, until successors are duly elected or appointed and
qualified in accordance with applicable law, (a) the directors of AT&T Broadband
Merger Sub at the Effective Time shall be the directors of the AT&T Broadband
Surviving Corporation, (b) the officers of AT&T Broadband at the Effective Time
shall be the officers of the AT&T Broadband Surviving Corporation, (c) the
directors of Comcast Merger Sub at the Effective Time shall be the directors of
the Comcast Surviving Corporation and (d) the officers of Comcast at the
Effective Time shall be the officers of the Comcast Surviving Corporation.
SECTION 3.05. Alternative Structure. From the date hereof until the
Effective Time, each of AT&T and Comcast agrees that, at the request of the
other party, it will consider in good faith amending the terms of this Agreement
to the extent necessary to provide for a structure or a sequencing of the
Mergers that is more tax efficient or otherwise more advantageous than the
structure and sequencing provided by Articles 2 and 3 and is not adverse to the
other party.
ARTICLE 4
CONVERSION OF SECURITIES
SECTION 4.01. Conversion of Securities. (a) If the A Shareholder Approval
shall have been obtained, at the Effective Time, by virtue of the AT&T Broadband
Merger and without any action on the part of any of the parties hereto or the
holders of any of the following securities:
(i) Each issued and outstanding share of capital stock of AT&T
Broadband Merger Sub shall be converted into and become one fully paid and
nonassessable share of Common Stock, par value $.01 per share, of the AT&T
Broadband Surviving Corporation ("AT&T BROADBAND SURVIVING CORPORATION
COMMON STOCK").
(ii) Each share of AT&T Broadband Common Stock held in the treasury of
AT&T Broadband immediately prior to the Effective Time shall be canceled
and retired without any conversion thereof, and no payment shall be made
with respect thereto.
(iii) Subject to Sections 4.02(e), 4.03(a) and 4.04(a), each issued
and outstanding share of AT&T Broadband Common Stock that is issued and
outstanding immediately prior to the Effective Time (excluding any shares
of AT&T Broadband Common Stock canceled pursuant to Section 4.01(a)(ii))
shall be converted into the right to receive the Exchange Ratio of a fully
paid and nonassessable share of Parent Class A Common Stock. As of the
Effective Time, all such shares of AT&T Broadband Common Stock shall no
longer be outstanding and shall automatically be canceled and retired and
shall cease to exist, and each owner of any such shares of AT&T Broadband
Common Stock shall cease to have any rights with respect thereto, except
the right to receive certificates representing the shares of Parent Common
Stock, any cash in lieu of fractional shares of Parent Common Stock and any
dividends or distributions to the extent provided in Section 4.02(c) to be
issued or paid in consideration therefor, without interest.
(b) If the A Shareholder Approval shall have been obtained, at the
Effective Time, by virtue of the Comcast Merger and without any action on the
part of any of the parties hereto or the holders of any of the following
securities:
(i) Each issued and outstanding share of capital stock of Comcast
Merger Sub shall be converted into and become a number of fully paid and
nonassessable shares of Common Stock, par value $.01 per share, of the
Comcast Surviving Corporation ("COMCAST SURVIVING CORPORATION COMMON
STOCK") such that all of such shares of Comcast Surviving Corporation
Common Stock, together with the shares of Comcast Surviving Corporation
Common Stock issuable upon conversion
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of the shares of Comcast Common Stock held by Comcast Shareholder pursuant
to Section 4.01(e), equal 100 shares of Comcast Surviving Corporation
Common Stock.
(ii) Each share of Comcast Common Stock held in the treasury of
Comcast immediately prior to the Effective Time shall be canceled and
retired without any conversion thereof, and no payment shall be made with
respect thereto.
(iii) Subject to Sections 4.01(e) and 4.02(e), each issued and
outstanding share of Comcast Class A Common Stock, Comcast Class B Common
Stock and Comcast Class A Special Common Stock that is issued and
outstanding immediately prior to the Effective Time (excluding any of such
shares of Comcast Common Stock canceled pursuant to Section 4.01(b)(ii))
shall be converted into the right to receive one fully paid and
nonassessable share of Parent Class A Common Stock, Parent Class B Common
Stock and Parent Class A Special Common Stock, respectively. As of the
Effective Time, all such shares of Comcast Common Stock shall no longer be
outstanding and shall automatically be canceled and retired and shall cease
to exist, and each holder of a Certificate representing any such shares of
Comcast Common Stock shall cease to have any rights with respect thereto,
except the right to receive, upon the surrender of such Certificates,
certificates representing the shares of Parent Common Stock, any cash in
lieu of fractional shares of Parent Common Stock and any dividends or
distributions to the extent provided in Section 4.02(c) to be issued or
paid in consideration therefor upon surrender of such Certificate in
accordance with Section 4.02, without interest.
(c) If the A Shareholder Approval shall not have been obtained, at the
Effective Time, by virtue of the AT&T Broadband Merger and without any action on
the part of any of the parties hereto or the holders of any of the following
securities:
(i) Each issued and outstanding share of capital stock of AT&T
Broadband Merger Sub shall be converted into and become one fully paid and
nonassessable share of AT&T Broadband Surviving Corporation Common Stock.
(ii) Each share of AT&T Broadband Common Stock held in the treasury of
AT&T Broadband immediately prior to the Effective Time shall be canceled
and retired without any conversion thereof, and no payment shall be made
with respect thereto.
(iii) Subject to Sections 4.02(e), 4.03(b) and 4.04(b), each issued
and outstanding share of AT&T Broadband Common Stock that is issued and
outstanding immediately prior to the Effective Time (excluding any shares
of AT&T Broadband Common Stock canceled pursuant to Section 4.01(c)(ii))
shall be converted into the right to receive the Exchange Ratio of a fully
paid and nonassessable share of Parent Class C Common Stock. As of the
Effective Time, all such shares of AT&T Broadband Common Stock shall no
longer be outstanding and shall automatically be canceled and retired and
shall cease to exist, and each owner of any such shares of AT&T Broadband
Common Stock shall cease to have any rights with respect thereto, except
the right to receive certificates representing the shares of Parent Common
Stock, any cash in lieu of fractional shares of Parent Common Stock and any
dividends or distributions to the extent provided in Section 4.02(c) to be
issued or paid in consideration therefor, without interest.
(d) If the A Shareholder Approval shall not have been obtained, at the
Effective Time, by virtue of the Comcast Merger and without any action on the
part of any of the parties hereto or the holders of any of the following
securities:
(i) Each issued and outstanding share of capital stock of Comcast
Merger Sub shall be converted into and become a number of fully paid and
nonassessable shares of Comcast Surviving Corporation Common Stock such
that all of such shares of Comcast Surviving Corporation Common Stock,
together with the shares of Comcast Surviving Corporation Common Stock
issuable upon conversion of the shares of Comcast Common Stock held by
Comcast Shareholder pursuant to Section 4.01(e), equal 100 shares of
Comcast Surviving Corporation Common Stock.
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(ii) Each share of Comcast Common Stock held in the treasury of
Comcast immediately prior to the Effective Time shall be canceled and
retired without any conversion thereof, and no payment shall be made with
respect thereto.
(iii) Subject to Sections 4.01(e) and 4.02(e), each issued and
outstanding share of Comcast Class A Common Stock, Comcast Class B Common
Stock and Comcast Class A Special Common Stock that is issued and
outstanding immediately prior to the Effective Time (excluding any of such
shares of Comcast Common Stock canceled pursuant to Section 4.01(d)(ii))
shall be converted into the right to receive one fully paid and
nonassessable share of Parent Class A Common Stock, Parent Class B Common
Stock and Parent Class A Special Common Stock, respectively. As of the
Effective Time, all such shares of Comcast Common Stock shall no longer be
outstanding and shall automatically be canceled and retired and shall cease
to exist, and each holder of a Certificate representing any such shares of
Comcast Common Stock shall cease to have any rights with respect thereto,
except the right to receive, upon the surrender of such Certificates,
certificates representing the shares of Parent Common Stock, any cash in
lieu of fractional shares of Parent Common Stock and any dividends or
distributions to the extent provided in Section 4.02(c) to be issued or
paid in consideration therefor upon surrender of such Certificate in
accordance with Section 4.02, without interest.
(e) In lieu of receiving the consideration payable pursuant to Section
4.01(b) or 4.01(d) upon conversion of its shares of Comcast Common Stock in the
Comcast Merger, Comcast Shareholder (or any successor by merger to Comcast
Shareholder) may elect to merge with Parent immediately prior to the Effective
Time in a transaction in which the members of Comcast Shareholder (or such
successor), in exchange for all of their outstanding membership or other equity
interests in Comcast Shareholder (or such successor), would receive in the
aggregate the same consideration that Comcast Shareholder (or such successor)
would have received pursuant to Section 4.01(b) or 4.01(d), as the case may be,
upon conversion of its shares of Comcast Common Stock in the Comcast Merger. If
Comcast Shareholder (or such successor) elects to effect the foregoing merger,
then at the time of such merger (i) Comcast Shareholder (or such successor)
shall have no assets other than shares of Comcast Common Stock and no
liabilities other than possible de minimis liabilities, (ii) each issued and
outstanding share of Comcast Common Stock owned by Comcast Shareholder (or such
successor) shall be converted into and become a number of fully paid and
nonassessable shares of Comcast Surviving Corporation Common Stock such that all
of such shares of Comcast Surviving Corporation Common Stock, together with the
shares of Comcast Surviving Corporation Common Stock issuable upon conversion of
the shares of Comcast Merger Sub capital stock pursuant to Section 4.01(b)(i) or
4.01(d)(i), as the case may be, equal 100 shares of Comcast Surviving
Corporation Common Stock and (iii) Comcast Shareholder shall provide an
indemnity that is reasonably satisfactory to AT&T and Comcast pursuant to which
one or more members of Comcast Shareholder (which shall include at a minimum any
member or members (on a joint and several basis) who acquire the shares of
Parent Class B Common Stock pursuant to the merger contemplated by this Section
4.01(e)) agrees to indemnify Parent in respect of any liabilities (including tax
liabilities) of Comcast Shareholder or arising in connection with the
transactions under this Section 4.01(e).
(f) If, between the date of this Agreement and the Effective Time, the
outstanding shares of Comcast Common Stock, AT&T Common Stock or AT&T Broadband
Common Stock shall have been changed into a different number of shares, by
reason of any stock dividend (other than to create the number of shares of AT&T
Broadband Common Stock necessary to effect the Distribution and, if the QUIPS
Exchange occurs, the QUIPS Exchange or otherwise as a result of the Separation
and Distribution), subdivision, split or combination of shares, the
consideration payable pursuant to Section 4.01 will, if appropriate, be
correspondingly adjusted to reflect such stock dividend, subdivision, split or
combination of shares.
(g) For purposes of Sections 4.01(a)-(d), (i) any share of Comcast Common
Stock held by any Comcast Subsidiary will not be treated as a share of Comcast
Common Stock held in the treasury of Comcast and (ii) any share of AT&T
Broadband Common Stock held by any AT&T Broadband
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Subsidiary will not be treated as a share of AT&T Broadband Common Stock held in
treasury of AT&T Broadband.
SECTION 4.02. Exchange of Certificates. (a) Exchange Agent. At or prior
to the Effective Time, Parent shall deposit with a bank or trust company jointly
designated by AT&T and Comcast (the "EXCHANGE AGENT"), for the benefit of the
holders of shares of AT&T Broadband Common Stock and Comcast Common Stock, for
exchange in accordance with this Article 4, through the Exchange Agent,
certificates representing the shares of Parent Common Stock (such shares of
Parent Common Stock, together with any dividends or other distributions to the
extent provided in Section 4.02(c), the "EXCHANGE FUND") issuable pursuant to
Section 4.01 in exchange for outstanding shares of AT&T Broadband Common Stock
and Comcast Common Stock.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates that immediately prior to the Effective Time
represented outstanding shares of AT&T Broadband Common Stock or Comcast Common
Stock (the "CERTIFICATES"), other than shares to be canceled or retired or
converted into AT&T Broadband Surviving Corporation Common stock or Comcast
Surviving Corporation Common Stock in each case in accordance with Section 4.01,
(i) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Exchange Agent, and shall be in such form
and have such other provisions as Parent may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for certificates representing shares of Parent Common Stock. Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with such letter of
transmittal, duly executed, and such other documents as may reasonably be
required by the Exchange Agent, the holder of such Certificate shall be entitled
to receive in exchange therefor a certificate representing that number of whole
shares of Parent Common Stock that such holder has the right to receive pursuant
to the provisions of this Article 4, cash in lieu of any fractional shares of
Parent Common Stock to the extent provided in Section 4.02(e) and any dividends
or distributions to the extent provided in Section 4.02(c), and the Certificate
so surrendered shall forthwith be canceled. In the event of a transfer of
ownership of AT&T Broadband Common Stock or Comcast Common Stock that is not
registered in the transfer records of AT&T Broadband or Comcast, as the case may
be, a certificate representing the proper number of shares of Parent Common
Stock may be issued to a Person other than the Person in whose name the
Certificate so surrendered is registered if such Certificate shall be properly
endorsed or otherwise be in proper form for transfer and the Person requesting
such payment shall pay any transfer or other taxes required by reason of the
issuance of shares of Parent Common Stock to a Person other than the registered
holder of such Certificate or establish to the satisfaction of Parent that such
tax has been paid or is not applicable. Until surrendered as contemplated by
this Section 4.02, each Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender the
certificate representing the appropriate number of whole shares of Parent Common
Stock, cash in lieu of any fractional shares of Parent Common Stock to the
extent provided in Section 4.02(e) and any dividends and distributions to the
extent provided in Section 4.02(c). No interest will be paid or will accrue on
any cash payable in lieu of any fractional shares of Parent Common Stock. Any
amounts payable or deliverable pursuant to this Agreement shall be subject to
and made net of applicable withholding taxes to the extent such taxes are
imposed under applicable law as determined by Parent in its reasonable
discretion. To the extent that amounts are so withheld, those amounts shall be
treated for all purposes as having been paid to the holders of AT&T Broadband
Common Stock or Comcast Common Stock, as the case may be, in respect of which
the deduction and withholding was made.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions with respect to Parent Common Stock with a record date after
the Effective Time shall be paid to the holder of any unsurrendered Certificate
with respect to the shares of Parent Common Stock represented thereby, and no
cash payment in lieu of fractional shares shall be paid to any such holder
pursuant to Section 4.02(e) until the surrender of such Certificate in
accordance with this Article 4. Subject to the effect of applicable law,
following surrender of any such Certificate, there shall be paid to the holder
of the
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certificate representing whole shares of Parent Common Stock issued in exchange
therefor, without interest, (i) at the time of such surrender, the amount of any
cash payable in lieu of a fractional share of Parent Common Stock to which such
holder is entitled pursuant to Section 4.02(e) and the amount of dividends or
other distributions with a record date after the Effective Time theretofore paid
with respect to such whole shares of Parent Common Stock and (ii) at the
appropriate payment date, the amount of dividends or other distributions with a
record date after the Effective Time but prior to such surrender and a payment
date subsequent to such surrender payable with respect to such whole shares of
Parent Common Stock.
(d) No Further Ownership Rights in AT&T Broadband Common Stock or Comcast
Common Stock. All shares of Parent Common Stock issued upon the surrender for
exchange of Certificates in accordance with the terms of this Article 4
(including any cash paid pursuant to Section 4.02(c) or 4.02(e)) shall be deemed
to have been issued (and paid) in full satisfaction of all rights pertaining to
the shares of AT&T Broadband Common Stock or Comcast Common Stock, as the case
may be, theretofore represented by such Certificates, and there shall be no
further registration of transfers on the stock transfer books of the applicable
Surviving Corporation, of the shares of AT&T Broadband Common Stock or Comcast
Common Stock, as the case may be, that were outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates are presented to
Parent or the Exchange Agent for any reason, they shall be canceled and
exchanged as provided in this Article 4, except as otherwise provided by
applicable law. Certificates surrendered for exchange by any Person who is a
Rule 145 Affiliate shall not be exchanged until Parent has received written
undertakings from such Person in the form attached as Exhibit B.
(e) No Fractional Shares. (i) No certificates or scrip representing
fractional shares of Parent Common Stock shall be issued upon the surrender for
exchange of Certificates, and such fractional share interests shall not entitle
the owner thereof to vote or to any rights of a shareholder of Parent.
(ii) As promptly as practicable following the Effective Time, the Exchange
Agent shall determine the excess of (A) the number of shares of Parent Common
Stock delivered to the Exchange Agent by Parent pursuant to Section 4.02(a) over
(B) the aggregate number of whole shares of Parent Common Stock to be
distributed to holders of the Certificates pursuant to Section 4.02(b) (such
excess, the "EXCESS SHARES"). As soon as practicable after the Effective Time,
the Exchange Agent, as agent for the holders of the Certificates, shall sell the
Excess Shares at then-prevailing prices on Nasdaq, all in the manner provided in
Section 4.02(e)(iii).
(iii) The sale of the Excess Shares by the Exchange Agent shall be executed
on Nasdaq, and shall be executed in round lots to the extent practicable. The
proceeds from such sale or sales available for distribution to the holders of
Certificates shall be reduced by the compensation payable to the Exchange Agent
and the expenses incurred by the Exchange Agent, in each case, in connection
with such sale or sales of the Excess Shares, including all related commissions,
transfer taxes and other out-of-pocket transaction costs. Until the net proceeds
of such sale or sales have been distributed to the holders of the Certificates,
the Exchange Agent shall hold such proceeds in trust for the holders of the
Certificates (the "COMMON STOCK TRUST"). The Exchange Agent shall determine the
portion of the Common Stock Trust to which each holder of a Certificate shall be
entitled, if any, by multiplying the amount of the aggregate net proceeds
comprising the portion of the Common Stock Trust attributable to the relevant
class of Parent Common Stock by a fraction, the numerator of which is the amount
of the fractional share interest in such class of Parent Common Stock to which
such holder of a Certificate is entitled and the denominator of which is the
aggregate amount of fractional share interests to which all holders of the
Certificates are entitled.
(iv) As soon as practicable after the determination of the amount of cash,
if any, to be paid to holders of Certificates in lieu of any fractional share
interests, the Exchange Agent shall make available such amounts, without
interest, to such holders of Certificates that have surrendered their
Certificates in accordance with this Article 4.
(f) Termination of Exchange Fund and Common Stock Trust. Any portion of
the Exchange Fund and Common Stock Trust that remains undistributed to the
holders of Certificates for one year after the
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Effective Time shall be delivered to Parent, upon demand, and any holders of
Certificates who have not theretofore complied with this Article 4 shall
thereafter look only to Parent for payment of their claim for Parent Common
Stock, any cash in lieu of fractional shares of Parent Common Stock, and any
dividends or other distributions with respect to Parent Common Stock.
(g) AT&T Stock Options and Other AT&T Equity-Based Awards. (i) At the
Effective Time, all options to purchase, and stock appreciation rights with
respect to, shares of AT&T Broadband Common Stock ("AT&T STOCK OPTIONS" and
"AT&T SARS", respectively) that are outstanding and unexercised as of the
Effective Time shall cease to represent rights with respect to shares of AT&T
Broadband Common Stock and shall be converted automatically into options to
purchase, or stock appreciation rights with respect to, shares of Parent Indexed
Stock ("AT&T CONVERTED STOCK OPTIONS" and "AT&T CONVERTED SARS", respectively)
and Parent shall assume each such AT&T Converted Stock Option and AT&T Converted
SAR, on the same terms and conditions as applied to such AT&T Stock Option or
AT&T SAR immediately before the Effective Time (including without limitation any
vesting as a result of the consummation of the transactions contemplated
hereby); provided, however, that, from and after the Effective Time, (A) the
number of shares of Parent Indexed Stock subject to such AT&T Converted Stock
Option or AT&T Converted SAR, as applicable, shall be equal to the number of
shares, rounded to the nearest whole share, of Parent Indexed Stock whose fair
market value, immediately after the Effective Time, is equal to (a) minus (b),
where "(a)" is the aggregate fair market value, determined immediately prior to
the Distribution using the AT&T Closing Stock Value, of the AT&T Common Stock
subject to the original option or stock appreciation right (the "ORIGINAL
AWARD") with respect to which such AT&T Stock Option or AT&T SAR was issued
pursuant to the Employee Benefits Agreement; and "(b)," in the case of a
Broadband Employee, is zero, and in the case of a Former Employee is the
aggregate fair market value, determined immediately after the Distribution using
the AT&T Opening Stock Value (as such term is defined in the Employee Benefits
Agreement), of the AT&T Common Stock subject to the "adjusted AT&T Option" into
which the Original Award was partially converted pursuant to Section 5.3(b) of
the Employee Benefits Agreement; and (B) the per share exercise price under such
AT&T Converted Stock Option or AT&T Converted SAR, as applicable, as of the
Effective Time, shall be adjusted by dividing the aggregate exercise price of
the Original Award relating to such AT&T Stock Option or AT&T SAR, as applicable
(less, in the case of a Former Employee, the aggregate exercise price of the
relevant "adjusted AT&T Option" referred to in (A) above), by the number of
shares of Parent Indexed Stock to which such AT&T Converted Stock Option or AT&T
Converted SAR is subject, rounded to the nearest one-hundredth of a cent.
Notwithstanding the foregoing, the number of shares and the per share exercise
price of each AT&T Converted Stock Option that is, as of the Effective Time,
after giving effect to any vesting as a result of the transactions contemplated
hereby, an "incentive stock option" (as defined in Section 422 of the Code) and
each related AT&T Converted SAR, if any, shall be adjusted in accordance with
the requirements of Section 424 of the Code. Accordingly, with respect to any
incentive stock options, fractional shares shall be rounded down to the nearest
whole number of shares, and, where necessary, the per share exercise price shall
be rounded up to the nearest cent. For purposes of this Section 4.02, the fair
market value of a share of Parent Indexed Stock shall be determined using the
opening per-share price of Parent Indexed Stock as listed on Nasdaq as of the
opening of trading on the first Trading Day following the Effective Time;
provided, however, that if the Effective Time occurs at a time when Nasdaq is
open for trading, fair market value shall be determined using the price at which
Parent Indexed Stock trades as of the moment immediately after the Effective
Time; provided, further, that if the Effective Time occurs prior to the opening
of trading on Nasdaq, the fair market value shall be determined using the price
at which the Parent Indexed Stock first trades after the opening of trading on
this day.
(ii) At the Effective Time, all shares of AT&T Broadband restricted
stock outstanding as of the Effective Time shall be converted automatically
into the right to receive Parent Common Stock on the terms and conditions
set forth in the applicable sections of this Article 4 and all other equity
based awards based upon shares of AT&T Broadband Common Stock
(collectively, the "AT&T EQUITY AWARDS") outstanding as of the Effective
Time shall be converted automatically into equivalent awards based upon
shares of Parent Indexed Stock (collectively, the "AT&T CONVERTED
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EQUITY AWARDS"), and on the same terms and conditions as applied to such
AT&T Equity Award immediately before the Effective Time (including without
limitation any vesting as a result of the consummation of the transactions
contemplated hereby); provided, however, that from and after the Effective
Time, the number of shares of Parent Indexed Stock subject to such AT&T
Converted Equity Award shall be equal to the number of shares of Parent
Indexed Stock whose fair market value, immediately after the Effective
Time, is equal to the aggregate fair market value, determined immediately
prior to the Distribution using the AT&T Closing Stock Value, of the AT&T
Common Stock subject to the original equity based award with respect to
which such AT&T Equity Award was issued pursuant to the Employee Benefits
Agreement.
(iii) At or prior to the Effective Time, Parent shall reserve for
issuance the number of shares of Parent Indexed Stock necessary to satisfy
Parent's obligations under this Section 4.02(g). No later than five
Business Days after the Effective Time, Parent shall file with the SEC a
registration statement on Form S-8 (or other appropriate form) (an "S-8")
under the 1933 Act with respect to the shares of Parent Indexed Stock
subject to AT&T Converted Stock Options, AT&T Converted SARs and AT&T
Converted Equity Awards issued pursuant to this Section 4.02(g), and shall
use all reasonable best efforts to maintain the effectiveness of the
applicable S-8 and current status of the prospectus related to the
applicable S-8, as well as comply with any applicable state securities or
"blue sky" laws, for so long as any such AT&T Converted Stock Options, AT&T
Converted SARs and/or AT&T Converted Equity Awards remain outstanding.
(h) Comcast Stock Options. (i) At the Effective Time, all options to
purchase shares of Comcast Class A Special Common Stock ("COMCAST STOCK
OPTIONS") granted by Comcast or any Comcast Subsidiary pursuant to the terms of
any stock option or incentive plan and held, as of the Effective Time, by and
employee of Comcast of any Comcast Subsidiary (or any beneficiary thereof) shall
cease to represent rights to purchase shares of Comcast Class A Special Common
Stock and shall be converted automatically into options to purchase ("COMCAST
CONVERTED STOCK OPTIONS"), on the same terms and conditions as applied to such
Comcast Stock Option immediately prior to the Effective Time, that number of
shares of Parent Indexed Stock, rounded to the nearest whole share, whose fair
market value, immediately after the Effective Time, is equal to the aggregate
fair market value, determined immediately prior to the Effective Time, of the
Comcast Class A Special Common Stock subject to such Comcast Stock Option, at a
per share exercise price equal to the aggregate exercise price of such Comcast
Stock Option divided by the number of shares of Parent Indexed Common Stock to
which such Comcast Converted Stock Option is subject. Notwithstanding the
foregoing, the number of shares and the per share exercise price of each Comcast
Converted Stock Option that is, as of the Effective Time, an "incentive stock
option" (as defined in Section 422 of the Code) and each related Comcast
Converted SAR, if any, shall be adjusted in accordance with the requirements of
Section 424 of the Code. Accordingly, with respect to any incentive stock
options, fractional shares shall be rounded down to the nearest whole number of
shares, and, where necessary, the per share exercise price shall be rounded up
to the nearest cent.
(ii) At the Effective Time, all shares of Comcast restricted stock
outstanding as of the Effective Time shall be converted automatically into
the right to receive Parent Common Stock on the terms and conditions set
forth in the applicable sections of this Article 4 and all other equity
based awards based upon shares of Comcast Class A Special Common Stock
(collectively, the "COMCAST EQUITY AWARDS") shall be converted
automatically into equivalent awards based upon shares of Parent Indexed
Stock (collectively, the "COMCAST CONVERTED EQUITY AWARDS"), and on the
same terms and conditions as applied to such Comcast Equity Award
immediately prior to the Effective Time. The number of shares of Parent
Indexed Stock subject to such Comcast Converted Equity Award shall be the
number of shares of Parent Indexed Stock, rounded to the nearest share,
whose fair market value, immediately after the Effective Time, is equal to
the aggregate fair market value, determined immediately prior to the
Effective Time, of the shares of Comcast Common Stock that were subject to
such Comcast Equity Award.
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(iii) At or prior to the Effective Time, Parent shall reserve for
issuance the number of shares of Parent Indexed Stock necessary to satisfy
Parent's obligations under this Section 4.02(h). No later than five
Business days after the Effective Time, Parent shall file with the SEC an
S-8 under the 1933 Act with respect to the shares of Parent Indexed Stock
subject to the Comcast Converted Stock Options and Comcast Converted Equity
Awards issued pursuant to this Section 4.02(h), and shall use reasonable
best efforts to maintain the effectiveness of the applicable S-8 and
current status of the prospectus related to the applicable S-8, as well as
comply with any applicable state securities or "blue sky" laws, for so long
as any such Comcast Converted Stock Options and/or Comcast Converted Equity
Awards remain outstanding.
(i) No Liability. None of the parties hereto or the Exchange Agent shall
be liable to any Person in respect of any shares of Parent Common Stock (or
dividends or distributions with respect thereto) or cash from the Exchange Fund
or the Common Stock Trust delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law. If any Certificates shall
not have been surrendered prior to any date on which any shares of Parent Common
Stock, any cash in lieu of fractional shares of Parent Common Stock or any
dividends or other distributions with respect to Parent Common Stock in respect
of such Certificate would otherwise escheat to or become the property of any
Governmental Authority, any such shares, cash, dividends or other distributions
in respect of such Certificate shall, to the extent permitted by applicable law,
become the property of Parent, free and clear of all claims or interest of any
Person previously entitled thereto.
(j) Investment of Exchange Fund and Common Stock Trust. The Exchange Agent
shall invest any cash included in the Exchange Fund and Common Stock Trust, as
directed by Parent, on a daily basis; provided that no such investment or loss
thereon shall affect the amounts payable or the timing of the amounts payable to
AT&T Broadband or Comcast shareholders pursuant to this Article 4. Any interest
and other income resulting from such investments shall be paid to Parent.
(k) Lost Certificates. If any Certificate is lost, stolen or destroyed,
upon the making of an affidavit of that fact by the Person claiming such
Certificate to be lost, stolen or destroyed and executing an indemnity
reasonably satisfactory to Parent (and, if required by Parent in the case of a
Certificate representing more than 1,000 shares, the posting by such Person of a
bond, in such reasonable amount as Parent may direct, as indemnity) against any
claim that may be made against it with respect to such Certificate, the Exchange
Agent will issue, in exchange for such lost, stolen or destroyed Certificate and
in respect of the shares of AT&T Broadband Common Stock or Comcast Common Stock,
as the case may be, formerly represented by such lost Certificate, a certificate
representing that number of whole shares of Parent Common Stock that such holder
has the right to receive pursuant to the provisions of this Article 4, cash in
lieu of any fractional shares of Parent Common Stock to the extent provided in
Section 4.02(e) and any dividends or distributions to the extent provided in
Section 4.02(c).
(l) Notwithstanding anything to the contrary contained in Section 4.02,
Comcast and AT&T shall mutually agree upon an arrangement whereby holders of
shares of AT&T Broadband Common Stock shall not be required to deliver
Certificates to the Exchange Agent prior to receiving a certificate representing
the shares of Parent Common Stock into which their shares of AT&T Broadband
Common Stock have been converted in accordance with Section 4.01, any cash in
lieu of fractional shares payable to such holder pursuant to Section 4.02(e) or
dividends or other distributions on their shares of Parent Common Stock. Under
such arrangements, the parties shall instruct the Exchange Agent (i) not to mail
to any such holder of AT&T Broadband Common Stock the transmittal materials
referred to in Section 4.02(b) and (ii) to deliver the appropriate merger
consideration to each such holder of AT&T Broadband Common Stock as soon as
reasonably practicable after the Effective Time. The parties shall cooperate to
agree upon procedures to effect book entry transfers in respect of the
foregoing.
(m) If (i) any holder of AT&T Common Stock does not receive shares of AT&T
Broadband Common Stock in the Distribution in respect of such holder's shares of
AT&T Common Stock because such holder has purported to exercise rights pursuant
to Section 910 of the NYBCL in respect of such holder's shares of AT&T Common
Stock and (ii) such rights are subsequently invalidated or such holder
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subsequently withdraws his purported exercise of such rights, then Parent shall
deliver to such holder at such time the merger consideration payable pursuant to
this Article 4 in respect of the shares of AT&T Broadband Common Stock issuable
in the Distribution in respect such holder's shares of AT&T Common Stock.
SECTION 4.03. Section 355(e) Top-up. (a) In the event that the A
Shareholder Approval has been obtained and if, but for a disparity in the per
share value of the Parent Class A Common Stock and the Parent Class A Special
Common Stock, the Qualified Holders would have received a number of shares of
Parent Common Stock pursuant to Section 4.01(a)(iii) at the Effective Time that
represents more than 50% of the total value of all shares of Parent Common
Stock, Parent shall issue additional shares of Parent Common Stock to the same
holders of record of AT&T Broadband Common Stock in an amount sufficient to
ensure that Qualified Holders will be treated as holding at the Effective Time
more than 50% of the value of all shares of Parent Common Stock; provided,
however, that Parent shall not be obligated to issue additional shares pursuant
to this Section 4.03(a) to the extent that AT&T has issued shares in breach of
Section 8.01(v) of this Agreement.
(b) In the event that the A Shareholder Approval has not been obtained and
if, but for a disparity in the per share value of the Parent Class C Common
Stock and the Parent Class A Special Common Stock, the Qualified Holders would
have received a number of shares of Parent Common Stock pursuant to Section
4.01(c)(iii) at the Effective Time that represents more than 50% of the total
value of all shares of Parent Common Stock, Parent shall issue additional shares
of Parent Common Stock to the same holders of record of AT&T Broadband Common
Stock in an amount sufficient to ensure that Qualified Holders will be treated
as holding at the Effective Time more than 50% of the value of all shares of
Parent Common Stock; provided, however, that Parent shall not be obligated to
issue additional shares pursuant to this Section 4.03(b) to the extent that AT&T
has issued shares in breach of Section 8.01(v) of this Agreement.
(c) For purposes of this Section 4.03, (i) "QUALIFIED HOLDERS" shall mean
the holders of AT&T Broadband Common Stock other than holders that receive such
shares "pursuant to a plan or series of related transactions" with the
Distribution (within the meaning of Section 355(e) of the Code) and (ii) the
total value of all shares of Parent Common Stock shall be determined in
accordance with Section 4.03 of the Comcast Disclosure Schedule.
SECTION 4.04. Additional Payment. (a) In the event that the A Shareholder
Approval has been obtained and prior to the Effective Time Standard and Poors'
has not committed that the Parent Class A Common Stock will be included in the
Index immediately after the Effective Time, then in addition to the
consideration payable pursuant to Section 4.01(a)(iii), each holder of shares of
AT&T Broadband Common Stock shall be entitled to receive, in exchange for each
of such holder's shares, a non-transferable security (the "K/A SECURITY")
entitling the holder to the rights described in the next sentence. Each holder
of a K/A Security shall be entitled to receive from Parent, in exchange for and
in full satisfaction of such holder's rights under such K/A Security, a number
of shares of Parent Class A Common Stock equal to the product of (i) the
Exchange Ratio and (ii) the K/A Price Differential; provided that if the Parent
Class A Common Stock is included in the Index at any time prior to the end of
the Pricing Period, all rights under the K/A Security shall immediately
terminate. The number of shares of Parent Class A Common Stock issuable pursuant
to the preceding sentence (if any) in respect of each K/A Security will be
reduced by the number of shares of Parent Class A Common Stock previously issued
pursuant to Section 4.03(a) (if any) in respect of each share of AT&T Broadband
Common Stock.
(b) In the event that the A Shareholder Approval has not been obtained and
prior to the Effective Time Standard and Poors' has not committed that the
Parent Class C Common Stock will be included in the Index immediately after the
Effective Time, then in addition to the consideration payable pursuant to
Section 4.01(c)(iii), each holder of shares of AT&T Broadband Common Stock shall
be entitled to receive, in exchange for each of such holder's shares, a
non-transferable security (the "K/C SECURITY") entitling the holder to the
rights described in the next sentence. Each holder of a K/C Security shall be
entitled to receive from Parent, in exchange for and in full satisfaction of
such holder's rights under such
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K/C Security, a number of shares of Parent Class C Common Stock equal to the
product of (i) the Exchange Ratio and (ii) the K/C Price Differential; provided
that if the Parent Class C Common Stock is included in the Index at any time
prior to the end of the Pricing Period, all rights under the K/C Security shall
immediately terminate. The number of shares of Parent Class C Common Stock
issuable pursuant to the preceding sentence (if any) in respect of each K/C
Security will be reduced by the number of shares of Parent Class C Common Stock
previously issued pursuant to Section 4.03(b) (if any) in respect of each share
of AT&T Broadband Common Stock.
SECTION 4.05. Additional Exchange Arrangements. In the event that any
additional shares of Parent Common Stock will be issued pursuant to Section
4.03, Parent will enter into arrangements with the Exchange Agent (which
arrangements will be comparable to the arrangements described in Section 4.02
and will be mutually agreed upon by Comcast and AT&T) providing for the delivery
to the applicable holders of shares of Parent Common Stock of such additional
shares of Parent Common Stock as soon as reasonably practicable after such
additional shares become payable pursuant to Section 4.03. In the event that any
K/A Securities or K/C Securities will be issued pursuant to Section 4.04, or any
additional shares of Parent Common Stock will be issued in respect of any K/A
Securities or K/C Securities pursuant to Section 4.04, Parent will enter into
arrangements with the Exchange Agent (which arrangements will be comparable to
the arrangements described in Section 4.02 and will be mutually agreed upon by
Comcast and AT&T) providing for the delivery to the applicable Persons of such
Securities or such additional shares of Parent Common Stock as soon as
reasonably practicable after such Securities or additional shares become payable
pursuant to Section 4.04.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF COMCAST
Except as set forth in the Comcast Disclosure Schedule, regardless of
whether the relevant Section herein refers to the Comcast Disclosure Schedule,
or in the Specified Comcast SEC Documents filed prior to the date hereof,
Comcast represents and warrants to AT&T as follows:
SECTION 5.01. Corporate Existence and Power. Comcast is a corporation
duly incorporated, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania and has all corporate powers required to carry on
its business as currently conducted. Comcast is duly qualified to do business as
a foreign corporation and is in good standing in each jurisdiction where such
qualification is necessary, except for those jurisdictions where failure to be
so qualified, individually or in the aggregate, has not had and would not
reasonably be expected to have a Comcast Material Adverse Effect. Comcast has
heretofore delivered or made available to AT&T true and complete copies of the
articles of incorporation and bylaws of Comcast as currently in effect.
SECTION 5.02. Corporate Authorization. (a) The execution, delivery and
performance by Comcast of this Agreement and the consummation by Comcast of the
transactions contemplated hereby are within Comcast's corporate powers and,
except for the Comcast Shareholders' Approval, have been duly authorized by all
necessary corporate action on the part of Comcast. This Agreement constitutes a
valid and binding agreement of Comcast, enforceable against Comcast in
accordance with its terms, except (i) as the same may be limited by applicable
bankruptcy, insolvency, moratorium or similar laws of general application
relating to or affecting creditors' rights and (ii) for the limitations imposed
by general principles of equity.
(b) At a meeting duly called and held, Comcast's Board of Directors has
unanimously (i) determined that this Agreement and the transactions contemplated
hereby is fair to and in the best interests of Comcast shareholders; (ii)
approved and adopted this Agreement and the transactions contemplated hereby;
and (iii) resolved to recommend adoption of this Agreement by Comcast
shareholders.
SECTION 5.03. Governmental Authorization. The execution, delivery and
performance by Comcast of this Agreement and the consummation by Comcast of the
transactions contemplated hereby require no
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action by or in respect of, or filing with, any United States federal, state or
local, foreign or supranational governmental body, agency, official or authority
(a "GOVERNMENTAL AUTHORITY"), other than (a) notices to, or consents or waivers
from, the relevant Franchising Authorities in respect of the Franchises for the
Systems owned and operated by Comcast or the Comcast Subsidiaries (the "COMCAST
FRANCHISE CONSENTS"), and the FCC in connection with a change of control and/or
assignment of the holder of the FCC licenses of Comcast and the Comcast
Subsidiaries ("COMCAST LICENSE CONSENTS"); (b) notices to, consents or waivers
from the state public service and public utilities commissions having
jurisdiction over the assets of Comcast and the Comcast Subsidiaries ("COMCAST
PUC CONSENTS"); (c) the filing of the PA Articles of Merger pursuant to the PBCL
and appropriate documents with the relevant authorities of other states in which
Comcast is qualified to do business; (d) compliance with any applicable
requirements of the HSR Act; (e) compliance with any applicable requirements of
the 1933 Act, the 1934 Act, and any other applicable securities laws, whether
United States state or foreign; and (f) any actions or filings the absence of
which, individually or in the aggregate, would not reasonably be expected to
have a Comcast Material Adverse Effect or prohibit or materially impair or delay
the ability of Comcast to consummate the transactions contemplated by this
Agreement.
SECTION 5.04. Non-contravention. The execution, delivery and performance
by Comcast of this Agreement and the consummation by Comcast of the transactions
contemplated hereby do not and will not (a) contravene, conflict with, or result
in any violation or breach of any provision of the articles of incorporation or
bylaws of Comcast; (b) assuming compliance with the matters referred to in
Section 5.03, contravene, conflict with or result in a violation or breach of
any provision of any applicable law, statute, ordinance, rule, regulation,
judgment, injunction, order, or decree; (c) assuming compliance with the matters
referred to in Section 5.03, require any consent or other action by any Person
under, constitute a default (or an event that, with or without notice or lapse
of time or both, would constitute a default) under, or cause or permit the
termination, cancellation, acceleration, triggering or other change of any right
or obligation or the loss of any benefit to which Comcast or any Comcast
Subsidiary is entitled under (i) any provision of any agreement or other
instrument binding upon Comcast or any Comcast Subsidiary or any of their
respective assets or properties or (ii) any license, franchise, permit,
certificate, approval or other similar authorization held by, or affecting, or
relating in any way to, the assets, properties or business of, Comcast or any
Comcast Subsidiary; or (d) result in the creation or imposition of any Lien on
any asset or property of Comcast or any Comcast Subsidiary, other than such
exceptions in the case of clauses (b), (c) and (d) above as would not,
individually or in the aggregate, reasonably be expected to have a Comcast
Material Adverse Effect or prohibit or materially impair or delay the ability of
Comcast to consummate the transactions contemplated hereby.
SECTION 5.05. Capitalization. (a) The authorized capital stock of Comcast
consists of (i) 200,000,000 shares of Comcast Class A Common Stock, (ii)
50,000,000 shares of Comcast Class B Common Stock, (iii) 2,500,000,000 shares of
Comcast Class A Special Common Stock and (iv) 20,000,000 shares of preferred
stock. As of the close of business on November 30, 2001, there were outstanding
(1) 21,829,422 shares of Comcast Class A Common Stock, (2) 9,444,375 shares of
Comcast Class B Common Stock, (3) 913,778,527 shares of Comcast Class A Special
Common Stock (inclusive of shares issued pursuant to the Comcast ESPP but
exclusive of all shares of restricted stock granted under any compensatory plan
or arrangements), (4) Comcast Stock Options to purchase an aggregate of
55,853,196 shares of Comcast Class A Special Common Stock (of which options to
purchase an aggregate of 16,822,181 shares of Comcast Class A Special Common
Stock were exercisable), (5) phantom shares, stock units, stock appreciation
rights, other stock-based awards or other deferred stock awards issued under any
stock option, compensation or deferred compensation plan or arrangement with
respect to an aggregate of 6,808,916 shares of Comcast Class A Special Common
Stock and (6) no shares of preferred stock. As of November 30, 2001, no shares
of Comcast Common Stock were held in trust or in treasury. All outstanding
shares of capital stock of Comcast have been, and all shares that may be issued
pursuant to any compensatory plan or arrangement will be, when issued in
accordance with the respective terms thereof, duly authorized, validly issued,
fully paid and nonassessable.
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(b) Except as set forth in this Section 5.05 and for changes since November
30, 2001 resulting from the exercise of Comcast Stock Options and the vesting of
Comcast Equity Awards outstanding on such date, including, for the avoidance of
doubt, options to purchase stock under the Comcast ESPP (and the grant or award
of Comcast Stock Options and Comcast Equity Awards in the ordinary course of
business and the exercise thereof, including, for the avoidance of doubt,
options to purchase stock under the Comcast ESPP), there are no outstanding (i)
shares of capital stock or voting securities of Comcast, (ii) securities of
Comcast or any Comcast Subsidiary convertible into or exchangeable for shares of
capital stock or voting securities of Comcast or (iii) options or other rights
to acquire from Comcast or any Comcast Subsidiary, or other obligations of
Comcast or any Comcast Subsidiary to issue, any capital stock, voting securities
or securities convertible into or exchangeable for capital stock or voting
securities of Comcast. There are no outstanding obligations of Comcast or any
Comcast Subsidiary to repurchase, redeem or otherwise acquire any of the
securities referred to in clause (i), (ii) or (iii) above (collectively, the
"COMCAST SECURITIES").
SECTION 5.06. Subsidiaries. (a) Each Comcast Subsidiary is a corporation
or other legal entity duly organized, validly existing and in good standing
under the laws of its jurisdiction of organization and has all corporate,
partnership or other similar powers required to carry on its business as
currently conducted, other than such exceptions as, individually or in the
aggregate, have not had and would not reasonably be expected to have a Comcast
Material Adverse Effect. Each Comcast Subsidiary is duly qualified to do
business as a foreign corporation or other foreign legal entity and is in good
standing in each jurisdiction where such qualification is necessary, other than
such exceptions as, individually or in the aggregate, have not had and would not
reasonably be expected to have a Comcast Material Adverse Effect. Section
5.06(a) of the Comcast Disclosure Schedule sets forth a list of all Comcast
Significant Subsidiaries and their respective jurisdictions of organization.
(b) All of the outstanding capital stock of, or other voting securities or
ownership interests in, each Comcast Significant Subsidiary is owned by Comcast,
directly or indirectly, free and clear of any Lien and free of any other
limitation or restriction (including any restriction on the right to vote, sell
or otherwise dispose of such capital stock or other voting securities or
ownership interests). There are no outstanding (i) securities of Comcast or any
Comcast Subsidiary convertible into or exchangeable for shares of capital stock
or other voting securities or ownership interests in any Comcast Significant
Subsidiary or (ii) options or other rights to acquire from Comcast or any
Comcast Subsidiary, or other obligations of Comcast or any Comcast Subsidiary to
issue, any capital stock, or other voting securities or ownership interests in,
or any securities convertible into or exchangeable for any capital stock or
other voting securities or ownership interests in, any Comcast Significant
Subsidiary. There are no outstanding obligations of Comcast or any Comcast
Significant Subsidiary to repurchase, redeem or otherwise acquire any of the
items referred to in clauses (i) and (ii) above.
SECTION 5.07. SEC Filings. (a) Comcast has delivered or made available to
AT&T (i) Comcast's annual reports on Form 10-K for its fiscal years ended
December 31, 2000, 1999 and 1998, (ii) Comcast's proxy or information statements
relating to meetings of, or actions taken without a meeting by, Comcast
shareholders held since December 31, 1998, and (iii) all of Comcast's other
reports, statements, schedules and registration statements filed with the SEC
since December 31, 1998 (the documents referred to in clauses (i), (ii) and
(iii) above, collectively, the "COMCAST SEC DOCUMENTS").
(b) As of its filing date (and, if amended or superceded by a filing prior
to the date of this Agreement or the Effective Time, then on the date of such
filing), each Comcast SEC Document complied as to form in all material respects
with the applicable requirements of the 1933 Act and the 1934 Act, as the case
may be.
(c) As of its filing date (and, if amended or superceded by a filing prior
to the date of this Agreement or the Effective Time, then on the date of such
filing), each Comcast SEC Document filed pursuant to the 1934 Act did not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading.
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(d) Each Comcast SEC Document that is a registration statement, as amended
or supplemented, if applicable, filed pursuant to the 1933 Act, as of the date
such registration statement or amendment became effective, did not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading.
SECTION 5.08. Financial Statements. The audited consolidated financial
statements and unaudited consolidated interim financial statements of Comcast
included in the Comcast SEC Documents fairly present, in all material respects,
in conformity with United States generally accepted accounting principles
("GAAP") applied on a consistent basis (except as may be indicated in the notes
thereto), the consolidated financial position of Comcast and its consolidated
Subsidiaries as of the respective dates thereof and their consolidated results
of operations and cash flows for the periods then ended (subject to normal
year-end adjustments in the case of any unaudited interim financial statements).
SECTION 5.09. Information Supplied. The information supplied by Comcast
for inclusion or incorporation in the registration statement on Form S-4 or any
amendment or supplement thereto pursuant to which shares of Parent Common Stock
(and any K/A Securities or K/C Securities) issuable in the Mergers will be
registered with the SEC (the "REGISTRATION STATEMENT") shall not at the time the
Registration Statement is declared effective by the SEC contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The information
supplied by Comcast for inclusion in the joint proxy statement/prospectus or any
amendment or supplement thereto (the "JOINT PROXY STATEMENT") to be sent to
Comcast shareholders in connection with their meeting to consider this Agreement
and the Comcast Merger (the "COMCAST SHAREHOLDERS' MEETING") and to be sent to
AT&T shareholders in connection with their meeting to consider this Agreement
and the AT&T Broadband Merger (the "AT&T SHAREHOLDERS' MEETING") shall not, on
the date the Joint Proxy Statement is first mailed to the shareholders of each
of Comcast and AT&T, at the time of the Comcast Shareholders' Meeting, at the
time of the AT&T Shareholders' Meeting or at the Effective Time, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
SECTION 5.10. Absence of Certain Changes. Since the Comcast Balance Sheet
Date, the business of Comcast and the Comcast Subsidiaries has been conducted in
the ordinary course of business consistent with past practices, and there has
not been (i) any event, occurrence or development of a state of circumstances or
facts that, individually or in the aggregate, has had or would reasonably be
expected to have a Comcast Material Adverse Effect or (ii) any action, event,
occurrence or transaction that would have been prohibited by clause (iii), (iv),
(vii), (viii) or (ix) of Section 7.01 if this Agreement had been in effect at
the time thereof or any agreement, arrangement or commitment in respect of any
action, event, occurrence or transaction that would have been prohibited by the
foregoing clauses of Section 7.01 if this Agreement had been in effect at the
time thereof.
SECTION 5.11. No Undisclosed Material Liabilities. There are no
liabilities or obligations of Comcast or any Comcast Subsidiary of any kind
whatsoever, whether accrued, contingent, absolute, determined, determinable or
otherwise, and there is no existing condition, situation or set of circumstances
that would reasonably be expected to result in such a liability or obligation,
other than:
(a) liabilities or obligations disclosed and provided for in the
Comcast Balance Sheet or in the notes thereto;
(b) liabilities or obligations incurred since the Comcast Balance
Sheet Date in the ordinary course of business of the Comcast Group
consistent with past practice;
(c) liabilities or obligations under commercial transactions and
agreements in accordance with their terms or arising in compliance with
applicable laws, statutes, ordinances, rules or regulations; or
(d) liabilities or obligations that, individually or in the aggregate,
have not had and would not reasonably be expected to have a Comcast
Material Adverse Effect.
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SECTION 5.12. Compliance with Laws and Court Orders. Comcast and the
Comcast Subsidiaries hold all licenses, franchises, certificates, consents,
permits, qualifications and authorizations from all Governmental Authorities
necessary for the lawful conduct of their business, except where the failure to
hold any of the foregoing, individually or in the aggregate, has not had and
would not reasonably be expected to have a Comcast Material Adverse Effect.
Comcast and each of the Comcast Subsidiaries are, and have been in compliance
with, and to the knowledge of Comcast, are not under investigation with respect
to and have not been threatened to be charged with or given notice of any
violation of, any such license, franchise, certificate, consent, permit,
qualification or authorization, or any applicable law, statute, ordinance, rule,
regulation, judgment, injunction, order or decree, except for failures to comply
or violations that, individually or in the aggregate, have not had and would not
reasonably be expected to have a Comcast Material Adverse Effect.
SECTION 5.13. Litigation. There is no action, suit, investigation or
proceeding (or any basis therefor) pending against, or, to the knowledge of
Comcast, threatened against or affecting, Comcast, any Comcast Subsidiary or any
of their respective assets or properties before any court or arbitrator or
before or by any other Governmental Authority, that, individually or in the
aggregate, would reasonably be expected to have a Comcast Material Adverse
Effect.
SECTION 5.14. Finders' Fees. Except for Morgan Stanley & Co.
Incorporated, J.P. Morgan Securities Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Quadrangle Group, whose fees will be paid by Comcast, there is
no investment banker, broker, finder or other intermediary that has been
retained by or is authorized to act on behalf of Comcast or any Comcast
Subsidiary who might be entitled to any fee or commission in connection with the
transactions contemplated by this Agreement and the other Transaction
Agreements. A copy of Comcast's engagement agreement with each of Morgan Stanley
& Co. Incorporated, J.P. Morgan Securities Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Quadrangle Group has been provided to AT&T.
SECTION 5.15. Opinion of Financial Advisor. Comcast has received an
opinion of each of Morgan Stanley & Co. Incorporated, J.P. Morgan Securities
Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, financial advisors to
Comcast, to the effect that, as of the date hereof, the conversion ratios in the
Comcast Merger applicable to the holders of Comcast Common Stock, in the
aggregate, are fair, from a financial point of view, to the Comcast
shareholders, taken together.
SECTION 5.16. Taxes. Except as would not, individually or in the
aggregate, reasonably be expected to have a Comcast Material Adverse Effect, (a)
all Comcast and Comcast Subsidiary Tax Returns required to be filed on or before
the Effective Time with any taxing authority by, or with respect to, Comcast and
the Comcast Subsidiaries have been or will be timely filed (taking into account
extensions) and are or will be correct in all respects (other than with respect
to Taxes for which adequate reserves are reflected on the Comcast Balance
Sheet); (b) Comcast and the Comcast Subsidiaries have timely paid or will timely
pay all Taxes shown as due and payable on the Comcast Tax Returns that have been
or will be so filed, and, as of the time of filing, the Comcast Tax Returns
correctly reflected the facts regarding the income, business, assets,
operations, activities and the status of Comcast and the Comcast Subsidiaries
(other than with respect to Taxes for which adequate reserves are reflected on
the Comcast Balance Sheet); (c) Comcast and the Comcast Subsidiaries have made
provision for all Taxes payable by Comcast and the Comcast Subsidiaries for
which no Comcast Tax Return has yet been filed; (d) there is no action, suit,
proceeding, audit or claim currently proposed or pending against or with respect
to Comcast or any Comcast Subsidiary in respect of any Tax where there is a
reasonable possibility of an adverse determination; (e) the United States
federal income Tax Returns of Comcast and the Comcast Subsidiaries have been
examined and settled with the IRS (or the applicable statutes of limitation for
the assessment of United States federal income Taxes for such periods have
expired) for all years through 1993; (f) no extension of the statute of
limitations on the assessment of any Taxes has been granted by Comcast or any
Comcast Subsidiary and is currently in effect; (g) except for complete and
accurate copies of Tax sharing agreements and amendments thereto made available
to AT&T prior to the execution of this Agreement and listed in Section 5.16 of
the Comcast Disclosure Schedule, no agreements relating to the allocation or
sharing of Taxes exist between Comcast and/or any of the Comcast Subsidiaries,
on
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the one hand, and a third party, on the other hand; and (h) there are no Liens
for Taxes on any of the assets of Comcast or any Comcast Subsidiary except Liens
for current Taxes not yet due and payable. "TAXES" means (i) any and all taxes,
charges, fees, levies or other assessments, including all net income, gross
income, gross receipts, excise, stamp, real or personal property, ad valorem,
withholding, social security (or similar), unemployment, occupation, use,
service, service use, license, net worth, payroll, franchise, severance,
transfer, recording, employment, premium, windfall profits, environmental,
customs duties, capital stock, profits, disability, sales, registration, value
added, alternative or add-on minimum, estimated or other taxes, assessments or
charges imposed by any Governmental Authority and any interest, penalties, or
additions to tax attributable thereto, (ii) liability for the payment of any
amount imposed on any Person of the type described in clause (i) as a result of
being or having been before the Effective Time a member of an affiliated,
consolidated, combined or unitary group and (iii) any liability for the payment
of any amount imposed on any Person of the type described in (i) as a result of
any existing express or implied indemnification agreement or arrangement. "TAX
RETURNS" means any return, report, form or similar statement required to be
filed with respect to any Tax (including any attached schedules), including any
information return, claim for refund, amended return or declaration of estimated
Tax.
SECTION 5.17. Tax Opinions. Neither Comcast nor any Comcast Subsidiary
has taken any action or knows of any facts or circumstances relating to Comcast
or any Comcast Subsidiary that would prevent (i) the ruling or opinion referred
to in Section 10.01(j) from being obtained or (ii) Davis Polk & Wardwell from
delivering the opinion referred to in Section 10.03(b) as of the date hereof.
SECTION 5.18. Employee Benefit Plans and Labor Matters. Except as have
not had and would not reasonably be expected to have, individually or in the
aggregate, a Comcast Material Adverse Effect:
(a) Section 5.18(a) of the Comcast Disclosure Schedule contains a true
and complete list, as of the date hereof, of all Comcast Employee Plans and
all Comcast Benefit Arrangements. Copies of each Comcast Employee Plan and
each Comcast Benefit Arrangement (and, if applicable, related trust
agreements) and all amendments thereto have been made available to AT&T as
of the date hereof, together with the three most recent annual reports
(Form 5500, including, if applicable, Schedule B thereto) and the most
recent actuarial valuation report prepared in connection with any Comcast
Employee Plan.
(b) Neither Comcast nor any ERISA Affiliate nor any predecessor
thereof sponsors, maintains or contributes to any Comcast Employee Plan
subject to Title IV of ERISA. Neither Comcast nor any ERISA Affiliate has
any liability under Title IV of ERISA.
(c) As of September 30, 2001, the aggregate unfunded liability of
Comcast and any Comcast Subsidiary in respect of all Comcast Deferred
Compensation Plans, computed using reasonable actuarial assumptions and
determined as if all benefits under such plans were vested and payable as
of such date, did not exceed $180 million.
(d) Neither Comcast or any Comcast Subsidiary has any liability with
respect of post-retirement health, medical or life insurance benefits for
retired, former or current employees of Comcast or the Comcast Subsidiaries
except as required to avoid excise tax under Section 4980B of the Code.
(e) Each Comcast Employee Plan that is intended to be qualified under
Section 401(a) of the Code is so qualified and a favorable determination
letter is currently in effect for each such Comcast Employee Plan. To the
knowledge of Comcast, no fact or circumstance exists giving rise to a
material likelihood that such Comcast Employee Plan would not be treated as
qualified by the Internal Revenue Service.
(f) There is no contract, plan or arrangement (written or otherwise)
covering any employee or former employee of Comcast or any Comcast
Subsidiary that, individually or in the aggregate, could give rise to the
payment of any amount by Comcast or any Comcast Subsidiary that would not
be deductible pursuant to the terms of Sections 162(m) or 280G of the Code.
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(g) Comcast has made available to AT&T, as of the date hereof, a true
and complete list and copies of each material Comcast International Plan,
other than plans mandated by applicable law. According to the actuarial
assumptions and valuations most recently used for the purpose of funding
each Comcast International Plan (or, if the same has no such assumptions
and valuations or is unfunded, according to actuarial assumptions and
valuations in use by the PBGC on the date hereof), as of December 31, 2000,
the total amount or value of the funds available under such Comcast
International Plan to pay benefits accrued thereunder or segregated in
respect of such accrued benefits, together with any reserve or accrual with
respect thereto, exceeded the present value of all benefits (actual or
contingent) accrued as of such date of all participants and past
participants therein in respect of which Comcast or any Comcast Subsidiary
has or would have after the Effective Time any obligation.
(h) Each Comcast Employee Plan, Comcast Benefit Arrangement and
Comcast International Plan has been maintained in compliance with its terms
and with the requirements prescribed by all applicable laws, statutes,
orders, rules and regulations (including any special provisions relating to
registration or qualification where such plan was intended to be so
registered or qualified) and has been maintained in good standing with
applicable Governmental Authorities.
(i) There has been no amendment to, written interpretation or
announcement (whether or not written) by Comcast or any of its Affiliates
relating to, or change in employee participation coverage under, a Comcast
Employee Plan, Comcast Benefit Arrangement or Comcast International Plan
which would increase materially the expense of maintaining such plan above
the level of expense incurred in respect thereof for the fiscal year ended
December 31, 2000.
(j) No employee or former employee or independent contractor of
Comcast or any Comcast Subsidiary will become entitled to any bonus,
retirement, severance, job security or similar benefit or enhanced or
increased such benefit (including acceleration of vesting or exercise of an
incentive award) as a result of the transactions contemplated hereby
(either alone or together with any other event).
(k) Section 5.18(k) of the Comcast Disclosure Schedule sets forth a
list of all collective bargaining agreements to which Comcast or any of the
Comcast Subsidiaries is a party. Neither Comcast nor any of the Comcast
Subsidiaries is involved in or, to the knowledge of Comcast, threatened
with any labor dispute, work stoppage, labor strike, slowdown or grievance.
To the knowledge of Comcast, there is no organizing effort or
representation question at issue with respect to any collective bargaining
unit of Comcast or any of the Comcast Subsidiaries, or any employee of
Comcast or any of the Comcast Subsidiaries.
(l) There are no pending or threatened claims (other than claims for
benefits in the ordinary course), lawsuits or arbitrations that have been
asserted or instituted, and, to the knowledge of Comcast, no set of
circumstances exists that may reasonably give rise to a claim or lawsuit,
against any of the Comcast Benefit Arrangements, the Comcast Employee Plans
and the Comcast International Plans, any fiduciaries thereof with respect
to their duties thereto or the assets of any of the trusts thereunder, that
could reasonably be expected to result in any material liability of Comcast
or any of the Comcast Subsidiaries to the PBGC, the United States
Department of Treasury, the United States Department of Labor, any foreign
governmental authority, any Multiemployer Plan, any of the Comcast Benefit
Arrangements, the Comcast Employee Plans and the Comcast International
Plans, any participant therein, or any other Person.
SECTION 5.19. Environmental Matters. (a) Except as have not had and would
not reasonably be expected to have, individually or in the aggregate, a Comcast
Material Adverse Effect:
(i) no notice, notification, demand, request for information,
citation, summons or order has been received, no complaint has been filed,
no penalty has been assessed, and no investigation, action, claim, suit,
proceeding or review is pending or, to the knowledge of Comcast, threatened
by any Governmental Authority or other Person relating to or arising out of
any Environmental Law;
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(ii) Comcast is and has been in compliance with all Environmental Laws
and all Environmental Permits; and
(iii) there are no liabilities of Comcast or any Comcast Subsidiary of
any kind whatsoever, whether accrued, contingent, absolute, determined,
determinable or otherwise arising under or relating to any Environmental
Law, and there are no facts, conditions, situations or set of circumstances
that would reasonably be expected to result in, or be the basis for, any
such liability.
(b) There have been no environmental investigations, studies, audits,
tests, reviews or other analyses conducted of which Comcast has knowledge in
relation to the current or prior business of Comcast or any Comcast Subsidiary
or any property or facility now or previously owned or leased by Comcast or any
Comcast Subsidiary that reveal matters that, individually or in the aggregate,
have had, or would reasonably be expected to have, a Comcast Material Adverse
Effect.
(c) For purposes of this Section 5.19, the terms "Comcast" and "Comcast
Subsidiary" shall include any entity that is, in whole or in part, a predecessor
of Comcast or any Comcast Subsidiary.
SECTION 5.20. Intellectual Property. With such exceptions as,
individually or in the aggregate, have not had, and would not reasonably be
expected to have, a Comcast Material Adverse Effect, each of Comcast and the
Comcast Subsidiaries owns or has a valid license or other right to use each
trademark, service mark, trade name, invention, patent, trade secret, copyright,
know-how (including any registrations or applications for registration of any of
the foregoing) or any other similar type of proprietary intellectual property
right (collectively, the "COMCAST INTELLECTUAL PROPERTY") necessary to carry on
its business substantially as currently conducted. Neither Comcast nor any
Comcast Subsidiary has received any notice of infringement of or conflict with,
and, to Comcast's knowledge, there are no infringements of or conflicts with,
the rights of any Person with respect to the use of any Comcast Intellectual
Property in the conduct of Comcast's business that, in either such case,
individually or in the aggregate, have had or would reasonably be expected to
have, a Comcast Material Adverse Effect.
SECTION 5.21. Contracts. Neither Comcast nor any of the Comcast
Subsidiaries is a party to or bound by (a) any "material contract" (as defined
in Item 601(b)(10) of Regulation S-K of the SEC) or any agreement, contract or
commitment that would be such a "material contract" but for the exception for
contracts entered into in the ordinary course of business or (b) any
non-competition agreement or any other agreement or obligation that materially
limits or will materially limit Comcast or any of the Comcast Subsidiaries (or,
after the Mergers, Parent, AT&T Broadband or any of the AT&T Broadband
Subsidiaries) from engaging in the business of providing telephony, data
transmission services, cable television or programming content. With such
exceptions as, individually or in the aggregate, have not had, and would not
reasonably be expected to have, a Comcast Material Adverse Effect, (i) each of
the contracts, agreements and commitments of Comcast and the Comcast
Subsidiaries is valid and in full force and effect and (ii) neither Comcast nor
any of the Comcast Subsidiaries has violated any provision of, or committed or
failed to perform any act that, with or without notice, lapse of time, or both,
would constitute a default under the provisions of any such contract, agreement
or commitment. To the knowledge of Comcast, no counterparty to any such
contract, agreement or commitment has violated any provision of, or committed or
failed to perform any act that, with or without notice, lapse of time, or both
would constitute a default or other breach under the provisions of, such
contract, agreement or commitment, except for defaults or breaches that,
individually or in the aggregate, have not had, and would not reasonably be
expected to have, a Comcast Material Adverse Effect. Neither Comcast nor any
Comcast Subsidiary is a party to, or otherwise a guarantor of or liable with
respect to (including pursuant to any keepwell agreement), (i) any material
interest rate, currency or other swap or derivative transaction (other than
those entered into in the ordinary course of business solely for hedging
purposes) or (ii) any Indebtedness of any other Person except a wholly owned
Comcast Subsidiary. Neither Comcast nor any Comcast Subsidiary is a party to any
joint venture or partnership agreement pursuant to which it is obligated to make
capital contributions in excess of (x) $25,000,000 during the current or any
succeeding calendar year or (y) $100,000,000 during the remaining term of such
agreement. Subject to applicable confidentiality restrictions, Comcast has
provided or made available to AT&T prior to the date hereof a
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copy of each agreement of the type described in clause (a) or (b) in the first
sentence of this Section 5.21, in clause (i) or (ii) of the second preceding
sentence of this Section 5.21 or in the immediately preceding sentence.
SECTION 5.22. Vote Required. (a) The only vote of the holders of any
class or series of capital stock of Comcast necessary to approve and adopt this
Agreement and the transactions contemplated hereby is the affirmative vote of
the holders of shares of Comcast Common Stock representing a majority of the
votes cast by such holders ("COMCAST SHAREHOLDERS' APPROVAL"), except that the A
Shareholder Approval is required in order to effect the provisions hereof that
are expressly subject to obtaining the A Shareholder Approval. Assuming Comcast
Shareholder (or its successor) votes to approve and adopt this Agreement and the
transactions contemplated hereby in accordance with the terms of the Support
Agreement, no vote or consent of any other holder of any class or series of
capital stock of Comcast will be required to approve and adopt this Agreement
and the transactions contemplated hereby, except that the A Shareholder Approval
is required in order to effect the provisions hereof that are expressly subject
to obtaining the A Shareholder Approval.
SECTION 5.23. Antitakeover Statutes; Charter and Bylaw Provisions. (a)
Comcast has taken all action necessary to exempt the Comcast Merger and this
Agreement and the transactions contemplated hereby from the restrictions of
Section 2555 of the PBCL or otherwise to make such provisions inapplicable to
this Agreement and the transactions contemplated hereby, and, accordingly,
neither of Section 2555 of the PBCL nor any other antitakeover or similar
statute or regulation applies or purports to apply to any such transactions. No
other "control share acquisition", "fair price", "moratorium" or other
antitakeover laws or regulations enacted under any United States federal, state
or local or foreign laws apply to this Agreement or any of the transactions
contemplated hereby.
SECTION 5.24. AT&T Securities. Neither Comcast nor any Comcast Subsidiary
owns any AT&T Securities.
SECTION 5.25. Transactions with Affiliates. Except as set forth in
Section 5.25 of the Comcast Disclosure Schedule, none of Comcast or any Comcast
Subsidiary is a party (and since December 31, 2000 none of Comcast or any
Comcast Subsidiary has been a party) to any material business arrangement or
business relationship with any Comcast Affiliate (other than another member of
the Comcast Group), and no Comcast Affiliate (other than another member of the
Comcast Group) owns (or has owned since such date) any material property or
right, tangible or intangible, that is used in the business of any member of the
Comcast Group.
SECTION 5.26. Investments. Section 5.26 of the Comcast Disclosure
Schedule sets forth a list of each material investment of Comcast or any Comcast
Subsidiary in any Person (other than a Subsidiary). Neither Comcast nor any
Comcast Subsidiary has any material liability in respect of any such investment.
SECTION 5.27. No Approval Rights. Comcast has not granted any third party
any right to approve any waiver that Comcast may elect to grant to AT&T under
Section 8.01(xiii).
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF AT&T
Except as set forth (i) in the AT&T Disclosure Schedule, regardless of
whether the relevant Section herein refers to the AT&T Disclosure Schedule, or
(ii) (except with respect to Sections 6.08(c), 6.26, 6.27 and 6.28) in the
Specified AT&T SEC Documents filed prior to the date hereof (to the extent the
relevance of any disclosure in any of such Specified AT&T SEC Documents to the
AT&T Broadband Group is reasonably apparent on the face of such disclosure),
AT&T represents and warrants to Comcast as follows:
SECTION 6.01. Corporate Existence and Power. Each of AT&T and the AT&T
Subsidiaries that is or will be a party to a Transaction Agreement is a
corporation or other entity duly incorporated or formed, validly existing and in
good standing under the laws of the state of its incorporation or formation and
has
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all corporate or other powers required to carry on its business as currently
conducted. Each of AT&T and the AT&T Subsidiaries that is or will be a party to
a Transaction Agreement is duly qualified to do business and is in good standing
in each jurisdiction where such qualification is necessary, except for those
jurisdictions where failure to be so qualified, individually or in the
aggregate, has not had and would not reasonably be expected to have an AT&T
Broadband Material Adverse Effect. AT&T has heretofore delivered or made
available to Comcast true and complete copies of the certificate of
incorporation, bylaws or other organizational document of AT&T and each AT&T
Subsidiary that is or will be a party to a Transaction Agreement, as currently
in effect.
SECTION 6.02. Corporate Authorization. (a) The execution, delivery and
performance by AT&T and the AT&T Subsidiaries of the Transaction Agreements to
which they are or will be party and the consummation by AT&T and the AT&T
Subsidiaries of the transactions contemplated hereby and thereby are within
AT&T's and the AT&T Subsidiaries' corporate or other powers and, except for the
AT&T Shareholders' Approval, have been duly authorized by all necessary
corporate action on the part of AT&T and the AT&T Subsidiaries. Each Transaction
Agreement to which AT&T or any AT&T Subsidiary is or will be a party constitutes
or will when executed constitute a valid and binding agreement of AT&T and each
AT&T Subsidiary that is a party thereto, enforceable against AT&T and each such
AT&T Subsidiary in accordance with its terms, except (i) as the same may be
limited by applicable bankruptcy, insolvency, moratorium or similar laws of
general application relating to or affecting creditors' rights and (ii) for the
limitations imposed by general principles of equity.
(b) At meetings duly called and held, AT&T's Board of Directors and AT&T
Broadband's Board of Directors unanimously (i) determined that this Agreement
and the transactions contemplated hereby are fair to and in the best interests
of AT&T shareholders and AT&T Broadband shareholders, respectively; (ii)
approved and adopted this Agreement and the transactions contemplated hereby;
and (iii) resolved to recommend adoption of this Agreement by AT&T shareholders
(subject to Section 8.02(b)) and AT&T Broadband shareholders, respectively.
(c) At meetings duly called and held, each of AT&T's Board of Directors and
AT&T Broadband's Board of Directors unanimously approved the Separation and the
Distribution pursuant to the Separation and Distribution Agreement. AT&T and
AT&T Broadband have entered into the Separation and Distribution Agreement.
(d) AT&T, as sole shareholder of AT&T Broadband as of the date hereof, has
adopted this Agreement and the transactions contemplated hereby, including the
AT&T Broadband Merger.
SECTION 6.03. Governmental Authorization. The execution, delivery and
performance by AT&T and the AT&T Subsidiaries of the Transaction Agreements to
which they are or will be party and the consummation by AT&T and the AT&T
Subsidiaries of the transactions contemplated hereby and thereby require no
action by or in respect of, or filing with, any Governmental Authority, other
than (a) notices to, consents or waivers from, the relevant Franchising
Authorities in respect of the Franchises for the Systems owned and operated by
AT&T or the AT&T Subsidiaries (the "AT&T FRANCHISE CONSENTS" and, together with
the Comcast Franchise Consents, the "FRANCHISE CONSENTS")), and the FCC in
connection with a change of control and/or assignment of the holder of the FCC
licenses and social contracts of AT&T or the AT&T Subsidiaries (the "AT&T
LICENSE CONSENTS" and, together with the Comcast License Consents, the "LICENSE
CONSENTS"); (b) notices to, consents or waivers from the state public service
and public utilities commissions having jurisdiction over the assets of AT&T and
the AT&T Subsidiaries (the "AT&T PUC CONSENTS" and, together with the Comcast
PUC Consents, the "PUC CONSENTS"); (c) the filing of the DE Certificate of
Merger pursuant to the DGCL and appropriate documents with the relevant
authorities of other states in which AT&T is qualified to do business; (d)
compliance with any applicable requirements of the HSR Act; (e) compliance with
any applicable requirements of the 1933 Act, the 1934 Act and any other
applicable securities laws, whether United States state or foreign; (f) notices,
consents, waivers, approvals and filings necessary in connection with the
Separation and set forth on Section 6.03 of the AT&T Disclosure Schedule; and
(g) any actions or filings the absence of which, individually or in the
aggregate, would not reasonably be expected to have an AT&T Broadband Material
Adverse Effect or
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prohibit or materially impair or delay the ability of AT&T and the AT&T
Subsidiaries to consummate the transactions contemplated by this Agreement and
the other Transaction Agreements.
SECTION 6.04. Non-contravention. The execution, delivery and performance
by AT&T and the AT&T Subsidiaries of the Transaction Agreements to which they
are or will be party and the consummation by AT&T and the AT&T Subsidiaries of
the transactions contemplated hereby and thereby do not and will not (a)
contravene, conflict with, or result in any violation or breach of any provision
of the certificate of incorporation, bylaws or other organizational document of
AT&T or any AT&T Subsidiary; (b) assuming compliance with the matters referred
to in Section 6.03, contravene, conflict with or result in a violation or breach
of any provision of any applicable law, statute, ordinance, rule, regulation,
judgment, injunction, order or decree; (c) assuming compliance with the matters
referred to in Section 6.03, require any consent or other action by any Person
under, constitute a default (or an event that, with or without notice or lapse
of time or both, would constitute a default) under, or cause or permit the
termination, cancellation, acceleration, triggering or other change of any right
or obligation or the loss of any benefit to which AT&T or any AT&T Subsidiary is
entitled under (i) any provision of any agreement or other instrument binding
upon AT&T or any AT&T Subsidiary or any of their respective assets or properties
or (ii) any license, franchise, permit, certificate, approval or other similar
authorization held by, or affecting, or relating in any way to, the assets,
properties or business of AT&T or any AT&T Subsidiary; or (d) result in the
creation or imposition of any Lien on any asset or property of AT&T or any AT&T
Subsidiary, other than such exceptions in the case of clauses (b), (c) and (d)
above as would not, individually or in the aggregate, reasonably be expected to
have an AT&T Broadband Material Adverse Effect or prohibit or materially impair
or delay the ability of AT&T or any AT&T Subsidiary to consummate the
transactions contemplated by any of the Transaction Agreements.
SECTION 6.05. Capitalization. (a) The authorized capital stock of AT&T
consists of (i) 16,400,000,000 shares of Common Stock, of which (A)
6,000,000,000 shares have been designated AT&T Common Stock, (B) 4,000,000,000
shares have been designated Class A Liberty Media Group Common Stock, (C)
400,000,000 shares have been designated Class B Liberty Media Group Common Stock
and (D) 6,000,000,000 shares have been designated Wireless Group Common Stock,
and (ii) 100,000,000 shares of preferred stock, $1.00 par value per share, of
which (A) 1,500,000 shares have been designated Wireless Group Preferred
Tracking Stock ("WIRELESS PREFERRED STOCK"), (B) 1,000,000 shares have been
designated Series E Convertible Preferred Stock ("SERIES E PREFERRED STOCK") and
(C) 2,000,000 shares have been designated Subsidiary Exchangeable Preferred
Stock ("AT&T SUBSIDIARY PREFERRED STOCK"). As of the close of business on
November 30, 2001, there were outstanding (1) 3,540,410,643 shares of AT&T
Common Stock (exclusive of all shares of restricted stock granted under any
compensatory plans or arrangements), (2) no shares of Class A Liberty Media
Group Common Stock, (3) no shares of Class B Liberty Media Group Common Stock,
(4) no shares of Wireless Group Common Stock, (5) AT&T Stock Options to purchase
an aggregate of 313,598,348 shares of AT&T Common Stock (of which options to
purchase an aggregate of approximately 170,242,786 shares of AT&T Common Stock
were exercisable), (6) phantom shares, stock units, stock appreciation rights or
other stock-based awards issued under any stock option, compensation or deferred
compensation plan or arrangement with respect to an aggregate of 12,492,305
shares of AT&T Common Stock, (7) 52,808,000 shares of AT&T Common Stock reserved
for issuance under the Warrants issued pursuant to the Warrant Agreement dated
as of June 16, 1999 between AT&T and The Bank of New York, as Warrant Agent (the
"WARRANTS"), (8) 88,015,773 shares of AT&T Common Stock issuable upon conversion
of the QUIPS, (9) 52,347,844 shares of AT&T Common Stock reserved for issuance
upon exchange (and shares of AT&T Common Stock issuable upon redemption in
accordance with the terms thereof) of the Class A Senior Cumulative Exchangeable
Preferred Stock of TCI Pacific Communications, Inc. (the "TCI PACIFIC PREFERRED
STOCK"), (10) no shares of Wireless Preferred Stock, (11) no shares of Series E
Preferred Stock, (12) 759,792 shares of AT&T Subsidiary Preferred Stock held by
AT&T Broadband Subsidiaries that are directly or indirectly wholly owned
Subsidiaries of AT&T and (13) 94,163 shares of AT&T Subsidiary Preferred Stock
held by T-Holdings and/or one of its Subsidiaries. As of November 30, 2001,
851,782,532 shares of AT&T Common Stock were held in treasury. No shares of AT&T
Common Stock are held by any Subsidiary of AT&T. All outstanding shares of
capital stock of AT&T have been, and all
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shares that may be issued pursuant to any compensatory plan or arrangement will
be, when issued in accordance with the respective terms thereof, duly
authorized, validly issued, fully paid and nonassessable.
(b) Except as set forth in this Section 6.05 and for changes since November
30, 2001 resulting from the exercise of AT&T Stock Options, AT&T SARs and AT&T
Equity Awards outstanding on such date, including, for the avoidance of doubt,
options to purchase stock under the AT&T ESPP (and the grant or award of AT&T
Stock Options, AT&T SARs and AT&T Equity Awards in the ordinary course of
business and the exercise thereof, including, for the avoidance of doubt,
options to purchase stock under the AT&T ESPP) or resulting from the exercise or
conversion of the Warrants or the QUIPS, or the exchange or redemption of the
TCI Pacific Preferred Stock, or as otherwise expressly contemplated hereby or by
the Transaction Agreements, there are no outstanding (i) shares of capital stock
or voting securities of AT&T, (ii) securities of AT&T or any AT&T Subsidiary
convertible into or exchangeable for shares of capital stock or voting
securities of AT&T or (iii) options or other rights to acquire from AT&T or any
AT&T Subsidiary, or other obligations of AT&T or any AT&T Subsidiary to issue,
any capital stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of AT&T. There are no
outstanding obligations of AT&T or any AT&T Subsidiary to repurchase, redeem or
otherwise acquire any of the securities referred to in clause (i), (ii) or (iii)
above (collectively, the "AT&T SECURITIES").
SECTION 6.06. AT&T Broadband and AT&T Broadband Subsidiaries. (a) Each of
AT&T Broadband and the AT&T Broadband Subsidiaries is a corporation or other
legal entity duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization and has all corporate, partnership or
other similar powers required to carry on its business as currently conducted,
other than such exceptions as, individually or in the aggregate, have not had
and would not reasonably be expected to have an AT&T Broadband Material Adverse
Effect. Each of AT&T Broadband and the AT&T Broadband Subsidiaries is duly
qualified to do business as a foreign corporation or other foreign legal entity
and is in good standing in each jurisdiction where such qualification is
necessary, other than such exceptions as, individually or in the aggregate, have
not had and would not reasonably be expected to have an AT&T Broadband Material
Adverse Effect. Section 6.06(a) of the AT&T Disclosure Schedule sets forth a
list of all AT&T Significant Broadband Subsidiaries and their respective
jurisdictions of organization.
(b) All of the outstanding capital stock of, or other voting securities or
ownership interests in, AT&T Broadband is (as of the date hereof) and will be
(immediately prior to the Distribution) directly owned by AT&T, free and clear
of any Lien and free of any other limitation or restriction (including any
restriction on the right to vote, sell or otherwise dispose of such capital
stock or other voting securities or ownership interests). All of the outstanding
capital stock of, or other voting securities or ownership interests in, each
AT&T Significant Broadband Subsidiary is, as of the date hereof, owned by AT&T
and will, at the Effective Time, be owned by AT&T Broadband, directly or
indirectly, free and clear of any Lien and free of any other limitation or
restriction (including any restriction on the right to vote, sell or otherwise
dispose of such capital stock or other voting securities or ownership
interests). There are no outstanding (i) securities of AT&T or any AT&T
Subsidiary convertible into or exchangeable for shares of capital stock or other
voting securities or ownership interests in AT&T Broadband or any AT&T
Significant Broadband Subsidiary or (ii) options or other rights to acquire from
AT&T or any AT&T Subsidiary, or other obligations of AT&T or any AT&T Subsidiary
to issue, any capital stock or other voting securities or ownership interests
in, or any securities convertible into or exchangeable for any capital stock or
other voting securities or ownership interests in, AT&T Broadband or any AT&T
Significant Broadband Subsidiary. Except for the TCI Pacific Preferred Stock,
there are no outstanding obligations of AT&T or any AT&T Subsidiary to
repurchase, redeem or otherwise acquire any of the items referred to in clauses
(i) and (ii) above.
(c) At the time of the Distribution, subject to Section 4.01 of the
Separation and Distribution Agreement, the issued and outstanding capital stock
of AT&T Broadband will consist of a number of shares of AT&T Broadband Common
Stock equal to the number of then outstanding shares of AT&T Common Stock. In
the Distribution, subject to Section 4.01 of the Separation and Distribution
Agreement, AT&T will distribute to each holder of AT&T Common Stock one share of
AT&T Broadband Common
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Stock per share of AT&T Common Stock. All of the shares of AT&T Broadband Common
Stock have been or will be prior to the Effective Time duly authorized and
validly issued and fully paid and nonassessable. After giving effect to the
Distribution, subject to Section 4.01 of the Separation and Distribution
Agreement, neither AT&T nor any AT&T Subsidiary will own any shares of AT&T
Broadband Common Stock or any other capital stock or other equity interest in
AT&T Broadband.
SECTION 6.07. SEC Filings. (a) AT&T has delivered or made available to
Comcast (i) AT&T's annual reports on Form 10-K for its fiscal years ended
December 31, 2000, 1999 and 1998, (ii) AT&T's proxy or information statements
relating to meetings of, or actions taken without a meeting by, AT&T
shareholders held since December 31, 1998, and (iii) all of AT&T's other
reports, statements, schedules and registration statements filed with the SEC
since December 31, 1998 (the documents referred to in clauses (i), (ii) and
(iii) above, collectively, the "AT&T SEC DOCUMENTS").
(b) As of its filing date (and, if amended or superceded by a filing prior
to the date of this Agreement or the Effective Time, then on the date of such
filing), each AT&T SEC Document complied as to form in all material respects
with the applicable requirements of the 1933 Act and the 1934 Act, as the case
may be.
(c) As of its filing date (and, if amended or superceded by a filing prior
to the date of this Agreement or the Effective Time, then on the date of such
filing), each AT&T SEC Document filed pursuant to the 1934 Act did not contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading.
(d) Each AT&T SEC Document that is a registration statement, as amended or
supplemented, if applicable, filed pursuant to the 1933 Act, as of the date such
registration statement or amendment became effective, did not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading.
SECTION 6.08. Financial Statements. (a) The audited consolidated
financial statements and unaudited consolidated interim financial statements of
AT&T included in the AT&T SEC Documents fairly present, in all material
respects, in conformity with GAAP applied on a consistent basis (except as may
be indicated in the notes thereto), the consolidated financial position of AT&T
and its consolidated Subsidiaries as of the respective dates thereof and their
consolidated results of operations and cash flows for the periods then ended
(subject to normal year-end adjustments in the case of any unaudited interim
financial statements).
(b) The unaudited combined financial statements and unaudited combined
interim financial statements of the AT&T Broadband Group are attached as Exhibit
E, and subject to and reflecting the assumptions set forth in the notes thereto,
fairly present, in all material respects, in conformity with GAAP applied on a
consistent basis (except as may be indicated in the notes thereto), the combined
financial position of the AT&T Broadband Group as of the respective dates
thereof and its combined results of operations and cash flows for the periods
then ended (subject to normal year-end adjustments in the case of any unaudited
interim financial statements).
(c) Except as set forth in Section 6.08(c) of the AT&T Disclosure Schedule,
the financial statements as of and for the period ending September 30, 2001
attached as Exhibit E reflect in all material respects the transactions
contemplated by the Ancillary Agreements as if such agreements had been in
effect during the nine month period covered by such financial statements.
Section 6.08(c) of the AT&T Disclosure Schedule describes all material
allocations and charges relating to affiliated and intercompany transactions
used in connection with the preparation of the financial statements attached as
Exhibit E.
SECTION 6.09. Information Supplied. The information supplied by AT&T for
inclusion or incorporation in the Registration Statement shall not at the time
the Registration Statement is declared effective by the SEC contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The information
supplied by AT&T for
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inclusion in the Joint Proxy Statement shall not, on the date the Joint Proxy
Statement is first mailed to the shareholders of each of Comcast and AT&T, at
the time of the Comcast Shareholders' Meeting, at the time of the AT&T
Shareholders' Meeting or at the Effective Time, contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
SECTION 6.10. Absence of Certain Changes. Since the AT&T Broadband
Balance Sheet Date, and except as expressly contemplated hereby or by the
Transaction Agreements, the business of the AT&T Broadband Group, AT&T (to the
extent relating to the AT&T Broadband Group), AT&T Broadband and the AT&T
Broadband Subsidiaries has been conducted for the benefit of the AT&T Broadband
Group (it being understood that since the AT&T Broadband Balance Sheet Date the
AT&T Communications Group has been conducted for the benefit of the AT&T
Communications Group and that the interests of the AT&T Broadband Group and the
AT&T Communications Group may not have coincided) and in the ordinary course of
business consistent with past practices, and there has not been (i) any event,
occurrence or development of a state of circumstances or facts that,
individually or in the aggregate, has had or would reasonably be expected to
have an AT&T Broadband Material Adverse Effect or (ii) any action, event,
occurrence or transaction that would have been prohibited by clause (iii), (iv),
(vii), (viii), (ix) or (xviii) of Section 8.01 if this Agreement had been in
effect at the time thereof or any agreement, arrangement or commitment in
respect of any action, event, occurrence or transaction that would have been
prohibited by the foregoing clauses of Section 8.01 if this Agreement had been
in effect at the time thereof.
SECTION 6.11. No Undisclosed Material Liabilities. There are no
liabilities or obligations of the AT&T Broadband Group, AT&T (to the extent
relating to the AT&T Broadband Group), AT&T Broadband or any AT&T Broadband
Subsidiary of any kind whatsoever, whether accrued, contingent, absolute,
determined, determinable or otherwise, and there is no existing condition,
situation or set of circumstances that would reasonably be expected to result in
such a liability or obligation, other than:
(a) liabilities or obligations disclosed and provided for in the AT&T
Broadband Balance Sheet or in the notes thereto;
(b) liabilities or obligations incurred since the AT&T Broadband
Balance Sheet Date in the ordinary course of business of the AT&T Broadband
Group consistent with past practice;
(c) liabilities or obligations under commercial transactions and
agreements in accordance with their terms or arising in compliance with
applicable laws, statutes, ordinances, rules or regulations; or
(d) liabilities or obligations that, individually or in the aggregate,
have not had and would not reasonably be expected to have an AT&T Broadband
Material Adverse Effect.
SECTION 6.12. Compliance with Laws and Court Orders. Except as set forth
in Section 6.12 of the AT&T Disclosure Schedule, AT&T (to the extent relating to
the AT&T Broadband Group), AT&T Broadband and the AT&T Broadband Subsidiaries
hold all licenses, franchises, certificates, consents, permits, qualifications
and authorizations from all Governmental Authorities necessary for the lawful
conduct of their business, except where the failure to hold any of the
foregoing, individually or in the aggregate, has not had and would not
reasonably be expected to have an AT&T Broadband Material Adverse Effect. AT&T
(to the extent relating to the AT&T Broadband Group), AT&T Broadband and each of
the AT&T Broadband Subsidiaries are, and have been in compliance with, and to
the knowledge of AT&T, are not under investigation with respect to and have not
been threatened to be charged with or given notice of any violation of, any such
license, franchise, certificate, consent, permit, qualification or authorization
or any applicable law, statute, ordinance, rule, regulation, judgment,
injunction, order or decree, except for failures to comply or violations that,
individually or in the aggregate, have not had and would not reasonably be
expected to have an AT&T Broadband Material Adverse Effect.
SECTION 6.13. Litigation. There is no action, suit, investigation or
proceeding (or any basis therefor) pending against, or, to the knowledge of
AT&T, threatened against or affecting AT&T, the AT&T Broadband Group or any AT&T
Subsidiary, or any of their respective assets or properties before
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any court or arbitrator or before or by any other Governmental Authority, that,
individually or in the aggregate, would reasonably be expected to have an AT&T
Broadband Material Adverse Effect.
SECTION 6.14. Finders' Fees. Except for Credit Suisse First Boston and
Goldman Sachs & Co., whose fees, subject to Section 11.03(a), will be paid by
AT&T Broadband, there is no investment banker, broker, finder or other
intermediary that has been retained by or is authorized to act on behalf of AT&T
or any AT&T Subsidiary who might be entitled to any fee or commission in
connection with the transactions contemplated by this Agreement and the other
Transaction Agreements. A copy of AT&T's engagement agreement with each of
Goldman Sachs & Co. and Credit Suisse First Boston have been provided to
Comcast.
SECTION 6.15. Opinion of Financial Advisor. AT&T has received an opinion
of each of Credit Suisse First Boston and Goldman, Sachs & Co., financial
advisors to AT&T, to the effect that, as of the date hereof, the exchange ratio
in the AT&T Broadband Merger is fair, from a financial point of view, to the
shareholders of AT&T who will become shareholders of AT&T Broadband pursuant to
the Separation and Distribution Agreement (other than Comcast and its
Affiliates).
SECTION 6.16. Taxes. Except as would not, individually or in the
aggregate, reasonably be expected to have an AT&T Broadband Material Adverse
Effect, (a) all AT&T and AT&T Subsidiary Tax Returns required to be filed on or
before the Effective Time with any taxing authority by, or with respect to, AT&T
and the AT&T Subsidiaries have been or will be timely filed (taking into account
extensions) and are or will be correct in all respects (other than with respect
to Taxes for which adequate reserves are reflected on the AT&T Balance Sheet
and, to the extent related to the AT&T Broadband Group, AT&T Broadband or an
AT&T Broadband Subsidiary, on the AT&T Broadband Balance Sheet); (b) AT&T and
the AT&T Subsidiaries have timely paid or will timely pay all Taxes shown as due
and payable on the AT&T Tax Returns that have been or will be so filed, and, as
of the time of filing, the AT&T Tax Returns correctly reflected the facts
regarding the income, business, assets, operations, activities and the status of
AT&T and the AT&T Subsidiaries (other than with respect to Taxes for which
adequate reserves are reflected on the AT&T Balance Sheet and, to the extent
related to the AT&T Broadband Group, AT&T Broadband or an AT&T Broadband
Subsidiary, on the AT&T Broadband Balance Sheet); (c) AT&T and the AT&T
Subsidiaries have made provision for all Taxes payable by AT&T and the AT&T
Subsidiaries for which no AT&T Tax Return has yet been filed; (d) there is no
action, suit, proceeding, audit or claim currently proposed or pending against
or with respect to AT&T or any AT&T Subsidiary in respect of any Tax where there
is a reasonable possibility of an adverse determination; (e) the United States
federal income Tax Returns of AT&T and the AT&T Subsidiaries have been examined
and settled with the IRS (or the applicable statutes of limitation for the
assessment of United States federal income Taxes for such periods have expired)
for all years through 1992; (f) no extension of the statute of limitations on
the assessment of any Taxes has been granted by AT&T or any AT&T Subsidiary and
is currently in effect; (g) except for complete and accurate copies of Tax
sharing agreements and amendments thereto made available to Comcast prior to the
execution of this Agreement and listed in Section 6.16 of the AT&T Disclosure
Schedule, no agreements relating to the allocation or sharing of Taxes exist
between AT&T and/or any of the AT&T Subsidiaries, on the one hand, and a third
party, on the other hand; and (h) there are no Liens for Taxes on any of the
assets of AT&T or any AT&T Subsidiary except Liens for current Taxes not yet due
and payable.
SECTION 6.17. Tax Opinions. Neither AT&T nor any AT&T Subsidiary has
taken any action or knows of any facts or circumstances relating to AT&T or any
AT&T Subsidiary that would prevent (i) the ruling or opinion referred to in
Section 10.01(j) from being obtained or (ii) Wachtell, Lipton, Rosen & Katz from
delivering the opinion referred to in Section 10.02(b) as of the date hereof.
SECTION 6.18. Employee Benefit Plans and Labor Matters. Except as have
not had and would not reasonably be expected to have, individually or in the
aggregate, an AT&T Broadband Material Adverse Effect:
(a) Section 6.18(a) of the AT&T Disclosure Schedule contains a true
and complete list, as of the date hereof, of all Broadband Employee Plans
and all Broadband Benefit Arrangements. Copies of
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each Broadband Employee Plan and Broadband Benefit Arrangement (and, if
applicable, related trust agreements) and all amendments thereto have been
made available to Comcast as of the date hereof, together with the three
most recent annual reports (Form 5500 including, if applicable, Schedule B
thereto) and the most recent actuarial valuation report prepared in
connection with any Broadband Employee Plan.
(b) No "accumulated funding deficiency" (as defined in Section 412 of
the Code) has been incurred with respect to any Broadband Employee Plan
subject to such Section 412 of the Code, whether or not waived. No
"reportable event" (within the meaning of Section 4043 of ERISA) for which
the 30-day notice period has not been waived, and no event described in
Section 4062 or 4063 of ERISA, has occurred in connection with any
Broadband Employee Plan. Neither AT&T nor any ERISA Affiliate of AT&T has
(i) engaged in, or is a successor or parent corporation to an entity that
has engaged in, a transaction described in Sections 4069 or 4212(c) of
ERISA or (ii) incurred, or reasonably expects to incur prior to the
Effective Time, (A) any liability under Title IV of ERISA arising in
connection with the termination of, or a complete or partial withdrawal
from, any plan covered or previously covered by Title IV of ERISA or (B)
any liability under Section 4971 of the Code that in either case could
become a liability of Parent, AT&T Broadband, any AT&T Broadband
Subsidiary, Comcast, any Comcast Subsidiary, or any of their respective
ERISA Affiliates after the Effective Time. No Broadband Employee Plan is a
Multiemployer Plan.
(c) As of June 30, 2001, the fair market value of the assets of each
Broadband Pension Plan (excluding for these purposes any accrued but unpaid
contributions) exceeded the present value of the pension benefit
obligations accrued under such Broadband Pension Plan calculated pursuant
to SFAS No. 87, "Employers' Accounting for Pensions". As of September 30,
2001, the aggregate unfunded liability of AT&T and any AT&T Subsidiary in
respect of all Broadband Deferred Compensation Plans, computed using
reasonable actuarial assumptions and determined as if all benefits under
such plans were vested and payable as of such date, did not exceed $132
million.
(d) Neither AT&T, AT&T Broadband nor any AT&T Broadband Subsidiary has
any liability with respect of post-retirement health, medical or life
insurance benefits for retired, former or current Broadband Employees
except as to required to avoid excise tax under Section 4980B of the Code.
(e) Each Broadband Employee Plan that is intended to be qualified
under Section 401(a) of the Code is so qualified and a favorable
determination letter is currently in effect for each such Broadband
Employee Plan. To the knowledge of AT&T, no fact or circumstance exists
giving rise to a material likelihood that such Broadband Employee Plan
would not be treated as qualified by the Internal Revenue Service.
(f) There is no contract, plan or arrangement (written or otherwise)
covering any Broadband Employee that, individually or in the aggregate,
could give rise to the payment of any amount by AT&T Broadband or any of
the AT&T Broadband Subsidiaries that would not be deductible pursuant to
the terms of Sections 162(m) or 280G of the Code.
(g) AT&T has made available to Comcast, as of the date hereof, a true
and complete list and copies of each material Broadband International Plan,
other than plans mandated by applicable law.
(h) Each Broadband Employee Plan, Broadband Benefit Arrangement and
Broadband International Plan has been maintained in compliance with its
terms and with the requirements prescribed by all applicable laws,
statutes, orders, rules and regulations (including any special provisions
relating to registration or qualification where such plan was intended to
be so registered or qualified) and has been maintained in good standing
with applicable Governmental Authorities.
(i) There has been no amendment to, written interpretation or
announcement (whether or not written) by AT&T or any of its Affiliates
relating to, or change in employee participation coverage under, a
Broadband Employee Plan, Broadband Benefit Arrangement or Broadband
International Plan which would increase materially the expense of
maintaining such plan above the level of expense incurred in respect
thereof for the fiscal year ended December 31, 2000.
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(j) No Broadband Employee, former Broadband Employee or independent
contractor of AT&T Broadband or any of the AT&T Broadband Subsidiaries,
will become entitled to any bonus, retirement, severance, job security or
similar benefit or enhanced such benefit (including acceleration of vesting
or exercise of an incentive award) as a result of the transactions
contemplated hereby (either alone or together with any other event).
(k) Section 6.18(k) of the AT&T Disclosure Schedule sets forth a list
of all collective bargaining agreements to which AT&T Broadband or any of
the AT&T Broadband Subsidiaries is a party or otherwise covering any
employee of AT&T Broadband or any of the AT&T Broadband Subsidiaries. None
of AT&T, AT&T Broadband nor any of the AT&T Broadband Subsidiaries is
involved in, or to the knowledge of AT&T, threatened with any labor
dispute, work stoppage, labor strike, slowdown or grievance relating to the
AT&T Broadband Group. To the knowledge of AT&T, there is no organizing
effort or representation question at issue with respect to any collective
bargaining unit of AT&T Broadband or any of the AT&T Broadband Subsidiaries
or any employee of AT&T Broadband or any of the AT&T Broadband
Subsidiaries.
(l) There are no pending or threatened claims (other than claims for
benefits in the ordinary course), lawsuits or arbitrations that have been
asserted or instituted, and, to the knowledge of AT&T, no set of
circumstances exists that may reasonably give rise to a claim or lawsuit,
against any of the Broadband Benefit Arrangements, the Broadband Employee
Plans and the Broadband International Plans, any fiduciaries thereof with
respect to their duties thereto or the assets of any of the trusts
thereunder, that could reasonably be expected to result in any material
liability of AT&T or any of the AT&T Subsidiaries to the PBGC, the United
States Department of Treasury, the United States Department of Labor, any
foreign governmental authority, any Multiemployer Plan, any of the
Broadband Benefit Arrangements, the Broadband Employee Plans and the
Broadband International Plans, any participant therein, or any other
Person.
SECTION 6.19. Environmental Matters. (a) Except as have not had and would
not reasonably be expected to have, individually or in the aggregate, an AT&T
Broadband Material Adverse Effect:
(i) no notice, notification, demand, request for information,
citation, summons or order has been received, no complaint has been filed,
no penalty has been assessed, and no investigation, action, claim, suit,
proceeding or review is pending or, to the knowledge of AT&T, threatened by
any Governmental Authority or other Person with respect to AT&T (to the
extent relating to the AT&T Broadband Group), AT&T Broadband, any AT&T
Broadband Subsidiary or the AT&T Broadband Group relating to or arising out
of any Environmental Law;
(ii) each member of AT&T (to the extent relating to the AT&T Broadband
Group), AT&T Broadband, the AT&T Broadband Subsidiaries and the AT&T
Broadband Group is and has been in compliance with all Environmental Laws
and all Environmental Permits; and
(iii) there are no liabilities of AT&T (to the extent relating to the
AT&T Broadband Group), AT&T Broadband, the AT&T Broadband Subsidiaries or
the AT&T Broadband Group of any kind whatsoever, whether accrued,
contingent, absolute, determined, determinable or otherwise arising under
or relating to any Environmental Law, and there are no facts, conditions,
situations or set of circumstances that would reasonably be expected to
result in, or be the basis for, any such liability.
(b) There have been no environmental investigations, studies, audits,
tests, reviews or other analyses conducted of which AT&T has knowledge in
relation to the current or prior business of the AT&T Broadband Group, AT&T (to
the extent relating to the AT&T Broadband Group), AT&T Broadband or any AT&T
Broadband Subsidiary or any property or facility now or previously owned or
leased by the AT&T Broadband Group, AT&T (to the extent relating to the AT&T
Broadband Group), AT&T Broadband or any AT&T Broadband Subsidiary that reveal
matters that, individually or in the aggregate, have had, or would reasonably be
expected to have, an AT&T Broadband Material Adverse Effect.
(c) For purposes of this Section 6.19, the terms "AT&T Broadband Group",
"AT&T (to the extent relating to the AT&T Broadband Group)", "AT&T Broadband"
and "AT&T Broadband Subsidiary" shall
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include any entity that is, in whole or in part, a predecessor of the AT&T
Broadband Group, AT&T (to the extent relating to the AT&T Broadband Group), AT&T
Broadband or any AT&T Broadband Subsidiary.
SECTION 6.20. Intellectual Property. The Transaction Agreements, taken as
a whole, including the Separation and Distribution Agreement and the assets
transferred thereby, the Intellectual Property Agreement (as defined in the
Separation and Distribution Agreement) and the intellectual property licenses
granted thereby and the other Ancillary Agreements and all services furnished
thereby provide sufficient rights in or access to intellectual property owned by
AT&T to enable the AT&T Broadband Group, without violating such AT&T
intellectual property, to conduct its business immediately after the Effective
Time in all material respects as that business was conducted by the AT&T
Broadband Group immediately prior to the Effective Time. Neither AT&T nor any
AT&T Subsidiary has received any notice of infringement of or conflict with,
and, to AT&T's knowledge, there are no infringements of or conflicts with, the
rights of any Person with respect to the use of any trademark, service mark,
trade name, invention, patent, trade secret, copyright, know-how (including any
registrations or applications for registration of any of the foregoing) or any
other similar type of proprietary intellectual property right that, in either
such case, individually or in the aggregate, have had or would reasonably be
expected to have, an AT&T Broadband Material Adverse Effect.
SECTION 6.21. Contracts. Except as set forth in Section 6.21 of the AT&T
Disclosure Schedule and except as may relate to TWE or At Home, neither AT&T (to
the extent relating to the AT&T Broadband Group), AT&T Broadband nor any of the
AT&T Broadband Subsidiaries is a party to or bound by (a) any "material
contract" (as defined in Item 601(b)(10) of Regulation S-K of the SEC) or any
agreement, contract or commitment that would be such a "material contract" but
for the exception for contracts entered into in the ordinary course of business,
(b) any non-competition agreement or any other agreement or obligation that
materially limits or will materially limit AT&T Broadband, the AT&T Broadband
Group or the AT&T Broadband Subsidiaries (or, after the Mergers, Parent, Comcast
or any of the Comcast Subsidiaries) from engaging in the business of providing
telephony, data transmission services, cable television or programming content,
or (c) any agreement, contract or commitment to which Liberty Media Corporation,
AT&T Wireless or any of their respective Subsidiaries is a party that is
material to or not in the ordinary course of business of the AT&T Broadband
Group. With such exceptions as, individually or in the aggregate, have not had,
and would not reasonably be expected to have, an AT&T Broadband Material Adverse
Effect and except as may relate to TWE or At Home, (i) each of the contracts,
agreements and commitments of the AT&T Broadband Group, AT&T (to the extent
relating to the AT&T Broadband Group), AT&T Broadband and the AT&T Broadband
Subsidiaries is valid and in full force and effect and (ii) neither the AT&T
Broadband Group, AT&T (to the extent relating to the AT&T Broadband Group), AT&T
Broadband nor any of the AT&T Broadband Subsidiaries has violated any provision
of, or committed or failed to perform any act that, with or without notice,
lapse of time, or both, would constitute a default under the provisions of, any
such contract, agreement or commitment. To the knowledge of AT&T, no
counterparty to any such contract, agreement or commitment has violated any
provision of, or committed or failed to perform any act that, with or without
notice, lapse of time, or both would constitute a default or other breach under
the provisions of such contract, agreement or commitment, except for defaults or
breaches that, individually or in the aggregate, have not had, or would not
reasonably be expected to have, an AT&T Broadband Material Adverse Effect.
Except as set forth in Section 6.21 of the AT&T Disclosure Schedule and except
as may relate to TWE or At Home, neither AT&T (to the extent relating to the
AT&T Broadband Group), the AT&T Broadband Group, AT&T Broadband nor any AT&T
Broadband Subsidiary is a party to, or otherwise a guarantor of or liable with
respect to (including pursuant to any keepwell agreement), (i) any material
interest rate, currency or other swap or derivative transaction (other than
those entered into in the ordinary course of business solely for hedging
purposes) or (ii) any Indebtedness of any other Person except a wholly owned
AT&T Broadband Subsidiary. Except as set forth in Section 6.21 of the AT&T
Disclosure Schedule and except as may relate to TWE or At Home, neither AT&T (to
the extent relating to the AT&T Broadband Group), the AT&T Broadband Group, AT&T
Broadband nor any AT&T Broadband Subsidiary is a party to any joint venture or
partnership agreement pursuant to which it is
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obligated to make capital contributions in excess of (x) $25,000,000 during the
current or any succeeding calendar year or (y) $100,000,000 during the remaining
term of such agreement. Subject to applicable confidentiality restrictions, AT&T
has provided or made available to Comcast prior to the date hereof a copy of
each agreement of the type described in clause (a), (b) or (c) of the first
sentence of this Section 6.21, in clause (i) or (ii) of the second preceding
sentence of this Section 6.21 or in the immediately preceding sentence.
SECTION 6.22. AT&T Shareholder Vote. Assuming the receipt of the
affirmative vote of the holders of a majority of the outstanding shares of AT&T
Common Stock (the "AT&T SHAREHOLDERS' APPROVAL"), which the parties acknowledge
is a condition to the obligations of the parties to effect the Separation,
Distribution and Mergers, no other vote of the holders of any class or series of
capital stock of AT&T will be necessary to approve and adopt this Agreement and
the transactions contemplated hereby, including the Distribution. The only vote
of the holders of any class or series of capital stock of any AT&T Subsidiary
necessary to approve and adopt this Agreement and the transactions contemplated
hereby, including the AT&T Broadband Merger, is the affirmative vote of the
holders of a majority of the outstanding shares of AT&T Broadband Common Stock,
which vote has previously been obtained.
SECTION 6.23. Antitakeover Statutes. AT&T Broadband has taken all action
necessary to exempt the AT&T Broadband Merger and this Agreement and the
transactions contemplated hereby from the restrictions of Section 203 of the
DGCL or otherwise to make such provisions inapplicable to this Agreement and the
transactions contemplated hereby, and, accordingly, neither Section 203 of the
DGCL nor any other antitakeover or similar statute or regulation applies or
purports to apply to any such transactions. No other "control share
acquisition", "fair price", "moratorium" or other antitakeover laws or
regulations enacted under any United States federal, state or local or foreign
laws apply to this Agreement or any of the transactions contemplated hereby.
SECTION 6.24. Comcast Securities. Neither AT&T nor any of the AT&T
Subsidiaries owns any Comcast Securities.
SECTION 6.25. TWE; At Home. (a) Section 6.25(a) of the AT&T Disclosure
Schedule sets forth a list of each material agreement, contract or commitment to
which AT&T or any AT&T Subsidiary of AT&T is a party that amends the TWE
Partnership Agreement or any related agreement or that materially affects the
rights or obligations of AT&T (to the extent relating to the AT&T Broadband
Group), AT&T Broadband, the AT&T Broadband Group or the AT&T Broadband
Subsidiaries with respect to TWE or any TWE Subsidiary or that was entered into
in connection with or relates to AT&T's TWE interest (the "TWE CONTRACTS"). None
of AT&T (to the extent relating to the AT&T Broadband Group), AT&T Broadband or
any of the AT&T Broadband Subsidiaries has violated any material provision of,
or committed or failed to perform any act that, with or without notice, lapse of
time, or both, would constitute a default under any material provision of, any
such material contract, agreement or commitment or the TWE Partnership
Agreement, except for defaults or breaches that, individually or in the
aggregate, have not had, or would not reasonably be expected to have, an AT&T
Broadband Material Adverse Effect. The AT&T Broadband Group owns a Class A
Partnership Interest consisting of (x) a Common Sub-Account, entitling the AT&T
Broadband Group to a Participating Percentage Share of 25.51% and (y) an A
Sub-Account, each as described in Article VII of the TWE Partnership Agreement
and as adjusted pursuant to Article VIII of the TWE Partnership Agreement
(capitalized terms used in this sentence and not defined have the meanings set
forth in the TWE Partnership Agreement). The registration rights provisions of
Article 13 of the TWE Partnership Agreement are enforceable in accordance with
their terms and subject to the conditions thereof, except (i) as the same may be
limited by applicable bankruptcy, insolvency, moratorium or similar laws of
general application relating to or affecting creditors' rights and (ii) for the
limitations imposed by general principles of equity. AT&T has provided or made
available to Comcast prior to the date hereof a copy of each TWE Contract.
(b) Section 6.25(b) of the AT&T Disclosure Schedule sets forth a list of
each material agreement, contract or commitment between At Home and its
Subsidiaries, on the one hand, and AT&T (to the extent relating to the AT&T
Broadband Group other than At Home and its Subsidiaries), the AT&T
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Broadband Group (other than At Home and its Subsidiaries), AT&T Broadband or any
of the AT&T Broadband Subsidiaries (other than At Home and its Subsidiaries), on
the other hand, that is not described by any of the following: (i) it has been
rejected in bankruptcy proceedings, (ii) it has been filed with the SEC by At
Home, AT&T or AT&T Broadband, LLC (or its predecessor) or (iii) Comcast or any
of its Subsidiaries is a party thereto or to a comparable agreement, contract or
commitment. None of AT&T or any of its Subsidiaries (other than At Home and its
Subsidiaries) has violated any provision of, or committed or failed to perform
any act that, with or without notice, lapse of time or both, would constitute a
default under any provision of, any such material contract, agreement or
commitment, except for defaults or breaches that, individually or in the
aggregate, have not had, or would not reasonably be expected to have, an AT&T
Broadband Material Adverse Effect. AT&T has provided or made available to
Comcast prior to the date hereof a copy of each agreement of the type described
in the first sentence of this Section 6.25(b).
SECTION 6.26. Intercompany Transactions. (a) Except as described in
Section 6.26(a) of the AT&T Disclosure Schedule, since December 31, 1999 through
the date hereof there have been no material transactions (including allocations)
between the AT&T Broadband Group, on the one hand, and the AT&T Communications
Group, on the other hand.
(b) Except as described in Section 6.26(b) of the AT&T Disclosure Schedule,
since the AT&T Broadband Balance Sheet Date through the date hereof there have
been no material transactions (including allocations) between any AT&T Broadband
Entity, on the one hand, and any member of the AT&T Communications Group, on the
other hand.
SECTION 6.27. Sufficiency of Transferred Assets. (a) Except as set forth
in Section 6.27(a) of the AT&T Disclosure Schedule (and other than the Delayed
Transfer Assets (as defined in the Separation and Distribution Agreement) that
are AT&T Broadband Assets), as of the Effective Time, no material AT&T Broadband
Assets will be owned or held by AT&T or any AT&T Subsidiary. Assuming
consummation of the transactions contemplated by the Separation and Distribution
Agreement and assuming the availability of any assets and services contemplated
to be made available to the AT&T Broadband Group pursuant to the terms of the
Ancillary Agreements, (i) the assets reflected on the unaudited combined balance
sheet of the AT&T Broadband Group as of December 31, 2000 attached as Exhibit E
were sufficient in all material respects to conduct the business of the AT&T
Broadband Group in the manner reflected in the AT&T Broadband Financial
Statements and (ii) at the Effective Time, the AT&T Broadband Assets will be
sufficient for the conduct of the business of the AT&T Broadband Group as it is
being operated immediately prior to the Separation. Assuming the condition set
forth in Section 10.01(l) is satisfied with respect to all outstanding
Indebtedness issued under the Notes Indenture, neither Parent, nor AT&T
Broadband nor any AT&T Broadband Subsidiary will be required to guarantee or
otherwise become liable for any material Indebtedness or liability of AT&T (to
the extent not relating to the AT&T Broadband Group) or any AT&T Subsidiary
(other than AT&T Broadband or any AT&T Broadband Subsidiary) as a result of the
Separation or Distribution.
(b) Since December 31, 2000, (i) no material assets have been transferred
from AT&T (to the extent relating to the AT&T Broadband Group), AT&T Broadband,
any AT&T Broadband Subsidiary or the AT&T Broadband Group to AT&T (to the extent
not relating to the AT&T Broadband Group) or any AT&T Subsidiary other than AT&T
Broadband or any AT&T Broadband Subsidiary, other than the assets set forth in
Section 6.27(b) of the AT&T Disclosure Schedule and (ii) no material liabilities
have been assumed by AT&T (to the extent relating to the AT&T Broadband Group),
AT&T Broadband, any AT&T Broadband Subsidiary or the AT&T Broadband Group from
AT&T (to the extent not relating to the AT&T Broadband Group) or any AT&T
Subsidiary other than AT&T Broadband or any AT&T Broadband Subsidiary, other
than the liabilities set forth in Section 6.27 of the AT&T Disclosure Schedule.
(c) The investments set forth in Section 6.27(c) of the AT&T Disclosure
Schedule (or the net proceeds therefrom) constitute assets of one or more of the
AT&T Broadband Subsidiaries.
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SECTION 6.28. Investments. Section 6.28 of the AT&T Disclosure Schedule
sets forth a list of each material investment of AT&T (to the extent relating to
the AT&T Broadband Group), the AT&T Broadband Group, AT&T Broadband or any AT&T
Broadband Subsidiary. Neither AT&T nor any AT&T Subsidiary has any material
liability in respect of any such investment.
ARTICLE 7
COVENANTS OF COMCAST
SECTION 7.01. Comcast Interim Operations. Except as set forth in the
Comcast Disclosure Schedule, or as otherwise expressly contemplated hereby, from
the date hereof until the Effective Time, Comcast shall, and shall cause each of
the Comcast Subsidiaries to, conduct its business in all material respects in
the ordinary course of business consistent with past practice and use all
reasonable efforts to: (a) preserve intact its present business organization;
(b) keep available the services of its key officers and key employees; (c)
maintain in effect all material foreign and United States federal, state and
local licenses, approvals and authorizations, including all material licenses
and permits that are required for Comcast or any Comcast Subsidiary to carry on
its business; and (d) preserve existing relationships with its material lenders,
suppliers and others having material business relationships with it so that the
business of Comcast and the Comcast Subsidiaries shall not be impaired in any
material respect at the Effective Time. Without limiting the generality of the
foregoing, except as set forth in the Comcast Disclosure Schedule or as
otherwise expressly contemplated hereby and except as prohibited by law, from
the date hereof until the Effective Time, without the prior written consent of
AT&T, such consent not to be unreasonably withheld, Comcast shall not, nor shall
it permit any Comcast Subsidiary to:
(i) amend its articles of incorporation or bylaws or other applicable
governing instruments;
(ii) amend any material term of any of its outstanding securities;
(iii) split, combine, subdivide or reclassify any shares of its
capital stock or other equity interests or declare, set aside or pay any
dividend or other distribution (whether in cash, stock or property or any
combination thereof) in respect of its capital stock, or redeem, repurchase
or otherwise acquire or offer to redeem, repurchase, or otherwise acquire
any of its securities, except for cash dividends paid by any Comcast
Subsidiary to Comcast or any wholly owned Comcast Subsidiary;
(iv) adopt a plan or agreement of complete or partial liquidation,
dissolution, merger, consolidation, restructuring, recapitalization or
other material reorganization (other than a merger or consolidation between
wholly owned Comcast Subsidiaries);
(v) issue, deliver or sell, or authorize the issuance, delivery or
sale of, any shares of any class of its capital stock or other equity
interests or any securities convertible into or exercisable for, or any
rights, warrants or options to acquire, any such capital stock or other
equity interests, other than (A) the issuance of shares of capital stock or
other equity interests (or derivative securities therefor) by a Comcast
Subsidiary that is not a Comcast Significant Subsidiary, (B) the issuance
of shares of Comcast Common Stock upon the exercise of Comcast Stock
Options or options to purchase Comcast Common Stock under the Comcast ESPP
or upon the settlement of Comcast Equity Awards outstanding as of the date
hereof in accordance with their current terms or (C) the granting of
Comcast Stock Options, Comcast Equity Awards and options to purchase
Comcast Common Stock under the Comcast ESPP in the ordinary course of
business and consistent with past practices and the issuance of shares of
Comcast Common Stock upon the exercise or settlement thereof;
(vi) incur any capital expenditures, except as set forth in the
Comcast Disclosure Schedule;
(vii) except for capital expenditures, which shall be governed by
Section 7.01(vi), acquire (by merger, consolidation, acquisition of stock
or assets or otherwise), directly or indirectly, any assets, other than (A)
pursuant to agreements in effect as of the date hereof, (B) assets used in
the ordinary course of business of Comcast and the Comcast Subsidiaries, in
a manner that is consistent with past practice, (C) assets having a fair
market value not exceeding $100,000,000 in any one transaction or
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series of related transactions or $500,000,000 in the aggregate, or (D) in
the case of cable swaps and similar transactions where the primary
consideration for the acquired assets are cable properties, assets having a
fair market value not exceeding $100,000,000 in any one transaction or
series of related transactions or $500,000,000 in the aggregate;
(viii) other than pursuant to agreements in effect as of the date
hereof and other than in the ordinary course of business, sell, lease,
license, encumber or otherwise transfer any assets other than (A) assets
having a fair market value not exceeding $100,000,000 in any one
transaction or series of related transactions or $500,000,000 in the
aggregate, or (B) in the case of cable swaps and similar transactions where
the primary consideration for the disposed of assets are cable properties,
assets having a fair market value not exceeding $100,000,000 in any one
transaction or series of related transactions or $500,000,000 in the
aggregate;
(ix) incur, assume or guarantee any Indebtedness, other than in the
ordinary course of business;
(x) make any loan, advance or capital contributions to or investment
in any Person other than (A) loans, advances or capital contributions to or
investments in any wholly owned Comcast Subsidiary, (B) pursuant to
agreements in effect as of the date hereof or (C) loans, advances or
capital contributions to joint ventures or Affiliates of Comcast or the
Comcast Subsidiaries pursuant to Schedule 7.01(x) of the Comcast Disclosure
Schedules or as required by agreements currently in effect relating to such
joint ventures or Affiliates;
(xi) except for capital expenditures, which shall be governed by
Section 7.01(vi), engage in or enter into any transaction or commitment,
enter into any contract or agreement, or relinquish or amend in any
material respect any contract or other right, for the provision of goods or
services or the use of facilities (including any programming agreement, any
agreement with any vendor for the purchase of equipment, any agreement for
the provision by one or more third parties of telephone, data or other
services through the facilities of one or more of the Systems of Comcast or
any of the Comcast Subsidiaries or any agreement providing for access to,
or the right to use, the facilities of one or more of the Systems of
Comcast or any of the Comcast Subsidiaries) that is (A) material to Comcast
and the Comcast Subsidiaries, taken as a whole, or (B) that provides for
payments in excess of $50,000,000 per agreement (or $100,000,000 for all
agreements for similar goods or services);
(xii) enter into or amend in any material respect any joint venture,
partnership or other similar venture that is material to Comcast and the
Comcast Subsidiaries, taken as a whole;
(xiii) enter into any agreement or arrangement that materially limits
or otherwise materially restricts Comcast, any Comcast Subsidiary or any of
their respective Affiliates or any successor thereto, or that could, after
the Effective Time, materially limit or restrict Parent, AT&T, any AT&T
Subsidiary or any of their Affiliates, from engaging in any material
business;
(xiv) except as required pursuant to existing written, binding
agreements or as otherwise required by law, (A) enter into any commitment
to provide any severance or termination pay to (or amend any existing
arrangement with) any director, officer or employee of Comcast or any
Comcast Subsidiary, (B) increase the benefits payable under any existing
severance or termination pay policy or employment agreement (other than as
may be increased by function of the existing terms of any such policy or
agreement), (C) other than in the ordinary course of business consistent
with past practice, enter into any employment, deferred compensation or
other similar agreement (or amend any such existing agreement) with any
director or officer of Comcast or any Comcast Subsidiary, (D) establish,
adopt or amend (except as required by applicable law) any collective
bargaining (except to the extent it would contain economic terms that are
not materially less favorable to Comcast or any Comcast Subsidiary than the
terms of existing arrangements), bonus, profit-sharing, thrift, pension,
retirement, deferred compensation, compensation, stock option, restricted
stock or other benefit plan or arrangement covering any director, officer
or employee of Comcast or any Comcast Subsidiary, except that Comcast and
the Comcast Subsidiaries may amend any such existing agreement or plan or
adopt a successor plan or arrangement to the extent mandated by applicable
law
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or to the extent that such amendment would not result in a more than a de
minimis increase in the costs or liabilities under such agreement or plan,
(E) other than in the ordinary course of business consistent with past
practice, or as required by any agreement in effect as of the date hereof,
increase the compensation, bonus or other benefits payable to any director,
officer or employee of Comcast or any Comcast Subsidiary or (F) amend the
terms of any outstanding Comcast Stock Option, Comcast SAR or Comcast
Equity Award; provided that the foregoing shall not in any way restrict
Comcast or any of its Subsidiaries from taking any action (including
granting any stay bonuses and paying or providing other compensation
pursuant to retention plans or similar arrangements) on reasonable
commercial terms that Comcast determines is reasonably necessary or
desirable in order to retain or attract any officers or employees to the
extent that the aggregate cost of such actions, grants or payments does not
exceed the amount set forth in Section 7.01(xiv) of the Comcast Disclosure
Schedule;
(xv) launch any new channels, except as necessary to comply with any
requirement of any Governmental Authority and except pursuant to pending
agreements in effect as of the date hereof;
(xvi) change (A) its methods of accounting or accounting practices in
any material respect, except as required by changes in GAAP or by law, or
(B) its fiscal year;
(xvii) settle any litigation, investigation, arbitration, proceeding
or other claim if Comcast or any of the Comcast Subsidiaries would be
required to pay in excess of $25,000,000 or if such settlement would
otherwise be material to the Comcast Group taken as a whole;
(xviii) other than in the ordinary course of business and consistent
with past practice, make any material Tax election or enter into any
settlement or compromise of any material Tax liability;
(xix) (A) fail to comply with its obligations under the Exchange
Agreement and the Set-Top Box Commitment (as defined in the Exchange
Agreement) or (B) amend or waive any provision of the Exchange Agreement
except for such amendments or waivers as would not adversely affect AT&T or
delay or adversely affect consummation of the transactions contemplated
hereby;
(xx) engage in any transaction of a type described in Section 5.25 or
take any action that would reasonably be expected to make any
representation or warranty of Comcast hereunder inaccurate in any material
respect at the Effective Time;
(xxi) take any action that would, or would reasonably be expected to,
prevent, impair or materially delay the ability of AT&T or Comcast or any
of their respective Subsidiaries to consummate the transactions
contemplated by this Agreement and the other Transaction Agreements; or
(xxii) agree or commit to do any of the foregoing; provided that the
limitations set forth in Sections 7.01(i) through 7.01(xix) shall not apply
to any transaction between Comcast and any wholly owned Comcast Subsidiary
or between any wholly owned Comcast Subsidiaries.
SECTION 7.02. Comcast Shareholders' Meeting; Proxy Material. (a) Comcast
shall cause the Comcast Shareholders' Meeting to be duly called and held as soon
as reasonably practicable (taking into consideration all relevant factors,
including delays due to complications of preparing required pro forma and other
financial statements) for the purpose of voting on the approval and adoption of
this Agreement and the transactions contemplated by this Agreement, including
the Comcast Merger. In connection with the Comcast Shareholders' Meeting,
Comcast will (i) use its reasonable best efforts to obtain the Comcast
Shareholders' Approval and the A Shareholder Approval and (ii) otherwise comply
with all legal requirements applicable to the Comcast Shareholders' Meeting.
(b) Comcast's Board of Directors shall recommend approval and adoption of
this Agreement and the transactions contemplated by this Agreement, including
the Comcast Merger, by Comcast shareholders.
SECTION 7.03. Voting Agreement. Comcast agrees to vote, and to cause each
of the Comcast Subsidiaries to vote, any shares of AT&T Common Stock with
respect to which Comcast or such Comcast
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Subsidiary may have any voting power in favor of the Mergers, the Separation,
the Distribution and the other transactions contemplated hereby.
ARTICLE 8
COVENANTS OF AT&T
SECTION 8.01. AT&T Broadband Interim Operations. Except as set forth in
the AT&T Disclosure Schedule or as otherwise expressly contemplated hereby or by
any of the Ancillary Agreements, from the date hereof until the Effective Time,
AT&T shall, to the extent relating to the AT&T Broadband Group, and shall cause
each of the AT&T Broadband Group, AT&T Broadband and the AT&T Broadband
Subsidiaries to, conduct its business in all material respects for the benefit
of the AT&T Broadband Group (it being understood that the AT&T Communications
Group will be conducted for the benefit of the AT&T Communications Group and
that the interests of the AT&T Broadband Group and the AT&T Communications Group
may not coincide) and in the ordinary course of business consistent with past
practice and use all reasonable efforts to: (a) preserve intact its present
business organization; (b) keep available the services of its key officers and
key employees; (c) maintain in effect all material foreign and United States
federal, state and local licenses, approvals and authorizations, including all
material licenses and permits that are required for the AT&T Broadband Group,
AT&T (to the extent relating to the AT&T Broadband Group), AT&T Broadband or any
AT&T Broadband Subsidiary to carry on its business; and (d) preserve existing
relationships with its material lenders, suppliers and others having material
business relationships with it so that the business of the AT&T Broadband Group,
AT&T (to the extent relating to the AT&T Broadband Group), AT&T Broadband and
the AT&T Broadband Subsidiaries shall not be impaired in any material respect at
the Effective Time. Without limiting the generality of the foregoing, except as
set forth in the AT&T Disclosure Schedule or as otherwise expressly contemplated
hereby or by any of the Ancillary Agreements and except as prohibited by law,
from the date hereof until the Effective Time, without the prior written consent
of Comcast, such consent not to be unreasonably withheld, AT&T shall not, nor
shall it permit the AT&T Broadband Group, AT&T Broadband or any AT&T Broadband
Subsidiary to:
(i) amend its certificate of incorporation or bylaws or other
applicable governing instruments;
(ii) amend any material term of any of its outstanding securities
(other than debt securities of AT&T except to the extent relating to the
AT&T Broadband Group);
(iii) split, combine, subdivide or reclassify any shares of its
capital stock or other equity interests or declare, set aside or pay any
dividend or other distribution (whether in cash, stock or property or any
combination thereof) in respect of its capital stock, or redeem, repurchase
or otherwise acquire or offer to redeem, repurchase, or otherwise acquire
any of its securities or any securities of AT&T Broadband or any AT&T
Broadband Subsidiary, except for (A) the regular quarterly dividend of AT&T
and other dividends or distributions thereon not involving the assets or
securities of the AT&T Broadband Group, AT&T Broadband or any of the AT&T
Broadband Subsidiaries, (B) cash dividends paid by any AT&T Broadband
Subsidiary to AT&T Broadband or another AT&T Broadband Subsidiary, (C) the
exchange or redemption of the TCI Pacific Preferred Stock in accordance
with the terms thereof, (D) repurchases or other acquisitions of any shares
of capital stock of AT&T; provided that none of the assets used to pay for
such repurchases or other acquisitions are assets of the AT&T Broadband
Group; or (E) the creation and issuance of any class of tracking stock of
AT&T that is designed to reflect the financial performance of any of AT&T's
businesses other than the AT&T Broadband Group;
(iv) adopt a plan or agreement of complete or partial liquidation,
dissolution, merger, consolidation, restructuring, recapitalization or
other material reorganization (other than a merger or consolidation between
wholly owned AT&T Broadband Subsidiaries) other than in connection with any
Excepted Transaction;
A-49
(v) issue, deliver or sell, or authorize the issuance, delivery or
sale of, any shares of any class of its capital stock or other equity
interests or any securities convertible into or exercisable for, or any
rights, warrants or options to acquire, any such capital stock or other
equity interests, other than (A) the issuance of shares of AT&T Common
Stock upon the exercise of AT&T Stock Options, AT&T SARs or options to
purchase AT&T Common Stock under the AT&T ESPP or upon the settlement of
AT&T Equity Awards outstanding as of the date hereof in accordance with
their current terms, (B) the granting of AT&T Stock Options, AT&T SARs,
AT&T Equity Awards and options to purchase AT&T Common Stock under the AT&T
ESPP in the ordinary course of business and consistent with past practice
and the issuance of shares of AT&T Common Stock upon the exercise or
settlement thereof, (C) the granting of AT&T Stock Options and AT&T Equity
Awards that are not exercisable prior to the Distribution and that will
become options or equity awards, as applicable, solely with respect to AT&T
Common Stock following the Distribution, (D) the issuance of shares of AT&T
Common Stock pursuant to any instruments, agreements or other arrangements
contemplated by Section 6.05 or the Schedules thereto and outstanding as of
the date hereof or (E) 275 million shares of AT&T Common Stock as set forth
in Section 6.05(b) of the AT&T Disclosure Schedule in accordance with
Section 8.01(v) of the AT&T Disclosure Schedule;
(vi) incur any capital expenditures in respect of the AT&T Broadband
Group, except as set forth in the AT&T Disclosure Schedule;
(vii) except for capital expenditures in respect of the AT&T Broadband
Group, which shall be governed by Section 8.01(vi), acquire (by merger,
consolidation, acquisition of stock or assets or otherwise), directly or
indirectly, any assets in respect of the AT&T Broadband Group, other than
(A) pursuant to agreements in effect as of the date hereof, (B) assets used
in the ordinary course of business of the AT&T Broadband Group, AT&T (to
the extent relating to the AT&T Broadband Group), AT&T Broadband and the
AT&T Broadband Subsidiaries, in a manner that is consistent with past
practice, (C) assets having a fair market value not exceeding $100,000,000
in any one transaction or series of related transactions or $500,000,000 in
the aggregate, or (D) in the case of cable swaps and similar transactions
where the primary consideration for the acquired assets are cable
properties, assets having a fair market value not exceeding $100,000,000 in
any one transaction or series of related transactions or $500,000,000 in
the aggregate;
(viii) except for the sale of the interest in TWE, which shall be
governed by Section 8.01(xiii), and other than pursuant to agreements in
effect as of the date hereof and other than in the ordinary course of
business, sell, lease, license, encumber or otherwise transfer any assets
other than (A) assets having a fair market value not exceeding $100,000,000
in any one transaction or series of related transactions or $500,000,000 in
the aggregate or (B) in the case of cable swaps and similar transactions
where the primary consideration for the disposed of assets are cable
properties, assets having a fair market value not exceeding $100,000,000 in
any one transaction or series of related transactions or $500,000,000 in
the aggregate;
(ix) incur, assume or guarantee any Indebtedness, other than (A)
borrowings from AT&T or any AT&T Subsidiary on the terms set forth in
Schedule 8.01(ix) either in the ordinary course of business or to refinance
Indebtedness at maturity, (B) any transactions by AT&T and its wholly owned
Subsidiaries that do not involve the AT&T Broadband Group, AT&T Broadband
or any of the AT&T Broadband Subsidiaries, (C) Indebtedness incurred as
contemplated by Section 9.18 or (D) as approved by the Interim Finance
Committee;
(x) make any loan, advance or capital contributions to or investment
in any Person other than (A) loans, advances or capital contributions to or
investments in AT&T Broadband or any wholly owned AT&T Broadband Subsidiary
on terms set forth in Section 6.27(b) of the AT&T Disclosure Schedule, (B)
loans or advances to AT&T or any AT&T Subsidiary on terms set forth in
Section 6.27(b) of the AT&T Disclosure Schedule, (C) pursuant to agreements
in effect as of the date hereof, (D) any transactions by AT&T and its
wholly owned Subsidiaries that do not involve the AT&T Broadband Group,
AT&T Broadband and the AT&T Broadband Subsidiaries, or (E) loans,
A-50
advances or capital contributions to joint ventures or Affiliates of the
AT&T Broadband Group as required by agreements currently in effect relating
to such joint ventures or Affiliates or as contemplated by Schedule
8.01(x);
(xi) except for capital expenditures in respect of the AT&T Broadband
Group, which shall be governed by Section 8.01(vi), engage in or enter into
any transaction or commitment, enter into any contract or agreement, or
relinquish or amend in any material respect any contract or other right, in
each case in respect of the AT&T Broadband Group, for the provision of
goods or services or the use of facilities (including any programming
agreement, any agreement with any vendor for the purchase of equipment, any
agreement for the provision by one or more third parties of telephone, data
or other services through the facilities of one or more of the Systems of
AT&T or any of the AT&T Subsidiaries or any agreement providing for access
to, or the right to use, the facilities of one or more of the Systems of
AT&T or any of the AT&T Subsidiaries) that is (A) material to the AT&T
Broadband Group, taken as a whole, or (B) that provides for payments in
excess of $50,000,000 per agreement (or $100,000,000 for all agreements for
similar goods or services);
(xii) enter into or amend in any material respect any joint venture,
partnership or other similar venture that is material to the AT&T Broadband
Group, taken as a whole;
(xiii) (A) enter into any material agreement or arrangement in
connection with or relating to its interest in TWE or amend or modify in
any material respect any of the TWE Contracts (other than incidental
agreements necessary to implement the transactions contemplated by clauses
(B) and (C) below of this Section 8.01(xiii) such as underwriting
agreements, engagement letters and similar agreements), (B) exercise (other
than on a cashless basis) the TWE Option under the TWE Option Agreement or
(C) sell all or part of its interest in TWE except solely for cash or
pursuant to Section 13.1 of the TWE Partnership Agreement; provided that
AT&T has kept Comcast reasonably apprised of the status of the related
process;
(xiv) enter into any agreement or arrangement that materially limits
or otherwise materially restricts the AT&T Broadband Group, AT&T (to the
extent relating to the AT&T Broadband Group), AT&T Broadband, any AT&T
Broadband Subsidiary or any of their respective Affiliates (other than AT&T
(to the extent not relating to the AT&T Broadband Group) and the AT&T
Subsidiaries other than AT&T Broadband and the AT&T Broadband Subsidiaries)
or any successor thereto, or that could, after the Effective Time,
materially limit or restrict Parent, Comcast, any Comcast Subsidiary or any
of their Affiliates, from engaging in any material business;
(xv) except as required pursuant to existing written, binding
agreements, as otherwise required by law or as expressly provided in the
Employee Benefits Agreement, (A) enter into any commitment to provide any
severance or termination pay to (or amend any existing arrangement with)
any director, officer or employee of AT&T, AT&T Broadband or any AT&T
Broadband Subsidiary, (B) increase the benefits payable under any existing
severance or termination pay policy or employment agreement (other than as
may be increased by function of the existing terms of any such policy or
agreement), (C) other than in the ordinary course of business consistent
with past practice, enter into any employment, deferred compensation or
other similar agreement (or amend any such existing agreement) with any
director or officer of AT&T, AT&T Broadband or any AT&T Broadband
Subsidiary, (D) establish, adopt or amend (except as required by applicable
law) any collective bargaining (except to the extent it would contain
economic terms that are not materially less favorable to AT&T, AT&T
Broadband or any AT&T Broadband Subsidiary than the terms of existing
arrangements), bonus, profit-sharing, thrift, pension, retirement, deferred
compensation, compensation, stock option, restricted stock or other benefit
plan or arrangement covering any director, officer or employee of AT&T,
AT&T Broadband or any AT&T Broadband Subsidiary, except that AT&T, AT&T
Broadband and the AT&T Broadband Subsidiaries may amend any such existing
agreement or plan or adopt a successor plan or arrangement to the extent
mandated by applicable law or to the extent that such amendment would not
result in more than a de minimis increase in the costs or liabilities under
such agreement or plan, (E) other than in the ordinary course
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of business consistent with past practice or as required by any agreement
in effect as of the date hereof, increase the compensation, bonus or other
benefits payable to any director, officer or employee of AT&T, AT&T
Broadband or any AT&T Broadband Subsidiary or (F) amend the terms of any
outstanding AT&T Stock Option, AT&T SAR or AT&T Equity Award; provided that
the foregoing shall not in any way restrict AT&T or any of its wholly owned
Subsidiaries from entering into or amending commitments, contracts, plans
or other arrangements of the types referred to in clauses (A) through (F)
above to the extent that AT&T Broadband and the AT&T Broadband Subsidiaries
are not bound thereby and the AT&T Broadband Group is not affected thereby
and provided further that the foregoing shall not in any way restrict AT&T
or any of its Subsidiaries from taking any action (including granting any
stay bonuses and paying or providing other compensation pursuant to
retention plans or similar arrangements) on reasonable commercial terms
that AT&T determines is reasonably necessary or desirable in order to
retain or attract any officers or employees as set forth in Schedule
8.01(xv) to the extent that the aggregate cost of such actions, grants or
payments does not exceed the amount set forth in Section 8.01(xv) of the
AT&T Disclosure Schedule;
(xvi) launch any new channels, except as necessary to comply with any
requirement of any Governmental Authority and except pursuant to pending
agreements in effect as of the date hereof;
(xvii) change (A) its methods of accounting or accounting practices in
any material respect, except as required by changes in GAAP or by law, or
(B) its fiscal year;
(xviii) except as set forth on Section 8.01(xviii) of the AT&T
Disclosure Schedule, enter into or engage in any transaction with, or
transfer any assets to, or assume any liabilities of, AT&T (in its capacity
other than as part of the AT&T Broadband Group) or any of the AT&T
Subsidiaries (other than AT&T Broadband or any of the AT&T Broadband
Subsidiaries) other than non-material transactions on arm's-length terms in
the ordinary course of business;
(xix) except as set forth on Section 8.01(xix) of the AT&T Disclosure
Schedule, settle any litigation, investigation, arbitration, proceeding or
other claim if the AT&T Broadband Group would be required to pay in excess
of $25,000,000 or such settlement would otherwise be material to the AT&T
Broadband Group;
(xx) other than in the ordinary course of business and consistent with
past practice, make any material Tax election or enter into any settlement
or compromise of any material Tax liability;
(xxi) fail to comply with its obligations under the Exchange
Agreement;
(xxii) amend or waive any provision of any of the PrISMs Contracts or
SAILS Contracts, make any payment in settlement of any of such contracts or
terminate any of such contracts; provided that immediately prior to the
Effective Time each of such contracts will be amended as set forth in
Section 8.01(xxi) of the AT&T Disclosure Schedule if the counterparty to
such contract consents to such amendment;
(xxiii) (A) permit T-Holdings or any of its Subsidiaries to incur any
liabilities or (B) take any action that would reasonably be expected to
make any representation or warranty of AT&T hereunder or of AT&T or any
AT&T Subsidiary under any of the other Transaction Agreements inaccurate in
any material respect at the Effective Time;
(xxiv) take any action that would, or would reasonably be expected to,
prevent, impair or materially delay the ability of AT&T or Comcast or any
of their respective Subsidiaries to consummate the transactions
contemplated by this Agreement and the other Transaction Agreements; or
(xxv) agree or commit to do any of the foregoing; provided that the
limitations set forth in Sections 8.01(i) through 8.01(xxii) shall not
apply to any transaction between AT&T Broadband and any wholly owned AT&T
Broadband Subsidiary or between AT&T (to the extent not relating to the
AT&T Broadband Group) and any wholly owned AT&T Subsidiaries (other than
AT&T Broadband and any AT&T Broadband Subsidiaries) and provided, further,
that the limitations set forth in
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Sections 8.01(i) through 8.01(xxii) shall not be deemed to in any way apply
to or prohibit any Excepted Transaction or any transaction by or involving
AT&T and its wholly owned Subsidiaries if AT&T (to the extent relating to
the AT&T Broadband Group), the AT&T Broadband Group, AT&T Broadband and the
AT&T Broadband Subsidiaries are not bound thereby, such transaction does
not involve AT&T (to the extent relating to the AT&T Broadband Group), the
AT&T Broadband Group, AT&T Broadband or any of the AT&T Broadband
Subsidiaries and such transaction would not otherwise adversely affect the
transactions contemplated hereby in any material respect. In no event will
AT&T enter into, or permit the AT&T Broadband Group, AT&T Broadband or any
AT&T Broadband Subsidiary to enter into, any agreement or contract that
would bind or purport to bind, Parent or any of its Affiliates (other than
AT&T Broadband and the AT&T Broadband Subsidiaries) after the Effective
Time.
SECTION 8.02. AT&T Shareholders' Meeting; Proxy Material. (a) Subject to
applicable law, AT&T shall cause the AT&T Shareholders' Meeting to be duly
called and held as soon as reasonably practicable (taking into consideration all
relevant factors, including delays due to complications of preparing required
pro forma and other financial statements) for the purpose of voting on the
approval and adoption of this Agreement and the transactions contemplated by
this Agreement; provided, however, that if within five days of the time the
parties are notified by the SEC that it is willing to declare the Registration
Statement effective any conditions shall exist (such conditions, the "MANDATORY
RESIDUAL CONDITIONS") such that, as a result of the AT&T Shareholders' Approval
being obtained, the holders of the Senior Notes would be entitled to require
AT&T or any of its Affiliates to repurchase all or any portion of the Senior
Notes, then AT&T shall be entitled to delay the calling of the AT&T
Shareholders' Meeting until such time as the Mandatory Residual Conditions no
longer exist. In connection with the AT&T Shareholders' Meeting, AT&T will (i)
subject to Section 8.02(b), use its reasonable best efforts to obtain the AT&T
Shareholders' Approval and (ii) otherwise comply with all legal requirements
applicable to AT&T Shareholders' Meeting.
(b) Except as provided below, AT&T's Board of Directors shall recommend
approval and adoption of this Agreement and the transactions contemplated by
this Agreement by AT&T shareholders. AT&T's Board of Directors shall be
permitted to withdraw, or modify in a manner adverse to Comcast, its
recommendation to AT&T shareholders only if (i) AT&T has complied with the terms
of Section 8.03, including the requirement in Section 8.03(d) that it notify
Comcast promptly after its receipt of any AT&T Broadband Acquisition Proposal;
(ii) AT&T's Board of Directors determines in good faith by a majority vote,
after consulting with AT&T's outside counsel, that it must take such action to
comply with its fiduciary duties under applicable law; and (iii) AT&T shall have
delivered to Comcast a prior written notice advising Comcast that it intends to
take such action and describing its reasons for taking such action (such notice
to be delivered not less than two Business Days prior to the time such action is
taken). Unless this Agreement shall have been terminated in accordance with its
terms, subject to applicable law, AT&T shall submit this Agreement to AT&T
shareholders at the AT&T Shareholders' Meeting even if AT&T's Board of Directors
determines at any time after the date hereof that it is no longer advisable or
recommends that AT&T shareholders reject it.
SECTION 8.03. No Solicitation. (a) From the date hereof until the
termination hereof, AT&T will not, and will cause the AT&T Subsidiaries and the
officers, directors, employees, investment bankers, attorneys, accountants,
consultants or other agents, representatives or advisors of AT&T and the AT&T
Subsidiaries not to, directly or indirectly (i) take any action to solicit,
initiate, facilitate or encourage the submission of any AT&T Broadband
Acquisition Proposal; (ii) subject to Section 8.03(e), engage in any discussions
or negotiations with, or disclose any non-public information relating to AT&T
(to the extent relating to the AT&T Broadband Group), the AT&T Broadband Group,
AT&T Broadband or any AT&T Broadband Subsidiary or afford access to the
properties, books or records of AT&T (to the extent relating to the AT&T
Broadband Group), the AT&T Broadband Group, AT&T Broadband or any AT&T Broadband
Subsidiary to, any Person who is known by AT&T to be considering making, or has
made, an AT&T Broadband Acquisition Proposal; (iii)(A) amend or grant any waiver
or release under any standstill agreement, agreement restricting a party from
engaging in negotiations or discussions with other parties or
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any similar agreement with respect to any class of equity securities of AT&T
(other than in connection with an Excepted Transaction) or with respect to the
AT&T Broadband Group or any of its material assets or (B) approve any
transaction, or approve of any Person becoming an "Interested Shareholder",
under Section 912 of the NYBCL or Section 203 of the DGCL; or (iv) enter into
any agreement with respect to an AT&T Broadband Acquisition Proposal (other than
a confidentiality agreement as described below).
(b) Notwithstanding the provisions of Section 8.03(a) or any other
provision of this Agreement, prior to the AT&T Shareholders' Meeting, AT&T may,
in response to an unsolicited bona fide AT&T Broadband Acquisition Proposal that
AT&T's Board of Directors determines in good faith, by majority vote, after
consultation with its financial advisors and outside legal counsel, would
reasonably be expected to lead to an AT&T Superior Proposal, furnish
confidential or nonpublic information and access to, and engage in discussions
and negotiate with, such Person making such proposal; provided that prior to
taking any of such actions, (i) AT&T has complied with the terms of this Section
8.03, including the requirement in Section 8.03(d) that it notify Comcast
promptly after its receipt of any AT&T Broadband Acquisition Proposal, (ii) the
AT&T Board of Directors determines in good faith, by majority vote, after
consultation with AT&T's outside legal counsel that it must take such action to
comply with its fiduciary duties under applicable law and (iii) such Person
making such proposal executes a confidentiality agreement with terms no less
favorable in the aggregate to AT&T than those contained in the AT&T
Confidentiality Agreement. "AT&T SUPERIOR PROPOSAL" means an unsolicited, bona
fide AT&T Broadband Acquisition Proposal that AT&T's Board of Directors
determines in good faith, after consultation with its financial advisors and
outside legal counsel and taking into account all the terms and conditions of
the AT&T Broadband Acquisition Proposal, including the likelihood and timing of
consummation of the AT&T Broadband Acquisition Proposal (including, without
limitation, the likelihood of obtaining financing and receiving necessary
regulatory approvals), would be more favorable to the holders of AT&T Common
Stock than the transactions provided for in this Agreement.
(c) Nothing contained in this Agreement shall prevent AT&T's Board of
Directors from complying with Rule 14e-2 and Rule 14d-9 under the 1934 Act with
regard to an AT&T Broadband Acquisition Proposal; provided that AT&T's Board of
Directors shall not recommend that AT&T shareholders tender their shares in
connection with a tender offer, except to the extent AT&T's Board of Directors
by a majority vote determines in its good faith judgment that such a
recommendation is required to comply with the fiduciary duties of AT&T's Board
of Directors under applicable law, after consulting with outside legal counsel.
(d) AT&T will notify Comcast promptly (but in no event later than 24 hours)
after receipt by AT&T (or any of its advisors) of any AT&T Broadband Acquisition
Proposal, or of any request for non-public information relating to AT&T (to the
extent relating to the AT&T Broadband Group), the AT&T Broadband Group, AT&T
Broadband or any AT&T Broadband Subsidiary or for access to the properties,
books or records of AT&T (to the extent relating to the AT&T Broadband Group),
the AT&T Broadband Group, AT&T Broadband or any AT&T Broadband Subsidiary by any
Person who is known to be considering making, or has made, an AT&T Broadband
Acquisition Proposal. AT&T shall provide such notice orally and in writing and
shall identify the Person making, and the terms and conditions of, any such AT&T
Broadband Acquisition Proposal, indication or request. AT&T shall keep Comcast
fully informed, on a prompt basis (but in any event no later than 24 hours), of
the status and details of any such AT&T Broadband Acquisition Proposal,
indication or request. AT&T shall, and shall cause the AT&T Subsidiaries and the
directors, employees and other agents of AT&T and the AT&T Subsidiaries to,
cease immediately and cause to be terminated all activities, discussions or
negotiations, if any, with any Persons conducted prior to the date hereof with
respect to any AT&T Broadband Acquisition Proposal. This Section 8.03(d) shall
not apply with respect to any Excepted Transaction; provided that if an
agreement is entered into with respect to an Excepted Transaction that would
reasonably be expected to delay the transactions contemplated hereby, AT&T shall
promptly thereafter notify Comcast of such agreement and provide Comcast with
information it may reasonably request relating to such Excepted Transaction to
the extent it is relevant to the transactions contemplated hereby.
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(e) Notwithstanding anything in Section 8.03 to the contrary, in connection
with discussions or negotiations relating to a proposed Excepted Transaction,
AT&T may (i) disclose non-public information relating to AT&T (to the extent
relating to the AT&T Broadband Group), the AT&T Broadband Group, AT&T Broadband
or any AT&T Broadband Subsidiary and (ii) afford access to the properties, books
or records of AT&T (to the extent relating to the AT&T Broadband Group), the
AT&T Broadband Group, AT&T Broadband or any AT&T Broadband Subsidiary, in the
case of (i) and (ii), to the Person or Persons with whom AT&T is engaged in such
discussions or negotiations relating to such proposed transaction; provided that
(x) such Person or Persons (A) are not known by AT&T to be considering making,
or to have made, an AT&T Broadband Acquisition Proposal and (B) execute a
confidentiality agreement with AT&T Broadband with confidentiality terms no less
favorable than those in the AT&T Confidentiality Agreement pursuant to which
such Person or Persons agree to hold any information relating to AT&T (to the
extent relating to the AT&T Broadband Group), the AT&T Broadband Group, AT&T
Broadband and any AT&T Broadband Subsidiary confidential and (y) such disclosure
and such access are limited to that reasonably necessary in connection with such
proposed transaction.
SECTION 8.04. Ancillary Agreements. Subject to the terms and conditions
of this Agreement, the Separation and Distribution Agreement and the other
Ancillary Agreements, AT&T shall, and shall cause each of its Subsidiaries
(which, after the Effective Time, shall not include any of the AT&T Broadband
Entities) to, comply with its respective obligations under the Separation and
Distribution Agreement and the other Ancillary Agreements pursuant to and in
accordance with the terms thereof. No provision of the Separation and
Distribution Agreement or any of the other Ancillary Agreements may be amended
or waived prior to the Effective Time without the prior written consent of
Comcast, except that the Primary Commercial Agreements and the Additional
Commercial Agreements may be amended or waived in the ordinary course of
business without the prior written consent of Comcast if such amendment or
waiver would not be adverse in any material respect to AT&T (to the extent
relating to the AT&T Broadband Group), the AT&T Broadband Group, AT&T Broadband
or any of the AT&T Broadband Subsidiaries. None of the Separation and
Distribution Agreement and the other Ancillary Agreements may be terminated
prior to the Effective Time without the prior written consent of Comcast. The
AT&T Broadband Group shall not grant any consent or approval under the
Separation and Distribution Agreement or any of the other Ancillary Agreements
prior to the Effective Time without the prior written concurrence of Comcast,
except that the AT&T Broadband Group may grant a consent or approval under any
Primary Commercial Agreement or Additional Commercial Agreement in the ordinary
course of business if such consent or approval would not be adverse in any
material respect to AT&T (to the extent relating to the AT&T Broadband Group),
the AT&T Broadband Group, AT&T Broadband or any of the AT&T Broadband
Subsidiaries. Any agreements entered into or documents executed pursuant to the
Primary Transaction Agreements shall be reasonably acceptable to Comcast. Prior
to the Effective Time, all determinations by the AT&T Broadband Group under the
Separation and Distribution Agreement or any of the other Ancillary Agreements
will be made for the benefit of the AT&T Broadband Group and, in the event of
any discretion as to terms, such terms shall be no less favorable to the AT&T
Broadband Group than arm's-length terms.
SECTION 8.05. Neutrality Agreement. Notwithstanding any other provision
of this Agreement, AT&T shall not renew, extend or modify the Neutrality and
Consent Election Agreement (the "NEUTRALITY AGREEMENT") among AT&T, the
Communications Workers of America and the International Brotherhood of
Electrical Workers, such that such agreement, as so renewed, extended or
modified, will apply to or otherwise bind or purport to apply to or otherwise
bind, after the Effective Time, AT&T Broadband, any of the AT&T Broadband
Subsidiaries, Parent, Comcast or any of the Comcast Subsidiaries, either as a
matter of contract or term or condition of employment. AT&T shall not enter into
any other agreement or arrangement with respect to the same or similar matters
as the matters covered by the Neutrality Agreement if such agreement or
arrangement would apply to or otherwise bind or purport to apply to or otherwise
bind, after the Effective Time, AT&T Broadband, any of the AT&T Broadband
Subsidiaries, Parent, Comcast or any of the Comcast Subsidiaries, either as a
matter of contract or term or condition of employment.
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SECTION 8.06. Broadband Employees. Prior to the Effective Time, AT&T
shall, and shall cause each of its Subsidiaries to, use reasonable best efforts
so that, immediately prior to the Effective Time, (i) all individuals (other
than Broadband Transferees) who are then primarily employed (whether actively or
then on an approved leave of absence) in connection with the AT&T Broadband
Business will be employed, as of the Effective Time, by the AT&T Broadband Group
and (ii) the AT&T Broadband Group will employ no individuals other than those
referred to in clause (i) of this Section 8.06 and the Broadband Transferees;
provided that no transfers required to implement this Section 8.06 shall result
in any severance liabilities to AT&T Broadband.
SECTION 8.07. AT&T Post-Signing Equity Awards. With respect to any
options to purchase shares of AT&T Common Stock and any other equity-based
awards based upon shares of AT&T Common Stock granted by AT&T or any of its
Subsidiaries from the date hereof until the Effective Time, AT&T shall provide
in the agreements evidencing such awards that the transactions contemplated by
this Agreement or any of the other Transaction Agreements shall not constitute a
"Change in Control" for purposes of triggering accelerated vesting of the
awards; provided that if any employee who receives such an award is terminated
after the Effective Time under conditions entitling him to receive "Change in
Control Severance Benefits" under Appendix 2 of the AT&T Broadband Severance
Plan, the equity awards held by such employee shall become immediately vested
upon termination of employment and, if subject to exercise, shall remain
exercisable for the full extent of the original term of the award.
SECTION 8.08. Redemption of TCI Pacific Preferred Stock. Prior to the
Effective Time, AT&T shall cause TCI Pacific Communications, Inc. (i) to call
for redemption all of the outstanding shares of TCI Pacific Preferred Stock and
(ii) to the extent any of such shares are not exchanged for shares of AT&T
Common Stock prior to the applicable redemption date, to redeem all of such
shares remaining outstanding in exchange for shares of AT&T Common Stock, in the
case of each of (i) and (ii), in accordance with the terms of the certificate of
designation for the TCI Pacific Preferred Stock. The shares of AT&T Common Stock
used to effect the foregoing redemption or exchange shall be provided by AT&T to
TCI Pacific Communications, Inc. without payment of any consideration or charge
by TCI Pacific Communications, Inc. or the AT&T Broadband Group.
SECTION 8.09. Note Consent Process. AT&T will consult with Comcast in
connection with actions taken by AT&T in furtherance of satisfaction of the
condition specified in Section 10.01(l). AT&T will conduct such actions in a
manner reasonably designed to minimize the cost and expenses incurred in
connection with satisfaction of such condition. The parties agree that AT&T may
obtain Note Consents or otherwise satisfy the condition set forth in Section
10.01(l) by a one-time cash payment of a consent fee, through a coupon increase
or a combination thereof and that any costs and expenses incurred in connection
therewith (as calculated pursuant to Section 11.03) shall be shared pursuant to
Section 11.03(a)(iv). AT&T shall not be required to take any action other than
those referred to in the preceding sentence in order to satisfy the condition
set forth in Section 10.01(l) unless Comcast agrees that the costs and expenses
incurred in connection therewith shall be shared on the basis set forth in
Section 11.03(a)(iv).
ARTICLE 9
COVENANTS OF AT&T, COMCAST AND PARENT
SECTION 9.01. Best Efforts. (a) Subject to the terms and conditions of
this Agreement, each of the parties hereto will use its best efforts to promptly
(i) take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate the Mergers and the other transactions contemplated hereby as soon as
practicable, including preparing and filing as promptly as practicable all
documentation to effect all necessary filings, notices, petitions, statements,
registrations, submissions of information, applications and other documents and
(ii) obtain and maintain all approvals, consents, registrations, permits,
authorizations and other confirmations required to be obtained from any third
Person that are necessary, proper or advisable to consummate the Mergers and the
other transactions contemplated hereby; provided, that the parties'
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obligations to obtain the License Consents and the expiration (without either
the Department of Justice or the Federal Trade Commission obtaining any
injunction or other relief that prevents the consummation of the transactions
contemplated hereby) or termination of the applicable waiting periods under the
HSR Act shall be unconditional and shall not be qualified by best efforts.
Consistent with its obligations under the preceding sentence, Comcast and AT&T
will commit to and implement divestitures, hold separate or similar transactions
or actions with respect to assets or businesses of the Comcast Group and the
AT&T Broadband Group, which commitments and implementations may, at Comcast's or
AT&T's option, be conditioned upon and effective as of the Effective Time. No
party hereto shall, directly or indirectly, extend any waiting period under the
HSR Act or enter into any agreement with a Governmental Authority to delay or to
not consummate the Mergers or the other transactions contemplated by this
Agreement, except with the prior written consent of the other parties. The
parties' actions with respect to this paragraph shall be reasonable and
reasonably calculated to facilitate consummation of the Mergers by the End Date.
Subject to applicable law relating to the exchange of information, Comcast and
AT&T shall have the right to review in advance, and to the extent practicable
each will consult the other on, all the information relating to Comcast and the
Comcast Subsidiaries or AT&T and the AT&T Broadband Subsidiaries, as the case
may be, that appears in any filing made with, or written materials submitted to,
any third party and/or any Governmental Authority in connection with the Mergers
and the other transactions contemplated hereby. Prior to the date hereof, each
of Comcast and AT&T has provided to the other a list of all material Franchise
Consents of such party, all material License Consents of such party, all
material PUC Consents of such party and all rights that any Person may have
under the terms of such party's material Franchises to purchase all or any
portion of a System owned and operated by such party as a result of the
transactions contemplated hereby ("PURCHASE RIGHTS"). Within 45 calendar days of
the date of this Agreement, each of Comcast and AT&T shall provide to the other
a supplemental list of all of such party's other Franchise Consents, License
Consents, PUC Consents and Purchase Rights.
(b) In furtherance and not in limitation of the foregoing, each of AT&T and
Comcast agrees to (i) make an appropriate filing of a Notification and Report
Form pursuant to the HSR Act with respect to the Mergers and the other
transactions contemplated hereby as promptly as practicable (and, in any event,
within 45 calendar days of the date of this Agreement), (ii) supply as promptly
as practicable any additional information and documentary material that may be
requested pursuant to the HSR Act and (iii) complete the review process under
the HSR Act to permit the consummation of the Mergers and the other transactions
contemplated hereby, including causing the expiration or termination of the
applicable waiting periods under the HSR Act as soon as practicable.
SECTION 9.02. Joint Proxy Statement; Registration Statement. (a) As
promptly as practicable after the date hereof (and, in any event, within 60
calendar days of the date of this Agreement) the parties hereto shall prepare
and file the Joint Proxy Statement and the Registration Statement (in which the
Joint Proxy Statement will be included) with the SEC. AT&T and Comcast shall use
their reasonable best efforts to cause the Registration Statement to become
effective under the 1933 Act as soon after such filing as practicable and to
keep the Registration Statement effective as long as is necessary to consummate
the Mergers. The Joint Proxy Statement shall include the recommendation of each
of the Board of Directors of Comcast and AT&T in favor of approval and adoption
of this Agreement and the applicable Merger, except to the extent the Board of
Directors of AT&T shall have withdrawn or modified its approval or
recommendation of this Agreement as permitted by Section 8.02(b). Comcast and
AT&T each shall use its reasonable best efforts to cause the Joint Proxy
Statement to be mailed to its respective shareholders as promptly as practicable
after the Registration Statement becomes effective. Each of Comcast and AT&T
shall promptly provide copies, consult with each other and prepare written
responses with respect to any written comments received from the SEC with
respect to the Joint Proxy Statement and the Registration Statement and advise
one another of any oral comments received from the SEC. The Registration
Statement and the Joint Proxy Statement shall comply as to form in all material
respects with the rules and regulations promulgated by the SEC under the 1933
Act and the 1934 Act, respectively.
(b) AT&T and Comcast shall make all necessary filings with respect to the
Mergers and the transactions contemplated hereby under the 1933 Act and the 1934
Act and applicable state "blue sky"
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laws and the rules and regulations thereunder. Each party hereto will advise the
other parties, promptly after it receives notice thereof, of the time when the
Registration Statement has become effective or any supplement or amendment has
been filed, the issuance of any stop order, the suspension of the qualification
of the Parent Common Stock issuable in connection with the Mergers for offering
or sale in any jurisdiction, or any request by the SEC for amendment of the
Joint Proxy Statement or the Registration Statement or comments thereon and
responses thereto or requests by the SEC for additional information. No
amendment or supplement to the Joint Proxy Statement or the Registration
Statement shall be filed without the approval of both AT&T and Comcast, which
approval shall not be unreasonably withheld or delayed. If, at any time prior to
the Effective Time, any information relating to AT&T or Comcast, or any of their
respective Affiliates, officers or directors should be discovered by AT&T or
Comcast that should be set forth in an amendment or supplement to the
Registration Statement or the Joint Proxy Statement so that such documents would
not include any misstatement of a material fact or omit to state any material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, the party hereto that discovers such
information shall promptly notify the other parties hereto and an appropriate
amendment or supplement describing such information shall be promptly filed with
the SEC and, to the extent required by law, disseminated to the shareholders of
AT&T and Comcast.
SECTION 9.03. Public Announcements. So long as this Agreement is in
effect, Comcast and AT&T will consult with each other before issuing any press
release or making any public statement with respect to this Agreement or the
transactions contemplated hereby and, except as may be required by applicable
law or any listing agreement with any national securities exchange or quotation
system, will not issue any such press release or make any such public statement
without the prior consent of the other, which consent shall not be unreasonably
withheld. Notwithstanding the foregoing, any such press release or public
statement that may be required by applicable law or any listing agreement with
any national securities exchange or quotation system may be issued without such
consent, if the party hereto making such release or statement has used its
reasonable best efforts to consult with the other parties.
SECTION 9.04. Further Assurances. At and after the Effective Time, the
officers and directors of the applicable Surviving Corporation will be
authorized to execute and deliver, in the name and on behalf of AT&T Broadband
or Comcast, as the case may be, any deeds, bills of sale, assignments or
assurances and to take and do, in the name and on behalf of AT&T Broadband or
Comcast, as the case may be, any other actions and things to vest, perfect or
confirm of record in such Surviving Corporation, any and all right, title and
interest in, to and under any of the rights, properties or assets of AT&T
Broadband or Comcast, as the case may be, acquired or to be acquired by such
Surviving Corporation, as a result of or in connection with the applicable
Merger.
SECTION 9.05. Access to Information. From the date hereof until the
Effective Time or earlier termination of this Agreement and subject to
applicable law and the Confidentiality Agreements, each of Comcast and AT&T
shall (a) give to the other and the other's legal counsel, financial advisors,
auditors and other authorized representatives reasonable access during normal
business hours to the offices, properties, books and records of such party and
its Subsidiaries, (b) furnish to the other and the other's counsel, financial
advisors, auditors and other authorized representatives such financial and
operating data and other information as such Persons may reasonably request and
(c) instruct its employees, legal counsel, financial advisors, auditors and
other authorized representatives to cooperate with the other in such other
party's investigation. Any investigation pursuant to this Section 9.05 shall be
conducted in a manner as not to interfere unreasonably with the conduct of the
business of the party being investigated. No information or knowledge obtained
in any investigation pursuant to this Section 9.05 shall affect or be deemed to
modify any representation or warranty made by any party hereunder. Each party
hereto will hold such information that is non-public in confidence in accordance
with the provisions of the applicable Confidentiality Agreement.
SECTION 9.06. Tax-free Transactions. (a) Prior to the Effective Time,
each party hereto shall use its best efforts to cause the Mergers to qualify as
tax-free exchanges described in Section 351 of the Code
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("351 TRANSACTIONS"), and will not take any action reasonably likely to cause
the Mergers not to so qualify.
(b) Prior to the Effective Time, each party hereto shall use its best
efforts to (i) cause the Separation and Distribution to qualify as tax-free
transactions pursuant to Sections 355 and 368(a) of the Code, and will not take
any action reasonably likely to cause the Separation and Distribution not to so
qualify and (ii) ensure that the Mergers will not cause the Separation and
Distribution to fail to be qualified as tax-free transactions pursuant to
Sections 355 and 368(a) of the Code.
(c) Each party hereto shall use its best efforts to obtain (i) the ruling
or opinion referred to in Section 10.01(j) and (ii) the opinions referred to in
Sections 10.02(b) and 10.03(b).
SECTION 9.07. Affiliates. (a) Within 30 days following the date of this
Agreement, AT&T shall deliver to Comcast a letter identifying all known Persons
who may be deemed affiliates of AT&T Broadband under Rule 145 of the 1933 Act
(an "AT&T RULE 145 AFFILIATE"). AT&T shall use its reasonable best efforts to
obtain and deliver to Comcast a written agreement from each AT&T Broadband Rule
145 Affiliate as soon as practicable and, in any event, at least 30 days prior
to the Effective Time, substantially in the form attached as Exhibit B.
(b) Within 30 days following the date of this Agreement, Comcast shall
deliver to AT&T a letter identifying all known Persons who may be deemed
affiliates of Comcast under Rule 145 of the 1933 Act (an "COMCAST RULE 145
AFFILIATE"). Comcast shall use its reasonable best efforts to obtain and deliver
to AT&T a written agreement from each Comcast Rule 145 Affiliate as soon as
practicable and, in any event, at least 30 days prior to the Effective Time,
substantially in the form attached as Exhibit B.
SECTION 9.08. Governance and Other Matters. Parent shall take all actions
necessary so that at the Effective Time the Parent Board of Directors shall
consist of 12 directors, five (5) of whom shall be existing Comcast directors
designated by Comcast, five (5) of whom shall be existing AT&T directors
designated by AT&T and two (2) of whom shall be Independent Persons jointly
designated by Comcast and AT&T. Except as set forth on the Comcast Disclosure
Schedule or the AT&T Disclosure Schedule, the individuals designated to be
members of the Parent Board of Directors shall be mutually agreed by Comcast and
AT&T. The senior officers of Parent at the Effective Time shall be designated by
the chief executive officer of Comcast in consultation with the chief executive
officer of AT&T. Until Parent's 2005 annual meeting of shareholders, Parent
shall maintain an executive office in the New York City metropolitan area. The
headquarters for Parent shall initially be in Philadelphia, Pennsylvania.
SECTION 9.09. Notices of Certain Events. Each of Comcast and AT&T shall
promptly notify the other of:
(a) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection with the
transactions contemplated hereby;
(b) any notice or other communication from any Governmental Authority
in connection with the transactions contemplated hereby;
(c) the occurrence, or nonoccurrence, of any event the occurrence, or
nonoccurrence, of which would reasonably be expected to cause any
representation or warranty contained herein to be untrue or inaccurate in
any material respect at any time during the period commencing on the date
hereof and ending at the Effective Time; and
(d) any failure of such party to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder;
provided, however, that the delivery of any notice pursuant to this Section
9.09 shall not limit or otherwise affect the remedies available hereunder
to the party receiving such notice.
SECTION 9.10. Section 16 Matters. Prior to the Effective Time, Comcast,
AT&T and AT&T Broadband shall take all such actions as may be required to cause
any (i) dispositions of AT&T Common Stock or AT&T Broadband Common Stock
(including derivative securities with respect to AT&T
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Common Stock or AT&T Broadband Common Stock) or Comcast Common Stock (including
derivative securities with respect to Comcast Common Stock) or (ii) acquisitions
of Parent Common Stock (including derivative securities with respect to Parent
Common Stock) resulting from the transactions contemplated by this Agreement by
each individual who is subject to the reporting requirements of Section 16(a) of
the 1934 Act with respect to AT&T, AT&T Broadband or Comcast, or will become
subject to such reporting requirements with respect to Parent, to be exempt
under Rule 16b-3 promulgated under the 1934 Act.
SECTION 9.11. Director and Officer Liability. (a) Parent shall indemnify
and hold harmless and advance expenses to the present and former officers and
directors of AT&T, the AT&T Subsidiaries, AT&T Broadband, the AT&T Broadband
Subsidiaries, Comcast and the Comcast Subsidiaries, and each individual who
prior to the Effective Time becomes an officer or director of AT&T, an AT&T
Subsidiary, AT&T Broadband, an AT&T Broadband Subsidiary, Comcast or a Comcast
Subsidiary (each an "INDEMNIFIED PERSON"), in respect of acts or omissions by
them in their capacities as such occurring at or prior to the Effective Time
(including for acts or omissions occurring in connection with this Agreement and
the consummation of the transactions contemplated hereby) to the maximum extent
permitted by law ("INDEMNIFIED LOSSES"); provided that notwithstanding the
foregoing Parent shall have no obligation to indemnify and hold harmless and
advance expenses to any Indemnified Person in respect of acts or omissions of
such Indemnified Person that occurred while such Indemnified Person was acting
in a capacity for AT&T and its Subsidiaries other than in connection with either
the AT&T Broadband Group or this Agreement and the transactions contemplated
hereby; provided, further, that AT&T shall indemnify and hold harmless Parent
for 50% of any Indemnified Losses arising out of acts or omissions of the AT&T
officers and directors in connection with this Agreement and the consummation of
the transactions contemplated hereby. Without limiting the generality of the
foregoing, the Indemnified Losses shall include reasonable costs of prosecuting
a claim under this Section 9.11(a). Parent shall periodically advance or
reimburse each Indemnified Person for all reasonable fees and expenses of
counsel constituting Indemnified Losses as such fees and expenses are incurred;
provided that such Indemnified Person shall agree to promptly repay to Parent
the amount of any such reimbursement if it shall be judicially determined by
judgment or order not subject to further appeal or discretionary review that
such Indemnified Person is not entitled to be indemnified by Parent in
connection with such matter. In the event that Parent sells, transfers or leases
all or substantially all of its assets or is not a surviving corporation in any
merger, consolidation or other business combination in which it may enter with
any Person, Parent shall, as a condition of any such transaction, cause such
purchaser or such surviving corporation, as the case may be, to assume Parent's
obligations under this Section 9.11 upon the consummation of any such
transaction.
(b) For six years after the Effective time, Parent shall provide or shall
cause each of the Surviving Corporations to provide officers' and directors'
liability insurance in respect of acts or omissions occurring prior to the
Effective Time (including for acts or omissions occurring in connection with
this Agreement and the consummation of the transactions contemplated hereby),
covering each such Indemnified Person (but, in the case of officers and
directors of AT&T and its Subsidiaries, only in respect of acts or omissions of
such person acting in connection with the AT&T Broadband Group or this Agreement
and the transactions contemplated hereby) currently covered by the officers' and
directors' liability insurance policy of AT&T or Comcast, as the case may be, on
terms with respect to coverage and amount (including with respect to the payment
of attorneys' fees) no less favorable than those of such policy in effect on the
date hereof; provided that, if the aggregate annual premiums for such insurance
during such period shall exceed 300% of the per annum rate of premium paid by
either AT&T or Comcast as of the date hereof for such insurance, then Parent
shall provide or cause to be provided a policy for the applicable individuals
with the best coverage as shall then be available at 300% of such rate (it being
agreed that in the event that Parent or its Affiliate shall pay premiums in
excess of such rate in order to cover directors or officers of one such entity,
it shall pay premiums at such higher rate to cover directors or officers of the
other such entity).
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(c) The rights of each Indemnified Person and his or her heirs and legal
representatives under this Section 9.11 shall be in addition to any rights such
Indemnified Person may have under the certificate of incorporation or bylaws of
AT&T, any AT&T Subsidiary, AT&T Broadband, any AT&T Broadband Subsidiary,
Comcast or any Comcast Subsidiary, or under the PBCL, the NYBCL, the DGCL or any
other applicable law.
SECTION 9.12. Listing of Stock. Comcast and Parent shall use their
respective reasonable best efforts to cause the shares of Parent Class A Common
Stock and the Parent Class A Special Common Stock (and, if applicable, Parent
Class C Common Stock) to be issued in connection with the Mergers and reserved
for issuance in connection with the AT&T Stock Options, the AT&T Equity Awards,
the Comcast Options and the Comcast Equity Awards to be approved for listing on
Nasdaq subject to official notice of issuance.
SECTION 9.13. Employee Matters. (a) Parent shall and shall cause its
Subsidiaries (including the AT&T Broadband Surviving Corporation and the Comcast
Surviving Corporation) to:
(i) honor the terms of all Broadband Employee Plans and Broadband
Benefit Arrangements, and to pay or provide, or cause its Subsidiaries to
pay or provide, the benefits required thereunder, recognizing that the
consummation of the transactions contemplated hereby will constitute a
"change in control" for purposes of the Broadband Employee Plans and
Broadband Benefit Arrangements that include a provision for modifications
to benefits in the event of a "change in control";
(ii) until December 31, 2003 (the "BENEFITS MAINTENANCE PERIOD"), with
respect to Broadband Employees (other than those subject to collective
bargaining obligations or agreements), provide a level of aggregate
employee benefits and compensation, taking into account all Employee Plans
and Benefit Arrangements and other programs sponsored or maintained by AT&T
and the AT&T Subsidiaries listed in Section 6.18(a) of the AT&T Disclosure
Schedule to the extent they remain in effect, but excluding any severance,
separation, or similar plan, program, policy or arrangement ("SEVERANCE
PLANS") that is substantially comparable in the aggregate to the aggregate
employee benefits and compensation provided, with respect to service to
AT&T Broadband or any of the AT&T Broadband Subsidiaries, to the Broadband
Employees immediately prior to the Effective Time (excluding benefits
provided under any Severance Plans); and
(iii) until December 31, 2003, continue, without any change adverse to
Broadband Employees, each severance plan identified in Section 6.18(a) of
the AT&T Disclosure Schedule (the "AT&T SEVERANCE PLANS").
(b) If Broadband Employees are included in any Employee Plan, Benefit
Arrangement or International Plan sponsored or maintained by Parent or any of
its Subsidiaries following the Effective Time, the Broadband Employees shall
receive credit for service with AT&T and the AT&T Subsidiaries and their
predecessors prior to the Effective Time to the same extent and for the same
purposes thereunder as such service was counted under similar predecessor
Employee Plans and Benefit Arrangements for all purposes (except that, with
respect to benefit accrual, such service shall not be counted to the extent that
it would result in a duplication of benefits and shall not be counted for
purposes of benefit accrual under any defined benefit plan); provided, however,
that service with respect to Broadband Employees subject to collective
bargaining agreements or obligations shall be determined under such collective
bargaining agreements or obligations. Notwithstanding the foregoing, as soon as
practicable after the Benefits Maintenance Period, Broadband Employees who
satisfy eligibility requirements shall be allowed to participate in any
retirement medical or life insurance benefit plan then sponsored or maintained
by Parent or any of its Subsidiaries. If Broadband Employees or their dependents
are included in any medical, dental or health plan (a "SUCCESSOR PLAN") other
than the plan or plans in which they participated immediately prior to the
Effective Time (a "PRIOR PLAN"), any such Successor Plan shall not include any
restrictions or limitations with respect to pre-existing condition exclusions or
any actively-at-work requirements (except to the extent such exclusions were
applicable under any similar Prior Plan at the Effective Time) and any eligible
expenses incurred by any Broadband Employee and his or her covered dependents
during the portion of the plan year of such Prior Plan ending on the date such
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employee's participation in such Successor Plan begins shall be taken into
account under such Successor Plan for purposes of satisfying all deductible,
coinsurance and maximum out-of-pocket requirements applicable to such Broadband
Employee and his or her covered dependents for the applicable plan year as if
such amounts had been paid in accordance with such Successor Plan. Without
limiting the generality of the foregoing, for purposes of determining severance
pay and benefits under any applicable Broadband Severance Plan or other
Severance Plan covering a Broadband Employee at or after the Effective Time,
each Broadband Employee shall receive credit for service prior to the Effective
Time with AT&T and the AT&T Subsidiaries and their predecessors to the same
extent and for the same purposes as such service was counted under the
applicable Broadband Severance Plans as in effect before the Effective Time, as
well as for service from and after the Effective Time with Parent and any of its
Subsidiaries (including the AT&T Broadband Surviving Corporation and the Comcast
Surviving Corporation).
(c) As soon as practicable after the Effective Time, Parent shall offer a
one-time grant of options to purchase a number of shares of Parent Common Stock
equal to 300 multiplied by the Exchange Ratio to each full-time employee of
Parent or any of its Subsidiaries (including, for the avoidance of doubt, each
Broadband Employee).
(d) Except as otherwise specifically set forth above, nothing contained
herein shall be construed as requiring Parent or any of its Subsidiaries to
continue any specific Employee Plan or Benefit Arrangement, or to continue the
employment of any specific person; provided, however, that any changes that
Parent or any of its Subsidiaries may make to any such Employee Plan or Benefit
Arrangement are permitted by the terms of the applicable Employee Plan or
Benefit Arrangement and under any applicable law.
SECTION 9.14. Employment Agreements. Parent shall offer to enter into an
employment agreement, effective as of the Effective Time, with each of Mr. Brian
L. Roberts, Mr. Ralph J. Roberts and Mr. C. Michael Armstrong, in each case on
substantially the same terms as his existing employment agreement with Comcast
or AT&T, as the case may be, except that (a) "Parent" shall be substituted for
"Comcast" or "AT&T", as the case may be, wherever such term appears in his
existing employment agreement, (b) such additional concomitant adjustments as
may be necessary to reflect the foregoing shall be made, (c) such additional
changes to reflect the provisions with respect to governance set forth in the
Parent Charter shall be made and (d) the term of the employment agreement shall
be extended to terminate no earlier than the date of the annual meeting of
shareholders of Parent in 2005.
SECTION 9.15. Interim Finance Committee. (a) The parties agree promptly
to establish an Interim Finance Committee, comprised of Lawrence S. Smith (or if
he is unavailable to serve, another senior officer of Comcast appointed by
Comcast) and Charles Noski (or if he is unavailable to serve, another senior
officer of AT&T Broadband appointed by AT&T) for the purpose of engaging in
financial planning for AT&T Broadband. The Interim Finance Committee will seek
to arrange financing (the "FINANCING") in an amount sufficient to (a) pay to
AT&T at the Effective Time an amount equal to any Indebtedness owed by any AT&T
Broadband Entity to AT&T or any of its Subsidiaries (other than any AT&T
Broadband Entity) at such time (including, if applicable, the intercompany
Indebtedness referred to in Section 9.18), (b) refinance any of the TOPRS that
will be called for redemption at the Effective Time or shortly thereafter and
(c) provide appropriate cash reserves to fund the operations of AT&T Broadband
after the Effective Time, including the costs and expenses of AT&T Broadband
under Section 11.03(a). In the event the Interim Finance Committee agrees upon
the Financing, Comcast shall use its reasonable best efforts to arrange for the
Financing on the terms agreed by the Interim Finance Committee. In the event
Comcast is unable to obtain the Financing so agreed upon by the Interim Finance
Committee or the Interim Finance Committee does not agree upon the Financing,
Comcast shall arrange for a senior credit facility with a term not exceeding
five years to provide the Financing. The Interim Finance Committee may consult
with financial advisors to the extent it deems necessary or advisable.
(b) The Interim Finance Committee shall also have responsibility for
monitoring AT&T's progress in obtaining the Note Consents and in taking other
actions in furtherance of the satisfaction of the condition specified in Section
10.01(l). At the request of AT&T, the Interim Finance Committee shall give due
consideration to any request made by AT&T that Comcast share in costs and
expenses incurred by AT&T
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in connection with an exchange offer, a tender offer, a defeasance or other
action proposed by AT&T in furtherance of satisfaction of the condition
specified in Section 10.01(l). After such consideration, the Interim Finance
Committee shall deliver a recommendation to Comcast of the portion (if any) of
the costs and expenses that the Interim Finance Committee reasonably believes
represents Comcast's equitable share of the costs and expenses that would be
incurred in connection with such action. Comcast shall give due consideration to
the recommendation of the Interim Finance Committee but shall have no obligation
to pay AT&T for any of such costs and expenses unless Comcast expressly consents
thereto in writing. Any expenses that Comcast so expressly consents to pay
shall, to the extent incurred, be treated as costs of obtaining Note Consents
for purposes of this Section 9.15(b) and Section 11.03(a). The costs and
expenses of obtaining the Note Consents shall be paid for by AT&T except as
provided in Section 11.03(a).
SECTION 9.16. TOPRS. (a) Subject to Section 9.16(d), at the Effective
Time, Parent shall (i) call for redemption each series of TOPRS that is
redeemable in accordance with its terms at the Effective Time and as to which
AT&T has guaranteed the obligations of the applicable Subsidiary Trust, issuer
or other obligor, (ii) cause AT&T to be released from any such guarantee of the
obligations of the applicable Subsidiary Trust, issuer or other obligor in
respect of such series or (iii) comply with Section 9.16(d) with respect to such
series.
(b) Subject to Section 9.16(d), with respect to any series of TOPRS that is
not redeemable in accordance with its terms at the Effective Time and as to
which AT&T has guaranteed the obligations of the applicable Subsidiary Trust,
issuer or other obligor, Parent shall (i) redeem, or cause to be redeemed, such
series of TOPRS on the earliest date on which such TOPRS may be redeemed in
accordance with their terms, (ii) cause AT&T to be released from any such
guarantee of the obligations of the applicable Subsidiary Trust, issuer or other
obligor on such date in respect of such series or (iii) comply with Section
9.16(d) with respect to such series on such date.
(c) The parties shall reasonably cooperate prior to the Effective Time in
connection with the transactions contemplated by this Section 9.16.
(d) If Parent does not comply with its obligations under Section 9.16(a)(i)
or (ii) or Section 9.16(b)(i) or (ii), then with respect to each series as to
which it has failed to so comply, it will post, or cause to be posted at the
applicable time set forth above, a letter of credit from a United States
financial institution reasonably acceptable to AT&T containing the terms
contemplated hereby and otherwise in form and substance reasonably acceptable to
AT&T (including any renewals thereof, the "LETTER OF CREDIT"). The term of the
initial Letter of Credit shall be no less than one year. Prior to the 60 days
prior to the expiration of any Letter of Credit, Parent shall renew or extend,
or cause to be renewed or extended, the Letter of Credit for at least one
additional year. AT&T shall be entitled to draw under any Letter of Credit if
AT&T makes any payment in respect of its guarantees relating to the TOPRS or if
any Letter of Credit is not renewed at least 60 days prior to the expiration
thereof on the terms contemplated by this Section. The face amount of each
Letter of Credit shall at all times be no less than the combined monetary
liabilities under guarantees with respect to the principal amount of notes held
by the applicable trust of all series of TOPRS as to which Parent has not
complied with Section 9.16(a)(i) or (ii) or Section 9.16(b)(i) or (ii) above and
as to which AT&T has guaranteed (A) the obligations of the applicable Subsidiary
Trust, issuer or other obligor with respect to such unredeemed TOPRS and (B) the
obligations of AT&T Broadband, LLC or MediaOne Group, Inc., as applicable, as
"Sponsor" pursuant to the declaration of trust applicable to the issuing
Subsidiary Trust. The obligation of Parent to post, or cause to be posted, the
Letter of Credit shall terminate with respect to any portion of the TOPRS with
respect to which any guarantee of AT&T is fully, irrevocably and unconditionally
released and discharged, whether as a result of refinancing or otherwise. Upon
the posting, if any, of the Letter of Credit, Parent shall provide AT&T with
copies of all documentation relating to such Letter of Credit and all such
documentation shall be in form and substance reasonably satisfactory to AT&T.
SECTION 9.17. Consideration. AT&T and Comcast acknowledge and agree that
the grant by AT&T Broadband of the rights pursuant to Section 2.11 of the
Separation and Distribution Agreement
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and the assumption by AT&T Broadband of the deferred tax liability pursuant to
Section 3.7(f) of the Tax Sharing Agreement constitute a portion of the
consideration payable in respect of the AT&T Broadband Group's interest in TWE.
SECTION 9.18. QUIPS. (a) If on the date that would otherwise be the
Closing Date the QUIPS Exchange does not occur (such date, the "QUIPS FAILURE
DATE"), then subject to Section 9.18(c), the Closing Date shall be delayed as
provided in this Section 9.18. Following the QUIPS Failure Date, AT&T and
Comcast will use their commercially reasonable efforts to consummate the QUIPS
Exchange. If Microsoft thereafter agrees to consummate the QUIPS Exchange, then
subject to the QUIPS Exchange occurring on the Closing Date, the Closing Date
shall occur on the earliest date practicable or, if on such date all conditions
to the Mergers set forth in Article 10, other than conditions that by their
nature are to be satisfied at the Effective Time, are not satisfied or (to the
extent permissible) waived, on the earliest date after such date on which all
such conditions are satisfied or (to the extent permissible) waived unless this
Agreement is previously terminated in accordance with its terms.
(b) In the event that the Closing Date does not occur within thirty (30)
days of the QUIPS Failure Date, AT&T may for a period of fifteen (15) calendar
days commencing on such 30th day elect to terminate this Agreement by giving two
Business Days' written notice to Comcast of its intent to terminate this
Agreement pursuant to this Section 9.18(b). Notwithstanding the foregoing,
AT&T's notice to terminate this Agreement pursuant to this Section 9.18(b) shall
not be effective if, prior to the expiration of such two Business Day period,
Comcast delivers a written notice pursuant to and in accordance with the second
sentence of Section 9.18(c) (which notice complies with the proviso thereof),
unless Comcast fails to close within 60 days of the QUIPS Failure Date, in which
event AT&T shall be entitled to terminate this Agreement.
(c) If the Closing Date has not occurred pursuant to Section 9.18(a) and
AT&T has not effectively terminated this Agreement pursuant to Section 9.18(b),
Comcast shall have the right to delay the consummation of the Mergers and the
other transactions contemplated by this Agreement until the date that is one
hundred eighty (180) calendar days after the QUIPS Failure Date. At any time
prior to the expiration of the 180 calendar day period referred to in the
preceding sentence, Comcast may elect to consummate the Mergers and the other
transactions contemplated by this Agreement on ten (10) Business Days' written
notice to AT&T in which event the Closing Date shall occur on the date specified
by Comcast in its notice or, if on such date all conditions to the Mergers set
forth in Article 10, other than conditions that by their nature are to be
satisfied at the Effective Time, are not satisfied or (to the extent
permissible) waived, on the earliest date after such date on which all such
conditions are satisfied or (to the extent permissible) waived; provided that if
Comcast delivers a notice pursuant to this Section 9.18(c) prior to the second
Business Day occurring after the forty-fifth calendar day after the QUIPS
Failure Date, Comcast must specify a date in its notice that is no later than
the sixtieth day after the QUIPS Failure Date. Notwithstanding the foregoing,
the Closing Date shall occur no later than the date that is one hundred eighty
(180) calendar days after the QUIPS Failure Date or, if on such date all
conditions to the Mergers set forth in Article 10, other than conditions that by
their nature are to be satisfied at the Effective Time, are not satisfied or (to
the extent permissible) waived, on the earliest date after such date on which
all such conditions are satisfied or (to the extent permissible) waived.
(d) If at any time during the 180 calendar day period specified above, it
appears reasonably unlikely that the QUIPS Exchange shall occur, AT&T and
Comcast will use their commercially reasonable efforts to obtain, on terms
reasonably acceptable to Comcast and AT&T, the consent of Microsoft to the QUIPS
Transfer. If Microsoft consents to the QUIPS Transfer in accordance with the
preceding sentence and on any Closing Date specified or determined pursuant to
Section 9.18(c) the QUIPS Exchange does not occur, the QUIPS Transfer shall be
effected on such Closing Date.
(e) On any Closing Date specified or determined pursuant to Section
9.18(c), if neither the QUIPS Exchange nor the QUIPS Transfer occurs, AT&T
Broadband will, immediately prior to the Separation on such Closing Date, issue
a note to AT&T representing Indebtedness in an amount equal to the QUIPS Fair
Market Value as determined as set forth below in Section 9.18(f) in exchange for
cash proceeds
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equal to such amount and AT&T Broadband will immediately after receipt of such
cash proceeds dividend such cash proceeds to AT&T, as holder of all of the AT&T
Broadband Common Stock.
(f) Within 10 (ten) Business Days after the QUIPS Failure Date, each of
AT&T and Comcast shall deliver to the other an appraisal conducted by an
investment banking firm of nationally recognized standing of the fair market
value of the QUIPS at such time. If the higher of the two appraisals is not
greater than 110% of the lower of the two appraisals, then the average of the
two appraisals shall be deemed to be the fair market value of the QUIPS. If the
higher of the two appraisals is greater than 110% of the lower of the two
appraisals, then the two investment banking firms shall promptly select a third
investment banking firm of nationally recognized standing acceptable to Comcast
and AT&T and shall cause such firm to deliver within ten (10) Business Days of
the delivery of the initial appraisals an appraisal of the fair market value of
the QUIPS. In the event such third appraisal is required pursuant to the
immediately preceding sentence, the fair market value of the QUIPS as determined
by such third appraisal shall be averaged with the initial appraisal that was
closer in value to such third appraisal and such average shall be deemed to be
the fair market value of the QUIPS. The fair market value of the QUIPS as
determined pursuant to this Section 9.18(f) is referred to herein as the "QUIPS
FAIR MARKET VALUE" and shall be determined without regard to accrued and unpaid
interest on the QUIPS.
(g) Notwithstanding any other provision of this Agreement, if the Closing
Date is delayed pursuant to this Section 9.18, the End Date shall be extended
for the aggregate period of the delay; provided that the End Date shall in no
event be extended pursuant to this Section 9.18(g) for a period exceeding one
hundred eighty-five (185) calendar days after the QUIPS Failure Date.
(h) In the event that the QUIPS Exchange and the QUIPS Transfer do not
occur, AT&T Broadband shall have no liability in respect of the QUIPS other than
as provided in Section 5.03(e) of the Separation and Distribution Agreement and
subject to Section 9.18(e).
(i) AT&T and Comcast acknowledge and agree that in the event of an Exchange
Closing (as defined in the Exchange Agreement), notwithstanding anything to the
contrary in the Indenture or in the Trust Agreement, interest in respect of the
Debentures and Distributions (as defined in the Exchange Agreement) in respect
of the QUIPS shall accrue up to and including the day immediately prior to, and
shall be payable on, the date of the Exchange Closing.
(j) For purposes of this Section 9.18, "QUIPS TRANSFER" means the following
actions: (i) the execution by AT&T Broadband of documents and agreements
identical in form, substance and economic effect to the holder of QUIPS to the
existing QUIPS transaction documents (including, but not limited to, the Trust
Agreement, the Trust Common Securities, the Indenture, the Debentures, the
Guarantee Agreement, the Expense Agreement and the Registration Rights Agreement
and any documents or agreements executed in connection therewith or delivered
pursuant thereto, but excluding any such documents or provisions of such
documents relating to the warrants issued to Microsoft in connection with the
sale of the QUIPS or relating to commercial transactions entered into in
connection with the issuance of the QUIPS), except such differences as are
required to reflect the identity of AT&T Broadband (rather than AT&T) as party
to each thereof and except that Article 12 of Indenture will provide that, prior
to the Mergers, the Debentures will be convertible into AT&T Broadband Common
Stock and following the Mergers, the Debentures will be convertible into shares
of Parent Common Stock, in each case, at a conversion price appropriately
adjusted for the Distribution and the Mergers, (ii) the delivery by AT&T
Broadband of all such replacement QUIPS transaction documents other than the
replacement Trust Common Securities to AT&T or its designee and retention by
AT&T Broadband of the replacement Trust Common Securities, (iii) the delivery by
AT&T or AT&T's designee of all such replacement QUIPS transaction documents
received from AT&T Broadband to Microsoft in exchange for transfer by Microsoft
to AT&T of the existing QUIPS transaction documents and the release of AT&T and
its subsidiaries in full from any obligations under any of such agreements and
the termination of all rights of Microsoft thereunder other than the documents
and rights relating to the warrants issued to Microsoft by AT&T in connection
with the sale of the QUIPS and (iv) the termination of any further liability of
the AT&T
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Broadband Group in respect of the QUIPS; all of the foregoing to be on terms
reasonably satisfactory to AT&T and AT&T Broadband.
SECTION 9.19. Index Stock. Each of Parent, Comcast and AT&T agrees to use
its reasonable best efforts to cause (i) if the A Shareholder Approval is
obtained, the Parent Class A Common Stock to be included in the Index at the
Effective Time or as promptly thereafter as possible or (ii) if the A
Shareholder Approval is not obtained, the Parent Class C Common Stock to be
included in the Index at the Effective Time or as promptly thereafter as
possible.
SECTION 9.20. Use of Name and Logo. (a) For a period of 180 calendar days
after the Closing Date, each of Parent and its Subsidiaries will be granted a
limited, non-exclusive, non-transferable, royalty-free license to use the
trademarks, trade names, service marks, service names, logos and other indicia
of origin of AT&T or any of its Subsidiaries (the "AT&T MARKS") to the same
extent, and in the same manner as, used at the Effective Time; provided that
each of Parent and its Subsidiaries will exercise commercially reasonable
efforts to remove all AT&T Marks from the AT&T Broadband Assets as soon as
reasonably practicable, and in any event within 180 calendar days, following the
Closing Date. After 180 calendar days following the Closing Date, Parent and its
Subsidiaries shall have no further rights or licenses to use any of the AT&T
Marks in connection with any products or services.
(b) During the 180 calendar day period provided above, Parent and its
Subsidiaries shall ensure that any products or services being provided in
connection with the AT&T Marks are provided in accordance with standards of
quality equal to or greater than the standards of quality relating to products
and services which AT&T and its Subsidiaries provided under the AT&T Marks
immediately prior to the Effective Time. AT&T may conduct during regular
business hours and with ten (10) calendar days prior notice an examination of
products and services being provided by Parent or its Subsidiaries under the
AT&T Marks at Parent's facilities to determine compliance of such products and
services with the applicable standards of quality. If such products and services
shall, in the reasonable opinion of AT&T, fail to conform with such standards of
quality AT&T shall so notify Parent. Upon such notification Parent and its
Subsidiaries shall have a reasonable time within which to conform with the
standards of quality.
(c) Notwithstanding the foregoing, nothing in this Section 9.20 will
require any of Parent and its Subsidiaries to remove or discontinue using any
such name or mark that is affixed to converters or other items already installed
in or to be used in customer homes or properties and neither Parent nor any of
its Subsidiaries will have any liability in respect thereof; provided that at
the first time Parent or its Subsidiaries shall have access to such converters
or other items (e.g., for repair or replacement), Parent or its Subsidiaries
shall completely obliterate or affix a label that completely obscures any AT&T
Mark on such converters or other items.
SECTION 9.21. Exchange Agreement. Concurrently with the execution of this
Agreement, AT&T and Parent are executing the Admission Agreement pursuant to
which AT&T and Parent are (i) agreeing to effect the Exchange and, if necessary,
the unwind of the QUIPS Exchange, as provided in the Exchange Agreement, (ii)
becoming parties to the Exchange Agreement and (iii) making the representations
and warranties referred to in Sections 9.01(b) and 9.01(c), respectively,
thereof. AT&T will provide information to Comcast in order to permit Comcast to
satisfy its obligations under Section 6.06(b) of the Exchange Agreement, subject
to applicable pre-existing third party confidentiality restrictions and subject
to applicable law. AT&T and Parent agree that Microsoft will be a third party
beneficiary of the first sentence of this Section 9.21.
SECTION 9.22. Significant Excepted Transactions. (a) AT&T may enter into
an agreement relating to a Significant Excepted Transaction but only if such
agreement would not reasonably be expected to result in a delay in the
consummation of the transactions contemplated by this Agreement past the End
Date; provided that, in such event, at the request of Comcast, the End Date
shall be extended by the reasonably expected period of delay in the consummation
of the transactions contemplated by this Agreement caused by such Significant
Excepted Transaction up to 60 days.
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(b) If AT&T proposes to enter into an agreement relating to a Significant
Excepted Transaction that would reasonably be expected to result in a delay in
the consummation of the transactions contemplated by this Agreement past the End
Date but which would not reasonably be expected to result in a delay in the
consummation of the transactions contemplated by this Agreement to a date that
is more than sixty (60) calendar days after the End Date, then at the request of
AT&T, AT&T and Comcast will use commercially reasonable efforts to obtain the
consent of Microsoft to extend the date specified in Section 10.01(c) of the
Exchange Agreement to the date after the End Date (which date shall be no later
than sixty (60) calendar days after the End Date) on which it is reasonably
anticipated that the transactions contemplated by this Agreement may be
consummated if AT&T were to enter into the proposed agreement relating to the
Significant Excepted Transaction. If Microsoft does not agree to so extend the
date specified in Section 10.01(c) of the Exchange Agreement, AT&T may not enter
into the proposed agreement relating to the Significant Excepted Transaction. If
Microsoft does agree to so extend such date, AT&T may enter into the proposed
agreement relating to the Significant Excepted Transaction; provided that AT&T
agrees to pay and be responsible for any costs, expenses or fees payable in
connection with obtaining the consent of Microsoft to so extend such date and to
indemnify AT&T Broadband from any such costs, expenses or fees. In the event
AT&T enters into the agreement relating to the Significant Excepted Transaction,
the End Date shall be extended to the same date that Microsoft has agreed to
extend the date specified in Section 10.01(c) of the Exchange Agreement but in
no event more than 60 days after the prior End Date.
(c) AT&T may not enter into any agreement relating to a Significant
Excepted Transaction that would reasonably be expected to result in a delay in
the consummation of the transactions contemplated by this Agreement to a date
that is more than sixty (60) calendar days after the End Date.
(d) For purposes of this Section 9.22, the reasonably expected delay in the
consummation of the transactions contemplated by this Agreement that would
result from a Significant Excepted Transaction shall be determined as of the
date that AT&T would propose to enter into an agreement relating to a
Significant Excepted Transaction.
SECTION 9.23. Comcast's AT&T Stock. (a) (i) Prior to the Distribution
Date, AT&T shall designate a series of preferred shares, par value $1.00 per
share, of AT&T as the "Series K Exchangeable Preferred Stock" (the "AT&T
EXCHANGEABLE PREFERRED STOCK"). The AT&T Exchangeable Preferred Stock issued in
accordance with Section 9.23(a)(ii) shall in the aggregate be mandatorily
exchangeable on the twenty-third (23rd) Combined Trading Day following the
Closing Date (the "EXCHANGE DATE") into a number of shares of AT&T Common Stock
equal to the Exchange Amount (as adjusted to account for any stock split,
dividend, reclassification, recapitalization, stock combination or similar event
the record date for which is after the Record Date and on or before the Exchange
Date; provided that, in the event AT&T declares a stock dividend the record date
for which is the Distribution Date (other than the Distribution), then (x) in
lieu of shares of AT&T Common Stock the AT&T Exchangeable Preferred Stock shall
instead be exchangeable into a combination of AT&T Common Stock and, for each
such share of AT&T Common Stock, such shares of stock as are distributed upon
each share of AT&T Common Stock in such stock dividend (the "DIVIDEND STOCK")
and (y) the number of shares of AT&T Common Stock and Dividend Stock for which
the shares of AT&T Exchangeable Preferred Stock shall be exchangeable shall be
determined according to a formula based upon the formula provided in the
definition of "Exchange Amount," appropriately adjusted to account for such
stock dividend by including the Trading Value or NYSE Trading Value, as the case
may be, of such Dividend Stock in such formula), it being understood that the
10% limitation set forth in the definition of Exchange Amount shall apply to
each class of stock to be issued in the exchange. Subject to the foregoing, the
AT&T Exchangeable Preferred Stock shall have such rights, preferences and
limitations as AT&T and Comcast shall mutually agree prior to the date that is
two Business Days prior to the Record Date.
(ii) Immediately prior to the Record Date, Comcast shall exchange or cause
to be exchanged each share of AT&T Common Stock held by Comcast or by any
Comcast Subsidiary for one share of AT&T Exchangeable Preferred Stock and AT&T
and Comcast shall make customary representations and warranties in connection
therewith.
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(b) If immediately after giving effect to the mandatory exchange on the
Exchange Date pursuant to Section Section 9.23(a)(i), Comcast and the Comcast
Subsidiaries own more than 5% of the outstanding shares of AT&T Common Stock,
Comcast agrees that it will sell or cause to be sold such excess shares within
one year after the Exchange Date. Prior to the time that such excess shares are
sold, Comcast agrees that it will vote or cause to be voted such excess shares
on all matters submitted to shareholders of AT&T in the same proportion as all
other holders of such stock vote on such matter. In the event that, as of the
Exchange Date, all of the excess shares could not be sold under Rule 144 under
the 1933 Act within three months of the Exchange Date, AT&T shall provide
customary registration rights in respect of such excess shares. The provisions
of this Section 9.23(b) shall also apply to any Dividend Stock.
(c) AT&T shall not effect any stock dividend the record date for which is
between the date following the Record Date and the Exchange Date, inclusive.
(d) The shares of AT&T Common Stock (and Dividend Stock, if any) issued on
exchange of the AT&T Exchangeable Preferred Stock shall be considered
Registrable Securities (as defined in the AT&T Registration Rights Agreement),
but subject to the last sentence of such definition.
ARTICLE 10
CONDITIONS TO THE MERGERS
SECTION 10.01. Conditions to the Obligations of Each Party. The
obligations of each party hereto to consummate the Mergers are subject to the
satisfaction of the following conditions:
(a) the Comcast Shareholders' Approval shall have been obtained;
(b) the AT&T Shareholders' Approval shall have been obtained;
(c) any applicable waiting period under the HSR Act relating to the
Mergers or the other transactions contemplated hereby shall have expired or
been terminated;
(d) no material provision of any applicable law or regulation and no
judgment, injunction, order or decree shall prohibit the consummation of
the Mergers or the other transactions contemplated hereby;
(e) the Registration Statement shall have been declared effective and
no stop order suspending the effectiveness of the Registration Statement
shall be in effect and no proceedings for such purpose shall be pending
before or threatened by the SEC;
(f) the shares of Parent Common Stock to be issued in the Mergers
(other than the shares of Parent Class B Common Stock) or reserved for
issuance in connection with the Mergers pursuant to Section 9.12 shall have
been approved for listing on Nasdaq, subject to official notice of
issuance;
(g) all License Consents, Franchise Consents, PUC Consents and other
consents and waivers, including waivers of all Purchase Rights, shall have
been obtained, be in effect and be subject to no limitations, conditions,
restrictions or obligations, except for such consents the failure of which
to obtain would not, and such limitations, conditions, restrictions or
obligations as would not, individually or in the aggregate, reasonably be
expected to have a Comcast Material Adverse Effect or an AT&T Broadband
Material Adverse Effect;
(h) no court, arbitrator or other Governmental Authority shall have
issued any order, and there shall not be any statute, rule or regulation
restraining or prohibiting the effective operation of the business of
Parent or the AT&T Broadband Group, AT&T Broadband and the AT&T Broadband
Subsidiaries or Comcast and the Comcast Subsidiaries after the Effective
Time that would, individually or in the aggregate, reasonably be expected
to have a Comcast Material Adverse Effect or an AT&T Broadband Material
Adverse Effect;
(i) the Separation and the Distribution shall have been completed in
accordance in all material respects with the terms of the Separation and
Distribution Agreement such that, among other things,
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immediately prior to the Effective Time, AT&T Broadband and the AT&T
Broadband Subsidiaries are no longer AT&T Subsidiaries;
(j) AT&T shall have obtained a supplemental private letter ruling or
rulings from the IRS, in form and substance reasonably satisfactory to AT&T
and Comcast, on the basis of submissions to the IRS which are reasonably
satisfactory to AT&T and Comcast (provided that Comcast shall not be
entitled to review those portions of any submission to the IRS that contain
(1) information that relates to the AT&T Communications Business (as
defined in the Separation and Distribution Agreement) or (2) information
disclosure of which to Comcast could (A) violate a confidentiality or
similar agreement between AT&T or one of the AT&T Subsidiaries and another
Person or (B) have a significant adverse effect on AT&T or any of its
businesses), which shall be in effect on the Closing Date, to the effect
that (x) the Separation and Distribution qualify as tax-free transactions
pursuant to Sections 355 and 368(a) of the Code, (y) the Mergers will not
cause the Separation and Distribution to fail to be qualified as a tax-free
transaction pursuant to Section 355 of the Code and (z) the Separation and
Distribution will not cause the distribution by AT&T of all of the common
stock of AT&T Wireless Services, Inc. or of Liberty Media Corporation to
fail to qualify as tax-free transactions pursuant to Sections 355 and
368(a) of the Code. In lieu of obtaining the supplemental private letter
ruling from the IRS described in the immediately preceding sentence, AT&T
and Comcast may mutually agree to obtain an opinion to the same effect from
tax counsel of a nationally recognized reputation mutually acceptable to
AT&T and Comcast in form and substance reasonably satisfactory to AT&T and
Comcast, on the basis of certain facts, representations and assumptions set
forth in such opinion, dated the Closing Date. In rendering the opinion
described in the preceding sentence, such tax counsel may request and shall
be entitled to rely upon certain documentation, including customary
representations of officers of AT&T and Comcast;
(k) each of the Transaction Agreements shall have been executed and
delivered by each of the parties thereto; and
(l) AT&T shall (i) have obtained Note Consents (which shall be in full
force and effect), or defeased, purchased or acquired Indebtedness (or any
combination of the foregoing), in respect of at least 90% in aggregate
principal amount of the securities outstanding as of the date of this
Agreement issued under the Notes Indenture and (ii) not have issued after
the date of this Agreement any securities under the Notes Indenture if
consummation of the Distribution or the other transactions contemplated
hereby would or may require a consent of the holders of such securities.
SECTION 10.02. Conditions to the Obligations of AT&T. The obligations of
AT&T to consummate the AT&T Broadband Merger are subject to the satisfaction of
the following further conditions:
(a) (i) Comcast shall have performed in all material respects all of
its obligations hereunder required to be performed by it at or prior to the
Effective Time, (ii) the representations and warranties of Comcast
contained in Sections 5.02, 5.03, 5.05, 5.08, 5.22 and 5.25 shall be true
in all material respects at and as of the Effective Time, as if made at and
as of such time (other than representations and warranties that address
matters only as of a certain date, which shall be true and correct as of
such date), (iii) the other representations and warranties of Comcast
contained in this Agreement and in any certificate or other writing
delivered by Comcast pursuant hereto, disregarding all qualifications and
exceptions contained therein relating to materiality or a Comcast Material
Adverse Effect or any similar standard or qualification, shall be true and
correct at and as of the Effective Time, as if made at and as of such time
(other than representations or warranties that address matters only as of a
certain date, which shall be true and correct as of such date), with only
such exceptions as, individually or in the aggregate, have not had and
would not reasonably be expected to have a Comcast Material Adverse Effect
and (iv) AT&T shall have received a certificate signed by an executive
officer of Comcast to the foregoing effect;
(b) AT&T shall have received an opinion of Wachtell, Lipton, Rosen &
Katz in form and substance reasonably satisfactory to AT&T, on the basis of
certain facts, representations and assumptions set forth in such opinion,
dated the Closing Date, to the effect that the Mergers will be
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treated for United States federal income tax purposes as 351 Transactions.
In rendering such opinion, Wachtell, Lipton, Rosen & Katz may require and
shall be entitled to rely upon certain documentation, including customary
representations of officers of Comcast and AT&T; and
(c) Comcast Shareholder (or its successor) shall have performed in all
material respects its obligations under the Support Agreement, and the
Support Agreement shall be in full force and effect.
SECTION 10.03. Conditions to the Obligations of Comcast. The obligations
of Comcast to consummate the Comcast Merger are subject to the satisfaction of
the following further conditions:
(a) (i) AT&T shall have performed in all material respects all of its
obligations hereunder required to be performed by it at or prior to the
Effective Time, (ii) the representations and warranties of AT&T contained
in Sections 6.02, 6.03, 6.05, 6.06(b), 6.06(c), 6.08, 6.22, 6.26 and 6.27
of this Agreement shall be true in all material respects at and as of the
Effective Time, as if made at and as of such time (other than
representations and warranties that address matters only as of a certain
date, which shall be true and correct as of such date), (iii) the other
representations and warranties of AT&T contained in this Agreement and in
any certificate or other writing delivered by AT&T pursuant hereto
disregarding all qualifications and exceptions contained therein relating
to materiality or AT&T Broadband Material Adverse Effect or any similar
standard or qualification shall be true at and as of the Effective Time, as
if made at and as of such time (other than representations and warranties
that address matters only as of a certain date, which shall be true and
correct as of such date), with only such exceptions as, individually or in
the aggregate, have not had and would not reasonably be expected to have an
AT&T Broadband Material Adverse Effect and (iv) Comcast shall have received
a certificate signed by an executive officer of AT&T to the foregoing
effect; and
(b) Comcast shall have received an opinion of Davis Polk & Wardwell in
form and substance reasonably satisfactory to Comcast, on the basis of
certain facts, representations and assumptions set forth in such opinion,
dated the Closing Date, to the effect that the Mergers will be treated for
United States federal income tax purposes as a 351 Transactions, In
rendering such opinion, Davis Polk & Wardwell may require and shall be
entitled to rely upon certain documentation, including customary
representations of officers of Comcast and AT&T.
ARTICLE 11
TERMINATION
SECTION 11.01. Termination. This Agreement may be terminated and the
Mergers may be abandoned at any time prior to the Effective Time
(notwithstanding any approval of this Agreement by the shareholders of Comcast
or AT&T or AT&T Broadband):
(a) by mutual written agreement of Comcast and AT&T;
(b) by either Comcast or AT&T, if:
(i) the Mergers have not been consummated on or before March 1,
2003 (the "END DATE"); provided, further, that the right to terminate
this Agreement pursuant to this Section 11.01(b)(i) shall not be
available to any party hereto whose breach of any provision of this
Agreement results in the failure of the Mergers to be consummated by the
End Date;
(ii) (A) there shall be any material law or regulation that makes
consummation of the Mergers or any of the other material transactions
contemplated hereby illegal or otherwise prohibited or (B) any judgment,
injunction, order or decree of any court or other Governmental Authority
having competent jurisdiction enjoining the parties hereto from
consummating the Mergers or any of the other material transactions
contemplated hereby is entered and such judgment, injunction, order or
decree shall have become final and non-appealable;
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(iii) the Comcast Shareholders' Approval shall not have been
obtained at the Comcast Shareholders' Meeting (or any adjournment or
postponement thereof); or
(iv) the AT&T Shareholders' Approval shall not have been obtained
at the AT&T Shareholders' Meeting (or any adjournment or postponement
thereof);
(c) by AT&T if:
(i) Comcast's Board of Directors shall have failed to call the
Comcast Shareholders' Meeting in accordance with Section 7.02(a), or
shall have breached its obligation under Section 7.02(b);
(ii) a breach of any representation, warranty, covenant or
agreement on the part of Comcast set forth in this Agreement shall have
occurred that would cause the condition set forth in Section 10.02(a)
not to be satisfied, and such condition shall be incapable of being
satisfied by the End Date;
(iii) AT&T shall have failed to call the AT&T Shareholders' Meeting
pursuant to the exercise of its delay rights under Section 8.02(a) for a
period of 120 calendar days from the date the SEC has notified the
parties of its willingness to declare the Registration Statement
effective; or
(iv) AT&T shall have the right to terminate this Agreement pursuant
to Section 9.18(b), but subject to the provisions of Section 9.18(b);
(d) by Comcast if:
(i) AT&T's Board of Directors shall have failed to recommend or
withdrawn, or modified in a manner adverse to Comcast, its approval or
recommendation of this Agreement, or shall have failed to call the AT&T
Shareholders' Meeting in accordance with Section 8.02(a) (or AT&T's
Board of Directors resolves to do any of the foregoing);
(ii) AT&T shall have willfully and materially breached any of its
obligations under Section 8.02(b) or 8.03;
(iii) a breach of any representation, warranty, covenant or
agreement on the part of AT&T set forth in this Agreement shall have
occurred that would cause the condition set forth in Section 10.03(a)
not to be satisfied, and such condition shall be incapable of being
satisfied by the End Date; or
(iv) AT&T shall have failed to call the AT&T Shareholders' Meeting
pursuant to the exercise of its delay rights under Section 8.02(a) for a
period of 90 calendar days from the date the SEC has notified the
parties of its willingness to declare the Registration Statement
effective.
The party hereto desiring to terminate this Agreement pursuant to this
Section 11.01 (other than pursuant to Section 11.01(a)) shall give notice of
such termination to the other parties.
SECTION 11.02. Effect of Termination. If this Agreement is terminated
pursuant to Section 11.01, this Agreement shall become void and of no effect
without liability of any party hereto (or any shareholder, director, officer,
employee, agent, consultant or representative of such party) to the other
parties hereto, except that (a) the agreements contained in this Section 11.02,
in the Confidentiality Agreements (subject to the terms thereof), and in Section
11.03 shall survive the termination hereof and (b) no such termination shall
relieve any party hereto of any liability or damages resulting from any
intentional breach by such party of a covenant or other agreement included in
this Agreement or any knowing breach of a representation or warranty included in
this Agreement.
SECTION 11.03. Fees and Expenses. (a) Except as otherwise provided in
this Section 11.03, all costs and expenses incurred in connection with this
Agreement and the other Transaction Agreements shall be paid by the party
incurring such cost or expense whether or not the Mergers are consummated.
Notwithstanding the foregoing, (i) AT&T shall pay any costs and expenses
incurred by AT&T Broadband
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or any AT&T Broadband Subsidiary in connection with this Agreement and the other
Transaction Agreements that are in excess of $120 million (exclusive of any
costs and expenses incurred by AT&T Broadband or any AT&T Broadband Subsidiary
as described in clauses (ii), (iii), (iv) and (v) of this sentence), (ii) AT&T
Broadband shall pay any costs and expenses incurred in connection with any
financing arrangements entered into by AT&T Broadband as contemplated by Section
9.15, (iii) AT&T Broadband shall pay any costs and expenses (to the extent not
paid by Parent) incurred in connection with the actions contemplated by Section
9.16, (iv) AT&T Broadband shall pay 50% of any costs and expenses incurred by
AT&T or any of its Subsidiaries in connection with obtaining the Note Consents
(through either a one-time cash payment of a consent fee or through a coupon
increase or a combination thereof) that are in excess of $50 million, subject to
and as determined in accordance with Sections 11.03(b) and 11.03(c), and (v)
AT&T (other than any AT&T Broadband Entity) and Comcast each shall pay 50% of
any fees and expenses, other than attorneys' and accounting fees and expenses,
incurred in relation to the printing, filing and mailing of the Registration
Statement and the Joint Proxy Statement.
(b) The costs of obtaining the Note Consents shall include (i) any
transaction costs paid in obtaining the Note Consents (including, without
limitation, the costs, expenses and commissions of any solicitation agent,
counsel, financial advisors and underwriters, any printing and mailing costs,
any SEC filing fees, rating agency fees and any costs of the trustee under the
Notes Indenture for which AT&T or any Affiliate thereof is responsible) plus
(ii)(A) the amount of any one-time cash payment made to obtain a Note Consent,
and (B) with respect to an increase in the coupon on any of the series of
securities issued under the Notes Indenture in connection with obtaining a Note
Consent, the amount equal to the excess of the present value of the increased
coupon on such series of securities over the present value of the coupon on such
series of securities immediately prior to the increase of the coupon, in each
case calculated based on "market convention" (e.g., calculated on a 30/360 day
basis in the case of a domestic fixed rate note and on an actual/360 day basis
in the case of a floating rate note, etc.) using a discount rate equal to the
Market Rate (determined as specified below in Section 11.03(c)). The amounts
described in clauses (i) and (ii) of the immediately preceding sentence shall be
reduced by the amount of any present or future tax benefit to AT&T as a result
of making any payments of such amounts. Such tax benefit shall be calculated by
multiplying the payment giving rise to the tax benefit by the highest combined
federal, state and local marginal corporate tax rate in effect as of the
Effective Time and, in the case of any future tax benefit, by discounting such
future tax benefit at the Market Rate.
(c) The Market Rate shall be determined by mutual agreement of AT&T and
Comcast. In the event AT&T and Comcast cannot reach agreement within five (5)
calendar days of the date of determination (as set forth below), the Market Rate
shall be determined by a process in which AT&T and Comcast will mutually appoint
four broker/dealer firms of national reputation to determine the then-current
market yield for each impacted series of securities. After each firm has
determined the then-current market yield for each impacted series of securities,
the arithmetic average of the four rates will be the Market Rate. In determining
each such Market Rate, the impacted series of securities shall be deemed to be
securities of AT&T, after giving effect to the Separation, Distribution and the
Mergers. Any determination of Market Rate pursuant to this Section 11.03(c)
shall be final and binding. Each of AT&T and Comcast shall bear the fees and
expenses of the broker/dealer firms which it appoints in making such
determinations. The Market Rate shall be determined in the case of clause
(ii)(B) of Section 11.03(b) as of the settlement date of the transaction.
(d) If this Agreement is terminated pursuant to Section 11.01(b)(iii) or
11.01(c)(i), Comcast shall pay to AT&T a termination fee of $1.5 billion in cash
(without duplication) (the "COMCAST TERMINATION FEE").
(e) If this Agreement is terminated pursuant to Section 11.01(d)(i) or
11.01(d)(ii), AT&T shall pay to Comcast a termination fee of $1.5 billion in
cash (without duplication) (the "AT&T TERMINATION FEE").
(f) If (i) this Agreement is terminated pursuant to Section 11.01(b)(iv),
(ii) after the date hereof and prior to the AT&T Shareholders' Meeting, an AT&T
Broadband Acquisition Proposal is made or
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continued or renewed by any Person and not withdrawn prior to the AT&T
Shareholders' Meeting and (iii) within one year of the AT&T Shareholders'
Meeting, either (A) AT&T or any AT&T Subsidiary enters into an agreement with
any Person with respect to an AT&T Broadband Acquisition Proposal, that provides
for (I) transfer or issuance of securities representing more than 50% of the
equity or voting interests in AT&T or the AT&T Broadband Group or 75% of the
equity or voting interests in any AT&T Significant Broadband Subsidiary, (II) a
merger, consolidation, recapitalization or another transaction resulting in the
issuance of cash or securities of any Person (other than a reincorporation or a
holding company merger that results in the AT&T shareholders owning all of the
equity interests in the surviving corporation) to AT&T shareholders in exchange
for more than 50% of the equity or voting interests in AT&T or the AT&T
Broadband Group or 75% of the equity or voting interests in any AT&T Significant
Broadband Subsidiary or (III) transfer of assets, securities or ownership
interests representing more than 50% of the consolidated assets or EBITDA
generating power of AT&T or the AT&T Broadband Group or 75% of the consolidated
assets or EBITDA generating power of any AT&T Significant Broadband Subsidiary
or (B) any Person commences a tender offer that results in the acquisition by
the Person making the tender offer of a majority of the AT&T Common Stock, then
AT&T shall pay to Comcast the AT&T Termination Fee.
(g) Any payment of the Comcast Termination Fee or AT&T Termination Fee
pursuant to this Section 11.03 shall be made within one Business Day after
termination of this Agreement, except that any payment of the AT&T Termination
Fee pursuant to Section 11.03(f) shall be paid within one Business Day after it
becomes payable. Any payment of the Comcast Termination Fee or AT&T Termination
Fee shall be made by wire transfer of immediately available funds. If any party
hereto fails to pay to the other parties promptly any fee or expense due
hereunder (including the Comcast Termination Fee or AT&T Termination Fee), the
defaulting party shall pay the costs and expenses (including legal fees and
expenses) in connection with any action, including the prosecution of any
lawsuit or other legal action, taken to collect payment, together with interest
on the amount of any unpaid fee at the publicly announced prime rate of The Bank
of New York in New York City from the date such fee was required to be paid to
the date it is paid.
(h) Notwithstanding any other provision of this Agreement, any payment by
AT&T of the AT&T Termination Fee or any payment by Comcast of the Comcast
Termination Fee, in each case pursuant to Section 11.03, shall relieve (i) AT&T
and AT&T Broadband or (ii) Comcast, as the case may be, from any further
liability or damages under any provision of this Agreement (other than Section
11.03(a)) or in connection with this Agreement and the transactions contemplated
hereby.
ARTICLE 12
MISCELLANEOUS
SECTION 12.01. Notices. All notices, requests and other communications to
any party hereto shall be in writing (including facsimile transmission) and
shall be given,
if to AT&T, to:
AT&T Corp.
295 North Maple Avenue
Basking Ridge, New Jersey 07920
Attention: Marilyn J. Wasser
Fax: (908) 953-8360
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with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Richard D. Katcher
Steven A. Rosenblum
Stephanie J. Seligman
Fax: (212) 403-2000
if to Comcast or Merger Sub, to:
Comcast Corporation
1500 Market Street
Philadelphia, Pennsylvania 19102
Attention: General Counsel
Fax: (215) 981-7794
with a copy to
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Dennis S. Hersch
William L. Taylor
Fax: (212) 450-4800
or such other address or facsimile number as such party hereto may hereafter
specify for such purpose by notice to the other parties hereto. All such
notices, requests and other communications shall be deemed received on the date
of receipt by the recipient thereof if received prior to 5 p.m. on a Business
Day, in the place of receipt. Otherwise, any such notice, request or
communication shall be deemed not to have been received until the next
succeeding Business Day in the place of receipt.
SECTION 12.02. Survival. The representations and warranties contained
herein and in any certificate or other writing delivered pursuant hereto shall
not survive the Effective Time or the termination of this Agreement. The AT&T
Confidentiality Agreement shall terminate at the Effective Time. The covenants
and agreements herein that relate to actions to be taken at or after the
Effective Time shall survive the Effective Time.
SECTION 12.03. Amendments; No Waivers. (a) Subject to applicable law, any
provision of this Agreement may be amended or waived prior to the Effective Time
if, but only if, such amendment or waiver is in writing and is signed, in the
case of an amendment, by each of the parties hereto or, in the case of a waiver,
by each party against whom the waiver is to be effective; provided that, after
the adoption of this Agreement by the shareholders of Comcast or AT&T, no such
amendment or waiver shall be made or given that requires the approval of the
shareholders of Comcast or AT&T, respectively, unless such required approval is
obtained.
(b) No failure or delay by any party hereto in exercising any right, power
or privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
SECTION 12.04. Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided that no party hereto may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the consent of the other parties hereto.
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SECTION 12.05. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to the conflicts of law rules of the State of New York.
SECTION 12.06. Jurisdiction. Any suit, action or proceeding seeking to
enforce any provision of, or based on any matter arising out of or in connection
with, this Agreement or the transactions contemplated hereby shall be brought in
any federal court located in the State of New York or any New York state court,
and each of the parties hereto hereby consents to the exclusive jurisdiction of
such courts (and of the appropriate appellate courts therefrom) in any such
suit, action or proceeding and irrevocably waives, to the fullest extent
permitted by law, any objection that it may now or hereafter have to the laying
of the venue of any such suit, action or proceeding in any such court or that
any such suit, action or proceeding brought in any such court has been brought
in an inconvenient form. Process in any such suit, action or proceeding may be
served on either party hereto anywhere in the world, whether within or without
the jurisdiction of any such court. Without limiting the foregoing, each party
hereto agrees that service of process on such party as provided in Section 12.01
shall be deemed effective service of process on such party.
SECTION 12.07. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
SECTION 12.08. Counterparts; Effectiveness. This Agreement may be signed
in counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument. This Agreement
shall become effective when each party hereto shall have received a counterpart
hereof signed by the other parties hereto.
SECTION 12.09. Entire Agreement; No Third Party Beneficiaries. (a) This
Agreement, and the other Transaction Agreements, together with the
Confidentiality Agreements, constitute the entire agreement between the parties
hereto with respect to the subject matter of this Agreement and supersede all
prior agreements and understandings, both oral and written, between the parties
hereto with respect to the subject matter of this Agreement.
(b) This Agreement shall be binding upon and inure solely to the benefit of
each party hereto, and nothing in this Agreement, express or implied, is
intended to or shall confer upon any other Person any right, benefit or remedy
of any nature whatsoever under or by reason of this Agreement, other than
Sections 4.01(e), 9.08, 9.11 and 9.14, the first sentence of Section 9.21 and
the last sentence of Section 12.03(a) (which is intended to be for the benefit
of the Persons covered thereby). AT&T shall be entitled to enforce the
provisions of Sections 4.03, 4.04 and 4.05 after the Effective Time.
SECTION 12.10. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated
so long as the economic or legal substance of the transactions contemplated
hereby is not affected in any manner materially adverse to any party hereto.
Upon such a determination, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner so that the transactions
contemplated hereby be consummated as originally contemplated to the fullest
extent possible.
SECTION 12.11. Specific Performance. The parties hereto agree that
irreparable damage would occur if any provision of this Agreement were not
performed in accordance with the terms hereof and that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
or to enforce specifically the performance of the terms and provisions hereof in
any federal court located in the State of New York or any New York state court,
in addition to any other remedy to which they are entitled at law or in equity.
A-75
SECTION 12.12. Schedules. Each of Comcast and AT&T has set forth
information in its respective disclosure schedule in a section thereof that
corresponds to the portion of the Section of this Agreement to which it relates.
A matter set forth in one section of the disclosure schedule need not be set
forth in any other section of the disclosure schedule so long as its relevance
to the latter section of the disclosure schedule or Section of the Agreement is
apparent on the face of the information disclosed in the disclosure schedule.
The fact that any item of information is disclosed in a disclosure schedule
shall not be construed to mean that such information is required to be disclosed
by this Agreement. Such information and the dollar thresholds set forth herein
shall not be used as a basis for interpreting the terms "material" or "Material
Adverse Effect" or other similar terms in this Agreement, except as otherwise
expressly set forth in such disclosure schedules.
A-76
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
AT&T CORP.
By: /s/ C. MICHAEL ARMSTRONG
------------------------------------
Name: C. Michael Armstrong
Title: Chairman and Chief
Executive Officer
AT&T BROADBAND CORP.
By: /s/ RAYMOND E. LIGUORI
------------------------------------
Name: Raymond E. Liguori
Title: President
COMCAST CORPORATION
By: /s/ RALPH J. ROBERTS
------------------------------------
Name: Ralph J. Roberts
Title: Chairman
AT&T COMCAST CORPORATION
By: /s/ BRIAN L. ROBERTS
------------------------------------
Name: Brian L. Roberts
Title: President
AT&T BROADBAND ACQUISITION CORP.
BY: /s/ BRIAN L. ROBERTS
------------------------------------
Name: Brian L. Roberts
Title: President
COMCAST ACQUISITION CORP.
BY: /s/ BRIAN L. ROBERTS
------------------------------------
Name: Brian L. Roberts
Title: President
A-77
ANNEX B
SEPARATION AND DISTRIBUTION AGREEMENT
BY AND BETWEEN
AT&T CORP.
AND
AT&T BROADBAND CORP.
DATED AS OF
DECEMBER 19, 2001
TABLE OF CONTENTS
------------------------
PAGE
----
ARTICLE 1
DEFINITIONS
Section 1.01. Definitions................................................. B-1
ARTICLE 2
THE SEPARATION
Section 2.01. Transfer of Assets and Assumption of Liabilities............ B-16
Section 2.02. Disclaimer of Representations and Warranties................ B-17
Section 2.03. Other Ancillary Agreements.................................. B-18
Section 2.04. Termination of Agreements................................... B-18
Section 2.05. Documents Relating to Transfer of Real Property Interests
and Tangible Property Located Thereon....................... B-19
Section 2.06. Documents Relating to Other Transfers of Assets and
Assumption of Liabilities................................... B-20
Section 2.07. Governmental Approvals and Consents......................... B-20
Section 2.08. Novation of AT&T Broadband Liabilities...................... B-21
Section 2.09. Novation of AT&T Communications Liabilities................. B-21
Section 2.10. Joint Purchasing Arrangements............................... B-22
Section 2.11. TWE Arrangements............................................ B-22
ARTICLE 3
FINANCIAL RESTRUCTURING
Section 3.01. Liability Management........................................ B-23
Section 3.02. Repayment of Intracompany Indebtedness...................... B-23
Section 3.03. Note Consents............................................... B-23
ARTICLE 4
THE DISTRIBUTION
Section 4.01. The Distribution............................................ B-23
Section 4.02. Actions Prior to the Distribution........................... B-24
Section 4.03. Timing of the Distribution.................................. B-24
ARTICLE 5
MUTUAL RELEASES; INDEMNIFICATION
Section 5.01. Release of Pre-Closing Claims............................... B-25
Section 5.02. Indemnification by AT&T..................................... B-27
Section 5.03. Indemnification by AT&T Broadband........................... B-27
Section 5.04. Indemnification Obligations Net of Insurance Proceeds and
Other Amounts............................................... B-28
Section 5.05. Procedures for Indemnification of Third Party Claims........ B-28
Section 5.06. Additional Matters.......................................... B-29
Section 5.07. Remedies Cumulative......................................... B-30
Section 5.08. Survival of Indemnities..................................... B-30
ARTICLE 6
INSURANCE AND CERTAIN OTHER MATTERS
Section 6.01. Insurance Matters........................................... B-30
Section 6.02. Certain Post-Distribution Transactions and Related
Matters..................................................... B-31
Section 6.03. Procedure for Indemnification for Tax Liabilities........... B-33
B-i
PAGE
----
Section 6.04. Other Transactions.......................................... B-35
ARTICLE 7
EXCHANGE OF INFORMATION; CONFIDENTIALITY
Section 7.01. Agreement for Exchange of Information....................... B-36
Section 7.02. Ownership of Information.................................... B-36
Section 7.03. Compensation for Providing Information...................... B-36
Section 7.04. Record Retention............................................ B-36
Section 7.05. Limitation of Liability..................................... B-37
Section 7.06. Other Agreements Providing for Exchange of Information...... B-37
Section 7.07. Production of Witnesses; Records; Cooperation............... B-37
Section 7.08. Confidentiality............................................. B-38
Section 7.09. Protective Arrangements..................................... B-38
ARTICLE 8
FURTHER ASSURANCES AND ADDITIONAL COVENANTS
Section 8.01. Further Assurances.......................................... B-38
ARTICLE 9
TERMINATION
Section 9.01. Termination................................................. B-39
Section 9.02. Effect of Termination....................................... B-39
ARTICLE 10
DISPUTE RESOLUTION AND ARBITRATION
Section 10.01. Agreement to Arbitrate...................................... B-39
Section 10.02. Reasonable Best Efforts to Resolve Disputes; Mediation...... B-40
Section 10.03. Demand for Arbitration...................................... B-40
Section 10.04. Arbitration Panel........................................... B-40
Section 10.05. Commencement and Place of Arbitration....................... B-40
Section 10.06. Arbitration Hearings........................................ B-40
Section 10.07. Arbitration Decision........................................ B-41
Section 10.08. Discovery and Related Matters............................... B-41
Section 10.09. Arbitration Panel's Authority............................... B-41
Section 10.10. Confidentiality............................................. B-41
Section 10.11. Certain Additional Matters.................................. B-42
Section 10.12. Limited Court Actions....................................... B-42
Section 10.13. Continuity of Performance and Remaining Obligations......... B-42
Section 10.14. Law Governing Arbitration Procedures........................ B-43
Section 10.15. Non-applicability of Article................................ B-43
ARTICLE 11
MISCELLANEOUS
Section 11.01. Counterparts; Entire Agreement; Corporate Power............. B-43
Section 11.02. Governing Law............................................... B-44
Section 11.03. Jurisdiction................................................ B-44
Section 11.04. Waiver of Jury Trial........................................ B-44
Section 11.05. Assignability............................................... B-44
Section 11.06. AT&T Restructuring.......................................... B-44
B-ii
PAGE
----
Section 11.07. Third Party Beneficiaries................................... B-44
Section 11.08. Notices..................................................... B-45
Section 11.09. Severability................................................ B-45
Section 11.10. Expenses.................................................... B-46
Section 11.11. Headings.................................................... B-46
Section 11.12. Waivers of Default.......................................... B-46
Section 11.13. Specific Performance........................................ B-46
Section 11.14. Amendments.................................................. B-46
Section 11.15. Late Payments............................................... B-46
Section 11.16. Interpretation.............................................. B-46
EXHIBITS
Exhibit A AT&T Communications Financial Statements
Exhibit B Corporate Name Agreement
Exhibit C Employee Benefits Agreement
Exhibit D Intellectual Property Agreement
Exhibit E Interim Services and Systems Replication Agreement
Exhibit F Patent Assignment
Exhibit G Tax Sharing Agreement
Exhibit H Trademark and Service Mark Agreement
Annex I TWE Consideration
B-iii
SEPARATION AND DISTRIBUTION AGREEMENT
THIS SEPARATION AND DISTRIBUTION AGREEMENT, dated as of December 19, 2001,
is by and between AT&T Corp., a New York corporation ("AT&T"), and AT&T
Broadband Corp., a Delaware corporation ("AT&T BROADBAND"). Capitalized terms
used herein and not otherwise defined shall have the respective meanings
assigned to them in Article 1.
WHEREAS, the Board of Directors of AT&T has determined that it is in the
best interests of AT&T and its shareholders to separate AT&T's communications
and broadband businesses into independent businesses and to subsequently merge
AT&T Broadband with a wholly owned subsidiary of AT&T Comcast Corporation, a
Pennsylvania corporation, pursuant to the Merger Agreement (as defined below);
WHEREAS, in furtherance of the foregoing, upon the terms and subject to the
conditions set forth in this Agreement, AT&T will transfer the AT&T Broadband
Assets to AT&T Broadband and its Subsidiaries and cause AT&T Broadband and its
Subsidiaries to assume the AT&T Broadband Liabilities, all as more fully
described in this Agreement and the other Ancillary Agreements;
WHEREAS, upon the terms and subject to the conditions set forth in this
Agreement, following the Separation, AT&T will distribute all of the AT&T
Broadband Common Stock to shareholders of AT&T and, if the QUIPS Exchange is
completed (as defined below), to Microsoft Corporation, a Washington
corporation, or an affiliate thereof ("MICROSOFT"), all as more fully described
in this Agreement;
WHEREAS, for federal income tax purposes, it is intended that the
Separation and Distribution constitute a tax-free reorganization under the Code;
and
WHEREAS, it is appropriate and desirable to set forth the principal
corporate transactions required to effect the Separation and the Distribution
and certain other agreements that will govern certain matters relating to the
Separation and the Distribution and the relationship of AT&T and AT&T Broadband
and their respective Subsidiaries following the Distribution.
NOW, THEREFORE, the parties hereto, intending to be legally bound, agree as
follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions. For the purpose of this Agreement the following
terms shall have the following meanings:
"ACTION" means any demand, action, suit, countersuit, arbitration, inquiry,
proceeding or investigation by or before any federal, state, local, foreign or
international Governmental Authority or any arbitration or mediation tribunal.
"ADDITIONAL COMMERCIAL AGREEMENTS" has the meaning set forth in the
definition of Ancillary Agreements.
"AFFILIATE" of any Person means a Person that controls, is controlled by,
or is under common control with such Person; provided, however, that for
purposes of this Agreement, no member of either the AT&T Broadband Group or the
AT&T Communications Group shall be deemed to be an Affiliate of any member of
the other Group and no employee plan or employee plan trust shall be deemed an
Affiliate of any employer or of any Affiliate of any employer. As used herein,
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of such entity, whether
through ownership of voting securities or other interests, by contract or
otherwise.
"AGENT" means the distribution agent to be appointed by AT&T to distribute
to shareholders of AT&T the shares of AT&T Broadband Common Stock pursuant to
the Distribution.
"AGREEMENT" means this Separation and Distribution Agreement, including all
of the Schedules and Exhibits hereto.
B-1
"AMERICAN RIDGE" means American Ridge Insurance Company, a Vermont
corporation.
"ANCILLARY AGREEMENTS" means (i) this Agreement, the Corporate Name
Agreement, the Tax Sharing Agreement, the Employee Benefits Agreement, the
Intellectual Property Agreement, the Patent Assignment, the Trademark and
Service Mark Assignment (the agreements referred to in this clause (i), the
"PRIMARY TRANSACTION AGREEMENTS"), (ii) those agreements and documents listed in
Items 1-23 on Schedule 2.4(b)(ii)(A) (the agreements referred to in this clause
(ii), as they may be amended as provided in Schedule 2.4(b)(ii)(B), the "PRIMARY
COMMERCIAL AGREEMENTS") and (iii) any agreement, commitment or understanding
that any of the Primary Commercial Agreements contemplates will be entered into
or made after the date hereof; provided that the relevant Primary Commercial
Agreement specifically sets forth all material terms of such agreement,
commitment or understanding (the agreements, commitments and understandings
referred to in this clause (iii) are referred to herein as the "ADDITIONAL
COMMERCIAL AGREEMENTS").
"APPLICABLE DEADLINE" has the meaning set forth in Section 10.03.
"ARBITRATION DEMAND NOTICE" has the meaning set forth in Section 10.03.
"ARBITRATION PANEL" has the meaning set forth in Section 10.05.
"ASSETS" means assets, properties and rights (including goodwill), wherever
located (including in the possession of vendors or other third parties or
elsewhere), whether real, personal or mixed, tangible, intangible or contingent,
in each case whether or not recorded or reflected or required to be recorded or
reflected on the books and records or financial statements of any Person,
including the following:
(a) all accounting and other books, records and files whether in
paper, microfilm, microfiche, computer tape or disc, magnetic tape or any
other form;
(b) all apparatus, computers and other electronic data processing
equipment, fixtures, machinery, equipment, furniture, office equipment,
automobiles, trucks, aircraft, rolling stock, vessels, motor vehicles and
other transportation equipment, special and general tools, test devices,
prototypes and models and other tangible personal property;
(c) all inventories of materials, parts, raw materials, supplies,
work-in-process and finished goods and products;
(d) all interests in real property of whatever nature, including
easements and rights of way, whether as owner, mortgagee or holder of a
Security Interest in real property, lessor, sublessor, lessee, sublessee or
otherwise, and copies of all related documentation;
(e) all interests in any capital stock or other equity interests of
any Subsidiary or any other Person, all bonds, notes, debentures or other
securities issued by any Subsidiary or any other Person, all loans,
advances or other extensions of credit or capital contributions to any
Subsidiary or any other Person and all other investments in securities of
any Person;
(f) all license agreements, leases of personal property, open purchase
orders for raw materials, supplies, parts or services, unfilled orders for
the manufacture and sale of products and other contracts, agreements or
commitments;
(g) all deposits, letters of credit and performance and surety bonds;
(h) all written technical information, data, specifications, research
and development information, engineering drawings, operating and
maintenance manuals, and materials and analyses prepared by consultants and
other third parties;
(i) all domestic and foreign patents, copyrights, trade names,
trademarks, service marks and registrations and applications for any of the
foregoing, mask works, trade secrets, inventions, other proprietary
information and licenses from third Persons granting the right to use any
of the foregoing;
B-2
(j) all computer applications, programs and other software, including
operating software, network software, firmware, middleware, design
software, design tools, systems documentation and instructions;
(k) all cost information, sales and pricing data, customer prospect
lists, supplier records, customer and supplier lists, records pertaining to
customers and customer accounts, customer and vendor data, correspondence
and lists, product literature, artwork, design, development and
manufacturing files, vendor and customer drawings, formulations and
specifications, quality records and reports and other books, records,
studies, surveys, reports, plans and documents;
(l) all prepaid expenses, trade accounts and other accounts and notes
receivable;
(m) all rights under contracts or agreements, all claims or rights
against any Person arising from the ownership of any Asset, all rights in
connection with any bids or offers and all claims, choices in action or
similar rights, whether accrued or contingent;
(n) all insurance proceeds and rights under insurance policies and all
rights in the nature of insurance, indemnification or contribution;
(o) all licenses (including radio and similar licenses), permits,
approvals and authorizations that have been issued by any Governmental
Authority;
(p) all cash or cash equivalents, bank accounts, lock boxes and other
deposit arrangements;
(q) copies of all documentation related to Insurance Policies; and
(r) interest rate, currency, commodity or other swap, collar, cap or
other hedging or similar agreements or arrangements.
"AT&T" has the meaning set forth in the Preamble.
"AT&T BROADBAND" has the meaning set forth in the Preamble.
"AT&T BROADBAND ACTION" has the meaning set forth in Section 6.02(d).
"AT&T BROADBAND ASSETS" means:
(a) except as set forth on Schedule 1.14(a), any Assets reflected in
the AT&T Broadband Balance Sheet, unless disposed of to third parties after
the date thereof (and, in the case of any such Assets disposed of after the
date thereof, the proceeds from such disposal);
(b) any Assets acquired after the date of the AT&T Broadband Balance
Sheet by AT&T or any of its Subsidiaries utilizing AT&T Broadband Assets;
(c) any AT&T Broadband Contracts;
(d) any capital stock or other ownership interests in AT&T Broadband
Entities;
(e) AT&T's interest in Western Range;
(f) any AT&T Broadband Real Property;
(g) any Assets that are expressly contemplated by this Agreement or
any other Ancillary Agreement (or the Schedules hereto or thereto) as
Assets to be retained by or assigned to any member of the AT&T Broadband
Group;
(h) any governmental licenses, permits, franchises, approvals,
certificates and other governmental authorizations held in the name of AT&T
or any of its Subsidiaries that are primarily related to the AT&T Broadband
Business (to the extent any of the foregoing would be required to be
transferred pursuant hereto, such items will be AT&T Broadband Assets only
to the extent they are transferable upon the receipt of any relevant
Consent), except for any intrastate telephony licenses, permits,
franchises, approvals, certificates or other governmental authorizations
that are used in the AT&T
B-3
Communications Business; (i) the Assets of T-Holdings and its Subsidiaries
to be purchased by AT&T Broadband pursuant to Section 2.01(f);
(j) any Assets underlying any of the monetizations that are AT&T
Broadband Liabilities;
(k) any Assets listed or described on Schedule 1.14(k); and
(l) any Assets that are not AT&T Communications Assets specified in
clauses (a) through (k) of the definition of AT&T Communications Assets and
that are used or held for use primarily in connection with the AT&T
Broadband Business (it being agreed that (i) any Assets owned by AT&T or
any of its controlled Affiliates immediately prior to March 9, 1999 shall
be deemed primarily used or held for use in connection with the AT&T
Communications Business and (ii) Assets that were paid for, built or
otherwise directly or indirectly acquired for consideration (as reflected
in current and historic financial records, including subsidiary ledgers,
journals and other financial books and records) by a Group shall be deemed
to be primarily used or held for use by the Group that most recently so
paid for or so built or acquired them).
AT&T Broadband Assets shall not in any event include any (i) Assets reflected on
the AT&T Communications Balance Sheet, except for those Assets specified in
clauses (b), (d), (e), (f), (g), (i), (j) and (k) of the definition of AT&T
Broadband Assets or (ii) Assets that as of the Distribution Date are Leased
Assets (as defined in the Local Network Connectivity Services Agreement).
Subject to the foregoing sentence, in the event that any Asset is included
in both the definition of "AT&T Broadband Asset" and "AT&T Communications Asset"
then (i) if it is specifically referred to in a definition or schedule or
otherwise (including in any of the Ancillary Agreements), it shall be treated in
accordance with such specific reference and (ii) otherwise it shall be treated
as an AT&T Broadband Asset or AT&T Communications Asset based upon whether it is
used or held for use primarily in connection with the AT&T Broadband Business or
primarily in connection with the AT&T Communications Business; provided that for
purposes hereof Assets that were paid for, built or otherwise directly or
indirectly acquired for consideration (as reflected in current and historic
financial records, including subsidiary ledgers, journals and other financial
books and records) by a Group shall be deemed to be primarily used or held for
use by the Group that most recently so paid for or so built or acquired them.
"AT&T BROADBAND BALANCE SHEET" means the balance sheet dated as of December
31, 2000 included in the AT&T Broadband Financial Statements.
"AT&T BROADBAND BUSINESS" means the business of the AT&T Broadband Group.
"AT&T BROADBAND COMMON STOCK" means the common stock, par value $0.01 per
share, of AT&T Broadband.
"AT&T BROADBAND CONTRACTS" means the following contracts and agreements to
which AT&T or any of its Subsidiaries is a party or by which it or any of its
Subsidiaries or any of their respective Assets is bound, whether or not in
writing, except for any such contract or agreement that is expressly
contemplated to be assigned to or retained by AT&T or any member of the AT&T
Communications Group pursuant to any provision of this Agreement or any other
Ancillary Agreement:
(a) any contract or agreement entered into in the name of, or
expressly on behalf of, any AT&T Broadband Entity, except to the extent
clearly relating to the AT&T Communications Group and except for any At
Home Contract;
(b) any contract or agreement that relates primarily to the AT&T
Broadband Business other than any At Home Contract;
(c) any rights and obligations of the AT&T Broadband Group under any
At Home Contract;
(d) any note, indenture, contract, agreement, mortgage or other
instrument representing Indebtedness or other Liabilities that are in
either such case AT&T Broadband Liabilities;
B-4
(e) any contract or agreement that is expressly contemplated pursuant
to this Agreement or any of the other Ancillary Agreements to be assigned
or transferred to or retained by AT&T Broadband or any member of the AT&T
Broadband Group;
(f) any guarantee, indemnity, representation, warranty or other
Liability of any member of the AT&T Communications Group in respect of any
other AT&T Broadband Contract, any AT&T Broadband Liability or the AT&T
Broadband Business;
(g) any contract or agreement listed or described on Schedule 1.18(g),
including in the case of commitment or similar contracts or agreements,
contracts or agreements to the extent indicated on such Schedule;
(h) any letter of credit, surety bond, swap, foreign exchange or other
instrument or contract primarily relating to the AT&T Broadband Group,
together with any letters of credit, surety bonds, swaps, foreign exchange
or other such instruments or contracts that were entered into in connection
with Indebtedness of the AT&T Broadband Group; and
(i) all monetizations listed or described on Schedule 1.18(i).
With respect to any contract or agreement that relates in material part to both
the AT&T Broadband Group and the AT&T Communications Group, the parties will
cooperate in good faith to apportion the rights and obligations thereunder to
the AT&T Broadband Group and the AT&T Communications Group, and to treat such
contract or agreement as an AT&T Broadband Contract to the extent relating to
the AT&T Broadband Group and an AT&T Communications Contract to the extent
relating to the AT&T Communications Group.
"AT&T BROADBAND ENTITIES" means AT&T Broadband and each of the AT&T
Broadband Subsidiaries.
"AT&T BROADBAND FINANCIAL STATEMENTS" has the meaning set forth in the
Merger Agreement.
"AT&T BROADBAND GROUP" means the direct or indirect interest of AT&T
(either itself or through direct or indirect Subsidiaries, or any of their
predecessors or successors) in (a) all of the businesses, Assets and Liabilities
reflected in the AT&T Broadband Financial Statements; (b) the other Assets and
Liabilities (contingent or otherwise) of AT&T and its Subsidiaries primarily
related to businesses, assets and liabilities described in clause (a) and all
net income, net losses, Assets and Liabilities arising in respect thereof after
the date of the AT&T Broadband Financial Statements; (c) all Assets, Liabilities
and businesses acquired after the date of the AT&T Broadband Financial
Statements by the AT&T Broadband Group or utilizing cash or other Assets
referred to in clauses (a) or (b); and (d) any business or operations that were
terminated, divested or discontinued by any AT&T Broadband Entity, including US
West, Inc. and its Subsidiaries (and their respective predecessors and
successors), or that are listed or described on Schedule 1.21(d); and (e) the
businesses, Assets and Liabilities listed or described on Schedule 1.21(e);
provided that the AT&T Broadband Group shall not include (x) any Assets disposed
of to any third party or otherwise transferred to any third party from the AT&T
Broadband Group after the date of the AT&T Broadband Financial Statements (but
it shall include any net proceeds thereof) or (y) any businesses, Liabilities or
Assets of, or the capital stock or other ownership interests in, T-Holdings and
its Subsidiaries, other than the Assets purchased pursuant to Section 2.01(f)
and any Liabilities of T-Holdings and its Subsidiaries as of the Distribution
Date. Notwithstanding the foregoing, when this Agreement refers to "a member of
the AT&T Broadband Group" or similar language clearly referring to a Person, it
means any one of the AT&T Broadband Entities.
"AT&T BROADBAND INDEMNITEES" has the meaning set forth in Section 5.02.
"AT&T BROADBAND LIABILITIES" means:
(a) any Liabilities reflected on the AT&T Broadband Balance Sheet,
subject to any discharge of such Liabilities subsequent to the date of the
AT&T Broadband Balance Sheet;
B-5
(b) any Liabilities that are expressly contemplated by this Agreement
or any other Ancillary Agreement (or the Schedules hereto or thereto) as
Liabilities to be retained or assumed by AT&T Broadband or any other member
of the AT&T Broadband Group, subject to discharge of such Liabilities
subsequent to the date of the AT&T Broadband Balance Sheet, and all
agreements, obligations and Liabilities of any member of the AT&T Broadband
Group under this Agreement or any of the other Ancillary Agreements;
(c) any Liabilities of any AT&T Broadband Entity and any Liabilities
as of the Distribution Date of T-Holdings or any of its Subsidiaries;
(d) any Liabilities relating to, arising out of or resulting from any
AT&T Broadband Contract, excluding, for the avoidance of doubt, any
Liabilities of any member of the AT&T Communications Group as a party (for
the benefit of the AT&T Communications Group) under any At Home Contract;
(e) any Liabilities incurred after the date of the AT&T Broadband
Balance Sheet by any AT&T Broadband Entity;
(f) except to the extent arising from any breach by any member of the
AT&T Communications Group after the Distribution Date of any covenant or
agreement entered into in connection with the separation, divestiture or
termination of LMC and its Subsidiaries, or as otherwise expressly
contemplated by any other Ancillary Agreement, any Liabilities to the
extent arising out of, relating to or resulting from LMC and its
Subsidiaries, any commercial or other agreements or arrangements primarily
relating to the AT&T Broadband Group and involving LMC or any of its
Subsidiaries or the ownership of any securities of any such entity;
(g) (i) any Liabilities relating to, arising out of, or resulting from
any Actions primarily related to, arising out of or resulting from the AT&T
Broadband Business, including those listed or described on Schedule
1.23(g), (ii) 50% of the excess of any Liability related to, arising out of
or resulting from any Specified Matter (including any legal or other fees
incurred as a result of, or with respect to, any Specified Matter) over any
amount AT&T receives from AWS in respect thereof, (iii) 50% of any
Liability related to, arising out of or resulting from any At Home Matter
(including any legal or other fees incurred as a result of, or with respect
to, any At Home Matter) and (iv) 50% of any Liability related to, arising
out of or resulting from the Separation or the Distribution or any proposed
transaction involving AT&T Broadband following the Distribution (including
any legal or other fees incurred as a result of, or with respect to, any
such Liability and including any Liability AT&T may have under Section 910
of the NYBCL in connection with the Distribution) (the transactions
specified in clause (iv), the "SPECIFIED TRANSACTIONS");
(h) any Liabilities, including any employee-related Liabilities and
Environmental Liabilities, primarily relating to, arising out of or
resulting from:
(i) the AT&T Broadband Group, including the operation of the AT&T
Broadband Business, as conducted at any time prior to, on or after the
Distribution Date (including any Liability relating to, arising out of
or resulting from any act or failure to act by any director, officer,
employee, agent or representative (whether or not such act or failure to
act is or was within such Person's authority));
(ii) the operation of any business conducted by any member of the
AT&T Broadband Group at any time after the Distribution Date (including
any Liability relating to, arising out of or resulting from any act or
failure to act by any director, officer, employee, agent or
representative (whether or not such act or failure to act is or was
within such Person's authority)); or
(iii) any AT&T Broadband Assets (including any AT&T Broadband
Contracts and any AT&T Broadband Real Property);
in any such case whether arising before, on or after the Distribution Date.
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(i) any of the monetizations set forth on Schedule 1.23(i);
(j) any Liabilities listed or described on Schedule 1.23(j); and
(k) any Liability arising from or relating to any terminated, divested
or discontinued business (or the termination, divestiture or
discontinuation thereof) of the AT&T Broadband Group.
In the event that any Liability is included in both the definition of "AT&T
Broadband Liability" and "AT&T Communications Liability" then (i) if it is
specifically referred to in a definition or schedule or otherwise (including in
any of the Ancillary Agreements), it shall be treated in accordance with such
specific reference and (ii) otherwise it shall be treated as an AT&T Broadband
Liability or AT&T Communications Liability to the extent it relates to the AT&T
Broadband Business or the AT&T Communications Business, respectively.
"AT&T BROADBAND MATERIAL ADVERSE EFFECT" has the meaning set forth in the
Merger Agreement.
"AT&T BROADBAND MERGER" has the meaning set forth in the Merger Agreement.
"AT&T BROADBAND REAL PROPERTY" means all right, title and interest in real
property, wherever located, held in the name of AT&T Broadband or any AT&T
Broadband Entity; provided that AT&T Broadband Real Property does not include
rights, title or interests (whether fee, leasehold or otherwise) in any AT&T
Communications Real Property.
"AT&T BROADBAND SUBSIDIARIES" means those entities set forth on Schedule
1.19 and their respective Subsidiaries but excluding AT&T Broadband T-Holdings,
Inc. (formerly TCI Telephony Holdings, Inc.) and its Subsidiaries.
"AT&T BROADBAND'S SHARE" has the meaning set forth in Section 6.04(b).
"AT&T COMMON STOCK" means the common stock, par value $1.00 per share, of
AT&T.
"AT&T COMMUNICATIONS ACTION" has the meaning set forth in Section 6.02(d).
"AT&T COMMUNICATIONS ASSETS" means:
(a) any Assets reflected in the AT&T Communications Balance Sheet,
unless disposed of to third parties after the date thereof (and, in the
case of any such Assets disposed of after the date thereof, the proceeds
from such disposal);
(b) any Assets acquired after the date of the AT&T Communications
Balance Sheet by AT&T or any of its Subsidiaries utilizing AT&T
Communications Assets;
(c) any AT&T Communications Contracts;
(d) any capital stock or other ownership interests in any member of
the AT&T Communications Group (other than AT&T) (unless disposed of after
the date thereof);
(e) AT&T's interest in Concert and American Ridge;
(f) any AT&T Communications Real Property;
(g) any Assets that are expressly contemplated by this Agreement or
any other Ancillary Agreement (or any Schedule hereto or thereto) to be
retained by or assigned to AT&T or any other member of the AT&T
Communications Group;
(h) (i) any governmental licenses, permits, franchises, approvals,
certificates, consents and other governmental authorizations held in the
name of AT&T or any of its Subsidiaries that are primarily related to the
AT&T Communications Business and (ii) any intrastate telephony licenses,
permits, franchises, approvals, certificates or other governmental
authorizations that are used in the AT&T Communications Business (in the
case of (i) or (ii), to the extent any of the foregoing would be required
to be transferred pursuant hereto, such items will be AT&T Communications
Assets only to the extent they are transferable upon receipt of any
relevant Consent);
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(i) AT&T's shares of AWS;
(j) any Assets listed or described on Schedule 1.28(j);
(k) any Assets that as of the Distribution Date are Leased Assets (as
defined in the Local Network Connectivity Services Agreement); and
(l) any Assets that are not AT&T Broadband Assets specified in clauses
(a) through (k) of the definition of AT&T Broadband Assets and that are
used or held for use primarily in connection with the AT&T Communications
Business (it being agreed that (i) any Assets owned by AT&T or any of its
controlled Affiliates immediately prior to March 9, 1999 shall be deemed
primarily used or held for use in connection with the AT&T Communications
Business and (ii) Assets that were paid for, built or otherwise directly or
indirectly acquired for consideration (as reflected in current and historic
financial records, including subsidiary ledgers, journals and other
financial books and records) by a Group shall be deemed to be primarily
used or held for use by the Group that most recently so paid for or so
built or acquired them).
AT&T Communications Assets shall not in any event include any Assets reflected
on the AT&T Broadband Balance Sheet, except for those Assets specified in
clauses (b), (d), (e), (f), (g), (i), (j) and (k) of the definition of AT&T
Communications Assets.
Subject to the foregoing sentence, in the event that any Asset is included in
both the definition of "AT&T Broadband Asset" and "AT&T Communications Asset"
then (i) if it is specifically referred to in a definition or schedule or
otherwise (including in any of the Ancillary Agreements), it shall be treated in
accordance with such specific reference and (ii) otherwise it shall be treated
as an AT&T Broadband Asset or AT&T Communications Asset based upon whether it is
used or held for use primarily in connection with the AT&T Broadband Business or
primarily in connection with the AT&T Communications Business; provided that for
purposes hereof Assets that were paid for, built or otherwise directly or
indirectly, acquired for consideration (as reflected in current and historic
financial records, including subsidiary ledgers, journals and other financial
books and records) by a Group shall be deemed to be primarily used or held for
use by the Group that most recently so paid for or so built or acquired them.
"AT&T COMMUNICATIONS BALANCE SHEET" means the consolidated balance sheet
dated as of December 31, 2000 included within the AT&T Communications Financial
Statements.
"AT&T COMMUNICATIONS BUSINESS" means the business of the AT&T
Communications Group.
"AT&T COMMUNICATIONS CONTRACTS" means any contract or agreements to which
AT&T or any of its Subsidiaries is a party or by which it or any of its
Subsidiaries or any of their respective Assets is bound, whether or not in
writing, except for any AT&T Broadband Contract, including (a) any contract or
agreement listed on Schedule 1.31(a), (b) any rights and obligations of any
member of the AT&T Communications Group as a party (for the benefit of the AT&T
Communications Group) under any At Home Contract, (c) any letter of credit,
surety bond, swap, foreign exchange or other instrument or contract not
primarily relating to the AT&T Broadband Group, together with any letters of
credit, surety bonds, swaps, foreign exchange or other such instruments or
contracts that were entered into in connection with Indebtedness of the AT&T
Communications Services Group, (d) any note, indenture, contract, agreement,
mortgage or other instrument representing Indebtedness or other Liabilities that
are in either such case AT&T Communications Liabilities, (e) any contract or
agreement that is expressly contemplated pursuant to this Agreement or any of
the other Ancillary Agreements to be assigned or transferred to or retained by
AT&T or any other member of the AT&T Communications Group, (f) any guarantee,
indemnity, representation, warranty or other Liability of any member of the AT&T
Broadband Group in respect of any other AT&T Communications Contract, any AT&T
Communications Liability or the AT&T Communications Business, and (g) any
contract or agreement entered into in the name of, or expressly on behalf of,
any member of the AT&T Communications Group (other than AT&T), except to the
extent clearly relating to the AT&T Broadband Group. With respect to any
contract or agreement that relates in material part to both the AT&T Broadband
Group and the AT&T Communications Group, the
B-8
parties will cooperate in good faith to apportion the rights and obligations
thereunder to the AT&T Broadband Group and the AT&T Communications Group, and to
treat such contract or agreement as an AT&T Broadband Contract to the extent
relating to the AT&T Broadband Group and an AT&T Communications Contract to the
extent relating to the AT&T Communications Group.
"AT&T COMMUNICATIONS FINANCIAL STATEMENTS" means the consolidated balance
sheets, income statements, statements of cash flow and other financial
statements of AT&T Communications as of and for the period ending December 31,
2000, attached hereto as Exhibit A.
"AT&T COMMUNICATIONS GROUP" means the direct or indirect interest of AT&T
(either itself or through direct or indirect subsidiaries, or any of their
predecessors or successors) in (a) all businesses (including terminated,
divested or discontinued businesses and operations), Assets and Liabilities
(contingent or otherwise), other than the AT&T Broadband Group, and (b) any
terminated, divested or discontinued businesses not specified in the definition
(or related schedules) of AT&T Broadband Group. Notwithstanding the foregoing,
when this Agreement refers to "a member of the AT&T Communications Group" or
similar language clearly referring to a Person, it means any one of AT&T or its
Subsidiaries other than the AT&T Broadband Entities.
"AT&T COMMUNICATIONS LIABILITIES" means (without duplication):
(a) any Liabilities reflected on the AT&T Communications Balance
Sheet, subject to any discharge of such Liabilities subsequent to the date
of the AT&T Communications Balance Sheet;
(b) any Liabilities that are expressly contemplated by this Agreement
or any other Ancillary Agreement (or the Schedules hereto or thereto) as
Liabilities to be retained or assumed by AT&T or any member of the AT&T
Communications Group, subject to discharge of such Liabilities subsequent
to the date of the AT&T Communications Balance Sheet, and all agreements,
obligations and Liabilities of any member of the AT&T Communications Group
under this Agreement or any of the other Ancillary Agreements;
(c) any Liabilities of any member of the AT&T Communications Group
(other than AT&T), excluding, for the avoidance of doubt, any Liabilities
as of the Distribution Date of T-Holdings or any of its Subsidiaries and
including, for the avoidance of doubt, any Liabilities of T-Holdings or any
of its Subsidiaries arising after the Distribution Date;
(d) any Liabilities relating to, arising out of or resulting from any
AT&T Communications Contract, excluding, for the avoidance of doubt, any
Liabilities under any At Home Contract except for Liabilities of any member
of the AT&T Communications Group as a party (for the benefit of the AT&T
Communications Group) under any At Home Contract;
(e) any Liabilities incurred after the date of the AT&T Communications
Balance Sheet by any member of the AT&T Communications Group;
(f) any Liabilities relating to, arising out of or resulting from any
Actions except (i) those primarily related to, arising out of or resulting
from the AT&T Broadband Business (including those listed on Schedule
1.23(g)) or as expressly set forth herein, (ii) 50% of the excess of any
Liability related to, arising out of or resulting from any Specified Matter
(including any legal or other fees incurred as a result of, or with respect
to, any Specified Matter) over any amount AT&T receives from AWS in respect
thereof, (iii) 50% of any Liability related to, arising out of or resulting
from any At Home Matter (including any legal or other fees incurred as a
result of, or with respect to, any At Home Matter) and (iv) 50% of any
Liability related to, arising out of or resulting from the Specified
Transactions (including any legal or other fees incurred as a result of, or
with respect to, any such Liability and including any Liability AT&T may
have under Section 910 of the NYBCL in connection with the Distribution);
B-9
(g) any Liabilities, including any employee-related Liabilities and
Environmental Liabilities, primarily relating to, arising out of or
resulting from:
(i) the AT&T Communications Group, including the operation of the
AT&T Communications Business, as conducted at any time prior to, on or
after the Distribution Date (including any Liability relating to,
arising out of or resulting from any act or failure to act by any
director, officer, employee, agent or representative (whether or not
such act or failure to act is or was within such Person's authority));
(ii) the operation of any business conducted by any member of the
AT&T Communications Group at any time after the Distribution Date
(including any Liability relating to, arising out of or resulting from
any act or failure to act by any director, officer, employee, agent or
representative (whether or not such act or failure to act is or was
within such Person's authority)); or
(iii) any AT&T Communications Assets (including any AT&T
Communications Contracts, any AT&T Communications Real Property and any
Leased Assets (except with respect to any Liabilities of the lessees
under the applicable leases));
in any such case whether arising before, on or after the Distribution Date;
(h) any Liability arising from or relating to any terminated, divested
or discontinued business (or the termination, divestiture or
discontinuation thereof) of the AT&T Communications Group;
(i) any Liability arising from any breach by any member of the AT&T
Communications Group after the Distribution Date of any covenant or
agreement entered into in connection with the separation, divestiture or
termination of LMC and its Subsidiaries; and
(j) any other direct or indirect Liabilities of AT&T or any of its
Subsidiaries that do not otherwise constitute AT&T Broadband Liabilities.
In the event that any Liability is included in both the definition of "AT&T
Broadband Liability" and "AT&T Communications Liability" then (i) if it is
specifically referred to in a definition or schedule or otherwise (including in
any of the Ancillary Agreements), it shall be treated in accordance with such
specific reference and (ii) otherwise it shall be treated as an AT&T Broadband
Liability or AT&T Communications Liability to the extent it relates to the AT&T
Broadband Business or the AT&T Communications Business, respectively.
"AT&T COMMUNICATIONS REAL PROPERTY" means all right, title and interest in
real property, wherever located, of AT&T or any of its Subsidiaries (other than
any AT&T Broadband Entity), including: (a) all land (the "LAND") owned by AT&T
or any of its Subsidiaries (other than any AT&T Broadband Entity), including all
buildings, structures and other improvements now or hereafter located thereon
(the "OWNED REAL PROPERTY"), (b) all real property leased, subleased or
otherwise occupied by AT&T or any of its Subsidiaries (other than any AT&T
Broadband Entity) (the "LEASED REAL PROPERTY" and together with the Owned Real
Property, the "REAL PROPERTY"), (c) all easements, licenses, permits, rights of
way, reservations, privileges and other estates and rights of AT&T or any of its
Subsidiaries (other than any AT&T Broadband Entity) either in gross or
appurtenant pertaining to such Real Property or to any other real property, (d)
all right, title and interest of AT&T or any of its Subsidiaries (other than any
AT&T Broadband Entity) in and to all strips and gores, all alleys adjoining
land, and the land lying in the bed of any street, road or avenue, opened or
proposed, in front of or adjoining the Land to the center line thereof, and all
right, title and interest of AT&T or any of its Subsidiaries (other than any
AT&T Broadband Entity) in and to any award made or to be made in lieu thereof
and in and to any unpaid award for any taking by condemnation or any damages to
the Owned Real Property by reason of any change of grade of any street, road or
avenue, (e) all right, title and interest of AT&T or any of its Subsidiaries
(other than any AT&T Broadband Entity) in and to the airspace above the Owned
Real Property (and the rights to use such airspace) and any transferable
development or similar rights appurtenant to the Owned Real Property by
allocation under applicable laws, by zoning lot merger or otherwise and (f) all
rights, licenses,
B-10
easements, leases, indefeasible rights of use, title, attachment rights,
authorizations and other rights pertaining to poles, conduits and cable held by
AT&T or any of its Subsidiaries (other than any AT&T Broadband Entity).
"AT&T COMMUNICATIONS' SHARE" has the meaning set forth in Section 6.04(b).
"AT&T INDEMNITEES" has the meaning set forth in Section 5.03.
"AT&T MATERIAL ADVERSE EFFECT" means a material adverse effect on the
financial condition, assets or results of operations of the AT&T Communications
Group, taken as a whole, excluding any such effect resulting from or arising in
connection with (i) changes or conditions generally affecting the industries in
which the AT&T Communications Group operates, (ii) changes in general economic,
regulatory or political conditions, or (iii) the announcement of this Agreement
or of the transactions contemplated hereby.
"AT&T MEETING" has the meaning set forth in Section 4.02(a).
"AT&T SUBSIDIARY PREFERRED STOCK" has the meaning set forth in the Merger
Agreement.
"AT HOME" means At Home Corporation, a Delaware corporation and/or its
bankruptcy estate, as applicable.
"AT HOME CONTRACTS" means any contracts or agreements between At Home or
any of its Subsidiaries, on the one hand, and any member of the AT&T
Communications Group (for the benefit of the AT&T Communications Group), on the
other hand.
"AT HOME MATTERS" means (i) the currently pending lawsuits styled Linda
Ward, Brian Lewis and Donnie Doby, Jr. v. At Home Corporation, et al. (Case No.
418233, Superior Court of California, San Mateo County), and In re: At Home
Corporation Stockholders' Litigation (Master File No. 413094, Superior Court of
California, San Mateo County), and any other shareholder claims or lawsuits or
claims or lawsuits by At Home alleging any breach of fiduciary or contractual
duties by AT&T or any of its Affiliates relating to At Home or its Subsidiaries
prior to the Effective Time, including any such claim or lawsuit against any
officers, directors or employees of AT&T or any of its Subsidiaries whether in
their capacity as a director, officer or employee of At Home or its Subsidiaries
or otherwise, and (ii) any claims or lawsuits by At Home, creditors of At Home
or its Subsidiaries, either previously or subsequently filed, concerning
activities prior to the Effective Time, including any lawsuit or claim asserting
that AT&T or any of its Subsidiaries (other than At Home or its Subsidiaries)
breached contractual or fiduciary obligations to At Home or its Subsidiaries,
received a fraudulent conveyance from At Home or its Subsidiaries, or is liable
for any Liability of At Home or any of its Subsidiaries, and including any such
claim or lawsuit against any officers, directors or employees of AT&T or any of
its Subsidiaries whether in their capacity as a director, officer or employee of
At Home or its Subsidiaries or otherwise.
"AWS" means AT&T Wireless Services, Inc., a Delaware corporation.
"BUSINESS DAY" means a day other than a Saturday, Sunday or other day on
which commercial banks in New York City are authorized or required by law to
close.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMCAST" means Comcast Corporation, a Pennsylvania corporation.
"COMMISSION" means the Securities and Exchange Commission.
"CONCERT" means Concert B.V.
"CONSENTS" means any consents, waivers or approvals from, or notification
requirements to, any third parties, other than Governmental Approvals.
"CPR" means the Center for Public Resources.
B-11
"CORPORATE NAME AGREEMENT" means the Corporate Name Agreement by and
between AT&T and AT&T Comcast Corporation, in the form attached hereto as
Exhibit B.
"DELAYED TRANSFER ASSETS" means any AT&T Broadband Assets that this
Agreement or any other Ancillary Agreement provides or contemplates are to be
transferred after the Distribution Date, including Assets that require a Consent
or Governmental Approval to transfer, which Consent or Governmental Approval is
not obtained on or prior to the Distribution Date.
"DELAYED TRANSFER LIABILITIES" means any AT&T Broadband Liabilities that
are expressly provided in this Agreement to be assumed after the Distribution
Date upon the removal of legal impediments or the receipt of Consents or
Governmental Approvals necessary for the transfer of such AT&T Broadband
Liabilities.
"DISPUTE DATE" has the meaning set forth in Section 6.03(c).
"DISTRIBUTION" means the distribution by AT&T to the holders of AT&T Common
Stock and, if the QUIPS Exchange is completed, to the holders of the QUIPS of
all of the outstanding shares of AT&T Broadband Common Stock on the Distribution
Date in accordance with Article 4.
"DISTRIBUTION DATE" means the date on which the Distribution occurs.
"DISTRIBUTION REGISTRATION STATEMENT" has the meaning set forth in Section
4.02(b).
"EFFECTIVE TIME" has the meaning set forth in the Merger Agreement.
"EMPLOYEE BENEFITS AGREEMENT" means the Employee Benefits Agreement by and
between AT&T and AT&T Broadband, in the form attached hereto as Exhibit C.
"ENVIRONMENTAL LAW" has the meaning set forth in the Merger Agreement.
"ENVIRONMENTAL LIABILITIES" means all Liabilities relating to, arising out
of or resulting from any Environmental Law or contract or agreement relating to
environmental, health or safety matters (including all removal, remediation or
cleanup costs, investigatory costs, governmental response costs, natural
resources damages, property damages, personal injury damages, costs of
compliance with any settlement, judgment or other determination of Liability and
indemnity, contribution or similar obligations) and all costs and expenses
(including allocated costs of in-house counsel and other personnel), interest,
fines, penalties or other monetary sanctions in connection therewith.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated thereunder.
"EXCHANGE AGREEMENT" has the meaning set forth in the Merger Agreement.
"GAAP" has the meaning set forth in the Merger Agreement.
"GOVERNMENTAL APPROVALS" means any notices, reports or other filings to be
made, or any consents, registrations, approvals, permits or authorizations to be
obtained from, any Governmental Authority.
"GOVERNMENTAL AUTHORITY" has the meaning set forth in the Merger Agreement.
"GROUP" means the AT&T Broadband Group or the AT&T Communications Group, as
the context requires.
"INDEBTEDNESS" means, with respect to any Person, (a) any obligation of
such Person (i) for borrowed money, (ii) evidenced by a note, debenture or
similar instrument (including a purchase money obligation) given in connection
with the acquisition of any property or assets, including securities, (iii) for
the deferred purchase price of property or services, except trade accounts
payable arising in the ordinary course of business, or (iv) under any lease or
similar arrangement that would be required to be accounted for by the lessee as
a capital lease in accordance with GAAP; (b) any guarantee (or keepwell
agreement) by such Person of any indebtedness of others described in the
preceding clause (a); and (c) all obligations to reimburse any bank or other
Person for amounts paid under a letter of credit or similar instrument. For
B-12
purposes of clarification, (x) Indebtedness includes, without duplication,
obligations (or guarantees of obligations) related to preferred securities
issued by a wholly owned trust Subsidiary and (y) Indebtedness (in the case of
AT&T Broadband, any AT&T Broadband Entity or any member of the AT&T Broadband
Group) includes the monetizations set forth on Schedule 1.23(i).
"INDEMNIFYING PARTY" has the meaning set forth in Section 5.04(a).
"INDEMNITEE" has the meaning set forth in Section 5.04(a).
"INDEMNITY PAYMENT" has the meaning set forth in Section 5.04(a).
"INFORMATION" means information, whether or not patentable or
copyrightable, in written, oral, electronic or other tangible or intangible
forms, stored in any medium, including studies, reports, records, books,
contracts, instruments, surveys, discoveries, ideas, concepts, know-how,
techniques, designs, specifications, drawings, blueprints, diagrams, models,
prototypes, samples, flow charts, data, computer data, disks, diskettes, tapes,
computer programs or other software, marketing plans, customer names,
communications by or to attorneys (including attorney-client privileged
communications), memos and other materials prepared by attorneys or under their
direction (including attorney work product), and other technical, financial,
employee or business information or data.
"INSURANCE POLICIES" means the insurance policies written by insurance
carriers other than American Ridge or Western Range under which, prior to the
Distribution Date, AT&T and/or AT&T Broadband or one or more of their
Subsidiaries or Affiliates (or their respective officers or directors) are
insured parties, excluding insurance policies funding Benefit Plans (as defined
in the Employee Benefits Agreement) (which are addressed in the Employee
Benefits Agreement).
"INSURANCE PROCEEDS" means those monies:
(a) received by an insured from an insurance carrier other than
American Ridge or Western Range; or
(b) paid by an insurance carrier other than American Ridge or Western
Range on behalf of an insured;
in any such case net of any applicable premium adjustments (including reserves
and retrospectively rated premium adjustments) and net of any costs or expenses
(including allocated costs of in-house counsel and other personnel) incurred in
the collection thereof.
"INTELLECTUAL PROPERTY AGREEMENT" means the Intellectual Property Agreement
by and between AT&T and AT&T Broadband, in the form attached hereto as Exhibit
D.
"IRS" means the U.S. Internal Revenue Service.
"ISSUING PARTY" has the meaning set forth in Section 6.02(c).
"LIABILITIES" means any and all losses, claims, charges, debts, demands,
Actions, damages, obligations, payments, costs and expenses, bonds, indemnities
and similar obligations, covenants, controversies, promises, omissions,
guarantees, make whole agreements and similar obligations, and other
liabilities, including all contractual obligations, whether absolute or
contingent, inchoate or otherwise, matured or unmatured, liquidated or
unliquidated, accrued or unaccrued, known or unknown, whenever arising, and
including those arising under any law, rule, regulation, Action, threatened or
contemplated Action (including the costs and expenses of demands, assessments,
judgments, settlements and compromises relating thereto and attorneys' fees and
any and all costs and expenses (including allocated costs of in-house counsel
and other personnel), whatsoever reasonably incurred in investigating, preparing
or defending against any such Actions or threatened or contemplated Actions),
order or consent decree of any Governmental Authority or any award of any
arbitrator or mediator of any kind, and those arising under any contract,
commitment or undertaking, including those arising under this Agreement or any
other Ancillary Agreement (other than the Tax Sharing Agreement) or incurred by
a party hereto or thereto in connection with enforcing its rights to
indemnification hereunder or thereunder, in each case, whether or
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not recorded or reflected or required to be recorded or reflected on the books
and records or financial statements of any Person; provided, however, that
Liabilities shall not include any liabilities for (i) Taxes based on, measured
by or calculated with respect to net income or profits or (ii) Non-Income Taxes
covered by Section 3.6 of the Tax Sharing Agreement.
"LMC" means Liberty Media Corporation, a Delaware corporation.
"LOCAL NETWORK CONNECTIVITY SERVICES AGREEMENT" means the Local Network
Connectivity Services Agreement dated as of January 1, 2001, as amended, between
AT&T and AT&T Broadband, LLC, a Delaware limited liability company.
"MERGERS" has the definition set forth in the Merger Agreement.
"MERGER AGREEMENT" means the Agreement and Plan of Merger dated as of
December 19, 2001 by and among AT&T, Comcast and the other parties referred to
therein.
"MICROSOFT" has the meaning set forth in the Recitals.
"MICROSOFT QUIPS CLAIM" has the meaning set forth in Section 5.02(e).
"NON-INCOME TAXES" has the meaning set forth in the Tax Sharing Agreement.
"NOTIFIED ACTION" has the meaning set forth in Section 6.02(c).
"NYBCL" means the Business Corporation Law of the State of New York.
"OTHER PARTY" has the meaning set forth in Section 6.02(c).
"PARENT COMMON STOCK" has the meaning set forth in the Merger Agreement.
"PATENT ASSIGNMENT" means the Patent Assignment by and between AT&T and
AT&T Broadband, LLC, a Delaware limited liability company, in the form attached
hereto as Exhibit F.
"PERSON" means an individual, a general or limited partnership, a
corporation, a trust, a joint venture, an unincorporated organization, a limited
liability entity, any other entity and any Governmental Authority.
"PRIMARY COMMERCIAL AGREEMENTS" has the meaning set forth in the definition
of Ancillary Agreements.
"PRIMARY INDEMNITY CLAIM" has the meaning set forth in Section 6.04(b).
"PRIMARY TRANSACTION AGREEMENTS" has the meaning set forth in the
definition of Ancillary Agreements.
"PRIME RATE" means the rate that The Bank of New York (or any successor
thereto or other major money center commercial bank agreed to by the parties
hereto) announces from time to time as its prime lending rate, as in effect from
time to time.
"PROPOSED ACQUISITION TRANSACTION" has the meaning set forth in Section
6.02(b).
"PROXY STATEMENT" has the meaning set forth in Section 4.02(a).
"QUIPS" has the meaning set forth in the Merger Agreement.
"QUIPS EXCHANGE" has the meaning set forth in the Merger Agreement.
"QUIPS FAIR MARKET VALUE" has the meaning set forth in the Merger
Agreement.
"QUIPS TRANSFER" has the meaning set forth in the Merger Agreement.
"REAL PROPERTY INSTRUMENTS" has the meaning set forth in Section 2.05(a).
"RECORD DATE" means the close of business on such date as is mutually
agreed upon by the parties.
"REGISTRATION STATEMENT CLAIM" has the meaning set forth in Section
5.02(d).
B-14
"REGISTRATION STATEMENTS" means the Distribution Registration Statement and
all other filings by AT&T, AT&T Broadband or any of their respective Affiliates
with the Commission or any comparable state or foreign body made in connection
with the transactions contemplated by this Agreement or any other Ancillary
Agreement.
"REPRESENTATION LETTER" means the representation letter and any other
materials (including the ruling request and the related supplemental submissions
to the IRS) delivered or deliverable by AT&T and others in connection with the
rendering by tax counsel and the issuance by the IRS of the Tax Opinions/
Rulings that shall be in form and substance reasonably satisfactory to AT&T and
AT&T Broadband.
"RESTRUCTURING TRANSACTION" has the meaning set forth in Section 2.01(h).
"SCHEDULED DEBT" has the meaning set forth in Section 3.01.
"SECURITIES ACT" means the Securities Act of 1933, as amended, together
with the rules and regulations promulgated thereunder.
"SECURITY INTEREST" means any mortgage, security interest, pledge, lien,
charge, claim, option, right to acquire, voting or other restriction,
right-of-way, covenant, condition, easement, encroachment, restriction on
transfer or other encumbrance of any nature whatsoever.
"SEPARATION" means the transfer of the AT&T Broadband Assets to AT&T
Broadband and the assumption by AT&T Broadband of the AT&T Broadband
Liabilities, all as more fully described in this Agreement and the other
Ancillary Agreements.
"SEPARATION TRANSACTIONS" has the meaning set forth in the Separation and
Distribution Agreement dated as of June 4, 2001 by and between AT&T and AWS.
"SPECIFIED MATTER" has the meaning set forth in the Separation and
Distribution Agreement, dated as of June 4, 2001, by and between AT&T and AWS.
"SPECIFIED TRANSACTIONS" has the meaning set forth in clause (g) of the
definition of AT&T Broadband Liabilities.
"SPIN-OFF DISQUALIFICATION" means (a) the Separation and Distribution
failing to qualify under the provisions of Sections 355, 361(c) and 368(a)(1)(D)
of the Code, or (b) the shares of AT&T Broadband failing to qualify as
"qualified property" for purposes of Section 355(c)(2) or 361(c) of the Code by
reason of Section 355(e) of the Code.
"SPLIT-OFF" has the meaning set forth in the Ninth Supplement to the
Inter-Group Agreement dated as of June 14, 2001 by and among AT&T and the
Liberty Media Parties (as defined therein).
"SUBSEQUENT TAX OPINION/RULING" has the meaning set forth in Section
6.02(c).
"SUBSIDIARY" has the meaning set forth in the Merger Agreement.
"SUBSIDIARY PREFERRED STOCK EXCHANGE" has the meaning set forth in Section
4.01(d).
"TAX OPINIONS/RULINGS" has the meaning set forth in Section 6.02(b).
"TAX RELATED LOSSES" has the meaning set forth in Section 6.02(d).
"TAX SHARING AGREEMENT" means the Tax Sharing Agreement by and between AT&T
and AT&T Broadband, in the form attached hereto as Exhibit G.
"TAXES" has the meaning set forth in the Tax Sharing Agreement.
"THIRD PARTY CLAIM" has the meaning set forth in Section 5.05(a).
"THIRD PARTY TAX CLAIM" has the meaning set forth in Section 6.03(a).
"T-HOLDINGS" means AT&T Broadband T-Holdings, Inc. (f/k/a TCI Telephony
Holdings, Inc.), a Delaware corporation.
B-15
"TOPRS" has the meaning set forth in the Merger Agreement.
"TRADEMARK AND SERVICE MARK AGREEMENT" means the Trademark and Service Mark
Agreement by and among AT&T, AT&T Broadband, LLC, a Delaware limited liability
company, and MediaOne Group, Inc., a Delaware corporation, in the form attached
hereto as Exhibit H.
"TRANSACTION DISQUALIFICATION" has the meaning set forth in Section
6.04(a).
"TWE OPTION" has the meaning set forth in the Merger Agreement.
"UNDERPAYMENT RATE" has the meaning set forth in Section 6.03(c).
"WESTERN RANGE" means Western Range Insurance Company, a Vermont
corporation.
ARTICLE 2
THE SEPARATION
SECTION 2.01. Transfer of Assets and Assumption of Liabilities. (a)
Subject to Section 4.03, on or prior to the Distribution Date, AT&T will assign,
transfer, convey and deliver to AT&T Broadband, and agrees to cause its
applicable Subsidiaries to assign, transfer, convey and deliver to AT&T
Broadband, and AT&T Broadband will accept from AT&T and its applicable
Subsidiaries, all of AT&T's and its applicable Subsidiaries' respective right,
title and interest in all AT&T Broadband Assets, other than the Delayed Transfer
Assets.
(b) Subject to Section 4.03, on or prior to the Distribution Date, AT&T
Broadband will assume and agree faithfully to perform and fulfill all the AT&T
Broadband Liabilities that are not already Liabilities of an AT&T Broadband
Subsidiary, other than the Delayed Transfer Liabilities, in accordance with
their respective terms. AT&T Broadband shall be responsible for all AT&T
Broadband Liabilities that are not already Liabilities of an AT&T Broadband
Subsidiary, regardless of when or where such Liabilities arose or arise, or
whether the facts on which they are based occurred prior to, on or subsequent to
the date hereof, regardless of where or against whom such Liabilities are
asserted or determined (including any AT&T Broadband Liabilities arising out of
claims made by AT&T's, or AT&T Broadband's, respective directors, officers,
employees, agents, Subsidiaries or Affiliates against any member of the AT&T
Broadband Group or the AT&T Communications Group) or whether asserted or
determined prior to the date hereof, and regardless of whether arising from or
alleged to arise from negligence, recklessness, violation of law, fraud or
misrepresentation by any member of the AT&T Broadband Group or the AT&T
Communications Group or any of their respective directors, officers, employees,
agents, Subsidiaries or Affiliates. For the avoidance of doubt, but subject to
Section 5.03 including the indemnification obligations thereunder with respect
to Liabilities described in clause (g) of the definition of AT&T Broadband
Liabilities, AT&T Broadband is not itself agreeing to assume any Liabilities of
At Home or its Subsidiaries.
(c) Subject to Section 4.03, on or prior to the Distribution Date, AT&T
will assume and agree faithfully to perform and fulfill all the AT&T
Communications Liabilities that are not already Liabilities of AT&T or any of
its Subsidiaries (other than any AT&T Broadband Entity) in accordance with their
respective terms. AT&T shall be responsible for all AT&T Communications
Liabilities that are not already Liabilities of an AT&T Subsidiary (other than
any AT&T Broadband Entity), regardless of when or where such Liabilities arose
or arise, or whether the facts on which they are based occurred prior to, on or
subsequent to the date hereof, regardless of where or against whom such
Liabilities are asserted or determined (including any AT&T Communications
Liabilities arising out of claims made by AT&T's, or AT&T Broadband's,
respective directors, officers, employees, agents, Subsidiaries or Affiliates
against any member of the AT&T Broadband Group or the AT&T Communications Group)
or whether asserted or determined prior to the date hereof, and regardless of
whether arising from or alleged to arise from negligence, recklessness,
violation of law, fraud or misrepresentation by any member of the AT&T Broadband
Group or the AT&T Communications Group or any of their respective directors,
officers, employees, agents, Subsidiaries or Affiliates.
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(d) Each of the parties hereto agrees that the Delayed Transfer Assets will
be assigned, transferred, conveyed and delivered, and the Delayed Transfer
Liabilities will be assumed, in accordance with the terms of the agreements that
provide for such assignment, transfer, conveyance and delivery, or such
assumption, after the date of this Agreement.
(e) In the event that at any time or from time to time (whether prior to or
after the Distribution Date) any party hereto (or any member of such party's
respective Group) shall receive or otherwise possess any Asset that is allocated
to any other Person pursuant to this Agreement or any other Ancillary Agreement,
such party shall promptly transfer, or cause to be transferred, such Asset to
the Person so entitled thereto. Prior to any such transfer, the Person receiving
or possessing such Asset shall hold such Asset in trust for any such other
Person.
(f) Prior to the transactions described in Section 2.01(a)-(c), (i) AT&T
shall contribute $18 million in cash to AT&T Broadband, (ii) AT&T shall cause
T-Holdings and its Subsidiaries to sell all of their respective Assets that are
used or held for use primarily in the AT&T Broadband Business to AT&T Broadband
for $18 million in cash and (iii) AT&T Broadband shall purchase from T-Holdings
and its Subsidiaries for $18 million in cash all of such Assets. Prior to the
time that AT&T Broadband LLC becomes a Subsidiary of AT&T Broadband, AT&T shall
cause AT&T Broadband LLC to distribute all of the outstanding shares of
T-Holdings to AT&T.
(g) The provisions of this Section 2.01 and the definition of AT&T
Broadband Asset do not apply to any intellectual property, including any
Software, Proprietary Information, Materials (as such terms are defined in the
Intellectual Property Agreement), copyrights, inventions, patents, patent
applications, trade secrets and other technology to the extent it is allocated
in the Intellectual Property Agreement, except for transfers made pursuant to
the Patent Assignment.
(h) Anything in this Agreement to the contrary notwithstanding, if either
AT&T or Comcast reasonably believes that the amount of income that would
otherwise be required to be recognized under Treasury Regulations Section
1.1502-13 or 1.1502-19 by reason of the Distribution may be reduced or
eliminated as a result of one or more restructuring transactions consummated
prior to the Distribution, then the parties shall negotiate in good faith to
reach agreement regarding such restructuring transaction. Notwithstanding
anything in the preceding sentence, AT&T shall be permitted to effect, at its
own expense, any restructuring transaction under this paragraph; provided that
(i) Comcast shall be afforded reasonable notice and opportunity to comment upon
plans to effect any such transaction, and (ii) such transaction shall not result
in the failure of any AT&T Broadband Asset that was intended under this
Agreement to be transferred to or held by any member of the AT&T Broadband Group
to be so transferred or held, unless (A) such asset consists of the capital
stock or other ownership interest in an AT&T Broadband Subsidiary the assets of
which will be transferred, on or prior to the Distribution Date, to another
member of the AT&T Broadband Group or (B) Comcast consents to such transaction,
such consent not to be unreasonably withheld; provided, further, that AT&T shall
indemnify Comcast for any increased Tax liability or other costs to Comcast or
any AT&T Broadband Entity resulting from such transactions. Comcast agrees to
reasonably cooperate with AT&T in connection with transactions described in this
paragraph (h).
SECTION 2.02. Disclaimer of Representations and Warranties. EXCEPT AS MAY
EXPRESSLY BE SET FORTH HEREIN, IN ANY OTHER ANCILLARY AGREEMENT OR REAL PROPERTY
INSTRUMENT OR IN THE MERGER AGREEMENT, (A) NONE OF AT&T, AT&T BROADBAND OR ANY
OTHER PERSON MAKES ANY REPRESENTATION OR WARRANTY OF ANY KIND WHATSOEVER,
EXPRESS OR IMPLIED, WITH RESPECT TO ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY
(INCLUDING ANY CONSENTS OR APPROVALS REQUIRED IN CONNECTION THEREWITH) OR THE
BUSINESS, ASSETS, CONDITION OR PROSPECTS (FINANCIAL OR OTHERWISE) OF, OR ANY
OTHER MATTER INVOLVING, THE ASSETS, BUSINESSES OR LIABILITIES OF AT&T, AT&T
BROADBAND, THE AT&T COMMUNICATIONS GROUP OR THE AT&T BROADBAND GROUP; (B) ALL OF
THE ASSETS TO BE RETAINED OR TRANSFERRED OR THE
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LIABILITIES TO BE RETAINED, ASSUMED OR TRANSFERRED IN ACCORDANCE WITH THIS
AGREEMENT SHALL BE TRANSFERRED OR ASSUMED ON AN "AS IS, WHERE IS BASIS," AND ALL
IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A SPECIFIC PURPOSE OR
OTHERWISE ARE HEREBY EXPRESSLY DISCLAIMED, AND (C) NONE OF AT&T, AT&T BROADBAND
OR ANY OTHER PERSON MAKES ANY REPRESENTATION OR WARRANTY WITH RESPECT TO ANY
INFORMATION, DOCUMENTS OR MATERIAL MADE AVAILABLE IN CONNECTION WITH THE
SEPARATION, THE DISTRIBUTION OR THE MERGER OR THE ENTERING INTO OF THIS
AGREEMENT OR THE MERGER AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY AND
THEREBY. EACH PARTY HERETO AGREES AND ACKNOWLEDGES THAT THE REPRESENTATIONS AND
WARRANTIES IN THE MERGER AGREEMENT SHALL NOT SURVIVE THE EFFECTIVE TIME. AT&T
UNDERSTANDS AND AGREES THAT NO AT&T BROADBAND ENTITY SHALL HAVE ANY LIABILITY TO
AT&T OR ANY OTHER PERSON FOR MONETARY DAMAGES FOR ANY BREACH BY SUCH AT&T
BROADBAND ENTITY PRIOR TO THE EFFECTIVE TIME OF THIS AGREEMENT OR ANY OTHER
ANCILLARY AGREEMENT OR REAL PROPERTY INSTRUMENT.
SECTION 2.03. Other Ancillary Agreements. On or prior to the Distribution
Date, each of AT&T and AT&T Broadband will execute and deliver or cause to be
executed and delivered all Ancillary Agreements to which it or any of its
Subsidiaries is a party. At the request of Comcast or AT&T, on or prior to the
Distribution Date, AT&T and AT&T Broadband will execute and deliver the Interim
Services and Systems Replication Agreement, in the form attached hereto as
Exhibit E. Pursuant to the terms of such agreement, AT&T or AT&T Broadband, as
the case may be, will provide to AT&T Broadband or AT&T, as the case may be,
such mutually agreed services as may be set forth on the schedules to such
Agreement, such schedules to be on terms mutually agreed between Comcast and
AT&T. If AT&T and AT&T Broadband enter into such agreement, such agreement will
be considered an Ancillary Agreement. Except to the extent set forth therein,
Article 11 of this Agreement shall apply to any Ancillary Agreement (other than
the Tax Sharing Agreement).
SECTION 2.04. Termination of Agreements. (a) Except as set forth in Section
2.04(b), as of the Distribution Date, AT&T and each member of the AT&T
Communications Group, on the one hand, and AT&T Broadband and each member of the
AT&T Broadband Group, on the other hand, shall terminate any and all agreements,
arrangements, commitments or understandings, whether or not in writing, between
or among AT&T and/or any member of the AT&T Communications Group, on the one
hand, and AT&T Broadband and/or any member of the AT&T Broadband Group, on the
other hand, effective as of the Distribution Date. No such terminated agreement,
arrangement, commitment or understanding (including any provision thereof that
purports to survive termination) shall be of any further force or effect after
the Distribution Date. Each party shall, at the reasonable request of any other
party, take, or cause to be taken, such other actions as may be necessary to
effect the foregoing.
(b) The provisions of Section 2.04(a) shall not apply to any of the
following agreements, arrangements, commitments or understandings (or to any of
the provisions thereof):
(i) this Agreement and the other Ancillary Agreements (and each other
agreement or instrument expressly contemplated by this Agreement or any
other Ancillary Agreement to be entered into by any of the parties hereto
or any of the members of their respective Groups);
(ii) any agreements, arrangements, commitments or understandings
listed or described on Schedule 2.04(b)(ii)(A); provided that the
agreements set forth in Schedule 2.04(b)(ii)(B) shall be amended on the
Distribution Date as set forth on such Schedule;
(iii) any agreements, arrangements, commitments or understandings
listed or described on Schedule 2.04(b)(iii) to which any Person other than
the parties hereto and their respective wholly owned Affiliates is a party
(it being understood that to the extent that the rights and obligations of
the parties and the members of their respective Groups under any such
agreements, arrangements,
B-18
commitments or understandings constitute AT&T Broadband Assets or AT&T
Broadband Liabilities, they shall be assigned pursuant to Section 2.01);
(iv) any intercompany accounts payable or accounts receivable arising
in the ordinary course of business and accrued as of the Distribution Date
that are reflected in the books and records of the parties or otherwise
documented in writing in accordance with past practices (regardless of
whether such intercompany accounts payable or accounts receivable accrued
under an agreement, arrangement, commitment or understanding that
terminated pursuant to Section 2.04(a)); provided that, subject to Section
3.02, AT&T or AT&T Broadband, as the case may be, will pay or cause to be
paid such intercompany accounts payable promptly when due;
(v) except as otherwise provided in the Tax Sharing Agreement, any
written Tax sharing or Tax allocation agreements to which any member of any
Group is a party;
(vi) any agreements, arrangements, commitments or understandings
listed or described on Schedule 2.04(b)(vi) to which any non-wholly owned
Subsidiary or Affiliate of AT&T or AT&T Broadband, as the case may be, is a
party (it being understood that directors' qualifying shares or similar
interests will be disregarded for purposes of determining whether a
Subsidiary is wholly owned);
(vii) any agreements, arrangements, commitments or understandings that
(A) either any Ancillary Agreement or any other agreement, arrangement,
commitment or understanding that pursuant to the terms of this Section is
not to be terminated as of the Distribution Date contemplates will be
entered into or made on or after the date hereof or (B) are otherwise
necessary to implement the transactions contemplated by any of the
foregoing clauses or that implement term sheets contemplated by any of the
foregoing clauses on terms not materially less advantageous to any member
of the AT&T Broadband Group; provided that each of the agreements,
arrangements, commitments or understandings referred in this clause (vii)
must be in form and substance reasonably satisfactory to Comcast; and
(viii) any other agreements, arrangements, commitments or
understandings that this Agreement or any other Ancillary Agreement
expressly contemplates will survive the Distribution Date.
SECTION 2.05. Documents Relating to Transfer of Real Property Interests
and Tangible Property Located Thereon. (a) To the extent necessary, in
furtherance of the assignment, transfer and conveyance of AT&T Communications
Real Property and the assumption of the related AT&T Communications Liabilities
pursuant to Section 2.01(a) and 2.01(b), on or prior to the Distribution Date
each of AT&T and AT&T Broadband, or their applicable Subsidiaries, will execute
and deliver such deeds, lease assignments and assumptions, leases, subleases and
sub-subleases as may be necessary to effect the transactions contemplated by
this Agreement, including this Section 2.05 (collectively, the "REAL PROPERTY
INSTRUMENTS"). Real Property Instruments will be on mutually acceptable terms.
(b) Except as otherwise expressly provided in this Agreement or any other
Ancillary Agreement and except for AT&T Broadband Assets, all leasehold
improvements, fixtures, furniture, office equipment, servers, private branch
exchanges, artwork and other tangible property (other than equipment subject to
capital or operating equipment leases, which will be transferred or retained
based on whether the associated capital or operating equipment lease is or is
not an AT&T Broadband Contract or as otherwise provided herein) located as of
the date hereof on any AT&T Communications Real Property shall be transferred to
a member of the AT&T Communications Group.
(c) Schedule 2.05(c) sets forth a list of AT&T Communications Real Property
currently used in connection with both the AT&T Communications Business and the
AT&T Broadband Business and that following the Distribution Date will be leased
or subleased by members of the AT&T Communications Group to members of the AT&T
Broadband Group, on terms and for the transition period reflected in Schedule
2.05(c).
B-19
(d) Schedule 2.05(d) sets forth a list of AT&T Broadband Real Property
currently used in connection with both the AT&T Communications Business and the
AT&T Broadband Business and that following the Distribution Date will be leased
or subleased by AT&T Broadband or any of the AT&T Broadband Entities to members
of the AT&T Communications Group, on terms and for the transition period
reflected in Schedule 2.05(d).
SECTION 2.06. Documents Relating to Other Transfers of Assets and
Assumption of Liabilities. In furtherance of the assignment, transfer and
conveyance of AT&T Broadband Assets and the assumption of AT&T Broadband
Liabilities pursuant to Sections 2.01(a) and 2.01(b), on or prior to the
Distribution Date, (a) AT&T shall execute and deliver, and shall cause its
Subsidiaries to execute and deliver, such bills of sale, stock powers,
certificates of title, assignments of contracts and other instruments of
transfer, conveyance and assignment as and to the extent necessary to evidence
the transfer, conveyance and assignment of all of AT&T's and its Subsidiaries'
right, title and interest in and to the AT&T Broadband Assets to AT&T Broadband
and (b) AT&T Broadband shall execute and deliver, to AT&T and its respective
Subsidiaries such bills of sale, stock powers, certificates of title,
assumptions of contracts and other instruments of assumption, as and to the
extent necessary to evidence the valid and effective assumption by AT&T
Broadband of the AT&T Broadband Liabilities that are not already Liabilities of
an AT&T Broadband Entity; provided that any instruments executed and delivered
pursuant to this Section 2.06 shall be in form and substance reasonably
satisfactory to Comcast.
SECTION 2.07. Governmental Approvals and Consents. (a) If and to the
extent that the valid, complete and perfected transfer or assignment to AT&T
Broadband of any AT&T Broadband Assets (or from the AT&T Broadband Group of any
AT&T Communications Assets held by any member of such Group) would be a
violation of applicable laws or require any Consent or Governmental Approval in
connection with the Separation or the Distribution, then the transfer or
assignment to or from the AT&T Communications Group, as the case may be, of such
AT&T Broadband Assets or AT&T Communications Assets, respectively, shall be
automatically deemed deferred and any such purported transfer or assignment
shall be null and void until such time as all legal impediments are removed
and/or such Consents or Governmental Approvals have been obtained.
Notwithstanding the foregoing, any such Transferred Asset shall be deemed an
Asset of the transferee AT&T Communications Group or the AT&T Broadband Group,
as applicable, for purposes of determining whether any Liability is a Liability
of the AT&T Communications Group or the AT&T Broadband Group.
(b) If the transfer or assignment of any Asset intended to be transferred
or assigned hereunder is not consummated prior to or at the Distribution Date,
whether as a result of the provisions of Section 2.07(a) or for any other
reason, then the Person retaining such Asset shall thereafter hold such Asset
for the use and benefit, insofar as reasonably possible, of the Person entitled
thereto (at the expense of the Person entitled thereto). In addition, the Person
retaining such Asset shall take such other actions as may be reasonably
requested by the Person to whom such Asset is to be transferred in order to
place such Person, insofar as reasonably possible, in the same position as if
such Asset had been transferred as contemplated hereby and so that all the
benefits and burdens relating to such AT&T Broadband Asset (or such AT&T
Communications Asset, as the case may be), including possession, use, risk of
loss, potential for gain, and dominion, control and command over such Asset, are
to inure from and after the Distribution Date to the AT&T Broadband Group (or
the AT&T Communications Group, as the case may be). To the extent permitted by
law and to the extent otherwise permissible in light of any required Consent
and/or Governmental Approval, the AT&T Broadband Group shall be entitled to, and
shall be responsible for, the management of any AT&T Broadband Asset not yet
transferred to it as a result of this Section 2.07(b) and the parties agree to
use reasonable commercial efforts to cooperate and coordinate with respect
thereto.
(c) If and when the Consents and/or Governmental Approvals, the absence of
which caused the deferral of transfer of any Asset pursuant to Section 2.07(a),
are obtained, the transfer of the applicable Asset shall be effected in
accordance with the terms of this Agreement and/or the other applicable
Ancillary Agreement.
B-20
(d) The Person retaining an Asset due to the deferral of the transfer of
such Asset shall not be obligated, in connection with the foregoing, to expend
any money unless the necessary funds are advanced by the Person entitled to the
Asset, other than reasonable out-of-pocket expenses, attorneys' fees and
recording or similar fees, all of which shall be promptly reimbursed by the
Person entitled to such Asset.
SECTION 2.08. Novation of AT&T Broadband Liabilities. (a) Each of AT&T
and AT&T Broadband, at the reasonable written request of the other, shall use
its reasonable commercial efforts to obtain, or to cause to be obtained, any
release, consent, substitution, approval or amendment required to novate and
assign all obligations under agreements, leases, licenses and other obligations
or Liabilities of any nature whatsoever that constitute AT&T Broadband
Liabilities, or to obtain in writing the unconditional release of all parties to
such arrangements other than any member of the AT&T Broadband Group, so that, in
any such case, the members of the AT&T Broadband Group will be solely
responsible for such Liabilities; provided, however, that none of AT&T, AT&T
Broadband or any of their respective Subsidiaries shall be obligated to pay any
consideration or surrender, release or modify any rights or remedies therefor to
any third party from whom such releases, consents, approvals, substitutions and
amendments are requested except as specifically set forth in the Merger
Agreement or elsewhere in this Agreement.
(b) If AT&T or AT&T Broadband is unable to obtain, or to cause to be
obtained, any such required release, consent, substitution, approval or
amendment, the applicable member of the AT&T Communications Group shall continue
to be bound by such agreements, leases, licenses and other obligations and,
unless not permitted by law or the terms thereof, AT&T Broadband shall, as agent
or subcontractor for such member of the AT&T Communications Group, pay, perform
and discharge fully all the obligations or other Liabilities of such member of
the AT&T Communications Group thereunder from and after the date hereof. AT&T
Broadband shall indemnify each AT&T Indemnitee and hold it harmless against any
Liabilities arising in connection therewith. AT&T shall cause each member of the
AT&T Communications Group, without further consideration, to pay and remit, or
cause to be paid or remitted, to AT&T Broadband or the applicable member of the
AT&T Broadband Group promptly all money, rights and other consideration received
by it or any member of the AT&T Communications Group in respect of such
performance. If and when any such release, consent, substitution, approval or
amendment shall be obtained or such agreement, lease, license or other rights or
obligations shall otherwise become assignable or able to be novated, AT&T shall
promptly assign, or cause to be assigned, all its rights, obligations and other
Liabilities thereunder or any rights, obligations or other Liabilities of any
member of the AT&T Communications Group to AT&T Broadband or to another member
of the AT&T Broadband Group without payment of further consideration and AT&T
Broadband, without the payment of any further consideration, shall, or shall
cause such other member of the AT&T Broadband Group to, assume such rights and
obligations. Notwithstanding the foregoing, unless AT&T shall so elect, AT&T
Broadband shall assume all Liabilities of any nature whatsoever that would
constitute AT&T Broadband Liabilities as of the Distribution Date, except for
Liabilities of another member of the AT&T Broadband Group.
SECTION 2.09. Novation of AT&T Communications Liabilities. (a) Each of
AT&T and AT&T Broadband, at the reasonable written request of the other, shall
use its reasonable commercial efforts to obtain, or to cause to be obtained, any
release, consent, substitution, approval or amendment required to novate and
assign all obligations under agreements, leases, licenses and other obligations
or Liabilities of any nature whatsoever that constitute AT&T Communications
Liabilities, or to obtain in writing the unconditional release of all parties to
such arrangements other than any member of the AT&T Communications Group, so
that, in any such case, the members of the AT&T Communications Group will be
solely responsible for such Liabilities; provided, however, that none of AT&T,
AT&T Broadband or any of their respective Subsidiaries shall be obligated to pay
any consideration or surrender, release or modify any rights or remedies
therefor to any third party from whom such releases, consents, approvals,
substitutions and amendments are requested except as specifically set forth in
the Merger Agreement or elsewhere in this Agreement.
(b) If AT&T or AT&T Broadband is unable to obtain, or to cause to be
obtained, any such required release, consent, approval, substitution or
amendment, the applicable member of the AT&T Broadband
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Group shall continue to be bound by such agreements, leases, licenses and other
obligations and, unless not permitted by law or the terms thereof, AT&T shall,
as agent or subcontractor for such member of the AT&T Broadband Group, pay,
perform and discharge fully all the obligations or other Liabilities of such
member of the AT&T Broadband Group thereunder from and after the date hereof.
AT&T shall indemnify each AT&T Broadband Indemnitee and hold each of them
harmless against any Liabilities arising in connection therewith. AT&T Broadband
shall cause each member of the AT&T Broadband Group, without further
consideration, to pay and remit, or cause to be paid or remitted, to AT&T or the
applicable member of the AT&T Communications Group promptly all money, rights
and other consideration received by it or any member of the AT&T Broadband Group
in respect of such performance. If and when any such release, consent,
substitution approval or amendment shall be obtained or such agreement, lease,
license or other rights or obligations shall otherwise become assignable or able
to be novated, AT&T Broadband shall promptly assign, or cause to be assigned,
all its rights, obligations and other Liabilities thereunder or any rights,
obligations or other Liabilities of any member of the AT&T Broadband Group to
AT&T or to another member of the AT&T Communications Group without payment of
further consideration and AT&T, without the payment of any further
consideration, shall, or shall cause such other member of the AT&T
Communications Group to, assume such rights and obligations. Notwithstanding the
foregoing, unless AT&T Broadband shall so elect, AT&T shall assume all
Liabilities of any nature whatsoever that would constitute AT&T Communications
Liabilities as of the Distribution Date, except for Liabilities of another
member of the AT&T Communications Group.
SECTION 2.10. Joint Purchasing Arrangements. (a) In the case of existing
purchasing agreements that prior to the Distribution Date provide the AT&T
Broadband Group and the AT&T Communications Group with volume discounts, subject
to applicable law, the parties agree to use their respective reasonable best
efforts so that, to the extent permitted under the terms of such existing
agreements, after the Distribution Date, each Group shall continue to be able to
make purchases and obtain the benefits of the volume discounts. In the case of
any other such contracts, subject to applicable law, the parties will cooperate
reasonably in seeking modifications to such contracts or alternative or
substitute arrangements so that, to the extent practicable after the
Distribution Date, each Group shall continue to be able to make purchases and
obtain the benefits of the volume discounts. Notwithstanding the foregoing, but
subject to the terms of any AT&T Broadband Contract or AT&T Communications
Contract, none of AT&T, AT&T Broadband or their respective Subsidiaries shall be
required to commit to any additional purchases or other obligations, make any
payments or waive any rights in order to effect the foregoing. Each party hereby
agrees to indemnify and hold harmless the other party, and if applicable, the
other party's Subsidiaries, with respect to any losses or claims arising from
such first party's, or such first party's Subsidiaries', own purchases,
commitments or other obligations under any such contracts.
(b) Until December 31, 2003, subject to applicable law, the parties will
use reasonable commercial efforts to cooperate with each other and, as
applicable, with each other's Subsidiaries, to coordinate and combine their
purchases in cases where they purchase common supplies or use the same supplier,
in each case to the extent permitted by law from time to time. It is the intent
of the parties that this coordination and cooperation will be focused on
achieving more favorable pricing and terms for such supplies and from such
suppliers by aggregating the combined purchases of the parties and their
Subsidiaries. Notwithstanding the foregoing, no party shall be obligated to
make, or cause its Subsidiaries to make, any specific purchases or to use any
specific supplier except to the extent (i) it or one of its Subsidiaries has
previously committed to make a specific purchase or to use a specific supplier,
or (ii) subsequent to the date of this Agreement, it or one of its Subsidiaries
makes a commitment for a specific purchase or to use a specific supplier. Each
party will be responsible for its own and its Subsidiaries' commitments and its
own and its Subsidiaries' purchases and other obligations made under any common
or shared contracts with suppliers and will, in respect of such commitments,
purchases or other obligations, indemnify and hold harmless the other party and
the other party's Subsidiaries that use such contracts.
SECTION 2.11. TWE Arrangements. The parties agree to the terms set forth
in Annex I with respect to the partnership interests in TWE held, as of the date
hereof, by MediaOne TWE Holdings, Inc., an AT&T Broadband Entity, and the TWE
Option held by Media One of Colorado, Inc.
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ARTICLE 3
FINANCIAL RESTRUCTURING
SECTION 3.01. Liability Management. The Indebtedness included on the AT&T
Broadband Balance Sheet consists of the Indebtedness to third parties (the
"SCHEDULED DEBT") and Indebtedness to members of the AT&T Communications Group.
Prior to the Distribution Date, the Indebtedness of the AT&T Broadband Group
shall consist only of (i) the Scheduled Debt, Indebtedness to third parties
reflected on the September 30, 2001 balance sheet included in the AT&T Broadband
Financial Statements and the third party Indebtedness identified in Item 3 of
Schedule 6.11 to the Merger Agreement (unless any such Indebtedness shall have
been discharged) (ii) Indebtedness of the members of the AT&T Broadband Group to
members of the AT&T Communications Group and (iii) such other debt as shall have
been approved by the Interim Finance Committee. On the Distribution Date, the
AT&T Broadband Entities may incur additional Indebtedness to parties (other than
to members of the AT&T Communications Group) in an amount sufficient to (i) pay
in full at the Effective Time to AT&T an amount equal to the Indebtedness owed
by any member of the AT&T Broadband Group to any member of the AT&T
Communications Group, (ii) refinance the TOPRS that may be called for redemption
at the Effective Time or shortly thereafter and (iii) provide appropriate cash
reserves to fund the operations of the AT&T Broadband Entities after the
Effective Time. Such Indebtedness shall be incurred in accordance with Section
9.15 of the Merger Agreement.
SECTION 3.02. Repayment of Intracompany Indebtedness. AT&T Broadband
agrees that it will pay to AT&T, at the Effective Time and in connection with
the transfer of assets and liabilities hereunder to AT&T Broadband, an amount of
cash equal to the total Indebtedness of all members of the AT&T Broadband Group
to any member of the AT&T Communications Group, and AT&T agrees to contribute
(or cause its subsidiaries to contribute) such Indebtedness to the capital of
AT&T Broadband. AT&T agrees that it will repay or cause to repaid at the
Effective Time any Indebtedness of any member of the AT&T Communications Group
to any member of the AT&T Broadband Group. AT&T also agrees that it will repay
or cause to be repaid at the Effective Time any intercompany receivables owed by
AT&T or any AT&T Subsidiary (other than any AT&T Broadband Entity) to Western
Ridge.
SECTION 3.03. Note Consents. Subject to the terms and conditions of the
Merger Agreement, AT&T and AT&T Broadband shall each use its reasonable best
efforts to obtain the irrevocable consent to the transactions contemplated
hereby of the holders of at least a majority in aggregate principal amount of
each series of securities at the time outstanding issued under the Indenture,
dated as of September 7, 1990, between American Telephone & Telegraph Company
and The Bank of New York, as trustee.
ARTICLE 4
THE DISTRIBUTION
SECTION 4.01. The Distribution. (a) Subject to Section 4.03, on or prior
to the Record Date, AT&T will deliver to the Agent for the benefit of holders of
record of AT&T Common Stock on the Record Date, a single stock certificate,
endorsed by AT&T in blank, representing the shares of AT&T Broadband Common
Stock issuable in the Distribution (which, together with the shares to be issued
pursuant to the Exchange Agreement, shall constitute all of the shares of AT&T
Broadband Common Stock outstanding as of the Distribution Date), and shall cause
the transfer agent for the shares of AT&T Common Stock to instruct the Agent to
hold in trust (pending conversion of such shares of AT&T Broadband Common Stock
into shares of Parent Common Stock pursuant to the AT&T Broadband Merger) the
appropriate number of such shares of AT&T Broadband Common Stock (as set forth
in Section 4.01(b)) for each such holder or designated transferee or transferees
of such holder. For avoidance of doubt, AT&T will not be considered a holder of
record of AT&T Common Stock as of the Record Date with respect to any shares of
AT&T Common Stock held in its treasury.
(b) Subject to Section 4.03, each holder of AT&T Common Stock on the Record
Date (or such holder's designated transferee or transferees) will be entitled to
receive in the Distribution a number of
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shares of AT&T Broadband Common Stock equal to the number of shares of AT&T
Common Stock held by such holder on the Record Date; provided, that no holder of
AT&T Common Stock having purported to exercise rights pursuant to Section 910 of
the NYBCL in respect of such holder's shares of AT&T Common Stock shall be
entitled to receive AT&T Broadband Common Stock in the Distribution.
(c) AT&T Broadband and AT&T, as the case may be, will provide to the Agent
all share certificates and any information reasonably required in order to
complete the Distribution on the basis specified above.
(d) Immediately prior to the Record Date, each of the AT&T Broadband
Subsidiaries, in exchange (the "SUBSIDIARY PREFERRED STOCK EXCHANGE") for all of
the shares of AT&T Subsidiary Preferred Stock held by such AT&T Broadband
Subsidiary immediately prior to the Subsidiary Preferred Stock Exchange, will
receive from AT&T a number of shares of AT&T Broadband Common Stock (or, if AT&T
and AT&T Broadband agree, shares of another class of AT&T Broadband Stock) that
has a value equal to the value of the shares of AT&T Subsidiary Preferred Stock
so exchanged.
(e) At the time of the Distribution, AT&T and AT&T Broadband will comply
with their obligations under the Exchange Agreement, including through the
transfer of shares of AT&T Broadband Common Stock from AT&T to Microsoft as
described therein.
(f) If the QUIPS Transfer is to occur, AT&T Broadband and AT&T will effect
the QUIPS Transfer.
(g) Each of AT&T, and AT&T Broadband agrees that in the event that any
holder of shares of AT&T Common Stock purports to exercise any appraisal rights
pursuant to Section 910 of the NYBCL, the parties will cooperate to
appropriately adjust the provisions hereof.
SECTION 4.02. Actions Prior to the Distribution. (a) As promptly as
reasonably practicable after the execution of this Agreement, subject to the
provisions of the Merger Agreement, AT&T shall prepare and file with the
Commission a proxy statement (the "PROXY STATEMENT") to be sent to shareholders
of AT&T in connection with their meeting to consider the Distribution (the "AT&T
MEETING"), it being understood that the AT&T Meeting may be combined with any
other meeting of shareholders regarding a possible business combination
involving the AT&T Broadband Group.
(b) As promptly as reasonably practicable after the execution of this
Agreement, subject to the provisions of the Merger Agreement and if required by
applicable law to effect the Distribution, AT&T and AT&T Broadband shall
prepare, and AT&T Broadband shall file with the Commission a registration
statement on Form S-1 or S-4 or any amendment or supplement thereto pursuant to
which shares of AT&T Broadband issuable in the Distribution will be registered
with the Commission (the "DISTRIBUTION REGISTRATION STATEMENT"). If the
Distribution Registration Statement is required by applicable law to be filed
with the Commission to effect the Distribution, AT&T and AT&T Broadband shall
use their reasonable best efforts to cause the Distribution Registration
Statement to become effective under the Exchange Act as soon after such filing
as reasonably practicable and to keep the Distribution Registration Statement
effective as long as is necessary to consummate the Distribution.
(c) AT&T and AT&T Broadband shall take all such actions as are reasonably
necessary or appropriate under the federal or state securities or blue sky laws
of the United States (and any comparable laws under any foreign jurisdiction) in
connection with the Distribution.
SECTION 4.03. Timing of the Distribution. AT&T shall consummate the
Separation and Distribution as soon as practicable (and, in any event, within
five Business Days) after satisfaction (or waiver to the extent permissible) of
all of the conditions to the Separation and the Distribution specified below
(other than conditions that by their nature are to be satisfied at the time of
the Distribution or the Mergers and will in fact be satisfied at such time). The
Separation shall occur on the Distribution Date prior to the Distribution which
shall occur at a time to be mutually agreed on the Distribution Date. With the
consent of Comcast, which consent shall not be unreasonably withheld, AT&T may
effect the Separation and/or the Distribution on different dates or different
times than provided for in the preceding sentence. The obligation of AT&T to
consummate the Separation and the Distribution and the other
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transactions contemplated by this Agreement is subject to the satisfaction (or
waiver to the extent permissible) of the following conditions:
(a) If required by applicable law to effect the Distribution, the
Distribution Registration Statement shall have been filed and declared
effective by the Commission, and there shall be no stop-order in effect
with respect thereto;
(b) The actions and filings with regard to material federal or state
securities and blue sky laws of the United States (and any comparable laws
under any foreign jurisdictions) described in Section 4.02(c) shall have
been taken and, where applicable, become effective or been accepted;
(c) Any Governmental Approvals and Consents including those listed on
Schedule 4.03(c) necessary to consummate the Distribution in the manner
contemplated by this Agreement shall have been obtained and be in full
force and effect, except for such Governmental Approvals and Consents the
failure of which to obtain would not, individually or in the aggregate,
reasonably be expected to have an AT&T Broadband Material Adverse Effect or
an AT&T Material Adverse Effect;
(d) All conditions to permit the Distribution to qualify as a tax-free
distribution to AT&T, AT&T Broadband and shareholders of AT&T shall, to the
extent applicable as of the time of the Distribution, be satisfied and
there shall be no event or condition that is likely to cause any of such
conditions not to be satisfied as of the time of the Distribution or
thereafter;
(e) No order, injunction or decree issued by any court or agency of
competent jurisdiction or other material legal restraint or prohibition
preventing the consummation of the Separation or the Distribution or any of
the other transactions contemplated by this Agreement or any other
Ancillary Agreement shall be in effect and the Separation and Distribution
shall be in compliance in all material respects with applicable law;
(f) This Agreement shall not have been terminated;
(g) The supplemental private letter ruling or rulings from the IRS or
the opinion described in Section 10.01(j) of the Merger Agreement shall
have been obtained and shall continue in effect;
(h) The Distribution shall have been approved by the affirmative vote
of shareholders holding a majority of the voting power of the issued and
outstanding shares of AT&T Common Stock at the AT&T Meeting; and
(i) The conditions specified in Sections 10.01 and 10.02 (other than
Section 10.01(i)) of the Merger Agreement shall have been satisfied (or
waived to the extent permissible).
The foregoing conditions are for the sole benefit of AT&T and shall not give
rise to or create any duty on the part of AT&T or the Board of Directors of AT&T
to waive or not waive any such condition.
ARTICLE 5
MUTUAL RELEASES; INDEMNIFICATION
SECTION 5.01. Release of Pre-Closing Claims. (a) Except as provided in
Section 5.01(c), effective as of the Distribution Date, AT&T shall, for itself
and each other wholly owned member of the AT&T Communications Group (other than
any member of the AT&T Broadband Group) and their respective successors and
assigns, and all shareholders, directors, officers, members, agents or employees
of any wholly owned member of the AT&T Communications Group (in each case, in
their respective capacities as such), remise, release and forever discharge each
of AT&T Broadband and the respective wholly owned members of the AT&T Broadband
Group (other than any member of the AT&T Communications Group), their respective
successors and assigns, and all shareholders, directors, officers, members,
agents or employees of any wholly owned member of the AT&T Broadband Group (in
each case, in their respective capacities as such), and their respective heirs,
executors, administrators, successors and assigns, from any and all Liabilities
whatsoever, whether at law or in equity (including any right of contribution),
whether
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arising under any contract or agreement, by operation of law or otherwise,
existing or arising from any acts or events occurring or failing to occur or
alleged to have occurred or to have failed to occur or any conditions existing
or alleged to have existed on or before the Distribution Date, whether or not
known as of the Distribution Date, including in connection with the transactions
and all other activities to implement either the Separation or the Distribution.
(b) Except as provided in Section 5.01(c), effective as of the Distribution
Date, AT&T Broadband shall, for itself and each other wholly owned member of the
AT&T Broadband Group (other than any member of the AT&T Communications Group)
and their respective successors and assigns, and all shareholders, directors,
officers, members, agents or employees of any wholly owned member of the AT&T
Broadband Group (in each case, in their respective capacities as such), remise,
release and forever discharge each of AT&T and the respective wholly owned
members of the AT&T Communications Group (other than any member of the AT&T
Broadband Group), their respective successors and assigns, and all shareholders,
directors, officers, members, agents or employees of any wholly owned member of
the AT&T Communications Group (in each case, in their respective capacities as
such), and their respective heirs, executors, administrators, successors and
assigns, from any and all Liabilities whatsoever, whether at law or in equity
(including any right of contribution), whether arising under any contract or
agreement, by operation of law or otherwise, existing or arising from any acts
or events occurring or failing to occur or alleged to have occurred or to have
failed to occur or any conditions existing or alleged to have existed on or
before the Distribution Date, whether or not known as of the Distribution Date,
including in connection with the transactions and all other activities to
implement either the Separation or the Distribution.
(c) Nothing contained in Section 5.01(a) or 5.01(b) shall impair any right
of any Person to enforce this Agreement, any other Ancillary Agreement or any
agreements, arrangements, commitments or understandings that are specified in
Section 2.04(b) or the applicable Schedules thereto not to terminate as of the
Distribution Date, in each case in accordance with its terms. Nothing contained
in Section 5.01(a) or 5.01(b) shall release any Person from:
(i) any Liability provided in or resulting from any agreement among
any members of the AT&T Broadband Group or the AT&T Communications Group
that is specified in Section 2.04(b) or the applicable Schedules thereto as
not to terminate as of the Distribution Date, or any other Liability
specified in such Section 2.04(b) as not to terminate as of the
Distribution Date;
(ii) any Liability, contingent or otherwise, assumed, transferred,
assigned or allocated to the Group of which such Person is a member in
accordance with, or any other Liability of any member of any Group under,
this Agreement or any other Ancillary Agreement;
(iii) any Liability arising from or relating to the sale, lease,
construction, provision, or receipt of goods, property or services
purchased, obtained or used in the ordinary course of business by a member
of one Group from a member of any other Group prior to the Distribution
Date;
(iv) any Liability for payment for goods, services or property
purchased, obtained or used in the ordinary course of business by a member
of one Group from a member of any other Group prior to the Distribution
Date or any related refund claims; or
(v) any Liability the release of which would result in the release of
any Person other than a Person released pursuant to this Section 5.01;
provided that the parties agree not to bring suit or permit any of their
Subsidiaries to bring suit against any Person with respect to any Liability
to the extent that such Person would be released with respect to such
Liability by this Section 5.01 but for the provisions of this clause (v).
(d) AT&T shall not make, and shall not permit any member of the AT&T
Communications Group to make, any claim or demand, or commence any Action
asserting any claim or demand, including any claim of contribution or any
indemnification, against AT&T Broadband or any wholly owned member of the AT&T
Broadband Group, or any other Person released pursuant to Section 5.01(a), with
respect to any Liabilities released in respect of such Person pursuant to
Section 5.01(a). AT&T Broadband shall not make, and shall not permit any member
of the AT&T Broadband Group to make, any claim or demand,
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or commence any Action asserting any claim or demand, including any claim of
contribution or any indemnification, against AT&T or any wholly owned member of
the AT&T Communications Group, or any other Person released pursuant to Section
5.01(b), with respect to any Liabilities in respect of such Person released
pursuant to Section 5.01(b).
(e) At any time, at the request of any other party, each party shall cause
each member of its respective Group to execute and deliver releases reflecting
the provisions of this Section 5.01.
SECTION 5.02. Indemnification by AT&T. Except as provided in Section
5.04, following the Distribution Date, AT&T shall indemnify, defend and hold
harmless AT&T Broadband, each member of the AT&T Broadband Group and each of
their respective directors, officers and employees, and each of the heirs,
executors, successors and assigns of any of the foregoing (collectively, the
"AT&T BROADBAND INDEMNITEES"), from and against any and all Liabilities (or in
the case of subsection (d), 50% of any and all Liabilities) of the AT&T
Broadband Indemnitees relating to, arising out of or resulting from any of the
following items (without duplication):
(a) the failure of AT&T or any other member of the AT&T Communications
Group or any other Person to pay, perform or otherwise promptly discharge
any AT&T Communications Liabilities, or AT&T Communications Contract, in
accordance with their respective terms, whether prior to or after the
Distribution Date or the date hereof;
(b) the AT&T Communications Business, any AT&T Communications Asset or
any AT&T Communications Contract (except to the extent such Liabilities
arise out of any breach by AT&T or any of its Subsidiaries prior to the
Distribution Date of any AT&T Communications Contract entered into in
connection with the separation, divestiture or termination of LMC and its
Subsidiaries);
(c) any breach by AT&T or any member of the AT&T Communications Group
of this Agreement or any of the other Ancillary Agreements; and
(d) any untrue statement or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading, with respect to all information contained in any Registration
Statement (any Action relating to the matters set forth in this Section
5.02(d) or Section 5.03(d), a "REGISTRATION STATEMENT CLAIM").
SECTION 5.03. Indemnification by AT&T Broadband. Except as provided in
Section 5.04, following the Distribution Date, AT&T Broadband shall indemnify,
defend and hold harmless AT&T, each member of the AT&T Communications Group and
each of their respective directors, officers and employees, and each of the
heirs, executors, successors and assigns of any of the foregoing (collectively,
the "AT&T INDEMNITEES"), from and against any and all Liabilities (or in the
case of subsection (d), 50% of any and all Liabilities) of the AT&T Indemnitees
relating to, arising out of or resulting from any of the following items
(without duplication):
(a) the failure of AT&T Broadband or any other member of the AT&T
Broadband Group or any other Person to pay, perform or otherwise promptly
discharge any AT&T Broadband Liabilities, or AT&T Broadband Contract, in
accordance with their respective terms, whether prior to or after the
Distribution Date or the date hereof;
(b) the AT&T Broadband Business, any AT&T Broadband Asset or any AT&T
Broadband Contract;
(c) any breach by AT&T Broadband or any member of the AT&T Broadband
Group of this Agreement or any of the other Ancillary Agreements;
(d) any untrue statement or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading, with respect to all information contained in any Registration
Statement; and
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(e) if neither the QUIPS Exchange nor the QUIPS Transfer occurs, any
Liabilities relating to, arising out of or resulting from any Actions
commenced by Microsoft claiming that the transactions contemplated hereby
or by the Merger Agreement violate the terms of the QUIPS; provided that
for purposes hereof, in the event that AT&T is required to repay the QUIPS
as a result of such Action, the indemnified Liability hereunder in respect
of such repayment shall be reduced by the amount of the QUIPS Fair Market
Value plus any accrued interest on the QUIPS since the date as of which the
QUIPS Fair Market Value was determined (any such Action, a "MICROSOFT QUIPS
CLAIM").
Notwithstanding the foregoing, AT&T Broadband shall have no obligation to
indemnify, defend and hold harmless any AT&T Indemnitee from and against any
Liabilities arising out of any breach by At Home or any of its Subsidiaries of
any At Home Contract.
SECTION 5.04. Indemnification Obligations Net of Insurance Proceeds and
Other Amounts. (a) The parties intend that any indemnification or reimbursement
obligation pursuant to this Article 5 will be net of Insurance Proceeds that
actually reduce the amount of the Liability. Accordingly, the amount which any
party (an "INDEMNIFYING PARTY") is required to pay to any Person entitled to
indemnification hereunder (an "INDEMNITEE") will be reduced by any Insurance
Proceeds theretofore actually recovered by or on behalf of the Indemnitee in
reduction of the related Liability. If an Indemnitee receives a payment (an
"INDEMNITY PAYMENT") required by this Agreement from an Indemnifying Party in
respect of any Liability and subsequently receives Insurance Proceeds, then the
Indemnitee will pay to the Indemnifying Party an amount equal to the excess of
the Indemnity Payment received over the amount of the Indemnity Payment that
would have been due if the Insurance Proceeds had been received, realized or
recovered before the Indemnity Payment was made.
(b) An insurer who would otherwise be obligated to defend or make payment
in response to any claim shall not be relieved of the responsibility with
respect thereto or, solely by virtue of the indemnification provisions hereof,
have any subrogation rights with respect thereto, it being expressly understood
and agreed that no insurer or any other third party shall be entitled to a
"windfall" (i.e., a benefit it would not be entitled to receive in the absence
of the indemnification provisions) by virtue of the indemnification provisions
hereof.
(c) With respect to all policies of insurance with insurance companies
other than American Ridge and Western Range, the parties agree to act in good
faith and to use their reasonable best efforts to preserve and maximize the
insurance benefits due to be provided thereunder and to cooperate with one
another as necessary to permit each other to access or obtain the benefits under
those policies, provided, however, that nothing in this Section 5.04 shall be
construed to prevent any party or any other Person from asserting claims for
insurance benefits or accepting insurance benefits provided by the policies. The
parties agree to exchange information upon reasonable request of the other party
regarding requests that they have made for insurance benefits, notices of
claims, occurrences and circumstances that they have submitted to the insurance
companies or other entities managing the policies, responses they have received
from those insurance companies or entities, including any payments they have
received from the insurance companies and any agreements by the insurance
companies to make payments, and any other information that the parties may need
to determine the status of the insurance policies and the continued availability
of benefits thereunder.
SECTION 5.05. Procedures for Indemnification of Third Party Claims. (a)
If an Indemnitee shall receive notice or otherwise learn of the assertion by a
Person (including any Governmental Authority) who is not a member of the AT&T
Broadband Group or the AT&T Communications Group of any claim or of the
commencement by any such Person of any Action (collectively, a "THIRD PARTY
CLAIM") with respect to which an Indemnifying Party may be obligated to provide
indemnification to such Indemnitee pursuant to Section 5.02 or 5.03, or any
other Section of this Agreement or any Ancillary Agreement (except as otherwise
provided therein), such Indemnitee shall give such Indemnifying Party written
notice thereof promptly after becoming aware of such Third Party Claim. Any such
notice shall describe the Third Party Claim in reasonable detail.
Notwithstanding the foregoing, the failure of any Indemnitee to give notice as
provided in this Section 5.05(a) shall not relieve the related Indemnifying
Party of its obligations under
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this Article 5, except to the extent that such Indemnifying Party is actually
prejudiced by such failure to give notice.
(b) An Indemnifying Party may elect to defend (and, unless the Indemnifying
Party has specified any reservations or exceptions, to seek to settle or
compromise), at such Indemnifying Party's own expense (including allocated costs
of in-house counsel and other personnel) and by such Indemnifying Party's own
counsel, any Third Party Claim. Within 30 days after the receipt of notice from
an Indemnitee in accordance with Section 5.05(a) (or sooner, if the nature of
such Third Party Claim so requires), the Indemnifying Party shall notify the
Indemnitee of its election whether the Indemnifying Party will assume
responsibility for defending such Third Party Claim, which election shall
specify any reservations or exceptions. After notice from an Indemnifying Party
to an Indemnitee of its election to assume the defense of a Third Party Claim,
such Indemnitee shall have the right to employ separate counsel and to
participate in (but not control) the defense, compromise, or settlement thereof,
but the fees and expenses of such counsel shall be the expense of such
Indemnitee, except as set forth in the next sentence. In the event that the
Indemnifying Party has elected to assume the defense of the Third Party Claim
but has specified and continues to assert, any reservations or exceptions in
such notice, then, in any such case, the reasonable fees and expenses of one
separate counsel for all Indemnitees shall be borne by the Indemnifying Party.
(c) If an Indemnifying Party elects not to assume responsibility for
defending a Third Party Claim, or fails to notify an Indemnitee of its election
as provided in Section 5.05(b), such Indemnitee may defend such Third Party
Claim at the cost and expense (including allocated costs of in-house counsel and
other personnel) of the Indemnifying Party.
(d) Unless the Indemnifying Party has failed to assume the defense of the
Third Party Claim in accordance with the terms of this Agreement, no Indemnitee
may settle or compromise any Third Party Claim without the consent of the
Indemnifying Party.
(e) No Indemnifying Party shall consent to any settlement of the Third
Party Claim without the consent of the Indemnitee if the effect thereof is to
permit any injunction, declaratory judgment, other order or other nonmonetary
relief to be entered, directly or indirectly, against any Indemnitee.
(f) The provisions of Section 5.05 and Section 5.06 shall not apply to
Taxes (which are covered by the Tax Sharing Agreement) or to matters covered by
Sections 6.02 and 6.03.
(g) Notwithstanding anything in this Agreement to the contrary, and subject
to any applicable provision of the AWS separation agreements, if either party is
named in any Action relating to any At Home Matter, Specified Matter, Specified
Transaction or Registration Statement Claim, that party shall be entitled to
assume and control its own defense and to employ its own counsel. Neither party
shall settle any such Action without the consent of the other party (which
consent will not be unreasonably withheld). All legal and other fees (including
allocated cost of in-house counsel and other personnel) incurred in connection
therewith shall be divided 50/50 between AT&T and AT&T Broadband.
SECTION 5.06. Additional Matters. (a) Any claim on account of a Liability
that does not result from a Third Party Claim shall be asserted by written
notice given by the Indemnitee to the related Indemnifying Party. Such
Indemnifying Party shall have a period of 30 days after the receipt of such
notice within which to respond thereto. If such Indemnifying Party does not
respond within such 30-day period, such Indemnifying Party shall be deemed to
have refused to accept responsibility to make payment. If such Indemnifying
Party does not respond within such 30-day period or rejects such claim in whole
or in part, such Indemnitee shall be free to pursue such remedies as may be
available to such party as contemplated by this Agreement and the other
Ancillary Agreements.
(b) In the event of payment by or on behalf of any Indemnifying Party to
any Indemnitee in connection with any Third Party Claim, such Indemnifying Party
shall be subrogated to and shall stand in the place of such Indemnitee as to any
events or circumstances in respect of which such Indemnitee may have any right,
defense or claim relating to such Third Party Claim against any claimant or
plaintiff asserting such Third Party Claim or against any other person but only
to the extent related to such
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payment. Such Indemnitee shall cooperate with such Indemnifying Party in a
reasonable manner, and at the cost and expense (including allocated costs of
in-house counsel and other personnel) of such Indemnifying Party, in prosecuting
any subrogated right, defense or claim.
(c) In the event of an Action in which the Indemnifying Party is not a
named defendant, if either the Indemnitee or Indemnifying Party shall so
request, the parties shall endeavor to substitute the Indemnifying Party for the
named defendant, if at all practicable. If such substitution or addition cannot
be achieved for any reason or is not requested, the named defendant shall allow
the Indemnifying Party to manage the Action as set forth in this Section 5.06
and the Indemnifying Party shall fully indemnify the named defendant against all
reasonable costs of defending the Action (including court costs, sanctions
imposed by a court, attorneys' fees, experts' fees and all other external
expenses, and the allocated costs of in-house counsel and other personnel), the
costs of any judgment or settlement, and the cost of any interest or penalties
relating to any judgment or settlement.
SECTION 5.07. Remedies Cumulative. The remedies provided in this Article
5 shall be cumulative and shall not preclude assertion by any Indemnitee of any
other rights or the seeking of any and all other remedies against any
Indemnifying Party.
SECTION 5.08. Survival of Indemnities. The rights and obligations of each
of AT&T, AT&T Broadband and their respective Indemnitees under this Article 5
shall survive the sale or other transfer by any party of any Assets or
businesses or the assignment by it of any Liabilities.
ARTICLE 6
INSURANCE AND CERTAIN OTHER MATTERS
SECTION 6.01. Insurance Matters. (a) The parties intend that both AT&T
and AT&T Broadband and each other member of the AT&T Communications Group and
the AT&T Broadband Group, after the Distribution Date, shall be
successors-in-interest to and retain all rights and interest (whether known,
unknown, contingent or otherwise) that each has as of the Distribution Date
under any Insurance Policy issued to and/or providing coverage to AT&T, as it
existed immediately prior to the Distribution Date, or any of its Subsidiaries
or Affiliates, and any agreements related to such Insurance Policies executed
and delivered prior to the Distribution Date, including any rights or interests
each has, as an insured, named insured, or additional named insured, Subsidiary,
Affiliate, division or department, to avail itself of any benefit under any such
Insurance Policy or any such agreement related to such policy as in effect prior
to the Distribution Date. The provisions of this Agreement are not intended to
relieve any insurer of any Liability under any policy. Notwithstanding the
foregoing, no member of the AT&T Broadband Group or the AT&T Communications
Group shall be deemed to have made any representation or warranty as to the
availability of any Insurance Policy or the rights and benefits provided
thereunder.
(b) This Agreement shall not be considered as an attempted assignment (if
such an assignment would be prohibited or would otherwise adversely affect the
rights of the insured parties under such policies) of any rights or interest
under any policy of insurance or as a contract of insurance and shall not be
construed to waive any right or remedy of any member of the AT&T Broadband Group
or the AT&T Communications Group in respect of any Insurance Policy or any other
contract or policy of insurance.
(c) Each of AT&T and AT&T Broadband does hereby, for itself and each other
member of the AT&T Communications Group and the AT&T Broadband Group, agree
that, as and to the extent necessary to give effect to Section 6.01(a), it will
assign any chose in action, claim, right or benefit under an Insurance Policy.
(d) AT&T Broadband does hereby, for itself and each other member of the
AT&T Broadband Group, agree that from and after the Distribution Date, AT&T
Broadband and each other member of the AT&T Broadband Group releases any and all
insurance or other claims that it may have against American Ridge and
Subsidiaries of American Ridge, whether known or unknown.
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(e) AT&T does hereby, for itself and each other member of the AT&T
Communications Group, agree that (i) no member of the AT&T Broadband Group or
any AT&T Broadband Indemnitee shall have any Liability whatsoever as a result of
the insurance policies and practices of AT&T and its Affiliates as in effect or
undertaken at any time prior to the Distribution Date, including as a result of
the level or scope of any such insurance, the creditworthiness of any insurance
carrier, the terms and conditions of any policy, the adequacy or timeliness of
any notice to any insurance carrier with respect to any claim or potential claim
or otherwise and (ii) from and after the Distribution Date, AT&T and each other
member of the AT&T Communications Group releases any and all insurance or other
claims that it may have against Western Range and Subsidiaries of Western Range,
whether known or unknown.
(f) Each of AT&T and AT&T Broadband does hereby, for itself and each other
member of the AT&T Communications Group and the AT&T Broadband Group, agree that
all duties and obligations under any Insurance Policy, including the fulfillment
of any conditions and the payment of any deductibles, retentions, co-insurance
payment or retrospective premiums, that correspond in any way with or may be
necessary to perfect, preserve or maintain an insuredIs right to obtain benefits
under that Insurance Policy, will be performed by the insured that is seeking
the benefits, subject to the indemnification provisions of Article 5. In the
event members of both Groups have claims under a given policy, any deductibles,
retentions, co-insurance payments, retrospective premiums, caps, limitations on
average and similar items will be appropriately allocated between such parties
based on the recoveries they would have obtained in the absence of such items.
SECTION 6.02. Certain Post-Distribution Transactions and Related
Matters. (a) Each of AT&T and AT&T Broadband agrees that, until 12 months after
the date of the Distribution, it will (i) maintain its status as a company
engaged in the active conduct of a trade or business and (ii) not engage in any
transaction that would result in it ceasing to be a company engaged in the
active conduct of a trade or business, as defined in Section 355(b) of the Code.
(b) Each of AT&T and AT&T Broadband further agrees that, until 25 months
after the date of the Distribution, it will not, except as expressly
contemplated by this Agreement or the Merger Agreement, (i) enter into any
Proposed Acquisition Transaction or, to the extent AT&T or AT&T Broadband, as
the case may be, has the right to prohibit any Proposed Acquisition Transaction,
permit any Proposed Acquisition Transaction to occur (whether by (A) redeeming
rights under a shareholders rights plan, (B) finding a tender offer to be a
"permitted offer" under any such plan or otherwise causing any such plan to be
inapplicable or neutralized with respect to any Proposed Acquisition
Transaction, or (C) approving any Proposed Acquisition Transaction, whether for
purposes of any interested shareholder statute, any "fair price" or other
provision of its respective charter or bylaws or otherwise), (ii) liquidate or
partially liquidate, (iii) in a single transaction or series of related
transactions, sell or transfer all or substantially all of the assets of AT&T or
the assets of the AT&T Broadband Group that were transferred to AT&T Broadband
prior to the Distribution, as the case may be, (iv) redeem or otherwise
repurchase (directly or through an Affiliate) any of its stock, (v) enter into
any transaction or series of transactions as a result of which any Person would
acquire, or have the right to acquire, from AT&T or AT&T Broadband, as the case
may be, or one of their respective Affiliates, a number of shares of stock that
would comprise more than 5% of (A) the value of all outstanding shares of stock
of as of the date of such transaction, or in the case of a series of
transactions, the date of the last transaction of such series, or (B) the voting
power of the issued and outstanding shares of stock as of the date of such
transaction, or in the case of a series of transactions, the date of the last
transaction of such series or (vi) take any other action or actions (including
any action or transaction that would be inconsistent with any representation
made in the Tax Opinions/Rulings) that in the aggregate (and taking into account
any other transactions described in this subparagraph (b)) would be reasonably
likely to have the effect of causing or permitting one or more Persons to
acquire directly or indirectly stock representing a 50 percent or greater
interest (within the meaning of Section 355(e) of the Code) in AT&T or AT&T
Broadband or otherwise jeopardize the non-recognition of taxable gain or loss
for U.S. federal income tax purposes to AT&T, AT&T Affiliates and shareholders
of AT&T in connection with the Separation and Distribution, unless prior to
taking any such action set forth in the foregoing clauses (i) through (vi), AT&T
(with respect to
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AT&T Broadband) and AT&T Broadband (with respect to AT&T) has determined, in its
sole and absolute discretion, which discretion shall be exercised in good faith
solely to preserve the tax-free status of the Separation and Distribution, that
such action or actions would not result in a Spin-Off Disqualification. Anything
in the preceding sentence to the contrary notwithstanding, a transaction
described in clauses (i) through (vi) of the preceding sentence shall not
require the determination of the other party in the event that as of the date
immediately preceding such transaction there has not been issued and, when taken
together with the shares to be issued pursuant to the transaction, there will
not be issued, directly or indirectly, pursuant to a Proposed Acquisition
Transaction or otherwise, including as a consequence of the Merger Agreement,
taking into account for such purpose all share transactions which would be taken
into account under Section 355(e) of the Code assuming all such issuances were
considered to be "part of a plan or series of related transactions" with the
Distribution number of shares in excess of 30 percent of (A) the value of all
outstanding shares of stock as of the date of such transaction, or in the case
of a series of transactions, the date of the last transaction of such series, or
(B) the voting power of the issued and outstanding shares of stock as of the
date of such transaction, or in the case of a series of transactions, the date
of the last transaction of such series. "PROPOSED ACQUISITION TRANSACTION" means
a transaction or series of transactions as a result of which AT&T or AT&T
Broadband would merge or consolidate with any other Person or pursuant to which
any Person or any group of related Persons would acquire, or have the right to
acquire, directly or indirectly, from one or more holders of outstanding shares
of stock of a number of shares of stock that would comprise more than 5% of (A)
the value of all outstanding shares of stock as of the date of such transaction,
or in the case of a series of transactions, the date of the last transaction of
such series, or (B) the voting power of the issued and outstanding shares of
stock as of the date of such transaction, or in the case of a series of
transactions, the date of the last transaction of such series. "TAX
OPINIONS/RULINGS" means, collectively, the opinions of tax counsel and the
rulings by the IRS deliverable to AT&T in connection with the transactions
contemplated by this Agreement.
(c) If one party (the "ISSUING PARTY") notifies the other (the "OTHER
PARTY") that it desires to take one of the actions described in clauses (i)
through (vi) of Section 6.02(b) (the "NOTIFIED ACTION") and the Other Party
declines to exercise its discretion pursuant to Section 6.02(b) to permit the
Issuing Party to take such Notified Action, the Issuing Party, in its reasonable
discretion, may elect to seek a Subsequent Tax Opinion/Ruling that would permit
the Issuing Party to take the Notified Action, and the Other Party shall
cooperate in connection with such efforts; provided, however, that the
reasonable costs and expenses of obtaining any such Subsequent Tax
Opinion/Ruling shall be borne by the Issuing Party. "SUBSEQUENT TAX
OPINION/RULING" means either (i) an unqualified opinion of counsel jointly
selected by the Issuing Party and the Other Party confirming that, as a
consequence of the consummation of the Notified Action, no income, gain or loss
for U.S. federal income tax purposes will be recognized by AT&T, the
shareholders or former shareholders of AT&T, or any AT&T Affiliate with respect
to the Separation and Distribution or (ii) an IRS private letter ruling to the
same effect that, after reasonable due diligence conducted by the Other Party,
are in form and substance reasonably satisfactory to the Other Party.
(d) Notwithstanding anything to the contrary herein or any provision of the
Tax Sharing Agreement to the contrary, if there is a determination (as defined
in Section 1313 of the Code) that a Spin-Off Disqualification has occurred, then
AT&T Broadband shall indemnify and hold harmless AT&T and each member of the
consolidated group of which AT&T is a member from and against one half of all
Tax Related Losses imposed upon or incurred by AT&T or any member of its group
as a result of the Spin-Off Disqualification; provided, however, that AT&T
Broadband shall indemnify and hold harmless AT&T and each member of the
consolidated group of which AT&T is a member from and against any and all Tax
Related Losses imposed upon or incurred by AT&T or any member of its group as a
result of the Spin-Off Disqualification if such Spin-Off Disqualification would
not have occurred but for an AT&T Broadband Action and; provided, further, that
AT&T Broadband shall have no obligation to indemnify AT&T or any member of the
consolidated group of which AT&T is a member if the Spin-Off Disqualification
would not have occurred but for an AT&T Communications Action. "AT&T BROADBAND
ACTION" means (i) any transaction with respect to the stock or assets of AT&T
Broadband that occurs after the Distribution,
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(ii) AT&T Broadband's failure to maintain its status as a company engaged in the
active conduct of a trade or business, and (iii) the failure of any
representation made by AT&T Broadband with respect to AT&T Broadband or the AT&T
Broadband Business, and the plans, proposals, intentions and policies of AT&T
Broadband after the Separation and Distribution in connection with a Subsequent
Tax Opinion/ Ruling to be true and correct in all material respects. "AT&T
COMMUNICATIONS ACTION" means (i) any transaction with respect to the stock or
assets of AT&T that occurs after the Distribution, (ii) AT&T's failure to
maintain its status as a company engaged in the active conduct of a trade or
business, and (iii) the failure of any representation made by AT&T with respect
to AT&T or the AT&T Communications Business and the plans, proposals, intentions
and policies of AT&T after the Separation and Distribution in connection with
the Tax Opinions/Rulings or a Subsequent Tax Opinion/Ruling to be true and
correct in all material respects. The delivery of any Subsequent Tax
Opinion/Ruling shall not affect either party's rights and obligations with
respect to indemnification under this Section 6.02(d). "TAX RELATED LOSSES"
means (A) all federal, state and local Taxes (including interest and penalties
thereon) imposed pursuant to any settlement, final determination, judgment or
otherwise; (B) all accounting, legal and other professional fees, and court
costs incurred in connection with such taxes; and (C) all costs and expenses
that may result from adverse tax consequences to AT&T (including all costs,
expenses and damages associated with shareholder litigation or controversies)
payable by AT&T or AT&T Affiliates.
SECTION 6.03. Procedure for Indemnification for Tax Liabilities. (a) If
AT&T receives notice of the assertion of any claim, suit, arbitration, inquiry,
proceeding or investigation by or before any court, governmental or other
regulatory or administrative agency or commission or any arbitration tribunal
asserted by a Person other than AT&T or any AT&T Affiliate or AT&T Broadband or
any AT&T Broadband Affiliate that gives rise to a right of indemnification
hereunder (a "THIRD PARTY TAX CLAIM") with respect to which AT&T Broadband may
be obligated under Section 6.02(d) to provide indemnification, AT&T shall give
AT&T Broadband notice thereof (together with a copy of such Third Party Tax
Claim, process or other legal pleading) promptly after becoming aware of such
Third Party Tax Claim; provided, however, that the failure of AT&T to give
notice as provided in this Section shall not relieve AT&T Broadband of its
obligations under Section 6.02(d), except to the extent that AT&T Broadband is
actually prejudiced by such failure to give notice. Such notice shall describe
such Third-Party Tax Claim in reasonable detail.
(b) (i) Notwithstanding any provision to the contrary contained in the Tax
Sharing Agreement, AT&T and AT&T Broadband shall jointly control the defense of,
and cooperate with each other with respect to defending, any Third Party Tax
Claim with respect to which AT&T Broadband may be obligated under Section
6.02(d) to provide indemnification; provided that AT&T Broadband shall forfeit
such joint control right with respect to a particular Third Party Tax Claim if
AT&T Broadband or any AT&T Broadband Affiliate makes any public statement or
filing, or takes any action (including, but not limited to, the filing of any
submission or pleading, or the giving of a deposition or production of
documents, in any administrative or court proceeding) in connection with such
Third Party Tax Claim that is inconsistent in a material respect with any
representation or warranty made by AT&T Broadband in the Agreement, the Tax
Opinions/Rulings, the Representation Letter or a Subsequent Tax Opinion/Ruling
and; provided, further, that AT&T shall forfeit such joint control right with
respect to a particular Third Party Tax Claim if AT&T or any AT&T Affiliate
makes any public statement or filing, or takes any action (including, but not
limited to, the filing of any submission or pleading, or the giving of a
deposition or production of documents, in any administrative or court
proceeding) in connection with such Third Party Tax Claim that is inconsistent
in a material respect with any representation or warranty made by AT&T in the
Agreement, the Tax Opinions/Rulings, the Representation Letter or a Subsequent
Tax Opinion/ Ruling.
(ii) AT&T and AT&T Broadband shall exercise their rights to jointly control
the defense of any such Third Party Tax Claim solely for the purpose of
defeating such Third Party Tax Claim and, unless required by applicable law,
neither AT&T nor AT&T Broadband shall make any statements or take any actions
that could reasonably result in the shifting of liability for any Tax Related
Losses arising out of
B-33
such Third Party Tax Claim from the party making such statement or taking such
action (or any of its Affiliates) to the other party (or any of its Affiliates).
(iii) Statements made or actions taken by either AT&T or AT&T Broadband in
connection with the defense of any such Third Party Tax Claim shall not
prejudice the rights of such party in any subsequent action or proceeding
between the parties.
(iv) If either AT&T or AT&T Broadband fails to jointly defend any such
Third Party Tax Claim, the other party shall solely defend such Third Party Tax
Claim and the party failing to jointly defend shall use commercially reasonable
efforts to cooperate with the other party in its defense of such Third Party Tax
Claim; provided, however, that neither party may compromise or settle any such
Third Party Tax Claim without the prior written consent of the other party,
which consent shall not be unreasonably withheld or delayed. All costs and
expenses of either party in connection with, and during the course of, the joint
control of the defense of any such Third Party Tax Claim shall be initially paid
by the party that incurs such costs and expenses. Such costs and expenses shall
be reallocated and reimbursed in accordance with the respective indemnification
obligations of the parties at the conclusion of the defense of such Third Party
Tax Claim.
(c) (i) If there is a determination (as defined in Section 1313 of the
Code) that a Spin-Off Disqualification has occurred, AT&T and AT&T Broadband
shall attempt in good faith to resolve any disagreement with respect to whether
there is an indemnification obligation pursuant to Section 6.02(d). If the
parties cannot agree by the tenth Business Day following the determination (the
"DISPUTE DATE"), then the liability shall initially be determined as follows:
Within 20 days of the Dispute Date, AT&T and AT&T Broadband shall each appoint
one arbitrator. The two arbitrators so appointed shall appoint a third
arbitrator within 30 days of the Dispute Date. If either party shall fail to
appoint an arbitrator within such 20-day period, the arbitration shall be
conducted by the sole arbitrator appointed by the other party. Whether selected
by AT&T, AT&T Broadband or otherwise, each arbitrator selected to resolve such
dispute shall be a tax attorney who is generally recognized in the tax community
as a qualified and competent tax practitioner with experience in the tax area
involved in the issue to be resolved. Such arbitrators shall be empowered to
determine initially whether or not AT&T Broadband is required to indemnify AT&T
pursuant to Section 6.02(d) hereunder. Each of AT&T and AT&T Broadband shall
bear 50% of the aggregate expenses of the arbitrators (or sole arbitrator). The
decision of the arbitrators shall be rendered no later than 90 days from the
Dispute Date.
(ii) On the tenth Business Day following the determination that there has
been a Spin-Off Disqualification, if AT&T Broadband agrees that it has an
indemnification obligation, AT&T Broadband shall pay in full any amount due and
payable to AT&T pursuant to Section 6.02(d), together with interest calculated
at the Underpayment Rate from the date of the determination that there was a
Spin-Off Disqualification through the date of payment. If AT&T Broadband and
AT&T disagree as to whether an indemnity obligation is due, and the arbitration
process concludes that AT&T Broadband is liable, AT&T Broadband shall pay any
amount that would be due and payable to AT&T if AT&T were entitled to indemnity
pursuant to Section 6.02(d), together with interest on such amount calculated at
the Underpayment Rate from the date of the determination that there was a
Spin-Off Disqualification through the date of the payment. "UNDERPAYMENT RATE"
shall mean the annual rate of interest described in Section 6621(c) of the Code
for large corporate underpayments of income Tax (or similar provision of state
or local income Tax law, as applicable), as determined from time to time.
(iii) If pursuant to a final nonappealable order of a court of competent
jurisdiction, it is determined that AT&T Broadband is obligated to pay and has
not paid amounts payable to AT&T pursuant to Section 6.02(d) or that amounts
paid by AT&T Broadband to AT&T should not have been paid, AT&T Broadband shall
pay to AT&T the balance due, or AT&T shall repay to the excess amount paid, in
either event within five days of the final determination of liability or
overpayment, together with interest at the Underpayment Rate calculated (A) from
the date of the determination that there was a Spin-Off Disqualification in the
case of a payment to be made by AT&T Broadband or (B) from the date of payment
by AT&T Broadband to AT&T in the case of a repayment to be made by AT&T. All
payments
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pursuant to this Section 6.03(c) shall be made by wire transfer to the bank
account designated by AT&T or AT&T Broadband, as the case may be, for such
purpose.
SECTION 6.04. Other Transactions. (a) Notwithstanding any provision of
the Tax Sharing Agreement to the contrary, AT&T Broadband shall indemnify and
hold harmless AT&T and each member of the consolidated group of which AT&T is a
member from and against one half of all Tax Related Losses imposed upon or
incurred by AT&T or any member of its group as a result of (i) the Separation
Transactions or the Split-Off failing to qualify as tax-free transactions under
the provisions of Sections 355, 361(c) and 368(a)(1)(D) of the Code, or (ii) the
shares of AWS or LMC failing to qualify as "qualified property" for purposes of
Section 355(c)(2) or 361(c) of the Code by reason of the application of Section
355(e) of the Code (each such failure, a "TRANSACTION DISQUALIFICATION");
provided, however, AT&T Broadband shall indemnify and hold harmless AT&T and
each member of the consolidated group of which AT&T is a member from and against
any and all Tax Related Losses imposed upon or incurred by AT&T or any member of
its group as a result of the Transaction Disqualification if such Transaction
Disqualification would not have occurred but for an AT&T Broadband Action and;
provided, further, that, AT&T Broadband shall have no obligation to indemnify
AT&T or any member of the consolidated group of which AT&T is a member if the
Transaction Disqualification would not have occurred but for an AT&T
Communications Action.
(b) Any indemnity payment required to be made by AT&T Broadband under
Section 6.04(a) as a result of a Transaction Disqualification shall be net of
AT&T Broadband's Share of any indemnification that AT&T is entitled to receive
from AWS or LMC, as the case may be, as a result of such Transaction
Disqualification (a "PRIMARY INDEMNITY CLAIM"). AT&T, at AT&T Broadband's
direction and expense, shall use reasonable efforts to pursue and collect AT&T
Broadband's Share of a Primary Indemnity Claim from AWS or LMC, as the case may
be, prior to seeking indemnification from AT&T Broadband for such amount. In the
event that AT&T has not received indemnification with respect to AT&T
Broadband's Share of a Primary Indemnity Claim at least five days prior to the
date on which AT&T is required to make a payment that gives rise to such claim,
AT&T shall be entitled to demand payment of AT&T Broadband's Share of a Primary
Indemnity Claim from AT&T Broadband, provided that AT&T Broadband shall have no
obligation to pay AT&T Broadband's Share of a Primary Indemnity Claim unless
AT&T has (i) provided AT&T Broadband with information in reasonable detail
describing its efforts to pursue and collect such Primary Indemnity Claim and
(ii) afforded AT&T Broadband the opportunity to take reasonable efforts on
behalf of AT&T, at AT&T Broadband's expense, to pursue and collect such Primary
Indemnity Claim. "AT&T BROADBAND'S SHARE" means (i) 100% in the event the
Transaction Disqualification is attributable to an AT&T Broadband Action or (ii)
50% otherwise. If AT&T Broadband makes payment to AT&T in respect of an amount
for which AT&T has a Primary Indemnity Claim, AT&T shall assign AT&T Broadband's
Share of such Primary Indemnity Claim to AT&T Broadband and shall cooperate, at
AT&T Broadband's direction and expense, with AT&T Broadband in prosecuting such
claim. If AT&T receives a payment required by Section 6.04(a) from AT&T
Broadband and subsequently receives a payment with respect to a Primary
Indemnity Claim that was not previously taken into account, in whole or in part,
in determining the amount of AT&T Broadband's payment to AT&T, then AT&T will
pay to AT&T Broadband an amount equal to the excess of the payment made by AT&T
Broadband over the amount of the payment that AT&T Broadband would have been
required to make if payment under the Primary Indemnity Claim had been received
by AT&T before payment was made by AT&T Broadband.
(c) If there is a determination (as defined in Section 1313 of the Code)
that a Transaction Disqualification has occurred and the parties cannot agree
whether such a Transaction Disqualification would not have occurred but for an
AT&T Communications Action or an AT&T Broadband Action, as the case may be, the
procedures set forth in Section 6.03(c) shall apply.
(d) In the event that, in connection with a Transaction Disqualification
that is attributable to an AT&T Broadband Action, AT&T has any rights against or
obligations to AWS or LMC that are substantially similar to those set forth in
Section 6.03, (i) AT&T shall assign such rights and obligations to AT&T
Broadband, if at all practicable, or (ii) if such assignment cannot be achieved
for any reason,
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AT&T shall exercise such rights and perform such obligations at the direction of
AT&T Broadband and AT&T Broadband shall indemnify AT&T for all associated costs.
Such costs shall be reallocated and reimbursed in accordance with the respective
indemnification obligations as determined under Section 6.04(c). If a
Transaction Disqualification is not attributable to an AT&T Communications
Action or an AT&T Broadband Action, such rights and obligations shall, to the
extent practicable, be exercised and performed jointly and all associated costs
shall be shared equally.
ARTICLE 7
EXCHANGE OF INFORMATION; CONFIDENTIALITY
SECTION 7.01. Agreement for Exchange of Information. (a) Each of AT&T and
AT&T Broadband, on behalf of the AT&T Communications Group and the AT&T
Broadband Group, respectively, agrees to provide, or cause to be provided, to
each other Group, at any time before or after the Distribution Date, as soon as
reasonably practicable after written request therefor, any Information in the
possession or under the control of such respective Group that the requesting
party reasonably needs (i) to comply with reporting, disclosure, filing or other
requirements imposed on the requesting party (including under applicable
securities or Tax laws) by a Governmental Authority having jurisdiction over the
requesting party, (ii) for use in any other judicial, regulatory,
administrative, Tax or other proceeding or in order to satisfy audit,
accounting, claims, regulatory, litigation, Tax or other similar requirements,
or (iii) to comply with its obligations under this Agreement or any other
Ancillary Agreement; provided, however, that in the event that any party
determines that any such provision of Information could be commercially
detrimental, violate any law or agreement, or waive any attorney-client
privilege, the parties shall take all reasonable measures to permit the
compliance with such obligations in a manner that avoids any such harm or
consequence. AT&T and AT&T Broadband intend that any transfer of Information
that would otherwise be within the attorney-client privilege shall not operate
as a waiver of any potentially applicable privilege.
(b) After the date hereof, each of AT&T and AT&T Broadband shall maintain
in effect adequate systems and controls to the extent necessary to enable the
members of the other Group to satisfy their respective reporting, accounting,
audit and other obligations.
SECTION 7.02. Ownership of Information. Any Information owned by one
Group that is provided to a requesting party pursuant to Section 7.01 shall be
deemed to remain the property of the providing party. Unless specifically set
forth herein, nothing contained in this Agreement shall be construed as granting
or conferring rights of license or otherwise in any such Information.
SECTION 7.03. Compensation for Providing Information. The party
requesting such Information agrees to reimburse the other party for the
reasonable costs, if any, of creating, gathering and copying such Information,
to the extent that such costs are incurred for the benefit of the requesting
party. Except as may be otherwise specifically provided elsewhere in this
Agreement or in any other agreement between the parties, such costs shall be
computed in accordance with the providing party's standard methodology and
procedures.
SECTION 7.04. Record Retention. To facilitate the possible exchange of
Information pursuant to this Article 7 and other provisions of this Agreement
after the Distribution Date, the parties agree to use their reasonable best
efforts to retain all Information in their respective possession or control on
the Distribution Date in accordance with their respective record retention
policies. No party will destroy, or permit any of its Subsidiaries to destroy,
any Information that the other party may have the right to obtain pursuant to
this Agreement prior to the third anniversary of the date hereof without first
using its reasonable best efforts to notify the other party of the proposed
destruction and giving the other party the opportunity to take possession of
such information prior to such destruction; provided, however, that in the case
of any Information relating to Taxes or to Environmental Liabilities, such
period shall be extended to the expiration of the applicable statute of
limitations (giving effect to any extensions thereof). Moreover, no party will
destroy, or permit any of its Subsidiaries to destroy, any policies of insurance
(or records
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related to such insurance policies) without first using its reasonable best
efforts to notify the other party of the proposed destruction and giving the
other party reasonable opportunity to take possession of such information prior
to such destruction, if it is possible that the other party may be able to
obtain coverage under such policies. (The foregoing includes "occurrence"-based
liability policies, which continue to cover liability for alleged harm during
their policy period, even if no claim is made based on such alleged harm until
after the end of the policy period.)
SECTION 7.05. Limitation of Liability. No party shall have any liability
to any other party in the event that any Information exchanged or provided
pursuant to this Agreement that is an estimate or forecast, or that is based on
an estimate or forecast, is found to be inaccurate, in the absence of willful
misconduct by the party providing such Information. No party shall have any
liability to any other party if any Information is destroyed after reasonable
best efforts by such party to comply with the provisions of Section 7.04.
SECTION 7.06. Other Agreements Providing for Exchange of Information. The
rights and obligations granted under this Article 7 are subject to any specific
limitations, qualifications or additional provisions on the sharing, exchange or
confidential treatment of Information set forth in any Ancillary Agreement.
SECTION 7.07. Production of Witnesses; Records; Cooperation. (a) After
the Distribution Date, except in the case of an adversarial Action by one party
against the other party (which shall be governed by such discovery rules as may
be applicable thereto), each party hereto shall take all reasonable steps to
make available to the other party, upon written request, the former, current and
future directors, officers, employees, other personnel and agents of its
respective Group (whether as witnesses or otherwise) and any books, records or
other documents within its control or which it otherwise has the ability to make
available, to the extent that any such person (giving consideration to business
demands of such directors, officers, employees, other personnel and agents) or
books, records or other documents may reasonably be required in connection with
any Action (including preparation for such Action) in which the requesting party
may from time to time be involved, regardless of whether such Action (or
preparation for such action) is a matter with respect to which indemnification
may be sought hereunder. The requesting party shall bear all costs and expenses
(including allocated costs of in-house counsel and other personnel) in
connection therewith.
(b) If an Indemnifying Party chooses to defend or to seek to compromise or
settle any Third Party Claim, or if any party chooses or is required to
prosecute, pursue, otherwise evaluate or defend any Action, the other parties
shall cooperate in such defense, settlement or compromise, or such prosecution,
evaluation or pursuit, as the case may be.
(c) Without limiting the foregoing, the parties shall cooperate and consult
to the extent reasonably necessary with respect to any Actions.
(d) Without limiting any provision of this Section 7.07, each of the
parties agrees to cooperate, and to cause each member of its respective Group to
cooperate, with each other in the defense of any infringement or similar claim
with respect to any intellectual property and shall not claim to acknowledge, or
permit any member of its respective Group to claim to acknowledge, the validity
or infringing use of any intellectual property of a third Person in a manner
that would hamper or undermine the defense of such infringement or similar
claim.
(e) The obligation of the parties to make available former, current and
future directors, officers, employees, other personnel and agents pursuant to
this Section 7.07 is intended to be interpreted in a manner so as to facilitate
cooperation and shall include the obligation to make available inventors and
other officers without regard to whether such individual or the employer of such
individual could assert a possible business conflict (subject to the exception
set forth in the first sentence of Section 7.07(a)). Without limiting the
foregoing, each party agrees that (i) neither it nor any member of its
respective Group will take adverse action against any employee of its Group
based on such employee's provision of assistance or information to the other
party pursuant to Section 7.07(a) and (ii) to the extent relevant and
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necessary, neither it nor any member of its respective Group will enforce any
confidentiality agreement against an employee of its Group that would otherwise
prevent or hinder such employee from cooperating or providing information to a
requesting party pursuant to Section 7.07(a).
(f) In connection with any matter contemplated by this Section 7.07, the
parties will enter into a mutually acceptable joint defense agreement so as to
maintain to the extent practicable any applicable attorney-client privilege or
work product immunity of either Group.
SECTION 7.08. Confidentiality. (a) Subject to Section 7.09, each of AT&T
and AT&T Broadband, on behalf of itself and its respective Group, agrees to
hold, and to cause its respective directors, officers, employees, agents,
accountants, counsel and other advisors and representatives to hold, in strict
confidence, with at least the same degree of care that applies to its own
confidential and proprietary information pursuant to policies in effect at the
relevant time, all Information concerning the other Group that is either in its
possession (including Information in its possession prior to any of the date
hereof, or the Distribution Date) or furnished by the other Group or its
respective directors, officers, employees, agents, accountants, counsel and
other advisors and representatives at any time pursuant to this Agreement, any
other Ancillary Agreement or otherwise, and shall not use any such Information
other than for such purposes as shall be expressly permitted hereunder or
thereunder, except, in each case, to the extent that such Information has been
(i) in the public domain through no fault of such party or such party's Group or
any of their respective directors, officers, employees, agents, accountants,
counsel and other advisors and representatives, (ii) later lawfully acquired
from other sources by such party (or such party's Group), which sources are not
themselves bound by a confidentiality obligation, or (iii) independently
generated without reference to any proprietary or confidential Information of
the other party.
(b) Each party agrees not to release or disclose, or permit to be released
or disclosed, any such Information concerning the other Group to any other
Person, except its directors, officers, employees, agents, accountants, counsel
and other advisors and representatives who need to know such Information (who
shall be advised of their obligations hereunder with respect to such
Information), except in compliance with Section 7.09. Without limiting the
foregoing, when any Information is no longer needed for the purposes
contemplated by this Agreement or any other Ancillary Agreement, each party will
promptly after request of the other party either return to the other party all
Information in a tangible form (including all copies thereof and all notes,
extracts or summaries based thereon) or certify to the other party that it has
destroyed such Information (and such copies thereof and such notes, extracts or
summaries based thereon).
SECTION 7.09. Protective Arrangements. In the event that any party or any
of its Subsidiaries either determines on the advice of its counsel that it is
required to disclose any Information concerning the other Group pursuant to
applicable law or receives any demand under lawful process or from any
Governmental Authority to disclose or provide Information concerning the other
Group that is subject to the confidentiality provisions hereof, such party shall
notify the other party of such disclosure at least five days prior to disclosing
or providing such Information and shall cooperate at the expense of the
requesting party in seeking any reasonable protective arrangements requested by
such other party. Subject to the foregoing, after a court of competent
jurisdiction has had an opportunity to rule on such protective arrangements, the
Person that received such request may thereafter disclose or provide Information
to the extent required by such law (as so advised by counsel) or by lawful
process or such Governmental Authority.
ARTICLE 8
FURTHER ASSURANCES AND ADDITIONAL COVENANTS
SECTION 8.01. Further Assurances. (a) In addition to the actions
specifically provided for elsewhere in this Agreement, the other Ancillary
Agreements and the Merger Agreement, but subject to the provisions hereof and
thereof, each of the parties hereto shall use its reasonable best efforts, prior
to, on and after the Distribution Date, to take, or cause to be taken, all
actions, and to do, or cause to be
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done, all things, reasonably necessary, proper or advisable under applicable
laws, regulations and agreements to consummate and make effective the
transactions contemplated by this Agreement, the other Ancillary Agreements and
the Merger Agreement.
(b) Without limiting the foregoing, prior to, on and after the Distribution
Date, each party hereto shall cooperate with the other party, and without any
further consideration, to execute and deliver, or use its reasonable best
efforts to cause to be executed and delivered, all instruments, including
instruments of conveyance, assignment and transfer, and to make all filings
with, and to obtain all consents, approvals or authorizations of, any
Governmental Authority or any other Person under any permit, license, agreement,
indenture or other instrument (including any Consents or Governmental
Approvals), and to take all such other actions as such party may reasonably be
requested to take by any other party hereto from time to time, consistent with
the terms of this Agreement, the other Ancillary Agreements and the Merger
Agreement, in order to effectuate the provisions and purposes of this Agreement,
the other Ancillary Agreements and the Merger Agreement and the transfers of the
AT&T Broadband Assets and the assignment and assumption of the AT&T Broadband
Liabilities and the other transactions contemplated hereby and thereby.
(c) On or prior to the Distribution Date, AT&T and AT&T Broadband in their
respective capacities as direct and indirect shareholders of their respective
Subsidiaries, shall each ratify any actions that are reasonably necessary or
desirable to be taken by AT&T and AT&T Broadband or any other Subsidiary of
AT&T, as the case may be, to effectuate the transactions contemplated by this
Agreement.
ARTICLE 9
TERMINATION
SECTION 9.01. Termination. This Agreement may be terminated by AT&T prior
to the Distribution Date at any time following termination of the Merger
Agreement in accordance with its terms.
SECTION 9.02. Effect of Termination. In the event of any termination of
this Agreement prior to the Distribution Date, no party to this Agreement (or
any of its directors or officers) shall have any Liability or further obligation
to any other party with respect to this Agreement.
ARTICLE 10
DISPUTE RESOLUTION AND ARBITRATION
SECTION 10.01. Agreement to Arbitrate. Except as otherwise specifically
provided in this Agreement (including, without limitation, in Article 6,
concerning Third Party Tax Claims) or in any other Ancillary Agreement, the
procedures set forth in this Article 10 shall apply to all disputes,
controversies or claims (whether sounding in contract, tort or otherwise) that
may arise out of or relate to, or arise under or in connection with this
Agreement or any other Ancillary Agreement, or the transactions contemplated
hereby or thereby (including all actions taken in furtherance of the
transactions contemplated hereby or thereby on or prior to the date hereof), or
the commercial or economic relationship of the parties relating hereto or
thereto, between or among any member of the AT&T Broadband Group, or the AT&T
Communications Group. Each party agrees on behalf of itself and each member of
its respective Group that the procedures set forth in this Article 10 shall be
the sole and exclusive remedy in connection with any dispute, controversy or
claim relating to any of the foregoing matters and irrevocably waives any right
to commence any Action in or before any Governmental Authority, except as
expressly provided in Sections 10.11(c) and 10.12 and except to the extent
provided under the Federal Arbitration Act in the case of judicial review of
arbitration results or awards. Each party on behalf of itself and each member of
its respective Group irrevocably waives any right to any trial by jury with
respect to any claim, controversy or dispute set forth in the first sentence of
this Section 10.01. The parties agree that claims filed pursuant to this Article
10 may seek direct damages but in no event for
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such claims shall either party be liable to the other for any incidental,
special, reliance, consequential or any other indirect damages or losses
(including lost profits or revenues).
SECTION 10.02. Reasonable Best Efforts to Resolve Disputes; Mediation. It
is the intent of the parties to use their respective reasonable best efforts to
negotiate and resolve expeditiously any dispute, controversy or claim between or
among them that may arise from time to time on a mutually acceptable negotiated
basis. The parties may, by mutual consent, retain a mediator to aid in any
attempt to informally negotiate resolution of any dispute, although any opinion
expressed by a mediator shall be strictly advisory and shall not be binding on
the parties, nor shall any opinion expressed by the mediator be admissible in
any arbitration proceedings. Costs of a mediation shall be borne equally by the
parties involved in the matter, except that each party shall be responsible for
its own expenses. Mediation is not a prerequisite to a demand for arbitration
under Section 10.03.
SECTION 10.03. Demand for Arbitration. At any time before the Applicable
Deadline, any party involved in the dispute, controversy or claim may make a
written demand (the "ARBITRATION DEMAND NOTICE") that the dispute be resolved by
binding arbitration, which Arbitration Demand Notice shall be given to the
parties to the dispute, controversy or claim in the manner set forth in Section
11.08. Such Arbitration Demand Notice shall describe in reasonable detail the
facts surrounding such dispute, controversy or claim and the basis of such
party's claim for relief pursuant to this Article. Except as may be expressly
provided in any Ancillary Agreement, any Arbitration Demand Notice must be
asserted within one year after the later of the occurrence of the act or event
giving rise to the underlying claim or the date on which such act or event was,
or should have been, in the exercise of reasonable due diligence, discovered by
the party asserting the claim (as applicable and as it may in a particular case
be specifically extended by the parties in writing, the "APPLICABLE DEADLINE";
provided that in no event will the Applicable Deadline occur with respect to any
matter before the first anniversary of the Distribution). Any discussions,
negotiations or mediations between the parties pursuant to this Agreement or
otherwise will not toll the Applicable Deadline unless expressly agreed in
writing by the parties. Each of the parties agrees on behalf of itself and each
member of its Group that if an Arbitration Demand Notice with respect to a
dispute, controversy or claim is not given prior to the expiration of the
Applicable Deadline, as between or among the parties and the members of their
Groups, such dispute, controversy or claim will be barred. Subject to Sections
10.11(c) and 10.12, upon delivery of an Arbitration Demand Notice prior to the
Applicable Deadline, the dispute, controversy or claim shall be decided by an
Arbitration Panel in accordance with the rules set forth in this Article 10.
SECTION 10.04. Arbitration Panel. When an Arbitration Demand Notice is
given, the parties involved in the dispute, controversy or claim shall attempt
to select a sole arbitrator satisfactory to all such parties. In the event the
parties are not able jointly to select a sole arbitrator, such parties shall
each appoint an arbitrator within 30 days after delivery of the Arbitration
Demand Notice. Only one arbitrator may be appointed for the AT&T Broadband Group
and the AT&T Communications Group, respectively. In the event that a sole
arbitrator is not selected, the two chosen arbitrators, within 30 days after the
appointment of the later of them to be appointed, will in turn choose a third
arbitrator, and the three arbitrators thus chosen will constitute the
arbitration panel.
SECTION 10.05. Commencement and Place of Arbitration. The sole arbitrator
or arbitration panel (as applicable, the "ARBITRATION PANEL") will meet within
30 days of the last appointment to commence the arbitration, which period may be
extended upon the agreement of the arbitrators. The Arbitration Panel will set a
time for the hearing of the matter, which will commence no later than 90 days
after the date of the last appointment. The place of any arbitration hereunder
will be as agreed upon by the parties, or, if the parties are unable to agree,
as set by the Arbitration Panel.
SECTION 10.06. Arbitration Hearings. The matter shall be presented to the
Arbitration Panel at a hearing by means of written submissions of memoranda and
verified witness statements, filed simultaneously, and responses, if necessary
in the judgment of the arbitrator or both the parties. If the Arbitration Panel
deems it to be appropriate for a fair resolution of the dispute, live
cross-examination or direct examination may be permitted. The Arbitration Panel
shall actively manage the arbitration with a
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view to achieving a just, speedy and cost-effective resolution of the dispute,
claim or controversy. The arbitration hearing will be no longer than 30 full
hearing days, unless in the judgment of the Arbitration Panel the matter is
complex and sophisticated and thereby requires a longer time; provided, however,
that such hearing shall in any event be completed within 180 calendar days. The
Arbitration Panel may set time and other limits on the presentation of each
party's case, its memoranda or other submissions, and may refuse to receive any
proffered evidence, that the Arbitration Panel finds to be cumulative,
unnecessary, irrelevant or of low probative nature. Except as otherwise set
forth herein, any arbitration hereunder will be conducted in accordance with the
CPR Rules for Non-Administered Arbitration of Business Disputes then prevailing
(except that the arbitration will not be conducted under the auspices of the CPR
and the fee schedule of the CPR will not apply). To the extent that the
provisions of this Agreement and the prevailing rules of the CPR conflict, the
provisions of this Agreement shall govern.
SECTION 10.07. Arbitration Decision. The final decision of the
Arbitration Panel will be rendered in writing to the parties not later than 60
days after the last hearing date, unless otherwise agreed by the parties in
writing. The decision of the Arbitration Panel will be final and binding on the
parties, and judgment thereon may be had and will be enforceable in any court
having jurisdiction over the parties. Arbitration awards will bear interest at
an annual rate of the Prime Rate plus 2% per annum.
SECTION 10.08. Discovery and Related Matters. Any party involved in the
applicable dispute may request limited document production from the other party
or parties of specific and expressly relevant documents. Any such discovery
shall be conducted expeditiously, and it is intended that discovery shall be
limited as compared to the provisions of the Federal Rules of Civil Procedure.
Depositions shall not occur except by consent of the parties or by order of the
Arbitration Panel. Disputes concerning the document production or other
discovery will be determined by written agreement of the parties involved in the
applicable dispute or, failing such agreement, will be referred to the
Arbitration Panel for resolution. All discovery requests will be subject to the
proprietary rights and rights of privilege of the parties, and the Arbitration
Panel will adopt procedures to protect such rights and to maintain the
confidential treatment of the arbitration proceedings (except as may be required
by law). Subject to the foregoing, the Arbitration Panel shall have the power to
issue subpoenas to compel the production of documents relevant to the dispute,
controversy or claim.
SECTION 10.09. Arbitration Panel's Authority. The Arbitration Panel shall
have full power and authority to determine issues of arbitrability and to
interpret or construe the applicable provisions of this Agreement or any other
Ancillary Agreement and to fashion appropriate remedies for breaches of this
Agreement (including interim or permanent injunctive relief); provided that the
Arbitration Panel shall not have any right or authority (i) in excess of the
authority a court having jurisdiction over the parties and the controversy or
dispute would have absent these arbitration provisions; (ii) to award
incidental, special, reliance, consequential, or other indirect damages
(including lost profits or revenues); (iii) to award punitive or treble damages;
or (iv) to modify the terms of this Agreement. It is the intention of the
parties that in rendering a decision, the Arbitration Panel give effect to the
applicable provisions of this Agreement and the other Ancillary Agreements and
follow applicable law (it being understood and agreed that this sentence shall
not give rise to a right of judicial review of the arbitrator's award).
SECTION 10.10. Confidentiality. Except as required by law, the parties
agree that the existence and contents of the entire arbitration, including the
award, shall be deemed a compromise of a dispute under Rule 408 of the Federal
Rules of Evidence, shall not be discoverable in any proceeding, shall not be
admissible in any court (except for the enforcement thereof) or arbitration and
shall not bind or collaterally estop either party with respect to any claim or
defense asserted by any third party. Except as required by law, the parties
shall hold, and shall cause their respective officers, directors, employees,
agents and other representatives to hold, the existence, content and result of
the arbitration or any mediation in confidence in accordance with the provisions
of Article 7 and except as may be required in order to enforce any award. Each
of the parties shall request that any mediator or arbitrator comply with such
confidentiality requirement.
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SECTION 10.11. Certain Additional Matters. (a) If a party fails or
refuses to appear at and participate in an arbitration hearing after due notice,
the arbitrator may hear and determine the controversy upon evidence produced by
the appearing party.
(b) Arbitration costs will be borne equally by each party involved in the
matter, except that each party will be responsible for its own attorneys' fees
and other costs and expenses, including the costs of witnesses selected by such
party.
(c) Prior to the time at which the Arbitration Panel are appointed, any
party may seek one or more temporary restraining orders in a court of competent
jurisdiction if necessary in order to preserve and protect the status quo.
Neither the request for, or grant or denial of, any such temporary restraining
order shall be deemed a waiver of the obligation to arbitrate as set forth
herein and the Arbitration Panel may dissolve, continue or modify any such
order.
(d) In the event that at any time any member of the Arbitration Panel shall
fail to serve as an arbitrator for any reason, the appropriate party or the two
party-selected arbitrators, as the case may be, shall select a new arbitrator,
in accordance with the procedures set forth in Section 10.04. The extent, if
any, to which testimony previously given shall be repeated or may be relied upon
based on the stenographic record (if there is one), shall be determined by the
replacement arbitrator.
SECTION 10.12. Limited Court Actions. (a) Notwithstanding anything herein
to the contrary, in the event that any party reasonably determines the amount in
controversy in any dispute, controversy or claim (or any series of related
disputes, controversies or claims) under this Agreement or any other Ancillary
Agreement is, or is reasonably likely to be, in excess of $100 million and if
such party desires to commence an Action in lieu of complying with the
arbitration provisions of this Article 10, such party shall so state in its
Arbitration Demand Notice. If the other parties to the arbitration disagree
about whether the amount in controversy exceeds $100 million, the Arbitration
Panel selected pursuant to Section 10.04 shall decide the issue. The Arbitration
Panel shall set a date no later than ten days after the date of its appointment
for submissions by the parties with respect to such issue. There shall be no
discovery in connection with such issue. The Arbitration Panel shall render its
decision on such issue within five days of such date so set by the Arbitration
Panel. The parties agree that any statute of limitations applicable to the
dispute, controversy or claim before the Arbitration Panel shall be tolled
during the pendency of the decision described in the immediately preceding
sentence. In the event that the Arbitration Panel determines that the amount in
controversy is or is reasonably likely to be in excess of $100 million, the
provisions of Sections 10.05, 10.06, 10.07, 10.08, and 10.14 shall not apply,
and within 15 days of such decision, any party to the arbitration may elect in
lieu of arbitration, to commence an Action with respect to such dispute,
controversy or claim (or such series of related disputes, controversies or
claims) in any court of competent jurisdiction returned to in Section 11.03. If
the Arbitration Panel does determines that the amount in controversy is not in
excess of $100 million, the provisions of this Article 10 (including with
respect to time periods) shall apply as if no determinations were sought or made
pursuant to this Section 10.12(a).
(b) In the event that an arbitration award in excess of $100 million is
issued in any arbitration proceeding commenced hereunder, any party may, within
60 days after the date of such award, submit the dispute, controversy or claim
(or series of related disputes, controversies or claims) giving rise thereto to
a court of competent jurisdiction, regardless of whether such party or any other
party sought to commence an Action in lieu of proceeding with arbitration in
accordance with Section 10.12(a). In such event, the applicable court may elect
to rely on the record developed in the arbitration or, if it determines that it
would be advisable in connection with the matter, allow the parties to seek
additional discovery or to present additional evidence. Each party shall be
entitled to present arguments to the court with respect to whether any such
additional discovery or evidence shall be permitted and with respect to all
other matters relating to the applicable dispute, controversy or claim (or
series of related disputes, controversies or claims).
SECTION 10.13. Continuity of Performance and Remaining
Obligations. Unless otherwise agreed in writing, the parties will continue to
provide service and honor all other commitments under this Agreement
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and each other Ancillary Agreement during the course of dispute resolution
pursuant to the provisions of this Article 10 with respect to all matters not
subject to such dispute, controversy or claim.
SECTION 10.14. Law Governing Arbitration Procedures. The interpretation
of the provisions of this Article 10, only insofar as they relate to the
agreement to arbitrate and any procedures pursuant thereto, shall be governed by
the Federal Arbitration Act and other applicable federal law. In all other
respects, the interpretation of this Agreement shall be governed as set forth in
Section 11.02.
SECTION 10.15. Non-applicability of Article. Notwithstanding anything
herein to the contrary, this Article 10 shall not apply to any dispute,
controversy or claim or to any other matter whatsoever arising under Section
6.02 or 6.03, the Tax Sharing Agreement, any other Tax sharing agreement or any
Third Party Tax Claims or to any other matter relating to Taxes. This Article
similarly shall not apply to the extent provided in any other Ancillary
Agreement.
ARTICLE 11
MISCELLANEOUS
SECTION 11.01. Counterparts; Entire Agreement; Corporate Power. (a) This
Agreement and each other Ancillary Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party.
(b) This Agreement, and the other Ancillary Agreements and the Exhibits,
Schedules and Appendices hereto and thereto contain the entire agreement between
the parties with respect to the subject matter hereof or thereof, supersede all
previous agreements, negotiations, discussions, writings, understandings,
commitments and conversations with respect to such subject matter and there are
no agreements or understandings between the parties other than those set forth
or referred to herein or therein.
(c) AT&T represents on behalf of itself and each of its Subsidiaries (other
than the AT&T Broadband Entities) and AT&T Broadband represents on behalf of
itself and each other AT&T Broadband Entity:
(i) each such Person is a corporation or other entity duly
incorporated or formed, validly existing and in good standing under the
laws of the state of its incorporation or formation, has all corporate or
other similar powers required to carry on its business as currently
conducted and is duly qualified to do business and is in good standing in
each jurisdiction where such qualification is necessary, except for those
jurisdictions where failure to be so qualified, individually or in the
aggregate, has not had and would not reasonably be expected to have an AT&T
Material Adverse Effect or an AT&T Broadband Material Adverse Effect,
respectively;
(ii) each such Person has the requisite corporate or other power and
authority and has taken all corporate or other similar action necessary in
order to execute, deliver and perform each of this Agreement and each other
Ancillary Agreements to which it is a party and to consummate the
transactions contemplated hereby and thereby; and
(iii) this Agreement and each other Ancillary Agreement to which any
such Person is a party has been duly executed and delivered by such Person
and constitutes a valid and binding agreement of such Person enforceable in
accordance with the terms thereof.
(d) Each party hereto acknowledges that it and each other party hereto is
executing certain of the Ancillary Agreements by facsimile, stamp or mechanical
signature. Each party hereto expressly adopts and confirms each such facsimile,
stamp or mechanical signature made in its respective name as if it were a manual
signature, agrees that it will not assert that any such signature is not
adequate to bind such party to the same extent as if it were signed manually and
agrees that at the reasonable request of any other
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party hereto at any time it will as promptly as reasonably practicable cause
each such Ancillary Agreement to be manually executed (any such execution to be
as of the date of the initial date thereof).
SECTION 11.02. Governing Law. This Agreement and, unless expressly
provided therein, each other Ancillary Agreement, shall be governed by and
construed and interpreted in accordance with the laws of the State of New York,
irrespective of the choice of laws principles of the State of New York, as to
all matters, including matters of validity, construction, effect,
enforceability, performance and remedies.
SECTION 11.03. Jurisdiction. Except as otherwise expressly provided in
this Agreement, the parties hereto agree that any suit, action or proceeding
seeking to enforce any provision of, or based on any matter arising out of or in
connection with, this Agreement, any of the other Ancillary Agreements or the
transactions contemplated hereby or thereby shall be brought in the United
States District Court for the Southern District of New York or any New York
State court sitting in New York City, so long as one of such courts shall have
subject matter jurisdiction over such suit, action or proceeding, and that any
cause of action arising out of this Agreement or out of any of the other
Ancillary Agreements shall be deemed to have arisen from a transaction of
business in the State of New York, and each of the parties hereby irrevocably
consents to the jurisdiction of such courts (and of the appropriate appellate
courts therefrom) in any such suit, action or proceeding and irrevocably waives,
to the fullest extent permitted by law, any objection that it may now or
hereafter have to the laying of the venue of any such suit, action or proceeding
in any such court or that any such suit, action or proceeding which is brought
in any such court has been brought in an inconvenient forum. Process in any such
suit, action or proceeding may be served on any party anywhere in the world,
whether within or without the jurisdiction of any such court. Without limiting
the foregoing, each party agrees that service of process on such party as
provided in Section 11.06 shall be deemed effective service of process on such
party.
SECTION 11.04. Waiver of Jury Trial. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATED TO THIS AGREEMENT, ANY OF THE OTHER ANCILLARY
AGREEMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
SECTION 11.05. Assignability. Except as set forth in any Ancillary
Agreement, this Agreement and each other Ancillary Agreement shall be binding
upon and inure to the benefit of the parties hereto and thereto, respectively,
and their respective successors and assigns; provided, however, that no party
hereto or thereto may assign its respective rights or delegate its respective
obligations under this Agreement or any other Ancillary Agreement without the
express prior written consent of each of the other parties hereto or thereto.
SECTION 11.06. AT&T Restructuring. AT&T and AT&T Broadband recognize that
AT&T is contemplating creating a tracking stock with respect to its consumer
services business. Subject to AT&T's obligations under the Merger Agreement,
including Section 9.06(b) thereof, nothing in this Agreement shall prevent the
creation by AT&T of any tracking stock with respect to such business or
otherwise. In the event of the creation of such a tracking stock, (i) references
in this Agreement to AT&T Common Stock shall be adjusted as necessary to
accommodate the existence of such tracking stock and (ii) AT&T may, but is not
required to, distribute all or a portion of the shares of such tracking stock in
the Distribution. In the event any such tracking stock is distributed in
connection with the Distribution, Article 4 shall be revised to appropriately
account for such distribution. Any adjustment or revision pursuant to the
preceding sentence shall be reasonably satisfactory to Comcast.
SECTION 11.07. Third Party Beneficiaries. Except for Comcast, which prior
to any termination of this Agreement shall be a third party beneficiary of AT&T
Broadband's rights under to this Agreement and each other Ancillary Agreement,
and except for the indemnification rights under this Agreement of any AT&T
Indemnitee or AT&T Broadband Indemnitee in their respective capacities as such,
and except as specifically provided in the Employee Benefits Agreement, (i) the
provisions of this Agreement and each other Ancillary Agreement are solely for
the benefit of the parties and are not intended to confer upon any Person except
the parties any rights or remedies hereunder, and (ii) there are no third party
B-44
beneficiaries of this Agreement or any other Ancillary Agreement and neither
this Agreement nor any other Ancillary Agreement shall provide any third person
with any remedy, claim, liability, reimbursement, claim of action or other right
in excess of those existing without reference to this Agreement or any other
Ancillary Agreement.
SECTION 11.08. Notices. All notices or other communications under this
Agreement or any other Ancillary Agreement shall be in writing and shall be
deemed to be duly given when (a) delivered in person or (b) deposited in the
United States mail or private express mail, postage prepaid, addressed as
follows:
If to AT&T, to:
AT&T Corp.
295 North Maple Avenue
Basking Ridge, New Jersey 07920
Attention: Marilyn J. Wasser
Fax: (908) 953-8360
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Richard D. Katcher
Steven A. Rosenblum
Stephanie J. Seligman
Fax: (212) 403-2000
If to AT&T Broadband, to:
AT&T Broadband Corp.
295 North Maple Avenue
Basking Ridge, New Jersey 07920
Attention: Marilyn J. Wasser
Fax: (908) 953-8360
with a copy to:
Comcast Corporation
1500 Market Street
Philadelphia, Pennsylvania 19102
Attention: General Counsel
Fax: (215) 981-7794
and:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Dennis S. Hersch
William L. Taylor
Fax: (212) 450-4800
Any party may, by notice to the other party, change the address to which such
notices are to be given.
SECTION 11.09. Severability. If any provision of this Agreement or any
other Ancillary Agreement or the application thereof to any Person or
circumstance is determined by a court of competent jurisdiction
B-45
to be invalid, void or unenforceable, the remaining provisions hereof or
thereof, or the application of such provision to Persons or circumstances or in
jurisdictions other than those as to which it has been held invalid or
unenforceable, shall remain in full force and effect and shall in no way be
affected, impaired or invalidated thereby, so long as the economic or legal
substance of the transactions contemplated hereby or thereby, as the case may
be, is not affected in any manner adverse to any party. Upon such determination,
the parties shall negotiate in good faith in an effort to agree upon such a
suitable and equitable provision to effect the original intent of the parties.
SECTION 11.10. Expenses. The provisions of Sections 11.03(a)-(c) of the
Merger Agreement are hereby incorporated by reference.
SECTION 11.11. Headings. The Article, Section and paragraph headings
contained in this Agreement and in the other Ancillary Agreements are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement or any other Ancillary Agreement.
SECTION 11.12. Waivers of Default. Waiver by any party of any default by
the other party of any provision of this Agreement or any other Ancillary
Agreement shall not be deemed a waiver by the waiving party of any subsequent or
other default, nor shall it prejudice the rights of the other party.
SECTION 11.13. Specific Performance. In the event of any actual or
threatened default in, or breach of, any of the terms, conditions and provisions
of this Agreement or any other Ancillary Agreement, the party or parties who are
or are to be thereby aggrieved shall have the right to specific performance and
injunctive or other equitable relief of its rights under this Agreement or such
other Ancillary Agreement, in addition to any and all other rights and remedies
at law or in equity, and all such rights and remedies shall be cumulative. The
parties agree that the remedies at law for any breach or threatened breach,
including monetary damages, are inadequate compensation for any loss and that
any defense in any action for specific performance that a remedy at law would be
adequate is waived. Any requirements for the securing or posting of any bond
with such remedy are waived.
SECTION 11.14. Amendments. No provisions of this Agreement or any other
Ancillary Agreement shall be deemed waived, amended, supplemented or modified by
any party, unless such waiver, amendment, supplement or modification is in
writing and signed by the authorized representative of the party against whom
such waiver, amendment, supplement or modification it is sought to be enforced.
SECTION 11.15. Late Payments. Except as expressly provided to the
contrary in this Agreement or in any other Ancillary Agreement, any amount not
paid when due pursuant to this Agreement or any other Ancillary Agreement (and
any amounts billed or otherwise invoiced or demanded and properly payable that
are not paid within 30 days of such bill, invoice or other demand) shall accrue
interest at a rate per annum equal to the Prime Rate plus 2%.
SECTION 11.16. Interpretation. Words in the singular shall be held to
include the plural and vice versa and words of one gender shall be held to
include the other genders as the context requires. The terms "hereof," "herein,"
and "herewith" and words of similar import herein (or in any Ancillary
Agreement) shall, unless otherwise stated, be construed to refer to this
Agreement (or the applicable other Ancillary Agreement) taken as a whole
(including all of the Schedules, Exhibits and Appendices hereto and thereto) and
not to any particular provision of this Agreement (or such other Ancillary
Agreement). Article, Section, Exhibit, Schedule and Appendix references are to
the Articles, Sections, Exhibits, Schedules and Appendices to this Agreement (or
the applicable other Ancillary Agreement) unless otherwise specified. The word
"including" and words of similar import when used in this Agreement (or the
applicable other Ancillary Agreement) means "including, without limitation,"
unless the context otherwise requires or unless otherwise specified. The word
"or" shall not be exclusive. Unless expressly stated to the contrary in this
Agreement or in any other Ancillary Agreement, all references to "the date
hereof," "the date of this Agreement," "hereby" and "hereupon" and words of
similar import shall all be references to December 19, 2001 (or the date of
which the relevant Ancillary Agreement is first entered into, as the case may
be) regardless of any amendment or restatement hereof (or thereof). References
to a "member" of either Group shall be held to include any corporation or other
Person within the definition of
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such Group. References to "legal fees" shall include allocated costs of in-house
counsel. The parties hereto have participated jointly in the negotiation and
drafting of this Agreement, and in the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the parties hereto, and no presumption or burden of proof shall arise
favoring or disfavoring any party hereto by virtue of the authorship of any
provisions of this Agreement.
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IN WITNESS WHEREOF, the parties have caused this Separation and
Distribution Agreement to be executed by their duly authorized representatives.
AT&T CORP.
By: /s/ MARILYN J. WASSER
------------------------------------
Name: Marilyn J. Wasser
Title: Vice President -- Law and
Secretary
AT&T BROADBAND CORP.
By: /s/ ROBERT S. FEIT
------------------------------------
Name: Robert S. Feit
Title: Vice President and
Assistant Secretary
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ANNEX I
The following provisions set forth the parties' understandings with respect
to the disposition of all or any portion of the interest in TWE (the "TWE
INTEREST") held, as of the date hereof, by MediaOne TWE Holdings, Inc. and its
affiliates at any time or from time to time whether prior to or after the
Closing Date:
(a) The following terms, as used in this Annex I, have the following
meanings:
"CLOSING DATE" has the meaning set forth in the Merger Agreement.
"CONTINGENT PAYMENT" means (i) 50% of the excess, if any, of (A) the
Determined Value over (B) the Threshold Amount, reduced by (ii) an amount equal
to the product of 50% of such excess and the rate set forth in subparagraph (e)
hereof.
"DETERMINED VALUE" means the Fair Market Value of the TWE Interest or
portion thereof disposed of, as the case may be; provided, however, that if all
or any portion of the TWE Interest is disposed of within the TWE Disposition
Period under Article XIII of the TWE Partnership Agreement or pursuant to one or
more negotiated dispositions or public or private market dispositions, then the
Determined Value with respect to such portion shall be the Proceeds from such
disposition(s).
"FAIR MARKET VALUE" means with respect to all or any portion of the TWE
Interest, the Proceeds that would be received in a public offering of such
interest (or corresponding equity securities of a corporation into which TWE is
converted or that holds the TWE interest) (after deducting (i) reasonable
expenses, including underwriters' discounts and commissions and (ii) in the
event such offering is an initial public offering, an appropriate initial public
offering discount) based on the then prevailing market conditions.
"PARENT" has the meaning set forth in the Merger Agreement.
"PROCEEDS" means (subject to clause (d) below) (a) if the proceeds are paid
in cash, the amount of the cash actually received;
(b) if the proceeds are paid in securities, assets or rights:
(i) in the case of securities, assets or rights listed on any
established stock exchange or a national market system including the
National Market System of the National Association of Securities Dealers,
Inc. Automated Quotation ("NASDAQ") System, Proceeds means the average of
the closing sales price for such item (or the closing bid, if no sales were
reported) reported in the Wall Street Journal for the 20 consecutive
trading day period prior to such date;
(ii) in the case of securities, assets or rights quoted on the NASDAQ
System (but not on the National Market System thereof) or regularly quoted
by a recognized securities dealer but selling prices are not reported,
Proceeds means the average of the means between the high and low asked
prices for the item for the 20 consecutive trading day period prior to such
date; or
(iii) in the absence of an established market for the securities,
assets or rights (including the rights embodied in this Annex I), Proceeds
means the fair value thereof as determined in good faith by a mutually
acceptable investment banking firm.
"THRESHOLD AMOUNT" means at any given time, an amount, which will initially
be $10.2 billion and shall be reduced by the aggregate Proceeds of previous
dispositions of the TWE Interest received from time to time, provided that from
the date the Merger Agreement is entered into, the outstanding balance of the
Threshold Amount from time to time shall bear simple interest at a rate of 7%
per annum and such interest shall be added to the Threshold Amount.
"TWE DISPOSITION PERIOD" has the meaning set forth in clause (b) of this
Annex I.
(b) If all or any part of the TWE Interest is disposed of by AT&T
Broadband, Parent or their respective successors during the period beginning on
the date the Merger Agreement is signed and ending on the last day of the 54th
month after the Closing Date (the "TWE DISPOSITION PERIOD"), and the
B-I-49
Closing occurs, AT&T Broadband shall pay to AT&T on behalf of the AT&T
Communications Group, an amount equal to the Contingent Payment. Any Contingent
Payment shall be paid in the same proportion of cash, securities, assets and
rights as was received in the disposition and no Contingent Payment shall be
made until amounts equal to the Threshold Amount have been received as Proceeds.
For the avoidance of doubt, the transactions contemplated by the Merger
Agreement and this Agreement shall not be considered a disposition for purposes
hereof.
(c) If the TWE Interest has not been fully disposed of within the TWE
Disposition Period, the remaining interest shall be appraised by a mutually
acceptable investment banking firm on the basis of Fair Market Value. To the
extent that the Proceeds that would be received if such remaining interest were
disposed of for Fair Market Value exceeds the Threshold Amount, AT&T Broadband
shall pay to AT&T on behalf of the AT&T Communications Group an amount in cash
equal to 50% of such excess, reduced by an amount equal to the product at 50% of
such excess and the tax rate set forth in subparagraph (e) hereof, and AT&T
Broadband shall have no further obligations under this Annex I. If no payment is
required to be made pursuant to the preceding sentence, AT&T Broadband shall
have no further obligations under this Annex I.
(d) In the event that, before the Closing Date, AT&T (subject to Section
8.01(xii) of the Merger Agreement), or after the Closing Date, Parent, effects a
disposition of the TWE Interest on a Tax deferred basis, the payment to be made
to AT&T (taking into account the present value of the deferred Tax, the direct
and indirect costs of executing the transaction (including the detriment of any
guarantees required to be given) and the risk of the transaction) shall be
determined in good faith by the Board of Directors of AT&T Broadband or Parent,
as applicable.
(e) For purposes of this Annex I, the Tax rate will be assumed to be the
highest combined federal, state and local marginal corporate Tax rate in effect
at the relevant time.
(f) For all Tax purposes (unless required by a change in applicable Tax law
or resolution of a contest conducted in good faith and not settled, compromised
and/or conceded without the other party's consent, which shall not be
unreasonably withheld), the parties hereto agree to treat, and to cause their
respective affiliates to treat any payment hereunder as a distribution by AT&T
Broadband to AT&T, as the case may be, occurring immediately prior to the
Distribution and in connection with the Distribution.
B-I-50
ANNEX C
FORM OF AMENDED AND RESTATED ARTICLES OF INCORPORATION OF AT&T COMCAST
CORPORATION
The Articles of Incorporation of the Corporation shall be amended and
restated in their entirety so as to read as follows:
FIRST: The name of the Corporation is AT&T Comcast Corporation (the
"CORPORATION").
SECOND: The location and post office address of the Corporation's current
registered office in this Commonwealth is:
1500 Market Street, 35th floor
Philadelphia, PA 19102-2148
THIRD: The Corporation is incorporated under the provisions of the
Business Corporation Law of 1988. The purpose or purposes for which the
Corporation is organized are:
To have unlimited power to engage in and to do any lawful act concerning
any or all lawful business for which corporations may be incorporated under the
Business Corporation Law.
FOURTH: The term of its existence is perpetual.
FIFTH: The aggregate number of shares which the Corporation shall have
authority to issue is SEVEN BILLION FIVE HUNDRED MILLION (7,500,000,000) shares
of Class A Common Stock, par value $0.01 per share, SEVEN BILLION FIVE HUNDRED
MILLION (7,500,000,000) shares of Class A Special Common Stock, par value $0.01
per share, SEVENTY FIVE MILLION (75,000,000) shares of Class B Common Stock, par
value $0.01 per share, and TWENTY MILLION (20,000,000) shares of Preferred
Stock, which the Board of Directors may issue, in one or more series, without
par value, with full, limited, multiple, fractional, or no voting rights, and
with such designations, preferences, qualifications, privileges, limitations,
restrictions, options, conversion rights and other special or relative rights as
shall be fixed by the Board of Directors.
B. The descriptions, preferences, qualifications, limitations,
restrictions and the voting, special or relative rights in respect of the shares
of each class of Common Stock are as follows:
1. (a) Subject to paragraph (B)(1)(c) of this Article FIFTH, each
share of Class A Common Stock shall entitle the holder thereof to 0.2254 of
a vote and each share of Class B Common Stock shall entitle the holder
thereof to fifteen (15) votes. Holders of shares of Class A Special Common
Stock shall not be entitled to vote for the election of directors or any
other matter except as may be required by applicable law, in which case
each share of Class A Special Common Stock shall entitle the holder thereof
to 0.2254 of a vote.
(b) Except as provided in Article SEVENTH or required by applicable
law, only the holders of Class A Common Stock, the holders of Class B
Common Stock and the holders of any other class or series of Common Stock,
Preferred Stock or other class of capital stock of the Corporation (if any)
with voting rights shall be entitled to vote and shall vote as a single
class on all matters with respect to which a vote of the shareholders of
the Corporation is required or permitted under applicable law, these
Articles of Incorporation, or the By-Laws of the Corporation. Whenever
applicable law, these Articles of Incorporation or the By-Laws of the
Corporation provide for a vote of the shareholders of the Corporation on
any matter, approval of such matter shall require the affirmative vote of a
majority of the votes cast by the holders entitled to vote thereon unless
otherwise expressly provided under applicable law, these Articles of
Incorporation or the By-Laws of the Corporation.
(c) Notwithstanding any other provision of these Articles of
Incorporation, including paragraph (B)(1)(a) of this Article FIFTH, but
subject to Article SEVENTH, with respect to any matter on which the holders
of Class B Common Stock and the holders of one or more classes or series of
Common Stock, Preferred Stock or any other class of capital stock of the
Corporation (if
C-1
any) vote as a single class, each share of Class B Common Stock shall
entitle the holder thereof to the number of votes necessary so that, if all
holders of Class B Common Stock and all holders of each such other class or
series of Common Stock, Preferred Stock and other class of capital stock of
the Corporation (if any) were to cast all votes they are entitled to cast
on such matter, the holders of the Class B Common Stock in the aggregate
would cast thirty three and one-third (33 1/3) per cent of the total votes
cast by all such holders. If at any time after the Effective Time for any
reason whatsoever the number of shares of Class B Common Stock outstanding
at such time is reduced below the number of shares of Class B Common Stock
outstanding at the Effective Time (appropriately adjusted for any stock
dividend paid in Class B Common Stock, stock splits of the Class B Common
Stock or combinations, consolidations or reclassifications of the Class B
Common Stock), the percentage specified in the preceding sentence shall be
reduced to a percentage equal to the product of (i) thirty three and
one-third (33 1/3) and (ii) the fraction obtained by dividing the number of
shares of Class B Common Stock outstanding at such time by the number of
shares of Class B Common Stock outstanding at the Effective Time
(appropriately adjusted for any stock dividend paid in Class B Common
Stock, stock splits of the Class B Common Stock or combinations,
consolidations or reclassifications of the Class B Common Stock). No
reduction in the percentage of the voting power of the Class B Common Stock
pursuant to the preceding sentence shall be reversed by any issuance of
Class B Common Stock that occurs after such reduction.
2. The holders of Class A Common Stock, the holders of Class A
Special Common Stock and the holders of Class B Common Stock shall be
entitled to receive, from time to time, when and as declared, in the
discretion of the Board of Directors, such cash dividends as the Board of
Directors may from time to time determine, out of such funds as are legally
available therefor, in proportion to the number of shares held by them,
respectively, without regard to class.
3. The holders of Class A Common Stock, the holders of Class A
Special Common Stock, and the holders of Class B Common Stock shall be
entitled to receive, from time to time, when and as declared by the Board
of Directors, such dividends of stock of the Corporation or other property
as the Board of Directors may determine, out of such funds as are legally
available therefor. Stock dividends on, or stock splits of, any class of
Common Stock shall not be paid or issued unless paid or issued on all
classes of Common Stock, in which case they shall be paid or issued only in
shares of that class; provided, however, that stock dividends on, or stock
splits of, Class B Common Stock may be paid or issued in shares of Class A
Special Common Stock. Any decrease in the number of shares of any class of
Common Stock resulting from a combination or consolidation of shares or
other capital reclassification shall not be permitted unless parallel
action is taken with respect to each other class of Common Stock, so that
the number of shares of each class of Common Stock outstanding shall be
decreased proportionately. Notwithstanding anything to the contrary
contained herein, in the event of a distribution of property, plan of
merger or consolidation, plan of asset transfer, plan of division, plan of
exchange, or recapitalization pursuant to which the holders of Class A
Common Stock, the holders of Class A Special Common Stock and the holders
of Class B Common Stock would be entitled to receive equity interests of
one or more corporations (including, without limitation, the Corporation)
or other entities, or rights to acquire such equity interests, then the
Board of Directors may, by resolution duly adopted, provide that the
holders of Class A Common Stock, the holders of Class A Special Common
Stock, and the holders of Class B Common Stock, respectively and as
separate classes, shall receive with respect to their Class A Common Stock,
Class A Special Common Stock, or Class B Common Stock (whether by
distribution, exchange, redemption or otherwise), in proportion to the
number of shares held by them, equity interests (or rights to acquire such
equity interests) of separate classes or series having substantially
equivalent relative designations, preferences, qualifications, privileges,
limitations, restrictions and rights as the relative designations,
preferences, qualifications, privileges, limitations, restrictions and
rights of the Class A Common Stock, Class A Special Common Stock and Class
B Common Stock. Except as provided above, if there should be any
distribution of property, merger, consolidation, purchase or acquisition of
property or stock, asset transfer, division, share exchange,
recapitalization or reorganization of the Corporation, the holders of Class
A Common Stock, the holders of Class A Special Common Stock, and the
holders of Class B
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Common Stock shall receive the shares of stock, other securities or rights
or other assets as would be issuable or payable upon such distribution,
merger, consolidation, purchase or acquisition of such property or stock,
asset transfer, division, share exchange, recapitalization or
reorganization in proportion to the number of shares held by them,
respectively, without regard to class.
4. Each share of Class B Common Stock shall be convertible at the
option of the holder thereof into one share of Class A Common Stock or one
share of Class A Special Common Stock. Each share of Class B Common Stock
shall be cancelled after it has been converted as provided herein.
5. Subject to Article SEVENTH and except as otherwise permitted by
applicable law, each and any provision of these Articles of Incorporation
may from time to time, when and as desired, be amended by a resolution of
the Board of Directors and the affirmative vote of a majority of the votes
cast by all shareholders entitled to vote thereon, as determined in
accordance with the provisions of this Article FIFTH. There shall be no
class voting on any such amendments or on any other matter except as shall
be required by Article SEVENTH or by applicable law, in which case there
shall be required the affirmative vote of a majority of the votes cast by
the holders of the outstanding shares of each class entitled to vote by
Article SEVENTH or by applicable law, voting as a separate class.
6. If there should be any merger, consolidation, purchase or
acquisition of property or stock, separation, reorganization, division or
share exchange, the Board of Directors shall take such action as may be
necessary to enable the holders of the Class B Common Stock to receive upon
any subsequent conversion of their stock into Class A Common Stock or Class
A Special Common Stock (as the case may be), in whole or in part, in lieu
of any shares of Class A Common Stock or Class A Special Common Stock (as
the case may be) of the Corporation, the shares of stock, securities, or
other assets as would be issuable or payable upon such merger,
consolidation, purchase, or acquisition of property or stock, separation,
reorganization, division or share exchange in respect of or in exchange for
such share or shares of Class A Common Stock or Class A Special Common
Stock (as the case may be).
7. In the event of any liquidation, dissolution or winding up (either
voluntary or involuntary) of the Corporation, the holders of Class A Common
Stock, the holders of Class A Special Common Stock and the holders of Class
B Common Stock shall be entitled to receive the assets and funds of the
Corporation in proportion to the number of shares held by them,
respectively, without regard to class.
8. At all times the Board of Directors shall take such action to
adjust the conversion privileges of the Class B Common Stock and the number
of shares of Class B Common Stock to be outstanding after any particular
transaction to prevent the dilution of the conversion rights of the holders
of Class B Common Stock.
9. Except as expressly set forth in these Articles of Incorporation
(including, without limitation, this Article FIFTH and Article SEVENTH),
the rights of the holders of Class A Common Stock, the rights of the
holders of Class A Special Common Stock and the rights of the holders of
Class B Common Stock shall be in all respects identical.
10. Neither the holders of the Class A Common Stock nor the holders
of the Class B Common Stock nor the holders of any other class or series of
Common Stock, Preferred Stock or other class of capital stock of the
Corporation, whether issued prior to or after the Effective Time, shall
have cumulative voting rights.
C-3
SIXTH: Governance
A. Definitions
1. "AT&T" means AT&T Corp., a New York corporation.
2. "AT&T DIRECTORS" means (i) those five (5) Directors designated by
AT&T to serve as members of the Board of Directors pursuant to a
contractual right of AT&T to designate such Directors and (ii) any
Replacement AT&T Director.
3. "BOARD OF DIRECTORS" means the Board of Directors of the
Corporation.
4. "CEO" means the Chief Executive Officer of the Corporation.
5. "CHAIRMAN" means the Chairman of the Board of Directors.
6. "COMCAST" means Comcast Corporation, a Pennsylvania corporation.
7. "COMCAST DIRECTORS" means (i) those five (5) Directors designated
by Comcast to serve as members of the Board of Directors pursuant to a
contractual right of Comcast to designate such Directors and (ii) any
Replacement Comcast Director.
8. "DIRECTOR" means a director of the Corporation.
9. "DIRECTORS NOMINATING COMMITTEE" has the meaning specified in
paragraph (E) of this Article SIXTH.
10. "EFFECTIVE TIME" means the date and time at which these Amended
and Restated Articles of Incorporation become effective with the Department
of State of the Commonwealth of Pennsylvania.
11. "HOLIDAY" has the meaning specified in paragraph (B)(4) of this
Article SIXTH.
12. "INDEPENDENT DIRECTOR" means (i) those two (2) Independent
Persons jointly designated by AT&T and Comcast to serve as members of the
Board of Directors pursuant to a contractual right of AT&T and Comcast to
designate such Directors and (ii) any Replacement Independent Director.
13. "INDEPENDENT PERSON" means a disinterested, independent person
(determined in accordance with customary standards for independent
directors applicable to U.S. public companies), it being understood that
(i) each individual who was a member of the Board of Directors of AT&T as
of December 19, 2001 (other than Mr. C. Michael Armstrong) was deemed to be
an Independent Person as of December 19, 2001, (ii) none of the Comcast
Directors (other than Decker Anstrom) as of December 19, 2001 was deemed to
be an Independent Person as of December 19, 2001 and (iii) none of the
spouse, parents, siblings, lineal descendants, aunts, uncles, cousins and
other close relatives (or their respective spouses) of Mr. Brian L. Roberts
will be deemed Independent Persons at any time.
14. "INITIAL TERM" means the period beginning at the Effective Time
and ending at the 2005 annual meeting of shareholders of the Corporation.
15. "REPLACEMENT AT&T DIRECTOR" has the meaning specified in
paragraph (B)(2) of this Article SIXTH.
16. "REPLACEMENT COMCAST DIRECTOR" has the meaning specified in
paragraph (B)(2) of this Article SIXTH.
17. "REPLACEMENT DIRECTOR" has the meaning specified in paragraph
(B)(2) of this Article SIXTH.
18. "REPLACEMENT INDEPENDENT DIRECTOR" has the meaning specified in
paragraph (B)(2) of this Article SIXTH.
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19. "SPECIFIED PERIOD" means the period beginning at the Effective
Time and ending at the 2005 annual meeting of shareholders of the
Corporation or, if earlier, the date on which Mr. C. Michael Armstrong
ceases to be the Chairman.
B. Directors
1. From the Effective Time until the expiration of the Initial Term,
the Board of Directors shall consist of twelve (12) Directors. From the
Effective Time until the expiration of the Initial Term, the Board of
Directors shall consist of the Comcast Directors, the AT&T Directors and
the Independent Directors. At all times, the Board of Directors shall
consist of a majority of Independent Persons.
2. From the Effective Time until the expiration of the Initial Term,
the Board of Directors shall take all action necessary to ensure that any
seat on the Board of Directors held by (i) a Comcast Director which becomes
vacant is filled promptly by a person designated by a majority of the
Comcast Directors remaining on the Board of Directors; provided that at all
times one of the Comcast Directors must be an Independent Person (such
person, a "REPLACEMENT COMCAST DIRECTOR"), (ii) an AT&T Director which
becomes vacant is filled promptly by a person designated by a majority of
the AT&T Directors remaining on the Board of Directors (such person, a
"REPLACEMENT AT&T DIRECTOR") and (iii) an Independent Director which
becomes vacant is filled promptly by an Independent Person designated by
the Independent Director remaining on the Board of Directors or, if at such
time, there is no Independent Director remaining on the Board of Directors,
by the Board of Directors (such person, a "REPLACEMENT INDEPENDENT
DIRECTOR" and, together with any Replacement Comcast Director and any
Replacement AT&T Director, a "REPLACEMENT DIRECTOR"); provided that the
designation of any Replacement Independent Director by the Independent
Director remaining on the Board of Directors shall be subject to the
approval of the Board of Directors prior to such person becoming a
Replacement Independent Director.
3. Each of the Comcast Directors, AT&T Directors and Independent
Directors at the Effective Time, and each Replacement Director elected to
the Board of Directors in accordance with this Article SIXTH during the
Initial Term, shall hold office until the expiration of the Initial Term
and until such Director's successor has been selected and qualified or
until such Director's earlier death, resignation or removal.
4. The first annual meeting of shareholders of the Corporation shall
occur on such date and at such time in April 2005 as the Board of Directors
may determine, or if the Board of Directors fails to set a date and time,
on the second Thursday of April 2005 at 9:00 o'clock a.m., if, in either
case, not a holiday on which national banks are or may elect to be closed
("HOLIDAY"), and if such day is a Holiday, then such meeting shall be held
on the next business day at such time.
C. Office of the Chairman
1. At the Effective Time and during the Specified Period, there shall
be an Office of the Chairman which shall be comprised of the Chairman and
the CEO.
2. The Office of the Chairman shall be the Corporation's principal
executive deliberative body with responsibility for corporate strategy,
policy and direction, governmental affairs and other matters of
significance to the Corporation. The Chairman and the CEO shall advise and
consult with each other with respect to each of the foregoing matters.
D. Officers
1. Chairman.
(a) At the Effective Time and during the Specified Period, the
Chairman shall be Mr. C. Michael Armstrong if he is willing and available
to serve; provided that from and after April 1, 2004, if the Specified
Period has not expired, Mr. C. Michael Armstrong shall be non-executive
Chairman for the remainder of the Specified Period. After the Specified
Period, the Chairman shall be Mr. Brian L. Roberts if he is willing and
available to serve.
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(b) The Chairman shall preside at all meetings of the shareholders of
the Corporation and of the Board of Directors. In the absence of the
Chairman, if the Chairman and the CEO are not the same person, the CEO
shall chair such meetings.
(c) The Chairman shall have the authority to call special meetings of
the Board of Directors, in the manner provided by the By-Laws of the
Corporation.
(d) Removal of the Chairman shall require the affirmative vote of at
least 75% of the entire Board of Directors until the earlier to occur of
(i) the date on which neither Mr. C. Michael Armstrong nor Mr. Brian L.
Roberts is the Chairman and (ii) the fifth anniversary of the expiration of
the Initial Term.
2. Chief Executive Officer and President.
(a) At the Effective Time, the CEO shall be Mr. Brian L. Roberts if he
is willing and available to serve. For so long as Mr. Brian L. Roberts
shall be the CEO, he shall also be the President of the Corporation.
(b) The powers, rights, functions and responsibilities of the CEO
shall include, without limitation, the following, subject to the control
and direction of the Board of Directors:
(i) the supervision, coordination and management of the
Corporation's business, operations, activities, operating expenses and
capital allocation;
(ii) matters relating to officers (other than the Chairman) and
employees, including, without limitation, hiring, terminating, changing
positions and allocating responsibilities of such officers and
employees; provided that, if the Chairman and the CEO are not the same
person, the CEO shall consult with the Chairman in connection with the
foregoing as it relates to the senior executives of the Corporation;
provided, further, that following the initial designation of officers by
the CEO (in consultation with the Chairman) as provided herein, the
election of officers shall be as provided in the By-Laws of the
Corporation;
(iii) all of the powers, rights, functions and responsibilities
typically exercised by a chief executive officer and president of a
corporation; and
(iv) the authority to call special meetings of the Board of
Directors, in the manner provided by the By-Laws of the Corporation.
(c) Removal of the CEO shall require the affirmative vote of at least
75% of the entire Board of Directors until the earlier to occur of (i) the
date on which Mr. Brian L. Roberts ceases to be the CEO and (ii) the fifth
anniversary of the expiration of the Initial Term.
E. Directors Nominating Committee. The Directors Nominating Committee
(the "DIRECTORS NOMINATING COMMITTEE") shall have the power to nominate
individuals for election by the shareholders of the Corporation as Directors at
the 2005 annual meeting of shareholders of the Corporation and thereafter.
During the Initial Term, the Directors Nominating Committee shall consist of Mr.
Brian L. Roberts, if he is the Chairman or the CEO, one (1) Comcast Director who
is an Independent Person selected by the Comcast Directors and three (3)
Directors who are Independent Persons selected from the AT&T Directors and the
Independent Directors by the Comcast Directors. During the Initial Term, if Mr.
Brian L. Roberts is not the Chairman or the CEO, the Directors Nominating
Committee shall consist of two (2) Comcast Directors selected by the Comcast
Directors one of whom shall be an Independent Person and three (3) Independent
Persons selected from the AT&T Directors and the Independent Directors by the
Comcast Directors. After the Initial Term, the Directors Nominating Committee
shall consist of Mr. Brian L. Roberts, if he is the Chairman or CEO, and four
(4) Directors who are Independent Persons selected by Mr. Brian L. Roberts;
provided that no Director who was a Comcast Director may be selected by Mr.
Brian L. Roberts as a member of the Directors Nominating Committee pursuant to
this sentence prior to the seventh anniversary of the date that such Director
was initially elected to the Board of Directors. After the Initial Term, if Mr.
Brian L. Roberts is not the Chairman or
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CEO, the Directors Nominating Committee shall be constituted as determined by
the Board of Directors. At any time that Mr. Brian L. Roberts is a member of the
Directors Nominating Committee, he shall be the Chairman of the Directors
Nominating Committee. All powers otherwise held by the Board of Directors to
nominate individuals for election by the shareholders of the Corporation as
Directors shall reside exclusively in the Directors Nominating Committee, no
such nominations shall be made by the Board of Directors and all nominations of
the Directors Nominating Committee shall be submitted directly to the
shareholders of the Corporation without any requirement that such nominations be
submitted to the Board of Directors for its approval or ratification.
F. Executive Committee. If the Board of Directors decides to establish an
Executive Committee, if he is willing and able to serve and for so long as he
shall be a member of the Board of Directors, Mr. Ralph J. Roberts shall be the
Chairman of the Executive Committee.
G. Amendment. Subject to paragraph (H) of this Article SIXTH, until the
earlier to occur of (i) the date on which Mr. Brian L. Roberts is no longer
serving as the Chairman or the CEO and (ii) the fifth anniversary of the
expiration of the Initial Term, the provisions of this Article SIXTH and the
provisions of Article 9 of the By-Laws may not be amended, altered, repealed or
waived in any respect without the prior approval of at least 75% of the entire
Board of Directors.
H. Termination. If Mr. Brian L. Roberts is no longer serving as the
Chairman or the CEO, the provisions of this Article SIXTH (other than paragraphs
(A) and (E) and the last sentence of paragraph (B)(1), in each case of this
Article SIXTH) shall terminate automatically without any further action of the
Board of Directors or the shareholders of the Corporation; provided that
notwithstanding the foregoing, in the event that Mr. Brian L. Roberts ceases to
serve as the Chairman or the CEO prior to the 2005 annual meeting of
shareholders of the Corporation, the provisions of paragraphs (A), (B), (C),
(D)(1)(a)-(c) and (E) of this Article SIXTH shall survive through the close of
such annual meeting.
SEVENTH: In addition to any other approval required by law or by these
Articles of Incorporation, and notwithstanding any provision of Article FIFTH,
the approval of the holders of Class B Common Stock, voting separately as a
class, shall be necessary to approve (i) any merger or consolidation of the
Corporation with another entity or any other transaction, in each case that
requires the approval of the shareholders of the Corporation pursuant to the law
of the Commonwealth of Pennsylvania or other applicable law, or any other
transaction that would result in any person or group (as such term is defined in
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) owning
shares representing in excess of 10% of the combined voting power of the
resulting or surviving corporation, or any issuance of securities (other than
pursuant to director or officer stock option or purchase plans) requiring
shareholder approval under the applicable rules and regulations of any stock
exchange or quotation system, (ii) any issuance of shares of Class B Common
Stock or any securities exercisable or exchangeable for or convertible into
shares of Class B Common Stock or (iii) any amendment to these Articles of
Incorporation (including, without limitation, any amendment to elect to have any
of Subchapters E, F, G, H, I and J or Section 2538 of Subchapter D, in each case
of Chapter 25 of the Business Corporation Law of 1988, be applicable to the
Corporation or any amendment to this Article SEVENTH) or the By-Laws of the
Corporation or any other action (including, without limitation, the adoption,
amendment or redemption of a shareholder rights plan) that would, in any such
case, limit the rights of the holders of Class B Common Stock or any subsequent
transferee of Class B Common Stock to transfer, vote or otherwise exercise
rights with respect to capital stock of the Corporation. In addition to any
other approval required by law or by these Articles of Incorporation, and
notwithstanding any provision of Article FIFTH, the approval of the holder of
any class or series of shares of the Corporation shall be necessary to approve
any amendment to these Articles of Incorporation which would make any change in
the preferences, limitations or rights of the shares of such class or series
adverse to such class or series.
EIGHTH: Special meetings of shareholders may be called only by the Board
of Directors and may not be called by shareholders of the Corporation.
NINTH: The shareholders of the Corporation shall not be permitted to act
by written consent in lieu of a meeting; provided that notwithstanding the
foregoing, the holders of a majority of the Class B
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Common Stock shall be permitted to act by written consent in lieu of a meeting
in the exercise of their approval rights under Article SEVENTH.
TENTH: The Board of Directors shall have the power to amend the By-Laws to
the extent provided therein, subject only to applicable law. Any amendment to
the By-Laws approved by the shareholders of the Corporation shall not be deemed
to have been adopted by the Corporation unless it has been previously approved
by the Board of Directors.
ELEVENTH: No person who is or was a Director shall be personally liable,
as such, for monetary damages (other than under criminal statutes and under
federal, state and local laws imposing liability on directors for the payment of
taxes) unless the person's conduct constitutes self-dealing, willful misconduct
or recklessness. No amendment or repeal of this Article ELEVENTH shall apply to
or have any effect on the liability or alleged liability of any person who is or
was a Director for or with respect to any acts or omissions of the Director
occurring prior to the effective date of such amendment or repeal. If the
Business Corporation Law of 1988 is amended to permit a Pennsylvania corporation
to provide greater protection from personal liability for its directors than the
express terms of this Article ELEVENTH, this Article ELEVENTH shall be construed
to provide for such greater protection.
TWELFTH: No person who is or was an officer of the Corporation shall be
personally liable, as such, for monetary damages (other than under criminal
statutes and under federal, state and local laws imposing liability on directors
for the payment of taxes) unless the person's conduct constitutes self-dealing,
willful misconduct or recklessness. No amendment or repeal of this Article
TWELFTH shall apply to or have any effect on the liability or alleged liability
of any person who is or was an officer of the Corporation for or with respect to
any acts or omissions of the officer occurring prior to the effective date of
such amendment or repeal. If the Business Corporation Law of 1988 is amended to
permit a Pennsylvania corporation to provide greater protection from personal
liability for its officers than the express terms of this Article TWELFTH, this
Article TWELFTH shall be construed to provide for such greater protection.
THIRTEENTH: Any or all classes and series of shares of the Corporation, or
any part thereof, may be represented by uncertificated shares to the extent
determined by the Board of Directors, except that shares represented by a
certificate that is issued and outstanding shall continue to be represented
thereby until the certificate is surrendered to the Corporation. Within a
reasonable time after the issuance or transfer of uncertificated shares, the
Corporation shall send to the registered owner thereof a written notice
containing the information required to be set forth or stated on certificates.
The rights and obligations of the holders of shares represented by certificates
and the rights and obligations of the holders of uncertificated shares of the
same class and series shall be identical.
FOURTEENTH: Subchapters E, F, G, H, I and J and Section 2538 of Subchapter
D, in each case of Chapter 25 of the Business Corporation Law of 1988, shall not
be applicable to the Corporation.
FIFTEENTH: Henceforth, these Articles supersede the original Articles and
all amendments filed thereto.
C-8
ANNEX D
TERM SHEET FOR THE ARTICLES OF INCORPORATION
(ALTERNATIVE STRUCTURE)
The Articles of Incorporation of AT&T Comcast Corporation (the
"CORPORATION"; each term used but not defined herein shall have the meaning
assigned to such term in the Agreement and Plan of Merger dated as of December
19, 2001 among Comcast Corporation, AT&T Corp., the Corporation and the other
parties referred to therein) if the A Shareholder Approval is not obtained will
be identical in all respects to the Articles of Incorporation of the Corporation
if the A Shareholder Approval is obtained, except that:
- Paragraph (A) of Article FIFTH shall provide the Corporation with the
authority to issue two hundred million (200,000,000) shares of Parent
Class A Common Stock and seven billion five hundred million
(7,500,000,000) shares of Parent Class C Common Stock (in addition to the
seven billion five hundred million (7,500,000,000) shares of Parent Class
A Special Common Stock, the seventy-five million (75,000,000) shares of
Parent Class B Common Stock and the twenty million (20,000,000) shares of
Parent Preferred Stock).
- Paragraph (B)(1)(a) of Article FIFTH shall provide that each share of
Parent Class A Common Stock shall entitle the holder to one (1) vote,
each share of Parent Class C Common Stock shall entitle the holder to
0.2117 of a vote and, when entitled to vote by applicable law, each share
of Parent Class A Special Common Stock shall entitle the holder to 0.2117
of a vote.
- Paragraph (B)(1)(b) of Article FIFTH shall provide that the holders of
Parent Class C Common Stock shall vote as a single class with the holders
of the other classes of capital stock of the Corporation with voting
rights.
- Paragraph (B)(1)(c) of Article FIFTH shall provide that the holders of
Parent Class A Common Stock and Parent Class B Common Stock will
initially hold 5.14% and 33 1/3%, respectively, of the combined voting
power of Parent's capital stock. Paragraph (B)(1)(c) of Article FIFTH
shall also provide that the voting interests of Parent Class A Common
Stock and Parent Class B Common Stock will remain at 5.14% and 33 1/3%,
respectively, regardless of any future issuances of Parent voting stock,
subject to the following two exceptions. First, if the number of shares
of either class outstanding at the Effective Time is reduced for any
reason after the Effective Time (e.g., by repurchase or, in the case of
the Parent Class B Common Stock only, by conversion), the voting interest
of that class will be proportionately reduced. Second, if the number of
shares of either class outstanding at the Effective Time is increased by
additional issuances after the Effective Time, the voting interest of the
applicable class will increase relative to the other class, but both
classes in the aggregate will still hold, subject to any previous
reduction as described in the immediately preceding sentence, 38 47/100%
of the combined voting power of Parent's capital stock.
- Paragraph (B)(2) of Article FIFTH shall provide holders of Parent Class C
Common Stock with the same right to receive cash dividends as the holders
of each other class of Parent Common Stock.
- Paragraph (B)(3) of Article FIFTH shall provide that holders of Parent
Class C Common Stock, like the holders of each other class of Parent
Common Stock, may receive dividends of stock or other property. Paragraph
(B)(3) of Article FIFTH shall further provide the holders of Parent Class
C Common Stock with the same relative rights as the holders of each other
class of Parent Common Stock upon the occurrence of the transactions
specified in the last two sentences of Paragraph (B)(3) of Article FIFTH.
- Paragraph (B)(4) of Article FIFTH shall provide that each share of Parent
Class B Common Stock shall be convertible into one share of Parent Class
A Common Stock, Parent Class A Special Common Stock or Parent Class C
Common Stock.
D-1
- Paragraph (B)(6) of Article FIFTH shall provide, in addition to the other
provisions thereof, that in the event of a merger or any similar
fundamental transaction, the Board of Directors shall take action to
enable holders of Parent Class B Common Stock who subsequently convert
their Parent Class B Common Stock into Parent Class C Common Stock to
receive, in lieu of shares of Parent Class C Common Stock, the stock,
securities or other property that holders of Parent Class C Common Stock
receive in such merger or other transaction.
- Paragraph (B)(7) of Article FIFTH shall provide that upon any liquidation
or other similar event, the holders of Parent Class C Common Stock, like
the holders of each other class of Parent Common Stock, shall be entitled
to receive any distributions in proportion to the number of shares they
hold, without regard to class.
- Paragraph (B)(9) of Article FIFTH shall provide that, except as otherwise
provided in the Articles of Incorporation, the rights of the holders of
Parent Class C Common Stock shall be in all respects identical to the
rights of the holders of each other class of Parent Common Stock.
- Paragraph (B)(10) of Article FIFTH shall provide that the holders of
Parent Class C Common Stock shall not have cumulative voting rights.
- Article SEVENTH shall provide that, except as provided in the last
sentence thereof regarding separate class or series votes, the approval
by a majority of the votes cast by the holders of Parent Class A Common
Stock and the holders of Parent Class B Common Stock, voting together as
a separate class, will be necessary to approve the actions specified in
Article SEVENTH. In addition, the holders of Parent Class A Common Stock
and the holders of Parent Class B Common Stock, voting together as a
separate class, will have an approval right over the issuance of shares
of Parent Class A Common Stock or any securities exercisable or
exchangeable for or convertible into shares of Parent Class A Common
Stock. Article SEVENTH shall also provide that in any such vote the
voting interest of the holders of Parent Class B Common Stock relative to
that of the holders of Parent Class A Common Stock will be the percentage
obtained by dividing (x) the voting interest of the Parent Class B Common
Stock at such time by (y) the sum of the voting interests of the Parent
Class B Common Stock and the Parent Class A Common Stock at such time
(each such voting interest as determined by, and subject to, the
provisions of paragraph (B)(3)(c) of Article FIFTH). Likewise, Article
SEVENTH shall also provide that in any such vote the voting interest of
the holders of Parent Class A Common Stock relative to that of the
holders of Parent Class B Common Stock will be the percentage obtained by
dividing (x) the voting interest of the Parent Class A Common Stock at
such time by (y) the sum of the voting interests of the Parent Class B
Common Stock and the Parent Class A Common Stock at such time (each such
voting interest as determined by, and subject to, the provisions of
paragraph (B)(3)(c) of Article FIFTH).
- Article NINTH shall provide that the holders of a majority of the voting
power of the Parent Class A Common Stock and the Parent Class B Common
Stock shall be permitted to act by written consent in the exercise of
their approval rights under Article SEVENTH.
D-2
ANNEX E
Microfilm Number -------- Filed with the Department of State on ----------------
Entity Number 74263 ------------------------------------------------
Secretary of the Commonwealth
ARTICLES OF AMENDMENT -- DOMESTIC BUSINESS CORPORATION
DSCB:15-1915 (Rev 90)
In compliance with the requirements of 15 Pa.C.S. sec. 1915 (relating to
articles of amendment), the undersigned business corporation, desiring to amend
its Articles, hereby states that:
The name of the corporation is: Comcast Corporation
------------------------------------------------------
The (a) address of this corporation's current registered office in this
Commonwealth or (b) name of its commercial registered office provider and the
county of venue is (the Department is hereby authorized to correct the following
information to conform to the records of the Department):
(a) 1500 Market Street, 35th Floor Philadelphia Pennsylvania 19102
--------------------------------------------------------------------------------
Number and Street City State Zip
Philadelphia
---------------
County
(b) c/o:
---------------------------------------------------------------------------
Name of Commercial Registered Office Provider
County
For a corporation represented by a commercial registered office provider,
the county in (b) shall be deemed the county in which the corporation is
located for venue and official publication purposes.
The statute by or under which it was incorporated is: Pennsylvania Business
Corporations Law
The date of its incorporation is: March 5, 1969
(Check, and if appropriate complete, one of the following):
--------- The amendment shall be effective upon filing these Articles of
Amendment in the Department of State.
X The amendment shall be effective on: at
---- ------------ ------------
Date Hour
(Check one of the following):
X The amendment was adopted by the shareholders (or members) pursuant to
----
15 Pa.C.S. sec. 1914(a) and (b).
The amendment was adopted by the board of directors pursuant to 15
----
Pa.C.S. sec. 1914(c).
(Check, and if appropriate complete, one of the following):
X The amendment adopted by the corporation, set forth in full, is as
----
follows:
The following phrase is inserted in the last sentence of Article 5(c),
immediately after the phrase "Except as provided above,": "and except
as provided in the Agreement and Plan of Merger dated as of
----------, 200------, by and among Comcast Corporation, ----------,
and others (the full text of which is on file at the principal place
of business of the corporation, 1500 Market Street, 35th Floor,
Philadelphia, Pennsylvania 19102),".
--------- The amendment adopted by the corporation is set forth in full in
Exhibit A attached hereto and made a part hereof.
E-1
(Check if the amendment restates the Articles):
___ The restated Articles of Incorporation supersede the original
Articles and all amendments thereto.
IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles
of Amendment to be signed by a duly authorized officer thereof this ______ day
of , .
Comcast Corporation
--------------------------------------
(Name of Corporation)
BY:
------------------------------------
--------------------------------------
(Signature)
TITLE:
----------------------------------
--------------------------------------
E-2
ANNEX F
FORM OF BY-LAWS OF AT&T COMCAST CORPORATION
The By-Laws of the Corporation shall be amended and restated in their
entirety so as to read as follows:
ARTICLE 1
OFFICES
SECTION 1.01. Registered Office. The registered office of the Corporation
shall be located within the Commonwealth of Pennsylvania at such place as the
Board of Directors (hereinafter referred to as the "BOARD OF DIRECTORS" or the
"BOARD") shall determine from time to time.
SECTION 1.02. Other Offices. The Corporation may also have offices at
such other places, within or without the Commonwealth of Pennsylvania, as the
Board of Directors may determine from time to time.
ARTICLE 2
MEETINGS OF SHAREHOLDERS
SECTION 2.01. Place of Meetings of Shareholders. Meetings of shareholders
may be held at such geographic locations, within or without the Commonwealth of
Pennsylvania, as may be fixed from time to time by the Board of Directors. If no
such geographic location is so fixed by the Board of Directors or the Board of
Directors does not determine to hold a meeting by means of electronic technology
(as provided in the next sentence) rather than at a geographic location,
meetings of the shareholders shall be held at the executive office of the
Corporation. If a meeting of the shareholders is held by means of the Internet
or other electronic communications technology in a fashion pursuant to which the
shareholders have the opportunity to read or hear the proceedings substantially
concurrently with their occurrence, vote on matters submitted to the
shareholders and pose questions to the Directors, the meeting need not by held
at a particular geographic location.
SECTION 2.02. Annual Meetings of Shareholders.
(a) Time. Subject to Article SIXTH of the Articles of Incorporation, a
meeting of the shareholders of the Corporation shall be held in each calendar
year, on such date and at such time as the Board of Directors may determine, or
if the Board of Directors fails to set a date and time, on the second Thursday
of June at 9:00 o'clock a.m., if not a holiday on which national banks are or
may elect to be closed ("HOLIDAY"), and if such day is a Holiday, then such
meeting shall be held on the next business day at such time.
(b) Election of Directors. At each such annual meeting, there shall be
held an election of Directors to serve for the ensuing year and until their
successors shall have been selected and qualified or until their earlier death,
resignation or removal.
SECTION 2.03. Special Meetings of Shareholders. Special meetings of the
shareholders may be called at any time by the Board of Directors. Special
meetings of the shareholders may not be called by shareholders. Upon the written
instruction of the Board of Directors, which instruction specifies the general
nature of the business to be transacted at such meeting as well as the date,
time and place of such meeting, it shall be the duty of the Secretary to give
due notice thereof as required by Section 2.04 hereof.
SECTION 2.04. Notices of Meetings of Shareholders. Written notice,
complying with Article 6 of these By-Laws, of any meeting of the shareholders,
shall be given to each shareholder of record entitled to vote at the meeting,
other than those excepted by Section 1707 of the Pennsylvania Business
Corporation Law of 1988, as amended (the "PENNSYLVANIA BCL"), at least twenty
days prior to the day named for the
F-1
meeting, except as provided in Section 6.07. Such notices may be given by, or at
the direction of, the Secretary or other authorized person.
SECTION 2.05. Quorum of and Action by Shareholders.
(a) General Rule. A meeting of shareholders duly called shall not be
organized for the transaction of business unless a quorum is present, in person
or by proxy, as to at least one of the matters to be considered. Except as
provided in subsections (c), (d) and (e) of this Section 2.05, the presence, in
person or by proxy, of shareholders entitled to cast at least a majority of the
votes that all shareholders are entitled to cast on a particular matter to be
acted upon at the meeting shall constitute a quorum for the purpose of
consideration of and action on the matter. To the extent that a quorum is
present with respect to consideration of and action on a particular matter or
matters but a quorum is not present as to another matter or matters,
consideration of and action on the matter or matters for which a quorum is
present may occur, and, after such consideration and action, the meeting may be
adjourned for purposes of the consideration of and action on the matter or
matters for which a quorum is not present.
(b) Action by Shareholders. Except as otherwise specifically provided by
law, all matters coming before a meeting of shareholders shall be determined by
a vote of shares. Except as otherwise provided by a resolution adopted by the
Board of Directors, by the Articles of Incorporation, by the Pennsylvania BCL or
by these By-Laws, whenever any corporate action is to be taken by vote of the
shareholders of the Corporation at a duly organized meeting of shareholders, it
shall be authorized by a majority of the votes cast at the meeting by the
holders of shares entitled to vote with respect to such matter; provided that in
no event may the required shareholder vote be reduced below that provided above.
(c) Continuing Quorum. The shareholders present at a duly organized
meeting can continue to do business until adjournment, notwithstanding the
withdrawal of enough shareholders to leave less than a quorum.
(d) Election of Directors at Adjourned Meetings. Those shareholders
entitled to vote who attend a meeting called for the election of Directors that
has been previously adjourned for one or more periods aggregating at least 5
days for lack of a quorum (whether with respect to a particular matter or all
matters to be considered and acted upon at such meeting), although less than a
quorum as fixed in subsection (a), shall nevertheless constitute a quorum for
the purpose of electing Directors at such reconvened meeting.
(e) Conduct of Other Business at Adjourned Meetings. Those shareholders
entitled to vote who attend a meeting of shareholders that has been previously
adjourned for one or more periods aggregating at least 15 days because of an
absence of a quorum (whether with respect to a particular matter or all matters
to be considered and acted upon at such meeting), although less than a quorum as
fixed in subsection (a), shall nevertheless constitute a quorum for the purpose
of acting upon any matter set forth in the notice of meeting if the notice
states that those shareholders who attend the adjourned meeting shall
nevertheless constitute a quorum for the purpose of acting upon the matter.
SECTION 2.06. Adjournments.
(a) General Rule. Adjournments of any regular or special meeting of
shareholders, including one at which Directors are to be elected, may be taken
for such periods as the shareholders present and entitled to vote shall direct.
(b) Lack of Quorum. Without limiting the generality of Section 2.06(c), if
a meeting cannot be organized because a quorum has not attended, those present
may, except as otherwise provided in the Pennsylvania BCL, adjourn the meeting
to such time and place as they may determine. To the extent, as set forth in
Section 2.05(a), that a quorum was not present with respect to consideration of
and action on a particular matter at a duly called and organized meeting,
consideration of and action on such matter may be adjourned to such date, time
and place as those present may determine, and the balance of the matters to be
considered at such meeting for which a quorum was present may be considered and
acted upon at the initial meeting.
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(c) Notice of an Adjourned Meeting. When a meeting of shareholders is
adjourned, it shall not be necessary to give any notice of the adjourned meeting
or of the business to be transacted at an adjourned meeting, other than by
announcement at the meeting at which the adjournment is taken, unless the Board
fixes a new record date for the adjourned meeting or the Pennsylvania BCL
requires notice of the business to be transacted and such notice has not been
previously given.
SECTION 2.07. Voting List, Voting and Proxies.
(a) Voting List. The officer or agent having charge of the transfer books
for shares of the Corporation shall make a complete list of the shareholders
entitled to vote at any meeting of shareholders, arranged in alphabetical order,
with the address of and the number of shares held by each. The list shall be
produced and kept open at the date, time and place of the meeting and shall be
subject to the inspection of any shareholder during the whole time of the
meeting for the purposes thereof except that, if the Corporation has 5,000 or
more shareholders, in lieu of the making of the list the Corporation may make
the information therein available at the meeting by any other means.
(b) Method of Voting. At the discretion of the presiding officer of a
meeting of shareholders, (i) in elections for directors voting need not be by
ballot but may be taken by voice, show of hands or such other method determined
by the presiding officer unless it is required by vote of the shareholders,
before the vote begins, that the vote be taken by ballot and (ii) with respect
to any other action to be taken by vote at the meeting, as set forth in Section
2.05(b), voting need not be by ballot but may be taken by voice, show of hands
or such other method determined by the presiding officer to the fullest extent
permitted by applicable law (including the Pennsylvania BCL).
(c) Proxies. At all meetings of shareholders, shareholders entitled to
vote may attend and vote either in person or by proxy. Every proxy shall be
executed or authenticated by the shareholder or by such shareholder's duly
authorized attorney-in-fact and shall be filed with, or transmitted to, the
Secretary of the Corporation or its designated agent. A shareholder or such
shareholder's duly authorized attorney-in-fact may execute or authenticate in
writing or transmit an electronic message authorizing another person to act for
such shareholder by proxy. A proxy, unless coupled with an interest (as defined
in Section 1759(d) of the Pennsylvania BCL), shall be revocable at will,
notwithstanding any other agreement or any provision in the proxy to the
contrary, but the revocation of a proxy shall not be effective until notice
thereof has been given to the Secretary of the Corporation or its designated
agent in writing or by electronic transmission. An unrevoked proxy shall not be
valid after three years from the date of its execution unless a longer time is
expressly provided therein. A proxy shall not be revoked by the death or
incapacity of the maker unless, before the vote is counted or the authority is
exercised, notice of the death or incapacity is given to the Secretary of the
Corporation or its designated agent in writing or by electronic transmission.
(d) Judges of Election. In advance of any meeting of shareholders of the
Corporation, the Board of Directors may appoint one or three Judges of Election,
who need not be shareholders and who will have such duties as provided in
Section 1765(a)(3) of the Pennsylvania BCL, to act at the meeting or any
adjournment thereof. If one or three Judges of Election are not so appointed,
the presiding officer of the meeting may, and on the request of any shareholder
shall, appoint one or three Judges of Election at the meeting. In case any
person appointed as a Judge of Election fails to appear or refuses to act, the
vacancy may be filled by appointment made by the Board of Directors in advance
of the convening of the meeting or at the meeting by the presiding officer. A
person who is a candidate for office to be filled at the meeting shall not act
as a Judge of Election. Unless the Pennsylvania BCL permits otherwise, this
Section 2.07(d) may be modified only by a By-Law amendment adopted by the
shareholders.
(e) No Action by Written Consent in Lieu of a Meeting. Subject to Article
NINTH of the Articles of Incorporation, the shareholders shall not be permitted
to act by written consent in lieu of a meeting.
SECTION 2.08. Participation in Meetings by Electronic Means. The Board of
Directors may permit, by resolution with respect to a particular meeting of the
shareholders, or the presiding officer of such meeting may permit, one or more
persons to participate in that meeting, count for the purposes of
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determining a quorum and exercise all rights and privileges to which such person
might be entitled were such person personally in attendance, including the right
to vote, by means of conference telephone or other electronic means, including,
without limitation, the Internet. Unless the Board of Directors so permits by
resolution, or the presiding officer of such meeting so permits, no person may
participate in a meeting of the shareholders by means of conference telephone or
other electronic means.
SECTION 2.09. Business at Meetings of Shareholders. Except as otherwise
provided by law (including but not limited to Rule 14a-8 promulgated under the
Securities and Exchange Act of 1934, as amended, or any successor provision
thereto) or in these By-Laws, the business which shall be conducted at any
meeting of the shareholders shall (a) have been specified in the written notice
of the meeting (or any supplement thereto) given by the Corporation, or (b) be
brought before the meeting at the direction of the Board of Directors, or (c) be
brought before the meeting by the presiding officer of the meeting unless a
majority of the Directors then in office object to such business being conducted
at the meeting, or (d) in the case of any matters intended to be brought by a
shareholder before an annual meeting of shareholders for specific action at such
meeting, have been specified in a written notice given to the Secretary of the
Corporation, by or on behalf of any shareholder who shall have been a
shareholder of record on the record date for such meeting and who shall continue
to be entitled to vote thereat (the "SHAREHOLDER NOTICE"), in accordance with
all of the following requirements:
(i) Each Shareholder Notice must be delivered to, or mailed and
received at, the principal executive offices of the Corporation (A) in the
case of an annual meeting that is called for a date that is within 30 days
before or after the anniversary date of the immediately preceding annual
meeting of shareholders, not less than 60 days nor more than 90 days prior
to such anniversary date, and (B) in the case of an annual meeting that is
called for a date that is not within 30 days before or after the
anniversary date of the immediately preceding annual meeting, not later
than the close of business on the tenth day following the day on which
notice of the date of the meeting was mailed or public disclosure of the
date of the meeting was made, whichever occurs first; and
(ii) Each such Shareholder Notice must set forth: (A) the name and
address of the shareholder who intends to bring the business before the
meeting; (B) the general nature of the business which such shareholder
seeks to bring before the meeting and the text of the resolution or
resolutions which the proposing shareholder proposes that the shareholders
adopt; and (C) a representation that the shareholder is a holder of record
of the stock of the Corporation entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to bring the
business specified in the notice before the meeting. The presiding officer
of the meeting may, in his or her sole discretion, refuse to acknowledge
any business proposed by a shareholder not made in compliance with the
foregoing procedure.
SECTION 2.10. Conduct of Meetings of Shareholders.
(a) Presiding Officer. There shall be a presiding officer at every meeting
of the shareholders. Subject to Article SIXTH of the Articles of Incorporation,
the presiding officer shall be appointed by the Board of Directors or in the
manner authorized by the Board of Directors; provided that if a presiding
officer is not designated by the Board of Directors or in the manner authorized
by the Board of Directors, the Chairman of the Board shall be the presiding
officer.
(b) Authority of Presiding Officer. Except as prescribed by the Board of
Directors, the presiding officer shall determine the order of business and shall
have the authority to establish rules for the conduct of the meeting of the
shareholders.
(c) Procedural Standard. Any action by the presiding officer in adopting
rules for, and in conducting, a meeting of the shareholders shall be fair to the
shareholders. The conduct of the meeting need not follow Robert's Rules of Order
or any other published rules for the conduct of a meeting.
(d) Closing of the Polls. The presiding officer shall announce at the
meeting of the shareholders when the polls close for each matter voted upon. If
no announcement is made, the polls shall be deemed
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to have closed upon the final adjournment of the meeting. After the polls close,
no ballots, proxies or votes, nor any revocations or changes thereto, may be
accepted.
ARTICLE 3
BOARD OF DIRECTORS
SECTION 3.01. Board of Directors.
(a) General Powers. Except as otherwise provided by law, the Articles of
Incorporation or these By-Laws, all powers of the Corporation shall be exercised
by or under the authority of, and the business and affairs of the Corporation
shall be managed under the direction of, the Board of Directors. Unless the
Pennsylvania BCL permits otherwise, this Section 3.01(a) may be modified only by
a By-Law amendment adopted by the shareholders.
(b) Number. Subject to Article SIXTH of the Articles of Incorporation, the
number of Directors shall be as determined by the Board of Directors from time
to time.
(c) Vacancies. Each Director shall hold office until the expiration of the
term for which such person was selected and until such person's successor has
been selected and qualified or until such person's earlier death, resignation or
removal. Subject to Article SIXTH of the Articles of Incorporation, any
vacancies on the Board of Directors, including vacancies resulting from an
increase in the number of Directors, may be filled by a majority vote of the
remaining members of the Board of Directors, though less than a quorum, or by a
sole remaining Director, or, if there are no remaining Directors, by the
shareholders, and each person so selected shall be a Director to serve for the
balance of the unexpired term.
(d) Removal. The entire Board of Directors or any individual Director may
be removed from office only for cause by the vote of the shareholders entitled
to elect directors.
(e) Qualification. A Director must be a natural person at least 18 years
of age.
SECTION 3.02. Place of Meetings. Meetings of the Board of Directors may be
held at such place within or without the Commonwealth of Pennsylvania as the
Board of Directors may appoint from time to time or as may be designated in the
notice of the meeting.
SECTION 3.03. Regular Meetings. A regular meeting of the Board of
Directors shall be held immediately following each annual meeting of the
shareholders, at the place where such meeting of the shareholders is held or at
such other place and time after the annual meeting of shareholders as the Board
of Directors may designate. Subject to Article SIXTH of the Articles of
Incorporation, at such meeting, the Board of Directors shall elect officers of
the Corporation. In addition to such regular meeting, the Board of Directors
shall have the power to fix by resolution the place, date and time of other
regular meetings of the Board of Directors.
SECTION 3.04. Special Meetings. Special meetings of the Board of
Directors shall be held whenever ordered by the Chairman of the Board, the Chief
Executive Officer, by the Board of Directors or by any officer of the
Corporation authorized by Article SIXTH of the Articles of Incorporation to call
special meetings of the Board of Directors for so long as such officer is also a
Director of the Corporation.
SECTION 3.05. Participation in Meetings by Electronic Means. Any Director
may participate in any meeting of the Board of Directors or of any committee
(provided such Director is otherwise entitled to participate), be counted for
the purpose of determining a quorum thereof and exercise all rights and
privileges to which such Director might be entitled were such Director
personally in attendance, including the right to vote, or any other rights
attendant to presence in person at such meeting, by means of conference
telephone or other electronic technology by means of which all persons
participating in the meeting can hear each other.
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SECTION 3.06. Notices of Meetings of Board of Directors.
(a) Regular Meetings. No notice shall be required to be given of any
regular meeting, unless the same is held at other than the place, date or time
for holding such meeting as fixed in accordance with Section 3.03 of these
By-Laws, in which event 48 hours' notice shall be given of the place and time of
such meeting complying with Article 6 of these By-Laws.
(b) Special Meetings. Written notice stating the place, date and time of
any special meeting of the Board of Directors shall be sufficient if given at
least 48 hours, as provided in Article 6, in advance of the date and time fixed
for the meeting.
SECTION 3.07. Quorum; Action by the Board of Directors. A majority of the
Directors in office shall be necessary to constitute a quorum for the
transaction of business and, subject to Article SIXTH of the Articles of
Incorporation and these By-Laws, the acts of a majority of the Directors present
and voting at a meeting at which a quorum is present shall be the acts of the
Board of Directors. If there is no quorum present at a duly convened meeting of
the Board of Directors, the majority of those present may adjourn the meeting
from place to place and from time to time.
SECTION 3.08. Informal Action by the Board of Directors. Any action
required or permitted to be taken at a meeting of the Board of Directors may be
taken without a meeting if, prior or subsequent to the action, a written consent
or consents thereto by all of the Directors in office is filed with the
Secretary of the Corporation. In addition to other means of filing with the
Secretary, insertion in the minute book of the Corporation shall be deemed
filing with the Secretary regardless of whether the Secretary or some other
authorized person has actual possession of the minute book. Written consents by
all the Directors, executed pursuant to this Section 3.08, may be executed in
any number of counterparts and shall be deemed effective as of the date set
forth therein.
SECTION 3.09. Committees.
(a) Establishment and Powers. The Board of Directors of the Corporation
may, by resolution adopted by a majority of the Directors in office, establish
one or more committees to consist of one or more Directors of the Corporation.
Any committee, to the extent provided in the applicable resolution of the Board
of Directors or in the By-Laws, shall have and may exercise all of the powers
and authority of the Board of Directors, except that a committee shall not have
any power or authority as to the following:
(i) The submission to shareholders of any action requiring approval of
shareholders under the Pennsylvania BCL.
(ii) The creation or filling of vacancies in the Board of Directors.
(iii) The adoption, amendment or repeal of the By-Laws.
(iv) The amendment or repeal of any resolution of the Board of
Directors that by its terms is amendable or repealable only by the Board of
Directors.
(v) Action on matters committed by the Articles of Incorporation, the
By-Laws or resolution of the Board of Directors to another committee of the
Board of Directors.
(b) Alternate Members. The Board of Directors may designate one or more
Directors otherwise eligible to serve on a committee of the Board as alternate
members of any committee who may replace any absent or disqualified member at
any meeting of the committee or for the purpose of any written action by the
committee. In the absence or disqualification of a member and alternate member
or members of a committee, the member or members thereof present at any meeting
and not disqualified from voting, whether or not such member or members
constitute a quorum, may unanimously appoint another Director to act at the
meeting in the place of the absent or disqualified member.
(c) Term. Each committee of the Board of Directors shall serve at the
pleasure of the Board of Directors.
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(d) Status of Committee Action. The term "BOARD OF DIRECTORS" or "BOARD",
when used in any provision of these By-Laws relating to the organization or
procedures of or the manner of taking action by the Board of Directors, shall be
construed to include and refer to any committee of the Board of Directors. Any
provision of these By-Laws relating or referring to action to be taken by the
Board of Directors or the procedure required therefor shall be satisfied by the
taking of corresponding action by a committee of the Board of Directors to the
extent authority to take the action has been delegated to the committee in
accordance with this Section.
SECTION 3.10. Nomination. Nominations for the election of Directors may
be made only (A) on behalf of the Corporation by the Directors Nominating
Committee pursuant to Article SIXTH of the Articles of Incorporation or, if
Article SIXTH of the Articles of Incorporation shall have terminated, by the
Board of Directors or (B) by any shareholder of record entitled to vote in the
election of Directors generally at the record date of the meeting and also on
the date of the meeting at which Directors are to be elected. However, any
shareholder entitled to vote in the election of Directors generally may nominate
one or more persons for election as Directors at a meeting only if written
notice of such shareholder's intention to make such nomination or nominations
has been delivered personally to, or been mailed to and received by the
Corporation at, the principal executive offices of the Corporation, addressed to
the attention of the President, (a) with respect to an election to be held at an
annual meeting that is called for a date that is within 30 days before or after
the anniversary date of the immediately preceding annual meeting of
shareholders, not less than 90 days nor more than 120 days prior to such
anniversary date, and (b) with respect either to an election to be held at an
annual meeting that is called for a date that is not within 30 days before or
after the anniversary date of the immediately preceding annual meeting, or to a
special meeting of shareholders called for the purpose of electing Directors,
not later than the close of business on the tenth day following the day on which
notice of the date of the meeting was mailed or public disclosure of the date of
the meeting was made, whichever occurs first. Each such notice shall set forth:
(i) the name and address of the shareholder intending to make the nomination and
of the person or persons to be nominated; (ii) a representation that the
shareholder is a holder of record of shares of the Corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (iii) a description of
all arrangements or understandings between the shareholder and each nominee and
any other person or persons (naming such person or persons) pursuant to which
the nomination or nominations are to be made by the shareholder; (iv) such other
information regarding each nominee proposed by such shareholder as would have
been required to be included in a proxy statement filed pursuant to the proxy
rules of the Securities and Exchange Commission had the nominee been nominated
by the Board of Directors; and (v) the written consent of each nominee to serve
as a Director of the Corporation if so elected. The presiding officer of the
meeting may, in his or her sole discretion, declare invalid or refuse to
acknowledge any nomination not made in compliance with the foregoing procedure.
ARTICLE 4
OFFICERS
SECTION 4.01. Election and Office. The Corporation shall have a Chairman
of the Board, a Chief Executive Officer, a President, a Secretary and a
Treasurer who, subject to Article SIXTH of the Articles of Incorporation, shall
be elected by the Board of Directors. Subject to Article SIXTH of the Articles
of Incorporation, the Board of Directors may create the positions of, define the
powers and duties of and elect as additional officers one or more Vice Chairmen
of the Board, one or more Vice Presidents, and one or more other officers or
assistant officers. Any number of offices may be held by the same person. The
Chairman of the Board and any Vice Chairman of the Board must be a Director of
the Corporation. The initial officers of the Corporation (other than the
Chairman of the Board) shall be selected by the Chief Executive Officer in
consultation with the Chairman of the Board.
SECTION 4.02. Term. Each officer of the Corporation shall hold office
until his successor is selected and qualified or until his earlier death,
resignation or removal. Subject to Article SIXTH of the
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Articles of Incorporation, any officer may be removed by a vote of a majority of
the Directors then in office. The terms of the Chairman of the Board and the
Chief Executive Officer are fixed pursuant to Article SIXTH of the Articles of
Incorporation.
SECTION 4.03. Powers and Duties of the Chairman of the Board. The
Chairman of the Board shall have such powers and shall perform such duties as
are provided in Article SIXTH of the Articles of Incorporation.
SECTION 4.04. Powers and Duties of the Chief Executive Officer. The Chief
Executive Officer shall have such powers and shall perform such duties as are
provided in Article SIXTH of the Articles of Incorporation.
SECTION 4.05. Powers and Duties of the President. The President shall
have such powers and shall perform such duties as may, subject to Article SIXTH
of the Articles of Incorporation, from time to time be assigned to the President
by the Board of Directors.
SECTION 4.06. Powers and Duties of the Secretary. Unless otherwise
determined by the Board of Directors, the Secretary shall be responsible for the
keeping of the minutes of all meetings of the shareholders, the Board of
Directors, and all committees of the Board, in books provided for that purpose,
and for the giving and serving of all notices for the Corporation. The Secretary
shall perform all other duties ordinarily incident to the office of Secretary
and shall have such other powers and perform such other duties as may be
assigned to the Secretary by the Board of Directors. The minute books of the
Corporation may be held by a person other than the Secretary.
SECTION 4.07. Powers and Duties of the Treasurer. Unless otherwise
determined by the Board of Directors, the Treasurer shall have charge of all the
funds and securities of the Corporation. When necessary or proper, unless
otherwise determined by the Board of Directors, the Treasurer shall endorse for
collection on behalf of the Corporation checks, notes and other obligations, and
shall deposit the same to the credit of the Corporation to such banks or
depositories as the Board of Directors may designate and may sign all receipts
and vouchers for payments made to the Corporation. The Treasurer shall be
responsible for the regular entry in books of the Corporation to be kept for
such purpose of a full and accurate account of all funds and securities received
and paid by the Treasurer on account of the Corporation. Whenever required by
the Board of Directors, the Treasurer shall render a statement of the financial
condition of the Corporation. The Treasurer shall have such other powers and
shall perform the duties as may be assigned to such officer from time to time by
the Board of Directors. The Treasurer shall give such bond, if any, for the
faithful performance of the duties of such office as shall be required by the
Board of Directors.
SECTION 4.08. Powers and Duties of the Vice Chairmen, Vice Presidents and
Assistant Officers. Unless otherwise determined by the Board of Directors and
subject to Article SIXTH of the Articles of Incorporation, each Vice Chairman,
Executive Vice President, Senior Vice President, Vice President and each
assistant officer shall have the powers and perform the duties of his or her
respective superior officer, except to the extent such powers and duties are
limited by such superior officer or by the Board of Directors. Executive Vice
Presidents, Senior Vice Presidents, Vice Presidents and assistant officers shall
have such rank as may be designated by the Board of Directors, with Executive
Vice Presidents serving as superior officers to Senior Vice Presidents and
Senior Vice Presidents serving as superior officers to Vice Presidents.
Executive Vice Presidents, Senior Vice Presidents and Vice Presidents may be
designated as having responsibility for a specific area of the Corporation's
affairs, in which event such Executive Vice Presidents, Senior Vice Presidents
or Vice Presidents shall be superior to the other Executive Vice Presidents,
Senior Vice Presidents or Vice Presidents, respectively, in relation to matters
within his or her area. The President shall be the superior officer of the
Executive Vice Presidents, Senior Vice Presidents, Vice Presidents and all other
officer positions created by the Board of Directors unless the Board of
Directors provides otherwise. The Treasurer and Secretary shall be the superior
officers of the Assistant Treasurers and Assistant Secretaries, respectively.
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SECTION 4.09. Vacancies. Subject to Article SIXTH of the Articles of
Incorporation, the Board of Directors shall have the power to fill any vacancies
in any office occurring for any reason.
SECTION 4.10. Delegation of Office. Subject to Article SIXTH of the
Articles of Incorporation, the Board of Directors may delegate the powers or
duties of any officer of the Corporation to any other person from time to time.
ARTICLE 5
CAPITAL STOCK
SECTION 5.01. Share Certificates.
(a) Execution. Except as otherwise provided in Section 5.05, the shares of
the Corporation shall be represented by certificates. Unless otherwise provided
by the Board of Directors, every share certificate shall be signed by two
officers and sealed with the corporate seal, which may be a facsimile, engraved
or printed, but where such certificate is signed by a transfer agent or a
registrar, the signature of any corporate officer upon such certificate may be a
facsimile, engraved or printed. In case any officer who has signed, or whose
facsimile signature has been placed upon, any share certificate shall have
ceased to be such officer because of death, resignation or otherwise, before the
certificate is issued, it may be issued with the same effect as if the officer
had not ceased to be such at the date of its issue. The provisions of this
Section shall be subject to any inconsistent or contrary agreement at the time
between the Corporation and any transfer agent or registrar.
(b) Designations, Voting Rights, Preferences, Limitations and Special
Rights. To the extent the Corporation is authorized to issue shares of more
than one class or series, every certificate shall set forth upon the face or
back of the certificate (or shall state on the face or back of the certificate
that the Corporation will furnish to any shareholder upon request and without
charge) a full or summary statement of the designations, voting rights,
preferences, limitations and special rights of the shares of each class or
series authorized to be issued so far as they have been fixed and determined and
the authority of the Board of Directors to fix and determine the designations,
voting rights, preferences, limitations and special rights of the classes and
series of shares of the Corporation.
(c) Fractional Shares. Except as otherwise determined by the Board of
Directors, shares or certificates therefor may be issued as fractional shares
for shares held by any dividend reinvestment plan or employee benefit plan
created or approved by the Corporation's Board of Directors, but not by any
other person.
SECTION 5.02. Transfer of Shares. Transfer of shares shall be made on the
books of the Corporation only upon surrender of the share certificate, duly
endorsed or with duly executed stock powers attached and otherwise in proper
form for transfer, which certificate shall be canceled at the time of the
transfer.
SECTION 5.03. Determination of Shareholders of Record.
(a) Fixing Record Date. The Board of Directors of the Corporation may fix
a time prior to the date of any meeting of shareholders as a record date for the
determination of the shareholders entitled to notice of, or to vote at, the
meeting, which time, except in the case of an adjourned meeting, shall be not
more than 90 days prior to the date of the meeting of shareholders. Only
shareholders of record on the date fixed shall be so entitled notwithstanding
any transfer of shares on the books of the Corporation after any record date
fixed as provided in this subsection. The Board of Directors may similarly fix a
record date for the determination of shareholders of record for any other
purpose. When a determination of shareholders of record has been made as
provided in this Section 5.03 for purposes of a meeting, the determination shall
apply to any adjournment thereof unless the Board of Directors fixes a new
record date for the adjourned meeting.
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(b) Determination when No Record Date Fixed. If a record date is not
fixed:
(i) The record date for determining shareholders entitled to notice of
or to vote at a meeting of shareholders shall be at the close of business
on the day next preceding the day on which notice is given or, if notice is
waived, at the close of business on the day immediately preceding the day
on which the meeting is held.
(ii) The record date for determining shareholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
(c) Certification by Nominee. The Board of Directors may adopt a procedure
whereby a shareholder of the Corporation may certify in writing to the
Corporation that all or a portion of the shares registered in the name of the
shareholder are held for the account of a specified person or persons. The
resolution of the Board of Directors may set forth:
(i) the classification of shareholder who may certify;
(ii) the purpose or purposes for which the certification may be made;
(iii) the form of certification and information to be contained
therein;
(iv) if the certification is with respect to a record date, the time
after the record date within which the certification must be received by
the Corporation; and
(v) such other provisions with respect to the procedure as are deemed
necessary or desirable.
Upon receipt by the Corporation of a certification complying with the
procedure, the persons specified in the certification shall be deemed, for the
purposes set forth in the certification, to be the holders of record of the
number of shares specified in place of the shareholder making the certification.
SECTION 5.04. Lost Share Certificates. Unless waived in whole or in part
by the Board of Directors or any of the Chairman, any Vice Chairman, the
President, any Senior Vice President, Secretary or Treasurer, unless the Board
of Directors prohibits such waiver by such officer, any person requesting the
issuance of a new certificate in lieu of an alleged lost, destroyed, mislaid or
wrongfully taken certificate shall (a) give to the Corporation his or her bond
of indemnity with an acceptable surety, and (b) satisfy such other requirements
as may be imposed by the Corporation. Thereupon, a new share certificate shall
be issued to the registered owner or his or her assigns in lieu of the alleged
lost, destroyed, mislaid or wrongfully taken certificate; provided that the
request therefor and issuance thereof have been made before the Corporation has
notice that such shares have been acquired by a bona fide purchaser.
SECTION 5.05. Uncertificated Shares. Notwithstanding anything herein to
the contrary, any or all classes and series of shares, or any part thereof, may
be represented by uncertificated shares to the extent determined by the Board of
Directors, except that shares represented by a certificate that is issued and
outstanding shall continue to be represented thereby until the certificate is
surrendered to the Corporation. Within a reasonable time after the issuance or
transfer of uncertificated shares, the Corporation shall send to the registered
owner thereof a written notice containing the information required to be set
forth or stated on certificates. The rights and obligations of the holders of
shares represented by certificates and the rights and obligations of the holders
of uncertificated shares of the same class and series shall be identical.
Notwithstanding anything herein to the contrary, the provisions of Section 5.02
shall be inapplicable to uncertificated shares and in lieu thereof the Board of
Directors shall adopt alternative procedures for registration of transfers.
ARTICLE 6
NOTICES; COMPUTING TIME PERIODS
SECTION 6.01. Contents of Notice. Whenever any notice of a meeting of the
Board of Directors or of shareholders is required to be given pursuant to these
By-Laws or the Articles of Incorporation of the Corporation, as the same may be
amended from time to time, or otherwise, the notice shall specify the
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geographic location, if any, date and time of the meeting; in the case of a
special meeting of shareholders or where otherwise required by law or the
By-Laws, the general nature of the business to be transacted at such meeting;
and any other information required by law.
SECTION 6.02. Method of Notice. Any notice required to be given to any
person under the provisions of the Articles of Incorporation or these By-Laws
shall be given to the person either personally or by sending a copy thereof (i)
by first class or express mail, postage prepaid, or courier service, charges
prepaid, to such person's postal address appearing on the books of the
Corporation, or, in the case of a Director, supplied by such Director to the
Corporation for the purpose of notice or (ii) by facsimile transmission, e-mail
or other electronic communication to such person's facsimile number or address
for e-mail or other electronic communication supplied by such person to the
Corporation for purposes of notice. Notice delivered pursuant to clause (i) of
the preceding sentence shall be deemed to have been given to the person entitled
thereto when deposited in the United States mail or with a courier service for
delivery to that person, and notice pursuant to clause (ii) of the preceding
sentence shall be deemed to have been given to the person entitled thereto when
sent. Except as otherwise provided in these By-Laws, or as otherwise directed by
the Board of Directors, notices of meetings may be given by, or at the direction
of, the Secretary.
SECTION 6.03. Computing Time Periods.
(a) Days to be Counted. In computing the number of days for purposes of
these By-Laws, all days shall be counted, including Saturdays, Sundays and any
Holiday; provided, however, that if the final day of any time period falls on a
Saturday, Sunday or Holiday, then the final day shall be deemed to be the next
day which is not a Saturday, Sunday or Holiday. In computing the number of days
for the purpose of giving notice of any meeting, the date upon which the notice
is given shall be counted but the day set for the meeting shall not be counted.
(b) One Day Notice. In any case where only one day's notice is being
given, notice must be given at least 24 hours in advance of the date and time
specified for the meeting in question by delivery in person or by telephone,
telex, telecopier or similar means of communication.
SECTION 6.04. Waiver of Notice. Whenever any notice is required to be
given under the provisions of the Pennsylvania BCL or other applicable law or
the Articles of Incorporation or these By-Laws, a waiver thereof in writing,
signed by the person or persons entitled to the notice, whether before or after
the time stated therein, shall be deemed equivalent to the giving of the notice.
Except as otherwise required by law or the next sentence, neither the business
to be transacted at, nor the purpose of, a meeting need be specified in the
waiver of notice of the meeting. In the case of a special meeting of
shareholders, the waiver of notice shall specify the general nature of the
business to be transacted. Attendance of a person at any meeting shall
constitute a waiver of notice of the meeting except where a person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting was not lawfully called
or convened.
SECTION 6.05. Modification of Proposal Contained in Notice. Whenever the
language of a proposed resolution is included in a written notice of a meeting
required to be given under the provisions of the Pennsylvania BCL or the
Articles of Incorporation or these By-Laws, the meeting considering the
resolution may without further notice adopt it with such clarifying or other
amendments as do not enlarge its original purpose.
SECTION 6.06. Bulk Mail. Notice of any regular or special meeting of the
shareholders, or any other notice required by the Pennsylvania BCL or by the
Articles of Incorporation or these By-Laws to be given to all shareholders or to
all holders of a class or a series of shares, may be given by any class of
post-paid mail if the notice is deposited in the United States mail at least 20
days prior to the day named for the meeting or any corporate or shareholder
action specified in the notice.
SECTION 6.07. Shareholders Without Forwarding Addresses. Notice or other
communications need not be sent to any shareholder with whom the Corporation has
been unable to communicate for more than 24 consecutive months because
communications to the shareholder have been returned unclaimed or the
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shareholder has otherwise failed to provide the Corporation with a current
address. Whenever the shareholder provides the Corporation with a current
address, the corporation shall commence sending notices and other communications
to the shareholder in the same manner as to other shareholders.
ARTICLE 7
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION OF DIRECTORS,
OFFICERS AND OTHER PERSONS
SECTION 7.01. Limitation of Directors' Liability. No Director of the
Corporation shall be personally liable for monetary damages as such for any
action taken or any failure to take any action unless: (a) the Director has
breached or failed to perform the duties of his or her office under Subchapter B
of Chapter 17 of the Pennsylvania BCL (relating to standard of care and
justifiable reliance), and (b) the breach or failure to perform constitutes
self-dealing, wilful misconduct or recklessness; provided, however, that the
provisions of this Section shall not apply to the responsibility or liability of
a Director pursuant to any criminal statute, or to the liability of a Director
for the payment of taxes pursuant to local, state or federal law.
SECTION 7.02. Indemnification and Insurance.
(a) Indemnification of Directors and Officers.
(i) Each Indemnitee (as defined below) shall be indemnified and held
harmless by the Corporation for all actions taken by him or her and for all
failures to take action (regardless of the date of any such action or
failure to take action) to the fullest extent permitted by Pennsylvania law
against all expense, liability and loss (including without limitation
attorneys fees, judgments, fines, taxes, penalties, and amounts paid or to
be paid in settlement) reasonably incurred or suffered by the Indemnitee in
connection with any Proceeding (as defined below). No indemnification
pursuant to this Section shall be made, however, in any case where the act
or failure to act giving rise to the claim for indemnification is
determined by a court to have constituted wilful misconduct or
recklessness.
(ii) The right to indemnification provided in this Section shall
include the right to have the expenses incurred by the Indemnitee in
defending any Proceeding paid by the Corporation in advance of the final
disposition of the Proceeding to the fullest extent permitted by
Pennsylvania law; provided that, if Pennsylvania law continues so to
require, the payment of such expenses incurred by the Indemnitee in advance
of the final disposition of a Proceeding shall be made only upon delivery
to the Corporation of an undertaking, by or on behalf of the Indemnitee, to
repay all amounts so advanced without interest if it shall ultimately be
determined that the Indemnitee is not entitled to be indemnified under this
Section or otherwise.
(iii) To the extent that an Indemnitee has been successful on the
merits or otherwise in defense of any Proceeding or in defense of any
claim, issue or matter therein, the Corporation shall indemnify such person
against expenses (including attorneys' fees) actually and reasonably
incurred by such person in connection therewith.
(iv) Indemnification pursuant to this Section shall continue as to an
Indemnitee who has ceased to be a Director or officer and shall inure to
the benefit of his or her heirs, executors and administrators.
(v) For purposes of this Article, (A) "INDEMNITEE" shall mean each
Director and each officer of the Corporation who was or is a party to, or
is threatened to be made a party to, or is otherwise involved in, any
Proceeding, by reason of the fact that he or she is or was a Director or
officer of the Corporation or is or was serving in any capacity at the
request or for the benefit of the Corporation as a Director, officer,
employee, agent, partner, or fiduciary of, or in any other capacity for,
another corporation or any partnership, joint venture, trust, employee
benefit plan, or other enterprise; and (B) "PROCEEDING" shall mean any
threatened, pending or completed action, suit or proceeding
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(including without limitation an action, suit or proceeding by or in the
right of the Corporation), whether civil, criminal, administrative or
investigative.
(b) Indemnification of Employees and Other Persons. The Corporation may,
by action of its Board of Directors and to the extent provided in such action,
indemnify employees and other persons, and provide for advancement of expenses
to such persons in the manner set forth in (a)(ii), above, as though they were
Indemnitees, except that, if Pennsylvania law continues to so require, to the
extent that an employee or agent of the Corporation has been successful on the
merits or otherwise in defense of any Proceeding or in defense of any claim,
issue or matter therein, the Corporation shall indemnify such person against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection therewith. Directors and officers of entities that have
merged into, or have been consolidated with, or have been liquidated into, the
Corporation shall not be Indemnitees with respect to Proceedings involving any
action or failure to act of such Director or officer prior to the date of such
merger, consolidation or liquidation, but such persons may be indemnified by the
Board of Directors pursuant to the first sentence of this Section 7.02(b).
(c) Non-Exclusivity of Rights. The rights to indemnification and to the
advancement of expenses provided in or pursuant to this Article shall not be
exclusive of any other rights that any person may have or hereafter acquire
under any statute, provision of the Articles of Incorporation or By-Laws,
agreement, vote of shareholders or Directors, or otherwise.
(d) Insurance. The Corporation may purchase and maintain insurance, at its
expense, for the benefit of any person on behalf of whom insurance is permitted
to be purchased by Pennsylvania law against any expense, liability or loss,
whether or not the Corporation would have the power to indemnify such person
under Pennsylvania or other law. The Corporation may also purchase and maintain
insurance to insure its indemnification obligations whether arising hereunder or
otherwise.
(e) Fund For Payment of Expenses. The Corporation may create a fund of any
nature, which may, but need not be, under the control of a trustee, or otherwise
may secure in any manner its indemnification obligations, whether arising
hereunder, under the Articles of Incorporation, by agreement, vote of
shareholders or Directors, or otherwise.
SECTION 7.03. Amendment. The provisions of this Article 7 relating to the
limitation of Directors' and officers' liability, to indemnification and to the
advancement of expenses shall constitute a contract between the Corporation and
each of its Directors and officers which may be modified as to any Director or
officer only with that person's consent or as specifically provided in this
Section. Notwithstanding any other provision of these By-Laws relating to their
amendment generally, any repeal or amendment of this Article 7 which is adverse
to any Director or officer shall apply to such Director or officer only on a
prospective basis, and shall not reduce any limitation on the personal liability
of a Director of the Corporation, or limit the rights of an Indemnitee to
indemnification or to the advancement of expenses with respect to any action or
failure to act occurring prior to the time of such repeal or amendment.
Notwithstanding any other provision of these By-Laws, no repeal or amendment of
these By-Laws shall affect any or all of this Article so as either to reduce the
limitation of Directors' liability or limit indemnification or the advancement
of expenses in any manner unless adopted by (a) the unanimous vote of the
Directors of the Corporation then serving, or (b) the affirmative vote of
shareholders entitled to cast at least eighty percent (80%) of the votes that
all shareholders are entitled to cast in the election of Directors; provided
that no such amendment shall have retroactive effect inconsistent with the
preceding sentence.
SECTION 7.04. Changes in Pennsylvania Law. References in this Article to
Pennsylvania law or to any provision thereof shall be to such law, as it existed
on the date this Article was adopted or as such law thereafter may be changed;
provided that (a) in the case of any change which expands the liability of
Directors or limits the indemnification rights or the rights to advancement of
expenses which the Corporation may provide, the rights to limited liability, to
indemnification and to the advancement of expenses provided in this Article
shall continue as theretofore to the extent permitted by law; and (b) if such
change permits the Corporation without the requirement of any further action by
shareholders or
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Directors to limit further the liability of Directors (or limit the liability of
officers) or to provide broader indemnification rights or rights to the
advancement of expenses than the Corporation was permitted to provide prior to
such change, then liability thereupon shall be so limited and the rights to
indemnification and the advancement of expenses shall be so broadened to the
extent permitted by law.
ARTICLE 8
FISCAL YEAR
SECTION 8.01. Determination of Fiscal Year. Determination of Fiscal Year.
The Board of Directors shall have the power by resolution to fix the fiscal year
of the Corporation. If the Board of Directors shall fail to do so, the Chief
Executive Officer shall fix the fiscal year.
ARTICLE 9
ARTICLES OF INCORPORATION
SECTION 9.01. Inconsistent Provisions. In the event of any conflict
between the provisions of these By-Laws and the provisions of the Articles of
Incorporation, including, but not limited to, Article SIXTH of the Articles of
Incorporation, the provisions of the Articles of Incorporation shall govern and
control.
ARTICLE 10
AMENDMENTS
SECTION 10.01. Amendments. Except as otherwise provided in these By-Laws
or in the Articles of Incorporation, including Article SIXTH, Article SEVENTH
and Article TENTH of the Articles of Incorporation:
(a) Shareholders. The shareholders entitled to vote thereon shall have the
power to alter, amend or repeal these By-Laws, by the vote of a majority of the
votes cast at a duly organized meeting of shareholders by the holders of shares
entitled to vote thereon, at any regular or special meeting, duly convened after
notice to the shareholders of such purpose. In the case of a meeting of
shareholders to amend or repeal these By-Laws, written notice shall be given to
each shareholder that the purpose, or one of the purposes, of the meeting is to
consider the adoption, amendment or repeal of the By-Laws.
(b) Board of Directors. The Board of Directors (but not a committee
thereof) shall have the power to alter, amend and repeal these By-Laws,
regardless of whether the shareholders have previously adopted the By-Law being
amended or repealed, subject to the power of the shareholders to change such
action; provided, however, that the Board of Directors shall not have the power
to amend these By-Laws on any subject that is expressly committed to the
shareholders by the express terms hereof, by the Pennsylvania BCL or otherwise.
ARTICLE 11
INTERPRETATION OF BY-LAWS; SEPARABILITY
SECTION 11.01. Interpretation. All words, terms and provisions of these
By-Laws shall be interpreted and defined by and in accordance with the
Pennsylvania BCL.
SECTION 11.02. Separability. The provisions of these By-Laws are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
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ARTICLE 12
DETERMINATIONS BY THE BOARD
SECTION 12.01. Effect of Board Determinations. Any determination
involving interpretation or application of these By-Laws made in good faith by
the Board of Directors shall be final, binding and conclusive on all parties in
interest.
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ANNEX G
1585 Broadway
New York, NY 10036
tel 212 761 4000
[Morgan Stanley Logo]
December 19, 2001
Board of Directors
Comcast Corporation
1500 Market Street
Philadelphia, PA 19102-2148
Ladies and Gentlemen:
We understand that AT&T Corp. (along with its subsidiaries, "AT&T"), AT&T
Broadband Corp., a wholly-owned subsidiary of AT&T (along with its subsidiaries,
"AT&T Broadband"; references to AT&T Broadband hereinafter relate to such entity
after giving effect to the actions provided for in the Separation and
Distribution Agreement), Comcast Corporation (along with its subsidiaries,
"Comcast"), AT&T Comcast Corporation, a newly-formed corporation ("Parent"),
AT&T Broadband Acquisition Corp., a newly-formed corporation that is a
wholly-owned subsidiary of Parent ("AT&T Broadband Merger Sub"), and Comcast
Merger Acquisition Corp., a newly-formed corporation that is a wholly-owned
subsidiary of Parent ("Comcast Merger Sub"), propose to enter into an Agreement
and Plan of Merger to be dated as of December 19, 2001 (the "Agreement"; unless
otherwise indicated, capitalized terms in this opinion have the meaning ascribed
to them in the Agreement), which provides, among other things, that:
(i) AT&T Broadband will hold, directly or indirectly, all of the
assets and liabilities of the AT&T Broadband Group in accordance with the
terms and conditions of the Separation and Distribution Agreement, being
entered into contemporaneously with the Agreement;
(ii) AT&T will, prior to the Mergers (as defined below), issue shares
of Common Stock, par value $0.01 per share, of AT&T Broadband ("AT&T
Broadband Common Stock") to the holders of the QUIPS in exchange for the
QUIPS pursuant to the QUIPS Exchange, in accordance with the terms and
conditions of the Exchange Agreement, and will distribute to the holders of
the Common Stock, par value $1.00 per share, of AT&T ("AT&T Common Stock")
one share of AT&T Broadband Common Stock for each AT&T Common Stock so
held, in accordance with the terms and conditions of the Separation and
Distribution Agreement;
(iii) Comcast Merger Sub will merge with and into Comcast (the
"Comcast Merger") in a transaction in which each issued and outstanding
share of Class A Common Stock, par value $1.00 per share, of Comcast
("Comcast Class A Common Stock"), Class B Common Stock, par value $1.00 per
share, of Comcast ("Comcast Class B Common Stock"), and Class A Special
Common Stock, par value $1.00 per share, of Comcast ("Comcast Class A
Special Common Stock", and, together with Comcast Class A Common Stock and
Comcast Class B Common Stock, "Comcast Common Stock"), other than shares of
Comcast Common Stock owned by Comcast (which will be canceled), will be
converted into the right to receive one share (collectively, the "Comcast
Conversion Ratios") of Class A Common Stock, par value $0.01 per share, of
Parent ("Parent Class A Common Stock"), Class B Common Stock, par value
$0.01 per share of Parent ("Parent Class B Common Stock") and Class A
Special Common Stock, par value $0.01 per share, of Parent ("Parent Class A
Special Common Stock"), respectively (such securities having terms as
contemplated by the Agreement); and
(iv) AT&T Broadband Merger Sub will be merged with and into AT&T
Broadband (the "AT&T Broadband Merger", together with the Comcast Merger,
the ("Mergers" and, after giving effect to the Separation and Distribution
Agreement, the "Transaction") in a transaction in which each outstanding
share of AT&T Broadband Common Stock, other than shares of AT&T Broadband
G-1
Common Stock owned by AT&T Broadband (which will be canceled), will be
converted into the right to receive:
(a) if the A Shareholder Approval has been obtained, the Exchange
Ratio of a share of Parent Class A Common Stock, or if the A Shareholder
Approval has not been obtained, the Exchange Ratio of a share of Class C
Common Stock, par value $0.01 per share, of Parent having terms as
contemplated by the Agreement ("Parent Class C Common Stock", and,
together with Parent Class A Common Stock, Parent Class B Common Stock
and Parent Class A Special Common Stock, "Parent Common Stock");
(b) solely under the circumstances set forth in Section 4.03 of the
Agreement, the additional shares of Parent Common Stock, if any,
contemplated by such Section (the "Section 355(e) Top-up"); and
(c) solely under the circumstances set forth in Section 4.04 of the
Agreement, the K/A Security or the K/C Security, as the case may be,
entitling such holder under circumstances enumerated in such Section to
a number of shares, if any, of Parent Class A Common Stock or Parent
Class C Common Stock, as the case may be, not exceeding the Exchange
Ratio multiplied by 0.03.
The terms and conditions of the Transaction are more fully set forth in the
Agreement and the Separation and Distribution Agreement.
You have asked for our opinion as to whether the Comcast Conversion Ratios
in the Comcast Merger, in the aggregate, are fair, from a financial point of
view, to the holders of Comcast Common Stock, taken together.
For purposes of the opinion set forth herein, we have, among other things:
(i) reviewed certain publicly available financial statements and other
business and financial information of or relating to Comcast, AT&T and AT&T
Broadband;
(ii) reviewed certain internal financial statements and other
financial and operating data concerning Comcast prepared by the management
of Comcast;
(iii) reviewed certain financial forecasts, including information
relating to certain strategic, financial and operational benefits
anticipated from the Transaction, prepared by the management of Comcast;
(iv) discussed the past and current operations and financial condition
and the prospects of Comcast, including the strategic, financial and
operational benefits anticipated from the Transaction, with the management
of Comcast;
(v) reviewed certain internal financial statements and other financial
operating data concerning AT&T and AT&T Broadband (including, without
limitation, the structure, composition, operations, assets, liabilities and
pro forma historical balance sheets and income statements of AT&T
Broadband) prepared by the managements of AT&T and AT&T Broadband and
Comcast;
(vi) reviewed certain financial forecasts (including, without
limitation, as to the pro forma forecasted balance sheets and income
statements of AT&T Broadband), and including information relating to
certain strategic, financial and operational benefits anticipated from the
Transaction, prepared by the managements of AT&T and AT&T Broadband and of
Comcast;
(vii) discussed the past and current operations and financial
condition and the prospects of AT&T Broadband, including the strategic,
financial and operational benefits anticipated from the Transaction, with
the managements of AT&T, AT&T Broadband and Comcast;
(viii) reviewed the reported prices and trading activity for Comcast
Common Stock and AT&T Common Stock;
G-2
(ix) compared the financial performance of Comcast and the prices and
trading activity of Comcast Common Stock with that of certain other
comparable publicly-traded companies and their securities;
(x) compared the financial performance of AT&T Broadband and the
prices and trading activity of the AT&T Common Stock with that of certain
other comparable publicly-traded companies and their securities;
(xi) reviewed the financial terms, to the extent publicly available,
of certain comparable transactions;
(xii) participated in discussions and negotiations among
representatives of Comcast, AT&T, AT&T Broadband and their financial and
legal advisors;
(xiii) reviewed final drafts of each of the Agreement and the
Separation and Distribution Agreement; and
(xiv) considered such other factors and performed such other analyses
as we have deemed appropriate.
We have assumed and relied upon, without any responsibility for independent
verification or liability therefor, the accuracy and completeness of all
information that was publicly available or supplied or otherwise made available
to us by Comcast, AT&T or AT&T Broadband or otherwise reviewed by or for us for
the purposes of this opinion. With respect to the financial forecasts, including
information relating to certain strategic, financial and operational benefits
anticipated from the Transaction, prepared and furnished to or discussed with us
by Comcast, AT&T or AT&T Broadband, we have assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of Comcast's, AT&T's and AT&T Broadband's managements as to the
expected future financial performance of Comcast, AT&T Broadband or Parent, as
the case may be, and the strategic, financial and operational benefits
anticipated from the Transaction. We express no view as to such financial
forecast information, including the strategic, financial and operational
benefits anticipated from the Transaction, or the assumptions on which they were
based. In addition, we have assumed that the Mergers will qualify as tax-free
exchanges under Section 351 of the Internal Revenue Code of 1986, as amended
(the "Code"), and that the Separation and Distribution will qualify as tax-free
transactions under Sections 355 and 368(a) of the Code, in each case for United
States federal income tax purposes, and that the Section 355(e) Top-up will not
occur. We have not made any independent valuation or appraisal of the assets or
liabilities of Comcast, AT&T or AT&T Broadband, nor have we been furnished with
any such appraisals. In addition, we have not assumed any obligation to conduct
any inspection of the properties or facilities of Comcast, AT&T or AT&T
Broadband. Our opinion is necessarily based on financial, economic, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof. It should be understood that subsequent developments may
affect this opinion and that we do not have any obligation to update, revise, or
reaffirm this opinion.
For purposes of rendering our opinion, we have assumed, in all respects
material to our analysis, that the Transaction will be consummated as described
in the Agreement and the Separation and Distribution Agreement, that all the
representations and warranties of each party contained in the Agreement and the
Separation and Distribution Agreement are true and correct, that each party to
the Agreement and the Separation and Distribution Agreement will perform all of
the covenants and agreements required to be performed by it thereunder without
any consents or waivers of the other parties thereto, and that all conditions to
the consummation of the Transaction will be satisfied without waiver thereof,
and that if the parties elect to consummate the Transaction by means of the
alternative structure contemplated by Section 3.05 of the Agreement, such
alternative structure will not differ from the structure reflected in the
Agreement and the Separation and Distribution Agreement in any respect material
to our analysis. We note that we are not legal, tax or regulatory experts and
have relied upon, without assuming any responsibility for independent
verification or liability therefor, the assessment of Comcast's legal, tax and
regulatory advisors with respect to the legal, tax and regulatory matters
related to the Transaction. We
G-3
have also assumed that the definitive Agreement and the definitive Separation
and Distribution Agreement will not differ in any material respects from the
drafts thereof furnished to and reviewed by us. We have further assumed that all
governmental, regulatory or other consents and approvals (contractual or
otherwise) necessary for or in connection with the consummation of the
Transaction will be obtained without any adverse effect on Comcast, AT&T
Broadband or Parent, or on the contemplated benefits of the Transaction, in any
respect material to our analysis.
In arriving at our opinion, we were not authorized to solicit, and did not
solicit, interest from any party with respect to a business combination or other
extraordinary transaction involving Comcast.
We have acted as financial advisor to Comcast in connection with this
transaction and will receive a fee for our services. In the past, Morgan Stanley
& Co. Incorporated and its affiliates have provided financial advisory and
financing services for Comcast and AT&T and their affiliates and have received
fees for the rendering of these services. Furthermore, Morgan Stanley & Co.
Incorporated and its affiliates may also provide financial advisory and
financing services to Comcast, Parent and AT&T, and their affiliates, in the
future for which they would expect to receive fees. In the ordinary course of
its businesses, Morgan Stanley & Co. Incorporated and its affiliates may
actively trade the debt and equity securities of Comcast or AT&T or, after the
Transaction, Parent for its own account or for the accounts of customers and,
accordingly, may at any time hold long or short positions in such securities.
It is understood that this letter is for the information of the Board of
Directors of Comcast and may not be used for any other purpose without our prior
written consent, except that this opinion may be included in its entirety in any
proxy or information statement filed with the Securities and Exchange Commission
and mailed to shareholders of Comcast. In addition, this opinion does not in any
manner address the underlying decision by Comcast to engage in the Transaction
or the prices at which Comcast Common Stock or Parent Common Stock will trade
after the announcement or consummation of the Transaction, and Morgan Stanley
expresses no opinion or recommendation as to how the shareholders of Comcast
should vote at the shareholders' meetings held in connection with the
Transaction or any other matter.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Comcast Conversion Ratios in the Comcast Merger, in the
aggregate, are fair, from a financial point of view, to the holders of Comcast
Common Stock, taken together.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ PAUL J. TAUBMAN
------------------------------------
Paul J. Taubman
Managing Director
G-4
ANNEX H
[JPMORGAN LOGO]
December 19, 2001
The Board of Directors
Comcast Corporation
1500 Market Street
Philadelphia, PA 19102-2148
Members of the Board of Directors:
You have requested our opinion as to the fairness, from a financial point
of view, of the Comcast Conversion Ratios (as defined below) in the Comcast
Merger (as defined below), in the aggregate, to the holders of Comcast Common
Stock (as defined below), taken together.
You have informed us that AT&T Corp. (along with its subsidiaries, "AT&T"),
AT&T Broadband Corp., a wholly-owned subsidiary of AT&T (along with its
subsidiaries, "AT&T Broadband"; references to AT&T Broadband hereinafter relate
to such entity after giving effect to the actions provided for in the Separation
and Distribution Agreement), Comcast Corporation (along with its subsidiaries,
"Comcast"), AT&T Comcast Corporation, a newly-formed corporation ("Parent"),
AT&T Broadband Acquisition Corp., a newly-formed corporation that is a
wholly-owned subsidiary of Parent ("AT&T Broadband Merger Sub"), and Comcast
Acquisition Corp., a newly-formed corporation that is a wholly-owned subsidiary
of Parent ("Comcast Merger Sub"), propose to enter into an Agreement and Plan of
Merger to be dated as of December 19, 2001 (the "Agreement"; unless otherwise
indicated, capitalized terms in this opinion have the meaning ascribed to them
in the Agreement), which provides, among other things, that:
(i) AT&T Broadband will hold, directly or indirectly, all of the
assets and liabilities of the AT&T Broadband Group in accordance with the
terms and conditions of the Separation and Distribution Agreement, being
entered into contemporaneously with the Agreement;
(ii) AT&T will, prior to the Mergers (as defined below), issue shares
of Common Stock, par value $0.01 per share, of AT&T Broadband ("AT&T
Broadband Common Stock") to the holders of the QUIPS in exchange for the
QUIPS pursuant to the QUIPS Exchange, in accordance with the terms and
conditions of the Exchange Agreement, and will distribute to the holders of
the Common Stock, par value $1.00 per share, of AT&T ("AT&T Common Stock")
one share of AT&T Broadband Common Stock for each share of AT&T Common
Stock so held, in accordance with the terms and conditions of the
Separation and Distribution Agreement;
(iii) Comcast Merger Sub will merge with and into Comcast (the
"Comcast Merger") in a transaction in which each issued and outstanding
share of Class A Common Stock, par value $1.00 per share, of Comcast
("Comcast Class A Common Stock"), Class B Common Stock, par value $1.00 per
share, of Comcast ("Comcast Class B Common Stock"), and Class A Special
Common Stock, par value $1.00 per share, of Comcast ("Comcast Class A
Special Common Stock", and, together with Comcast Class A Common Stock and
Comcast Class B Common Stock, "Comcast Common Stock"), other than shares of
Comcast Common Stock owned by Comcast (which will be canceled), will be
converted into the right to receive one share (collectively, the "Comcast
Conversion Ratios") of Class A Common Stock, par value $0.01 per share, of
Parent ("Parent Class A Common Stock"), Class B Common Stock, par value
$0.01 per share of Parent ("Parent Class B Common Stock") and Class A
Special Common Stock, par value $0.01 per share, of Parent ("Parent Class A
Special Common Stock"), respectively (such securities having terms as
contemplated by the Agreement); and
(iv) AT&T Broadband Merger Sub will be merged with and into AT&T
Broadband (the "AT&T Broadband Merger", together with the Comcast Merger,
the "Mergers" and, after giving effect to the Separation and Distribution
Agreement, the "Transaction") in a transaction in which
H-1
each outstanding share of AT&T Broadband Common Stock, other than shares of
AT&T Broadband Common Stock owned by AT&T Broadband (which will be
canceled), will be converted into the right to receive:
(a) if the A Shareholder Approval has been obtained, the Exchange
Ratio of one share of Parent Class A Common Stock, or if the A
Shareholder Approval has not been obtained, the Exchange Ratio of one
share of Class C Common Stock, par value $0.01 per share, of Parent
having terms as contemplated by the Agreement ("Parent Class C Common
Stock", and, together with Parent Class A Common Stock, Parent Class B
Common Stock and Parent Class A Special Common Stock, "Parent Common
Stock");
(b) solely under the circumstances set forth in Section 4.03 of the
Agreement, the additional shares of Parent Common Stock, if any,
contemplated by such Section (the "Section 355(e) Top-up"); and
(c) solely under the circumstances set forth in Section 4.04 of the
Agreement, the K/A Security or the K/C Security, as the case may be,
entitling such holder under circumstances enumerated in such Section to
a number of shares, if any, of Parent Class A Common Stock or Parent
Class C Common Stock, as the case may be, not exceeding the Exchange
Ratio multiplied by 0.03.
In arriving at our opinion, we have, among other things, (i) reviewed the
final drafts of each of the Agreement and the Separation and Distribution
Agreement, provided to us by Comcast; (ii) reviewed certain publicly available
business and financial information concerning Comcast, AT&T and AT&T Broadband
and the industries in which they operate; (iii) reviewed certain internal,
non-public financial and operating data, analyses and forecasts prepared by the
managements of Comcast, AT&T and AT&T Broadband relating to the businesses of
Comcast, on the one hand, and AT&T Broadband, on the other (including, without
limitation, the structure, composition, operations, assets, liabilities and pro
forma historical and forecasted balance sheets and income statements of AT&T
Broadband), as well as the estimated amount and timing of the cost savings and
related expenses and synergies expected to result from the Transaction (the
"Estimated Synergies") furnished to us by Comcast, AT&T and AT&T Broadband; (iv)
compared the proposed financial terms of the Transaction with the publicly
available financial terms of certain transactions involving companies we deemed
relevant; (v) compared the financial and operating performance of Comcast and
AT&T Broadband with publicly available information concerning certain other
companies we deemed relevant and reviewed the current and historical market
prices of Comcast Common Stock and AT&T Common Stock and certain publicly traded
securities of such other companies; (vi) participated in certain discussions and
negotiations among representatives of Comcast, AT&T and AT&T Broadband and their
financial and legal advisors; and (vii) performed such other financial studies
and analyses and considered such other information as we deemed appropriate for
the purposes of this opinion.
In addition, we have held discussions with certain members of the
management of Comcast, AT&T and AT&T Broadband with respect to certain aspects
of the Transaction and the foregoing matters, including the past and current
business operations of Comcast, AT&T and AT&T Broadband, the financial condition
and future prospects and operations of Comcast and AT&T Broadband, the effects
of the Transaction, including the Estimated Synergies, on the financial
condition and future prospects of Comcast, AT&T Broadband and Parent, and
certain other matters we believed necessary or appropriate to our inquiry.
In giving our opinion, we have relied upon and assumed, without any
responsibility for independent verification or liability therefor, the accuracy
and completeness of all information that was publicly available or furnished to
us by Comcast, AT&T or AT&T Broadband or otherwise reviewed by or for us. We
have not conducted any valuation or appraisal of any assets or liabilities of
Comcast, AT&T or AT&T Broadband, nor have any such valuations or appraisals been
provided to us. In addition, we have not assumed any obligation to conduct any
inspection of the properties or facilities of Comcast, AT&T or AT&T Broadband.
In relying on financial analyses and forecasts provided to us, including the
Estimated
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Synergies, we have assumed that they have been reasonably prepared based on
assumptions reflecting the best currently available estimates and judgments by
the managements of Comcast, AT&T and AT&T Broadband as to the expected future
results of operations and financial condition of Comcast, AT&T Broadband and
Parent and as to such other matters, including the Estimated Synergies, to which
such analyses or forecasts relate. We express no view as to such analyses or
forecasts, including the Estimated Synergies, or the assumptions on which they
were based. We have also assumed that the Mergers will qualify as tax-free
exchanges under Section 351 of the Internal Revenue Code of 1986, as amended
(the "Code"), and that the Separation and Distribution will qualify as tax-free
transactions under Sections 355 and 368(a) of the Code, in each case for United
States federal income tax purposes, and that the Section 355(e) Top-up will not
occur.
For purposes of rendering our opinion, we have assumed, in all respects
material to our analysis, that the Transaction will be consummated as described
in the Agreement and the Separation and Distribution Agreement, that all the
representations and warranties of each party contained in the Agreement and the
Separation and Distribution Agreement are true and correct, that each party to
the Agreement and the Separation and Distribution Agreement will perform all of
the covenants and agreements required to be performed by it thereunder without
any consents or waivers of the other parties thereto, and that all conditions to
the consummation of the Transaction will be satisfied without waiver thereof,
and that if the parties elect to consummate the Transaction by means of the
alternative structure contemplated by Section 3.05 of the Agreement, such
alternative structure will not differ from the structure reflected in the
Agreement and the Separation and Distribution Agreement in any respect material
to our analysis. We note that we are not legal, tax or regulatory experts and
have relied upon, without assuming any responsibility for independent
verification or liability therefor, the assessment of Comcast's legal, tax and
regulatory advisors with respect to the legal, tax and regulatory matters
related to the Transaction. We have also assumed that the definitive Agreement
and the definitive Separation and Distribution Agreement will not differ in any
material respects from the drafts thereof furnished to and reviewed by us. We
have further assumed that all governmental, regulatory or other consents and
approvals (contractual or otherwise) necessary for or in connection with the
consummation of the Transaction will be obtained without any adverse effect on
Comcast, AT&T Broadband or Parent, or on the contemplated benefits of the
Transaction, in any respect material to our analysis.
Our opinion is necessarily based on economic, market and other conditions
as in effect on, and the information made available to us as of, the date
hereof. It should be understood that subsequent developments may affect this
opinion and that we do not have any obligation to update, revise, or reaffirm
this opinion. Our opinion is limited to the fairness, from a financial point of
view, to the holders of Comcast Common Stock, taken together, of the Comcast
Conversion Ratios in the Comcast Merger, in the aggregate, and we express no
opinion as to the underlying decision by Comcast to engage in the Transaction.
We are expressing no opinion herein as to the price at which Comcast Common
Stock or Parent Common Stock will trade at any future time.
In arriving at our opinion, we were not authorized to solicit, and did not
solicit, interest from any party with respect to a business combination or other
extraordinary transaction involving Comcast.
We have acted as financial advisor to Comcast with respect to the proposed
Transaction and will receive a fee from Comcast for our services. We will also
receive an additional fee if the proposed Transaction is consummated. In
addition, Comcast has agreed to indemnify us for certain liabilities arising out
of our engagement. We have also provided financial advisory and financing
services from time to time to Comcast and AT&T and their respective affiliates.
We may also provide financial advisory and financing services to Comcast, Parent
and AT&T, and/or their affiliates, in the future. In the ordinary course of our
businesses, we and our affiliates may actively trade the debt and equity
securities of Comcast or AT&T or, after the Transaction, Parent for our own
account or for the accounts of customers and, accordingly, we may at any time
hold long or short positions in such securities.
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On the basis of and subject to the foregoing, it is our opinion that, as of
the date hereof, the Comcast Conversion Ratios in the Comcast Merger, in the
aggregate, are fair, from a financial point of view, to the holders of Comcast
Common Stock, taken together.
This letter is provided to the Board of Directors of Comcast in connection
with and for the purposes of its evaluation of the Transaction. This opinion
does not constitute a recommendation to any shareholder of Comcast as to how
such shareholder should vote with respect to the Transaction or any other
matter. This opinion may not be disclosed, referred to, or communicated (in
whole or in part) to any third party for any purpose whatsoever except with our
prior written approval. This opinion may be reproduced in full in any proxy or
information statement mailed to shareholders of Comcast but may not otherwise be
disclosed publicly in any manner without our prior written approval.
Very truly yours,
/s/ J.P. MORGAN SECURITIES INC.
-------------------------------
J.P. MORGAN SECURITIES INC.
H-4
ANNEX I
Investment Banking
Corporate and Institutional
Client Group
World Financial Center
North Tower
New York, New York 10281-1330
212 449 1000
[Merrill Lynch Logo]
December 19, 2001
Board of Directors
Comcast Corporation
1500 Market Street
Philadelphia, PA 19102-2148
Members of the Board of Directors:
You have informed us that AT&T Corp. (along with its subsidiaries, "AT&T"),
AT&T Broadband Corp., a wholly-owned subsidiary of AT&T (along with its
subsidiaries, "AT&T Broadband"; references to AT&T Broadband hereinafter relate
to such entity after giving effect to the actions provided for in the Separation
and Distribution Agreement), Comcast Corporation (along with its subsidiaries,
"Comcast"), AT&T Comcast Corporation, a newly-formed corporation ("Parent"),
AT&T Broadband Acquisition Corp., a newly-formed corporation that is a
wholly-owned subsidiary of Parent ("AT&T Broadband Merger Sub"), and Comcast
Merger Acquisition Corp., a newly-formed corporation that is a wholly-owned
subsidiary of Parent ("Comcast Merger Sub"), propose to enter into an Agreement
and Plan of Merger to be dated as of December 19, 2001 (the "Agreement"; unless
otherwise indicated, capitalized terms in this opinion have the meaning ascribed
to them in the Agreement), which provides, among other things, that:
(i) AT&T Broadband will hold, directly or indirectly, all of the
assets and liabilities of the AT&T Broadband Group in accordance with the
terms and conditions of the Separation and Distribution Agreement, being
entered into contemporaneously with the Agreement;
(ii) AT&T will, prior to the Mergers (as defined below), issue shares
of Common Stock, par value $0.01 per share, of AT&T Broadband ("AT&T
Broadband Common Stock") to the holders of the QUIPS in exchange for the
QUIPS pursuant to the QUIPS Exchange, in accordance with the terms and
conditions of the Exchange Agreement, and will distribute to the holders of
the Common Stock, par value $1.00 per share, of AT&T ("AT&T Common Stock")
one share of AT&T Broadband Common Stock for each share of AT&T Common
Stock so held, in accordance with the terms and conditions of the
Separation and Distribution Agreement;
(iii) Comcast Merger Sub will merge with and into Comcast (the
"Comcast Merger") in a transaction in which each issued and outstanding
share of Class A Common Stock, par value $1.00 per share, of Comcast
("Comcast Class A Common Stock"), Class B Common Stock, par value $1.00 per
share, of Comcast ("Comcast Class B Common Stock"), and Class A Special
Common Stock, par value $1.00 per share, of Comcast ("Comcast Class A
Special Common Stock", and, together with Comcast Class A Common Stock and
Comcast Class B Common Stock, "Comcast Common Stock"), other than shares of
Comcast Common Stock owned by Comcast (which will be canceled), will be
converted into the right to receive one share (collectively, the "Comcast
Conversion Ratios") of Class A Common Stock, par value $0.01 per share, of
Parent ("Parent Class A Common Stock"), Class B Common Stock, par value
$0.01 per share of Parent ("Parent Class B Common Stock") and Class A
Special Common Stock, par value $0.01 per share, of Parent ("Parent Class A
Special Common Stock"), respectively (such securities having terms as
contemplated by the Agreement); and
I-1
(iv) AT&T Broadband Merger Sub will be merged with and into AT&T
Broadband (the "AT&T Broadband Merger", together with the Comcast Merger,
the "Mergers" and, after giving effect to the Separation and Distribution
Agreement, the "Transaction") in a transaction in which each outstanding
share of AT&T Broadband Common Stock, other than shares of AT&T Broadband
Common Stock owned by AT&T Broadband (which will be canceled), will be
converted into the right to receive:
(a) if the A Shareholder Approval has been obtained, the Exchange
Ratio of a share of Parent Class A Common Stock, or if the A Shareholder
Approval has not been obtained, the Exchange Ratio of a share of Class C
Common Stock, par value $0.01 per share, of Parent having terms as
contemplated by the Agreement ("Parent Class C Common Stock", and,
together with Parent Class A Common Stock, Parent Class B Common Stock
and Parent Class A Special Common Stock, "Parent Common Stock");
(b) solely under the circumstances set forth in Section 4.03 of the
Agreement, the additional shares of Parent Common Stock, if any,
contemplated by such Section (the "Section 355(e) Top-up"); and
(c) solely under the circumstances set forth in Section 4.04 of the
Agreement, the K/A Security or the K/C Security, as the case may be,
entitling such holder under circumstances enumerated in such Section to
a number of shares, if any, of Parent Class A Common Stock or Parent
Class C Common Stock, as the case may be, not exceeding the Exchange
Ratio multiplied by 0.03.
You have asked us whether, in our opinion, the Comcast Conversion Ratios in
the Comcast Merger, in the aggregate, are fair, from a financial point of view,
to the holders of Comcast Common Stock, taken together.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial
information relating to Comcast, AT&T and AT&T Broadband that we deemed to
be relevant;
(2) Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets, liabilities and
prospects of Comcast, AT&T and AT&T Broadband (including, without
limitation, the structure, composition, operations, assets, liabilities and
pro forma historical and forecasted balance sheets and income statements of
AT&T Broadband), as well as the amount and timing of the cost savings and
related expenses and synergies expected to result from the Transaction (the
"Expected Synergies") furnished to us by Comcast, AT&T and AT&T Broadband;
(3) Conducted discussions with members of management and
representatives of Comcast, AT&T and AT&T Broadband concerning the matters
described in clauses 1 and 2 above, as well as their businesses and
prospects before and after giving effect to the Transaction and the
Expected Synergies;
(4) Reviewed the market prices and valuation multiples for Comcast
Common Stock and AT&T Common Stock and compared them with those of certain
publicly traded companies that we deemed to be relevant;
(5) Reviewed the results of operations of Comcast and AT&T Broadband
and compared them with those of certain publicly traded companies that we
deemed to be relevant;
(6) Compared the proposed financial terms of the Transaction with the
financial terms of certain other transactions that we deemed to be
relevant;
(7) Participated in certain discussions and negotiations among
representatives of Comcast, AT&T and AT&T Broadband and their financial and
legal advisors;
(8) Reviewed the potential pro forma impact of the Transaction;
I-2
(9) Reviewed the final drafts of each of the Agreement and the
Separation and Distribution Agreement, respectively; and
(10) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our assessment
of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
liability therefor, or undertaken an independent evaluation or appraisal of any
of the assets or liabilities of Comcast, AT&T or AT&T Broadband or been
furnished with any such evaluation or appraisal. In addition, we have not
assumed any obligation to conduct any physical inspection of the properties or
facilities of Comcast, AT&T or AT&T Broadband. With respect to the financial
forecast information and the Expected Synergies furnished to or discussed with
us by Comcast, AT&T or AT&T Broadband, we have assumed that they have been
reasonably prepared and reflect the best currently available estimates and
judgment of Comcast's, AT&T's or AT&T Broadband's managements as to the expected
future financial performance of Comcast, AT&T Broadband or Parent, as the case
may be, and the Expected Synergies. We express no view as to such financial
forecast information, including the Expected Synergies, or the assumptions on
which they were based. We have further assumed that will qualify as tax-free
exchanges under Section 351 of the Internal Revenue Code of 1986, as amended
(the "Code"), and that the Separation and Distribution will qualify as tax-free
transactions under Sections 355 and 368(a) of the Code, in each case for United
States federal income tax purposes, and that the Section 355(e) Top-up will not
occur. We have also assumed that the final form of the Agreement and the
Separation and Distribution Agreement will be substantially similar to the last
draft reviewed by us.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available to
us as of, the date hereof. It should be understood that subsequent developments
may affect this opinion and that we do not have any obligation to update,
revise, or reaffirm this opinion. We have assumed that all governmental,
regulatory or other consents and approvals (contractual or otherwise) necessary
for or in connection with the consummation of the Transaction will be obtained
without any adverse effect on Comcast, AT&T Broadband or Parent or on the
contemplated benefits of the Transaction, in any respect material to our
analysis. For purposes of rendering our opinion, we have assumed, in all
respects material to our analysis, that the Transaction will be consummated as
described in the Agreement and the Separation and Distribution Agreement, that
all the representations and warranties of each party contained in the Agreement
and the Separation and Distribution Agreement are true and correct, that each
party to the Agreement and the Separation and Distribution Agreement will
perform all of the covenants and agreements required to be performed by it
thereunder without any consents or waivers of the other parties thereto, and
that all conditions to the consummation of the Transaction will be satisfied
without waiver thereof, and that if the parties elect to consummate the
Transaction by means of the alternative structure contemplated by Section 3.05
of the Agreement, such alternative structure will not differ from the structure
reflected in the Agreement and the Separation and Distribution Agreement in any
respect material to our analysis. We note that we are not legal, tax or
regulatory experts and have relied upon, without assuming any responsibility for
independent verification or liability therefor, the assessment of Comcast's
legal, tax and regulatory advisors with respect to the legal, tax and regulatory
matters related to the Transaction.
In arriving at our opinion, we were not authorized to solicit, and did not
solicit, interest from any party with respect to a business combination or other
extraordinary transaction involving Comcast.
We are acting as financial advisor to Comcast in connection with the
Transaction and will receive a fee from Comcast for our services, a significant
portion of which is contingent upon the consummation of the Transaction. In
addition, Comcast has agreed to indemnify us for certain liabilities arising out
of our engagement. We have, in the past, provided financial advisory and
financing services to Comcast and AT&T and/or their affiliates and may continue
to do so (including, after the Transaction, to Parent and its
I-3
affiliates) and have received, and may receive, fees for the rendering of such
services. In addition, in the ordinary course of our business, we may actively
trade the shares of Comcast Common Stock and other securities of Comcast, as
well as shares of AT&T Common Stock and other securities of AT&T and, after the
Transaction, the securities of Parent, for our own account and for the accounts
of customers and, accordingly, may at any time hold a long or short position in
such securities.
This opinion is for the use and benefit of the Board of Directors of
Comcast. Our opinion does not address the merits of the underlying decision by
Comcast to engage in the Transaction and does not constitute a recommendation to
any shareholder of Comcast as to how such shareholder should vote on the
proposed Transaction or any matter related thereto.
We are not expressing any opinion herein as to the prices at which the
shares of Comcast Common Stock or Parent Common Stock will trade following the
announcement or consummation of the Transaction, as the case may be.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Comcast Conversion Ratios in the Comcast Merger, in
the aggregate, are fair, from a financial point of view, to the holders of
Comcast Common Stock, taken together.
Very truly yours,
/s/ MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
I-4
ANNEX J
[LETTERHEAD OF CREDIT SUISSE FIRST BOSTON CORPORATION]
December 19, 2001
Board of Directors
AT&T Corp.
295 North Maple Avenue
Basking Ridge, New Jersey 07920
Members of the Board:
You have asked us to advise you with respect to the fairness, from a
financial point of view, to the holders of the common stock of AT&T Broadband
Corp. ("AT&T Broadband") immediately prior to the Merger (as defined below),
other than Comcast Corporation ("Comcast") and its affiliates, of the AT&T
Broadband Exchange Ratio (as defined below) set forth in the Agreement and Plan
of Merger, dated as of December 19, 2001 (the "Merger Agreement"), among AT&T
Corp. ("AT&T"), AT&T Broadband, Comcast, AT&T Comcast Corporation ("AT&T
Comcast"), AT&T Broadband Acquisition Corp., a wholly owned subsidiary of AT&T
Comcast ("AT&T Broadband Merger Sub"), and Comcast Acquisition Corp., a wholly
owned subsidiary of AT&T Comcast ("Comcast Merger Sub").
As more fully described in the Merger Agreement, AT&T Broadband Merger Sub
will be merged with and into AT&T Broadband (the "AT&T Broadband Merger")
pursuant to which (A) if the requisite approval of the Merger Agreement and
related transactions is obtained by the holders of Class A Common Stock of
Comcast (the "Comcast Shareholder Approval"), each outstanding share of the
Common Stock, par value $0.01 per share, of AT&T Broadband ("AT&T Broadband
Common Stock") will be converted into the right to receive (i) that number of
shares of Class A Common Stock, par value $0.01 per share, of AT&T Comcast
("AT&T Comcast Class A Common Stock") equal to the Exchange Ratio (as defined
below) and (ii) if AT&T Comcast has not received prior to the effective time of
the Merger (the "Effective Time") a commitment from Standard and Poors' that the
AT&T Comcast Class A Common Stock will be included in the Standard and Poors'
500 Index (the "Index") immediately after the Effective Time, a non-transferable
security of AT&T Comcast which, under certain circumstances as more fully
described in the Merger Agreement, will entitle the holder thereof to receive up
to a number of shares of AT&T Comcast Class A Common Stock (the "K/A Exchange
Ratio") equal to the product of (x) the Exchange Ratio and (y) the K/A Price
Differential (as defined in the Merger Agreement), which K/A Price Differential
will in no event be less than zero or more than 0.03; and (B) if Comcast
Shareholder Approval is not obtained, each outstanding share of AT&T Broadband
Common Stock will be converted into the right to receive (i) that number of
shares of Class C Common Stock, par value $0.01 per share, of AT&T Comcast
("AT&T Comcast Class C Common Stock" and, together with AT&T Comcast Class A
Common Stock, "AT&T Comcast Common Stock") equal to the Exchange Ratio and (ii)
if AT&T Comcast has not received prior to the Effective Time a commitment from
Standard and Poors' that the AT&T Comcast Class C Common Stock will be included
in the Index immediately after the Effective Time, a non-transferable security
of AT&T Comcast which, under certain circumstances as more fully described in
the Merger Agreement, will entitle the holder thereof to receive up to a number
of shares of AT&T Comcast Class C Common Stock (the "K/C Exchange Ratio") equal
to the product of (x) the Exchange Ratio and (y) the K/C Price Differential (as
defined in the Merger Agreement), which K/C Price Differential will in no event
be less than zero or more than 0.03 (the number of shares of AT&T Comcast Common
Stock into which each outstanding share of AT&T Broadband Common Stock will be
so converted in the AT&T Broadband Merger as specified in clause (A)(i) or
(B)(i) above, as applicable, the "AT&T Broadband Common Stock Exchange Ratio"
and, together with the K/A Exchange Ratio or the K/C Exchange Ratio, as
applicable, the "AT&T Broadband Exchange Ratio"). The Merger Agreement also
provides for the merger of Comcast Merger Sub with and into Comcast (the
"Comcast Merger" and, together with the AT&T Broadband Merger, the "Merger")
pursuant to which each outstanding share of Class A Common Stock of Comcast,
Class B Common Stock of Comcast and
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Board of Directors
AT&T Corp.
295 North Maple Avenue
Basking Ridge, New Jersey 07920
Page 2
Class A Special Common Stock of Comcast will be converted into one share of AT&T
Comcast Class A Common Stock, Class B Common Stock of AT&T Comcast and Class A
Special Common Stock of AT&T Comcast, respectively. "Exchange Ratio" is defined
and more fully described in the Merger Agreement as a fraction (A) the numerator
of which is the difference between (i) 1,235,000,000 and (ii) the value of
certain outstanding but unexercised options to purchase shares of AT&T Broadband
Common Stock divided by the average stock price of Class A Common Stock of
Comcast for the five consecutive trading days preceding the date of the
Distribution (as defined below), and (B) the denominator of which is the sum of
(i) the number of shares of AT&T Broadband Common Stock outstanding immediately
prior to the AT&T Broadband Merger, excluding shares issued pursuant to the
QUIPS Exchange (as defined below) and shares held by certain affiliates of AT&T
Broadband, and (ii) the number of shares of Common Stock of AT&T in respect of
which statutory appraisal rights have been exercised but not withdrawn.
The Merger Agreement further provides that if, but for a disparity in the
per share value of AT&T Comcast Class A Common Stock or AT&T Comcast Class C
Common Stock, as applicable, and Class A Special Common Stock of AT&T Comcast,
the Qualified Holders (as defined in the Merger Agreement) would have received a
number of shares of AT&T Comcast Common Stock at the Effective Time that
represents more than 50% of the total value of all shares of AT&T Comcast Common
Stock, AT&T Comcast will issue additional shares of AT&T Comcast Common Stock to
such holders of AT&T Broadband Common Stock in an amount sufficient to ensure
that such holders will be treated as holding at the Effective Time more than 50%
of the value of all shares of AT&T Comcast Common Stock.
Representatives of AT&T have advised us that, in connection with the
transactions contemplated by, and as more fully described in, the Merger
Agreement and the Separation and Distribution Agreement, dated as of December
19, 2001, between AT&T and AT&T Broadband (the "Separation and Distribution
Agreement"), the following transactions (the "Ancillary Transactions"), among
other things, will occur: (A)(i) AT&T will contribute $18 million to AT&T
Broadband which will be used to purchase certain AT&T Broadband Assets (as
defined in the Separation and Distribution Agreement) from an affiliate of AT&T,
(ii) AT&T will transfer to AT&T Broadband the AT&T Broadband Assets and AT&T
Broadband will assume the AT&T Broadband Liabilities (as defined in the
Separation and Distribution Agreement) (the "Separation") and (iii) shares of
AT&T Broadband Common Stock will be distributed, on a pro rata basis, to holders
of Common Stock of AT&T (the "Distribution" and, together with the Separation,
the "Spin-Off"); (B) AT&T Comcast will redeem (or post letters of credit
reasonably acceptable to AT&T with respect to) each redeemable series of TOPRS
(as defined in the Merger Agreement); (C)(i) All outstanding 5% Convertible
Quarterly Income Preferred Securities ("QUIPS") of AT&T Finance Trust I, a
subsidiary of AT&T, will be exchanged for shares of AT&T Broadband Common Stock
(the "QUIPS Exchange"), (ii) the QUIPS Transfer (as defined in the Merger
Agreement) will occur or (iii) AT&T Broadband will issue a note to AT&T in the
amount of the QUIPS Fair Market Value (as defined in the Merger Agreement) in
exchange for an amount of cash equal to such amount and will dividend such cash
amount to AT&T; (D)(i) Shares of Common Stock of AT&T held by Comcast and its
affiliates will be exchanged for an equal number of shares of Series K
Exchangeable Preferred Stock of AT&T and (ii) shares of Subsidiary Exchangeable
Preferred Stock of AT&T held by certain affiliates of AT&T Broadband will be
exchanged for a number of shares of AT&T Broadband Common Stock of equal value;
and (E) AT&T will cause the Class A Senior Cumulative Exchangeable Preferred
Stock of TCI Pacific Communications, Inc. to be called for redemption in
exchange for shares of Common Stock of AT&T.
In arriving at our opinion, we have reviewed the Merger Agreement, the
Separation and Distribution Agreement and certain related documents, as well as
certain publicly available business and financial
J-2
Board of Directors
AT&T Corp.
295 North Maple Avenue
Basking Ridge, New Jersey 07920
Page 3
information relating to AT&T Broadband and Comcast. We also have reviewed
certain other information and data relating to AT&T Broadband and Comcast,
including financial forecasts (in the case of Comcast, as adjusted by the
management of AT&T Broadband and reviewed by AT&T and, in the case of potential
cost savings and synergies, as adjusted by the managements of AT&T and AT&T
Broadband), provided to or discussed with us by AT&T, AT&T Broadband and
Comcast, and have met with the managements of AT&T, AT&T Broadband and Comcast
to discuss the businesses and prospects of AT&T Broadband and Comcast. We also
have considered certain financial data of AT&T Broadband and certain financial
and stock market data of Comcast, and we have compared those data with similar
data for publicly held companies in businesses similar to AT&T Broadband and
Comcast, and we have considered, to the extent publicly available, the financial
terms of certain other business combinations and other transactions which have
been announced or effected. We also considered such other information, financial
studies, analyses and investigations and financial, economic and market criteria
which we deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
such information being complete and accurate in all material respects. With
respect to the financial forecasts (including adjustments thereto) and other
information and data, we have been advised, and have assumed, that they have
been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the managements of AT&T, AT&T Broadband and Comcast
as to the future financial performance of AT&T Broadband and Comcast, the
potential cost savings and synergies (including the amount, timing and
achievability thereof) and strategic benefits anticipated by the managements of
AT&T, AT&T Broadband and Comcast to result from the Merger and related
transactions and the other matters covered thereby. We have assumed, with your
consent, that in the course of obtaining the necessary regulatory and third
party approvals and consents for the Merger and related transactions, no
modification, delay, limitation, restriction or condition will be imposed that
will have an adverse effect on AT&T, AT&T Broadband or Comcast or the
contemplated benefits of the proposed Merger or related transactions in any
respect meaningful to our analyses. We also have assumed, with your consent,
that the Merger and related transactions (including, without limitation, the
Spin-Off and other Ancillary Transactions) will be consummated in accordance
with the terms of the Merger Agreement, the Separation and Distribution
Agreement and related documents, without waiver, modification or amendment of
any material terms, conditions or agreements, and in compliance with all
applicable laws (including, in the case of the Spin-Off, laws relating to
insolvency and fraudulent conveyance and to the payments of dividends). In
addition, we have assumed, with your consent, that the Merger will be treated as
a tax-free exchange, and the Spin-Off will qualify as a tax-free distribution,
for federal income tax purposes. We have not been requested to make, and have
not made, an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of AT&T, AT&T Broadband or Comcast, nor have we been
furnished with any such evaluations or appraisals. Our opinion is necessarily
based upon information available to us, and financial, economic, market and
other conditions as they exist and can be evaluated, on the date hereof. We are
not expressing any opinion as to what the value of the securities of AT&T
Broadband or AT&T Comcast actually will be when issued or the prices at which
such securities will trade at any time. In connection with our engagement, we
were requested to approach third parties to solicit indications of interest in
the possible acquisition of all or a part of AT&T Broadband and held preliminary
discussions with certain of these parties prior to the date hereof. Our opinion
does not address any aspect of the Merger, other than the AT&T Broadband
Exchange Ratio to the extent specified herein, or any related transactions
(including, without limitation, the Spin-Off and other Ancillary Transactions)
or the relative merits of the Merger or any related transactions as compared to
other business strategies that might be available to AT&T or
J-3
Board of Directors
AT&T Corp.
295 North Maple Avenue
Basking Ridge, New Jersey 07920
Page 4
AT&T Broadband, nor does it address the underlying business decision of AT&T to
proceed with the Merger or any related transactions.
We have acted as financial advisor to AT&T in connection with the Merger
and will receive a fee for our services, a significant portion of which is
contingent upon the consummation of the Merger. We and our affiliates in the
past have provided, and currently are providing, financial and investment
banking services to AT&T and certain of its affiliates, and in the past have
provided financial and investment banking services to Comcast and certain of its
affiliates unrelated to the proposed Merger, for which services we have received
and expect to receive compensation. In the ordinary course of business, we and
our affiliates may actively trade the securities of AT&T, Comcast and certain of
their respective affiliates and in the future may actively trade the securities
of AT&T Comcast for our own and such affiliates' accounts and for the accounts
of customers and, accordingly, may at any time hold long or short positions in
such securities.
It is understood that this letter is for the information of the Board of
Directors of AT&T in connection with its evaluation of the Merger and does not
constitute a recommendation to any stockholder as to how such stockholder should
vote or act on any matter relating to the Merger or any related transactions.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the AT&T Broadband Exchange Ratio is fair, from a financial point
of view, to the holders of AT&T Broadband Common Stock immediately prior to the
Merger (other than Comcast and its affiliates).
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
J-4
[LETTERHEAD OF GOLDMAN, SACHS & CO.]
ANNEX K
PERSONAL AND CONFIDENTIAL
December 19, 2001
Board of Directors
AT&T Corp.
295 North Maple Avenue
Basking Ridge, NJ 07920
Ladies and Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders (other than Comcast Corporation and its affiliates) of the
Common Stock, par value $.01 per share (the "AT&T Broadband Common Stock"), of
AT&T Broadband Corp. ("AT&T Broadband") immediately before the Merger (as
defined below) of the Exchange Ratio (as defined below) pursuant to the
Agreement and Plan of Merger, dated as of December 19, 2001 (the "Merger
Agreement"), by and among AT&T Corp. (the "Company" or "AT&T"), AT&T Broadband,
Comcast Corporation ("Comcast"), AT&T Comcast Corporation ("Parent"), AT&T
Broadband Acquisition Corp., a wholly owned subsidiary of Parent ("AT&T
Broadband Merger Sub"), and Comcast Acquisition Corp., a wholly owned subsidiary
of Parent ("Comcast Merger Sub"). Undefined capitalized terms used herein shall
have the meanings assigned to them in the Merger Agreement and in the Separation
and Distribution Agreement, dated as of December 19, 2001 (the "Separation and
Distribution Agreement"), by and between the Company and AT&T Broadband.
Pursuant to the Merger Agreement, AT&T Broadband Merger Sub will merge (the
"AT&T Broadband Merger") with and into AT&T Broadband, with AT&T Broadband as
the surviving corporation in the AT&T Broadband Merger, and, pursuant to the
AT&T Broadband Merger, (a) in the event that the approval, by a majority of the
votes cast, of the holders of Class A Common Stock, par value $1.00 per share
(the "Comcast Class A Common Stock"), of Comcast (the "Comcast A Shareholder
Approval") has been obtained at the Effective Time, (i) each outstanding share
of AT&T Broadband Common Stock will be converted into the right to receive the
Basic Exchange Ratio (as defined below) of a share of Class A Common Stock, par
value $.01 per share (the "Parent Class A Common Stock"), of Parent (the "Class
A Exchange Ratio"), and (ii) in the event that prior to the Effective Time
Standard and Poors' has not committed that the Parent Class A Common Stock will
be included in the Index immediately after the Effective Time, each holder of
shares of AT&T Broadband Common Stock will also be entitled to receive, in
exchange for each of such holder's shares, under certain circumstances, a number
of shares of Parent Class A Common Stock equal to the product of (i) the Basic
Exchange Ratio and (ii) the K/A Price Differential as defined in the Merger
Agreement; such number of additional shares of Parent Class A Common Stock will
be reduced by the number of shares of Parent Class A Common Stock previously
issued pursuant to the Top-up (as defined below) (the "K/A Exchange Ratio,"
together with the Class A Exchange Ratio, the "Preferred Exchange Ratio"); and
(b) in the event that the Comcast A Shareholder Approval has not been obtained
at the Effective Time, (i) each outstanding share of AT&T Broadband Common Stock
will be converted into the right to receive the Basic Exchange Ratio of a share
of Class C Common Stock, par value $.01 per share (the "Parent Class C Common
Stock"), of Parent (the "Class C Exchange Ratio"), and (ii) in the event that
prior to the Effective Time Standard and Poors' has not committed that the
Parent Class C Common Stock will be included in the Index immediately after the
Effective Time, each holder of shares of AT&T Broadband Common Stock will also
be entitled to receive, in exchange for each of such holder's shares, under
certain circumstances, a number of shares of Parent Class C Common Stock equal
to the product of (i) the Basic Exchange Ratio and (ii) the K/C Price
Differential as defined in the Merger Agreement; such number of additional
shares of Parent Class C Common Stock will be reduced by the number of shares of
Parent Class C Common Stock previously issued pursuant to the Top-up (the "K/C
Exchange Ratio," together with the Class C
K-1
Board of Directors
AT&T Corp.
295 North Maple Avenue
Basking Ridge, NJ 07920
Page 2
Exchange Ratio, the "Alternative Exchange Ratio") (the Preferred Exchange Ratio
and the Alternative Exchange Ratio, taken as a whole, depending on whether the
Comcast A Shareholder Approval has been obtained, collectively, the "Exchange
Ratio"). The "Basic Exchange Ratio" is defined in the Merger Agreement as the
number resulting from the fraction (i) the numerator of which is the difference
between (x) 1,235,000,000 and (y) the value of certain unexercised AT&T Stock
Options held by Broadband Employees and Former Employees divided by the average
stock price of Comcast Class A Common Stock for the five consecutive trading
days preceding the Distribution (as defined below), and (ii) the denominator of
which is the sum of (x) the number of shares of AT&T Broadband Common Stock
outstanding immediately prior to the AT&T Broadband Merger, excluding shares
issued pursuant to the QUIPS Exchange (as defined below) and shares held by
certain affiliates of AT&T Broadband, and (y) the number of shares of Common
Stock, par value $1.00 per share (the "AT&T Common Stock"), of AT&T in respect
of which statutory appraisal rights have been exercised and not withdrawn. We
note that if, but for a disparity in the per share value of the Parent Class A
Common Stock, the Parent Class A Special Common Stock (as defined below) or the
Parent Class C Common Stock (collectively, the "Parent Common Stock"), as
applicable, the holders of AT&T Broadband Common Stock qualified pursuant to the
Merger Agreement would have received a number of shares of Parent Common Stock
that at the Effective Time is more than 50% of the total value of all shares of
Parent Common Stock, Parent will issue additional shares of Parent Common Stock
to such holders of AT&T Broadband Common Stock in an amount sufficient to ensure
that such holders will be treated as holding at the Effective Time more than 50%
of the value of all shares of Parent Common Stock (the "Top-up").
The Merger Agreement also provides for the merger of Comcast Merger Sub
with and into Comcast (the "Comcast Merger" and, together with the AT&T
Broadband Merger, the "Merger") pursuant to which each outstanding share of
Comcast Class A Common Stock, Class B Common Stock, par value $1.00 per share,
and Class A Special Common Stock, par value $1.00 per share, of Comcast will be
converted into the right to receive one share of Parent Class A Common Stock,
Class B Common Stock, par value $.01 per share, of Parent and Class A Special
Common Stock, par value $.01 per share (the "Parent Class A Special Common
Stock"), of Parent, respectively.
You have informed us that prior to the Effective Time, among other things,
AT&T will effect the Spin-Off (as defined below) of the AT&T Broadband Business
in the following manner (the following transactions are referred to herein
collectively as the "Preliminary Transactions"): (a) AT&T will issue shares of
AT&T Broadband Common Stock to Microsoft Corporation ("Microsoft") in exchange
for all outstanding 5% Convertible Quarterly Income Preferred Securities issued
by AT&T Finance Trust I, a subsidiary of AT&T (the "QUIPS Exchange"), or, unless
Microsoft consents to the QUIPS Transfer (as defined in the Merger Agreement)
and upon the occurrence of certain circumstances set forth in the Merger
Agreement, AT&T Broadband will issue a note to AT&T representing the QUIPS Fair
Market Value (as defined in the Merger Agreement) in exchange for cash proceeds
equal to such amount and dividend such cash proceeds to AT&T; (b) AT&T will
contribute $18 million in cash to AT&T Broadband and AT&T Broadband will
purchase assets used in the AT&T Broadband Business from AT&T Broadband
T-Holdings, Inc., a wholly owned subsidiary of AT&T Broadband, in exchange for
$18 million in cash; (c) AT&T will transfer all AT&T Broadband Assets to AT&T
Broadband and AT&T Broadband will assume all AT&T Broadband Liabilities (the
"Separation"); (d) the shares of AT&T Common Stock held by Comcast and its
affiliates will be exchanged pro rata for shares of Series K Exchangeable
Preferred Stock, par value $1.00 per share, of AT&T; (e) the shares of AT&T
Subsidiary Preferred Stock held by AT&T Broadband Subsidiaries will be exchanged
for a certain number of shares of AT&T Broadband Common Stock as determined
pursuant to the Separation and Distribution Agreement; (f) AT&T will distribute
to the record holders of AT&T Common Stock pro rata shares of
K-2
Board of Directors
AT&T Corp.
295 North Maple Avenue
Basking Ridge, NJ 07920
Page 3
AT&T Broadband Common Stock (the "Distribution," together with the Separation,
the "Spin-Off"); (g) Parent will call for redemption (or post letters of credit
reasonably acceptable to the Company with respect to) each redeemable series of
TOPRS (as defined in the Merger Agreement); and (h) TCI Pacific Communications,
Inc. will call for redemption and exchange the TCI Pacific Preferred Stock for
shares of AT&T Common Stock.
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in performing financial analyses with respect to the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities and private placements as well
as for estate, corporate and other purposes. We are familiar with the Company
having provided certain investment banking services to the Company from time to
time, including (a) having acted as financial advisor to the Company in
connection with (i) its acquisition of Teleport Communications Group Inc. in
July 1998, (ii) its acquisition of Tele-Communications Inc. in March 1999, (iii)
its divestiture of a 50% interest in Lenfest Communications Inc. in January
2000, (iv) its divestiture of certain cable assets to Cox Communications, Inc.
in March 2000, (v) its acquisition of MediaOne Group in June 2000, (vi) its
acquisition of certain assets from Cablevision Systems Corporation in January
2001, (vii) its analysis, consideration and negotiation of revisions to the
Company's put arrangements with Cox Communications, Inc. and Comcast involving
At Home Corporation in May 2001, (viii) its distribution of the outstanding
shares of common stock of AT&T Wireless Inc. ("AT&T Wireless") held by AT&T to
the holders of AT&T Common Stock in July 2001, (ix) its debt-for-equity exchange
offer involving AT&T's remaining stake in AT&T Wireless in July 2001, and (x)
its transaction with BT Group plc relating to the unwinding of the Concert joint
venture announced in October 2001; (b) having acted as joint lead arranger in
connection with the loan syndication of the Company's senior credit facility in
April 1999 (aggregate principal amount $30 billion) and joint lead arranger of
its corporate revolving credit facility in December 2000 (aggregate principal
amount $25 billion) and in December 2001 (aggregate principal amount $8
billion); (c) having acted as joint bookrunner in connection with (i) the
initial public offering of AT&T Wireless Group tracking stock of AT&T in April
2000, (ii) the public offering pursuant to Rule 144A of $1.65 billion aggregate
principal amount of Notes of the Company due August 2002 in August 2001, and
(iii) the public offering pursuant to Rule 144A of $10.1 billion aggregate
principal amount of Notes of the Company in multiple tranches and currencies in
November 2001; (d) having acted as sole bookrunner in connection with the public
offerings pursuant to Rule 144A of (i) $3.0 billion of aggregate principal
amount of Notes of the Company due July 2000 in July 1999 and (ii) $6.0 billion
of aggregate principal amount of Notes of the Company in multiple tranches due
July 2001 in July 2000; (e) having acted as dealer with respect to the Company's
commercial paper program; (f) having acted as financial advisor to the Company
in connection with the restructuring announced by the Company in 2000; and (g)
having acted as financial advisor to the Company in connection with, and having
participated in certain of the negotiations leading up to, the Merger Agreement,
the Distribution and Separation Agreement and the agreements referred to
therein. We also have provided investment banking services to Comcast and its
affiliates from time to time, including (a) having acted as co-manager with
respect to the public offering of PHONES in March 1999 (aggregate principal
amount $870 million); (b) having acted as joint lead agent on the $4.45 billion
aggregate principal amount consent solicitation for various Comcast debt
securities in July 2000; and (c) having acted as co-manager with respect to the
public offerings of (i) $0.5 billion aggregate principal amount of Comcast's
6.375% Senior Unsecured Notes due 2006 and $1.0 billion aggregate principal
amount of Comcast's 3.75% Senior Notes due 2011 in January 2001, (ii) $0.75
billion aggregate principal amount of Comcast's 6.875% Senior Notes due 2009 in
May 2001, and (iii) $0.75 billion aggregate principal amount of Comcast's 7.125%
Senior Notes due 2013 in June 2001. Goldman,
K-3
Board of Directors
AT&T Corp.
295 North Maple Avenue
Basking Ridge, NJ 07920
Page 4
Sachs & Co. may provide investment banking and advisory services to the Company,
Comcast and their respective affiliates in the future. Goldman, Sachs & Co.
provides a full range of financial, advisory and securities services and, in the
course of its normal trading activities, may from time to time effect
transactions and hold positions in securities, including derivative securities,
of the Company, AT&T Broadband, Comcast, or their respective affiliates, for its
own account or the accounts of customers.
In connection with this opinion, we have reviewed, among other things, the
Merger Agreement; the Separation and Distribution Agreement; Annual Reports to
Shareholders and Annual Reports on Form 10-K of the Company and Comcast for the
five years ended December 31, 2000; the Preliminary Proxy Statement on Form 14A
of AT&T dated July 3, 2001; certain other communications from the Company and
Comcast to their respective shareholders; certain internal financial analyses
and forecasts for Comcast prepared by its management, as adjusted by AT&T
Broadband management and reviewed by AT&T management (the "Adjusted Comcast
Forecasts"); certain internal financial forecasts and analyses for AT&T
Broadband prepared by AT&T Broadband management and reviewed and/or adjusted by
AT&T management (the "AT&T Broadband Forecasts"; together with the Adjusted
Comcast Forecasts, the "Forecasts"); and certain cost savings and operating
synergies projected to result from the transactions contemplated by the Merger
Agreement as prepared by the managements of Comcast and AT&T Broadband and as
further adjusted by the managements of AT&T Broadband and AT&T (the
"Synergies"). We also have held discussions with members of the senior
management of the Company, AT&T Broadband and Comcast regarding their assessment
of the strategic rationale for, and the potential benefits of, the transaction
contemplated by the Merger Agreement and the past and current business
operations, financial condition and future prospects of their respective
companies. In addition, we have reviewed the reported price and trading activity
for the shares of AT&T Common Stock, Comcast Class A Common Stock and Comcast
Class A Special Common Stock, compared certain financial information for AT&T
Broadband and certain financial and stock market information for Comcast with
similar information for certain other companies the securities of which are
publicly traded, reviewed the financial terms of certain recent business
combinations in the cable industry specifically and in other industries
generally and performed such other studies and analyses as we considered
appropriate.
We have relied upon the accuracy and completeness of all of the financial,
accounting and other information and data discussed with or reviewed by us and
have assumed the accuracy and completeness thereof for purposes of this opinion.
In that regard, we have assumed, with your consent, that the Forecasts and the
Synergies have been reasonably prepared on a basis reflecting the best currently
available judgments and estimates of the managements of AT&T and AT&T Broadband.
We also have assumed, with your consent, that all governmental, regulatory and
other consents and approvals necessary for the consummation of the transactions
contemplated by the Merger Agreement and the Separation and Distribution
Agreement (collectively, the "Transactions") will be obtained without any
adverse effect on the Company, AT&T Broadband and Comcast or the combined
company following the Merger or the contemplated benefits of the Transactions in
any respect meaningful to our analyses. In addition, we have not made an
independent evaluation or appraisal of the assets and liabilities of the
Company, AT&T Broadband or Comcast or any of their subsidiaries and we have not
been furnished with any such evaluation or appraisal. Our advisory services and
the opinion expressed herein are provided for the information and assistance of
the Board of Directors of the Company in connection with its consideration of
the AT&T Broadband Merger.
For purposes of our analyses, we have been advised and have assumed, with
your consent, that the Merger and the other transactions contemplated by the
Merger Agreement and the Separation and Distribution Agreement will be
consummated in accordance with the terms of these agreements, and
K-4
Board of Directors
AT&T Corp.
295 North Maple Avenue
Basking Ridge, NJ 07920
Page 5
without waiver, modification or amendment of any material terms, conditions or
agreements and in compliance with all applicable laws (including, in the case of
the Spin-Off, laws relating to insolvency and fraudulent conveyance and to the
payment of dividends). You also have advised us, and we have assumed, with your
consent, that, for federal income tax purposes, the Spin-Off will qualify as a
tax-free distribution and the Merger will be treated as a tax-free
reorganization. Our opinion necessarily is based upon information available to
us and financial, economic, market and other conditions as they exist and can be
evaluated on the date hereof, and we assume no duty to update or revise our
opinion based on circumstances or events after the date hereof. Our opinion is
directed only to the fairness from a financial point of view of the Exchange
Ratio, and as such does not in any respect address AT&T's underlying business
decision to effect the Merger or any related transactions or constitute a
recommendation concerning how holders of shares of AT&T Common Stock or of AT&T
Broadband Common Stock should vote with respect to the Transactions. We also
express no opinion herein as to the prices at which the shares of AT&T Broadband
Common Stock or of Parent Class A Common Stock, Parent Class A Special Common
Stock or Parent Class C Common Stock may trade at any time if and when they are
issued and trade publicly.
Our opinion does not address any aspect of the Merger other than the
Exchange Ratio to the extent provided in this opinion, and we express no opinion
as to any Preliminary Transaction (including the Spin-Off) or the relative
merits of the Transactions as compared to any alternative business transaction
that might be available to the Company or to AT&T Broadband.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that as of the date hereof and based
on current market conditions the Exchange Ratio pursuant to the Merger Agreement
is fair from a financial point of view to the holders of AT&T Broadband Common
Stock immediately prior to the Merger (other than Comcast and its affiliates).
K-5
ANNEX L
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
HISTORICAL FINANCIAL STATEMENTS
AT&T CORP.
At or for the three and nine months ended September 30,
2001:
Unaudited Consolidated Statements of Operations........... L-3
Unaudited Consolidated Balance Sheets..................... L-4
Unaudited Consolidated Statements of Changes in
Shareowners' Equity.................................... L-6
Unaudited Consolidated Statements of Cash Flows........... L-8
Notes to Unaudited Consolidated Financial Statements...... L-9
At or for the year ended December 31, 2000:
Consolidated Statements of Income......................... L-36
Consolidated Balance Sheets............................... L-37
Consolidated Statements of Changes in Shareowners'
Equity................................................. L-38
Consolidated Statements of Cash Flows..................... L-40
Notes to Consolidated Financial Statements................ L-41
AT&T BROADBAND GROUP
At or for the three and nine months ended September 30,
2001:
Unaudited Combined Statements of Operations............... L-97
Unaudited Combined Balance Sheets......................... L-98
Unaudited Combined Statements of Changes in Combined
Attributed Net Assets.................................. L-99
Unaudited Combined Statements of Cash Flows............... L-100
Notes to Unaudited Combined Financial Statements.......... L-101
At or for the year ended December 31, 2000:
Combined Statements of Operations......................... L-114
Combined Balance Sheets................................... L-115
Combined Statements of Changes in Combined Attributed Net
Assets................................................. L-116
Combined Statements of Cash Flows......................... L-117
Notes to Combined Financial Statements.................... L-118
L-1
PAGE
-----
AT&T CONSUMER SERVICES GROUP
At or for the three and nine months ended September 30,
2001:
Unaudited Combined Statements of Income................... L-154
Unaudited Combined Balance Sheets......................... L-155
Unaudited Combined Statements of Changes in Combined
Attributed Net (Liabilities) Assets.................... L-156
Unaudited Combined Statements of Cash Flows............... L-157
Notes to Unaudited Combined Financial Statements.......... L-158
At or for the year ended December 31, 2000:
Combined Statements of Income............................. L-165
Combined Balance Sheets................................... L-166
Combined Statements of Changes in Combined Attributed Net
Assets................................................. L-167
Combined Statements of Cash Flows......................... L-168
Notes to Combined Financial Statements.................... L-169
AT&T CONSOLIDATING CONDENSED FINANCIAL STATEMENTS........... L-182
AT&T PRO FORMA FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Condensed Financial
Statements............................................. L-196
Unaudited Pro Forma Combined Condensed Balance Sheet at
September 30, 2001..................................... L-197
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Nine Months ended September 30,
2001................................................... L-198
Unaudited Pro Forma Combined Condensed Statement of Income
for the Year Ended December 31, 2000................... L-199
Unaudited Pro Forma Combined Condensed Statement of Income
for the Year Ended December 31, 1999................... L-200
Notes to Unaudited Pro Forma Combined Condensed Financial
Statements............................................. L-201
AT&T COMCAST CORPORATION BALANCE SHEET
Audited Balance Sheet of AT&T Comcast Corporation at
December 7, 2001....................................... L-204
L-2
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
2001 2000 2001 2000
------- ------- ------- -------
Revenue..................................................... $13,087 $14,176 $39,964 $41,623
Operating Expenses
Costs of services and products (excluding depreciation of
$1,165, $956, $3,533 and $2,927 included below)........... 3,476 3,282 10,458 9,249
Access and other connection................................. 3,033 3,147 9,289 10,180
Selling, general and administrative......................... 2,540 2,461 8,144 7,366
Depreciation and other amortization......................... 1,682 1,568 5,116 4,204
Amortization of goodwill, franchise costs and other
purchased intangibles..................................... 592 787 1,920 1,433
Net restructuring and other charges......................... 399 24 1,494 797
Total operating expenses.................................... 11,722 11,269 36,421 33,229
Operating income............................................ 1,365 2,907 3,543 8,394
Other (expense) income...................................... (4,966) 365 (7,195) 1,358
Interest expense............................................ 786 896 2,426 2,000
(Loss) income from continuing operations before income
taxes, minority interest, (losses) earnings from equity
investments and cumulative effect of accounting change.... (4,387) 2,376 (6,078) 7,752
(Benefit) provision for income taxes........................ (2,092) 939 (2,746) 2,532
Minority interest income.................................... 177 103 1,015 11
Equity earnings (losses) from Liberty Media Group........... 111 1,756 (2,711) 2,965
Net losses from other equity investments.................... 88 222 423 615
(Loss) income from continuing operations before cumulative
effect of accounting change............................... (2,095) 3,074 (5,451) 7,581
(Loss) income from discontinued operations (net of income
taxes of $--, $14, $158 and $113)......................... -- (2) 150 208
Gain on disposition of discontinued operations.............. 13,503 -- 13,503 --
Income before cumulative effect of accounting change........ 11,408 3,072 8,202 7,789
Cumulative effect of accounting change -- (net of income
taxes of $578)............................................ -- -- 904 --
Net income.................................................. 11,408 3,072 9,106 7,789
Dividend requirements of preferred stock.................... 235 -- 652 --
Premium on Wireless tracking stock exchange................. -- -- 80 --
Net income available to common shareowners.................. $11,173 $ 3,072 $ 8,374 $ 7,789
AT&T Common Stock Group -- per basic share:
(Loss) earnings -- continuing operations.................... $ (0.69) $ 0.35 $ (0.94) $ 1.35
Earnings -- discontinued operations......................... -- -- 0.03 0.06
Gain on disposition of discontinued operations.............. 3.82 -- 3.67 --
Cumulative effect of accounting change...................... -- -- 0.10 --
AT&T Common Stock Group earnings............................ $ 3.13 $ 0.35 $ 2.86 $ 1.41
AT&T Common Stock Group -- per diluted share:
(Loss) earnings -- continuing operations.................... $ (0.69) $ 0.35 $ (0.94) $ 1.34
Earnings -- discontinued operations......................... -- -- 0.03 0.06
Gain on disposition of discontinued operations.............. 3.82 -- 3.67 --
Cumulative effect of accounting change...................... -- -- 0.10 --
AT&T Common Stock Group earnings............................ $ 3.13 $ 0.35 $ 2.86 $ 1.40
Dividends declared.......................................... $0.0375 $ 0.22 $0.1125 $ 0.66
AT&T Wireless Group -- per basic and diluted share:
(Loss) earnings from discontinued operations................ $ -- $ (0.01) $ 0.08 $ 0.05
Liberty Media Group -- per basic and diluted share:
Earnings (loss) -- before cumulative effect of accounting
change.................................................... $ 0.04 $ 0.68 $ (1.05) $ 1.15
Cumulative effect of accounting change...................... -- -- 0.21 --
Liberty Media Group earnings (loss)......................... $ 0.04 $ 0.68 $ (0.84) $ 1.15
See Notes to Consolidated Financial Statements
L-3
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
AT AT
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
ASSETS
Cash and cash equivalents................................... $ 4,198 $ 64
Accounts receivable, less allowances of $1,013 and $1,185... 8,679 9,408
Other receivables........................................... 1,344 1,645
Investments................................................. -- 2,102
Deferred income taxes....................................... 1,623 720
Other current assets........................................ 614 781
TOTAL CURRENT ASSETS........................................ 16,458 14,720
Property, plant and equipment, net of accumulated
depreciation of $31,164 and $28,129....................... 40,748 41,269
Franchise costs, net of accumulated amortization of $2,226
and $1,664................................................ 43,287 48,218
Goodwill, net of accumulated amortization of $1,130 and
$609...................................................... 24,774 26,782
Investment in Liberty Media Group and related receivables,
net....................................................... -- 34,290
Other investments and related advances...................... 24,268 30,875
Prepaid pension costs....................................... 3,281 3,003
Other assets................................................ 7,233 7,979
Net assets of discontinued operations....................... -- 27,224
TOTAL ASSETS................................................ $160,049 $234,360
(Continued)
L-4
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(DOLLARS IN MILLIONS)
(UNAUDITED)
AT AT
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
LIABILITIES
Accounts payable............................................ $ 4,848 $ 5,382
Payroll and benefit-related liabilities..................... 1,592 1,991
Debt maturing within one year............................... 18,449 31,838
Liability under put options................................. -- 2,564
Other current liabilities................................... 6,988 6,200
TOTAL CURRENT LIABILITIES................................... 31,877 47,975
Long-term debt.............................................. 30,007 33,089
Long-term benefit-related liabilities....................... 3,506 3,670
Deferred income taxes....................................... 27,175 32,054
Other long-term liabilities and deferred credits............ 6,946 4,823
TOTAL LIABILITIES........................................... 99,511 121,611
Minority Interest........................................... 3,622 4,841
Company-Obligated Convertible Quarterly Income Preferred
Securities of Subsidiary Trust Holding Solely Subordinated
Debt Securities of AT&T................................... 4,718 4,710
SHAREOWNERS' EQUITY
Common Stock:
AT&T Common Stock, $1 par value, authorized 6,000,000,000
shares; issued and outstanding 3,535,801,018 shares (net
of 851,731,351 treasury shares) at September 30, 2001 and
3,760,151,185 shares (net of 416,887,452 treasury shares)
at December 31, 2000...................................... 3,536 3,760
AT&T Wireless Group Common Stock, $1 par value, authorized
6,000,000,000 shares, issued and outstanding 361,802,200
shares at December 31, 2000............................... -- 362
Liberty Media Group Class A Common Stock, $1 par value,
authorized 4,000,000,000 shares, issued and outstanding
2,363,738,198 shares (net of 59,512,496 treasury shares)
at December 31, 2000...................................... -- 2,364
Liberty Media Group Class B Common Stock, $1 par value,
authorized 400,000,000 shares, issued and outstanding
206,221,288 shares (net of 10,607,776 treasury shares) at
December 31, 2000......................................... -- 206
Additional paid-in capital.................................. 51,851 90,496
(Accumulated deficit)/Retained earnings..................... (2,093) 7,408
Accumulated other comprehensive income...................... (1,096) (1,398)
TOTAL SHAREOWNERS' EQUITY................................... 52,198 103,198
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY................... $160,049 $234,360
See Notes to Consolidated Financial Statements
L-5
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(DOLLARS IN MILLIONS)
(UNAUDITED)
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
-------------------
2001 2000
-------- --------
AT&T Common Shares
Balance at beginning of year.............................. $ 3,760 $ 3,196
Shares issued (acquired), net:
Under employee plans.................................... 10 --
For acquisitions........................................ 44 607
Settlement of put option................................ 155 --
For Wireless tracking stock exchange.................... (372) --
Other*.................................................. (61) (49)
Balance at end of period.................................... 3,536 3,754
AT&T Wireless Group Common Stock
Balance at beginning of year.............................. 362 --
Shares issued:............................................ 360
Under employee plans.................................... 2 1
For Wireless tracking stock exchange.................... 438 --
Conversion of preferred stock........................... 406 --
AT&T Wireless Group split-off........................... (1,208) --
Balance at end of period.................................... -- 361
Liberty Media Group Class A Common Stock
Balance at beginning of year.............................. 2,364 2,314
Shares issued, net:
For acquisitions........................................ -- 61
Other................................................... 14 (5)
Liberty Media Group split-off............................. (2,378) --
Balance at end of period.................................... -- 2,370
Liberty Media Group Class B Common Stock
Balance at beginning of year.............................. 206 217
Shares issued (acquired), net............................. 6 (11)
Liberty Media Group split-off............................. (212) --
Balance at end of period.................................... -- 206
Additional Paid-In Capital
Balance at beginning of year.............................. 90,496 59,526
Shares issued (acquired), net:
Under employee plans.................................... 208 15
For acquisitions........................................ 827 22,769
Settlement of put option................................ 3,237 --
Other*.................................................. (1,035) (2,514)
Proceeds in excess of par value from issuance of AT&T
Wireless common stock................................... -- 9,915
Gain on issuance of common stock by affiliates............ 20 480
Conversion of preferred stock............................. 9,631 --
AT&T Wireless Group split-off............................. (20,955) --
Liberty Media Group split-off............................. (30,738) --
Wireless tracking stock exchange.......................... 14 --
Beneficial conversion value of preferred stock............ 295 --
Dividends declared -- AT&T Common Stock Group............. (133) --
Other..................................................... (16) 153
Balance at end of period.................................... 51,851 90,344
Guaranteed ESOP Obligation
Balance at beginning of year.............................. -- (17)
Amortization.............................................. -- 17
Balance at end of period.................................... -- --
(CONTINUED)
L-6
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (CONT'D) (DOLLARS IN
MILLIONS)
(UNAUDITED)
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
-------------------
2001 2000
-------- --------
(Accumulated Deficit)/Retained Earnings
Balance at beginning of year.............................. 7,408 6,712
Net income................................................ 9,106 7,789
Dividends declared -- AT&T Common Stock Group............. (275) (2,344)
Dividends accrued -- preferred stock...................... (652) --
Premium on Wireless tracking stock exchange............... (80) --
Treasury shares issued at less than cost.................. (7) (1,433)
AT&T Wireless Group split-off............................. (17,593) --
Balance at end of period.................................... (2,093) 10,724
Accumulated Comprehensive Income
Balance at beginning of year.............................. (1,398) 6,979
Other comprehensive income................................ 988 (4,630)
AT&T Wireless Group split-off............................. 72 --
Liberty Media Group split-off............................. (758) --
Balance at end of year...................................... (1,096) 2,349
Total Shareowners' Equity................................... $ 52,198 $110,108
Summary of Total Comprehensive Income:
(Loss) income from continuing operations.................... $ (5,451) $ 7,581
Income from discontinued operations......................... 150 208
Gain on disposition of discontinued operations.............. 13,503 --
Cumulative effect of accounting change...................... 904 --
Net income.................................................. 9,106 7,789
Dividend requirements of preferred stock.................... 652 --
Premium on Wireless tracking stock exchange................. 80 --
Net income available to common shareowners.................. $ 8,374 $ 7,789
Net foreign currency translation adjustment (net of income
taxes of $(135) and $(177))(1)............................ (204) (305)
Net revaluation of securities:
Unrealized gains (losses) (net of income taxes of $274 and
$(1,775))(2)............................................ 363 (2,846)
Recognition of previously unrealized losses (gains) on
available-for-sale securities (net of income taxes of
$513 and $(955))(3)..................................... 829 (1,479)
Comprehensive Income........................................ $ 9,362 $ 3,159
---------------
AT&T accounts for treasury stock as retired stock. We have 100 million
authorized shares of preferred stock at $1 par value.
* Other activity in 2001 and 2000 represents AT&T stock received in exchange
for entities owning certain cable systems.
(1) Includes LMG's foreign currency translation adjustments totaling $(149) and
$(193), net of applicable income taxes for the year-to-date periods through
July 31, 2001 and September 30, 2000, respectively.
(2) Includes LMG's unrealized gains (losses) on available-for-sale securities
totaling $1,286 and $(1,825), net of applicable income taxes for the
year-to-date periods through July 31, 2001 and September 30, 2000,
respectively.
(3) See note (c) for a summary of the "Recognition of previously unrealized
losses (gains) on available-for-sale securities" and the income statement
line items impacted.
See Notes to Consolidated Financial Statements
L-7
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
2001 2000
-------- ---------
OPERATING ACTIVITIES
Net income.................................................. $ 9,106 $ 7,789
Deduct: Income from discontinued operations................. 150 208
Gain on disposition of discontinued operations...... 13,503 --
(Loss) income from continuing operations.................... (4,547) 7,581
Adjustments to reconcile (loss) income from continuing
operations to net cash provided by operating activities of
continuing operations:
Cumulative effect of accounting change -- net of income
taxes................................................. (904) --
Net gains on sales of businesses and investments........ (689) (885)
Investment impairment charges........................... 4,208 --
Estimated loss on contractual obligations............... 2,418 --
Put option settlement loss and mark-to-market charge.... 838 21
Net restructuring and other charges..................... 1,386 630
Depreciation and amortization........................... 7,036 5,637
Provision for uncollectible receivables................. 850 785
Deferred income taxes................................... (4,865) 198
Net revaluation of trading securities................... 779 --
Minority interest income................................ (1,222) (89)
Net equity losses (earnings) from Liberty Media Group... 2,711 (2,965)
Net losses from other equity investments................ 725 1,034
Increase in receivables................................. (49) (2,081)
Decrease in accounts payable............................ (816) (1,447)
Net change in other operating assets and liabilities.... (1,067) 59
Other adjustments, net.................................. (51) (364)
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING
OPERATIONS................................................ 6,741 8,114
INVESTING ACTIVITIES
Capital expenditures and other additions.................... (6,450) (7,753)
Proceeds from sale or disposal of property, plant and
equipment................................................. 62 547
Increase in other receivables............................... (105) (981)
Sales of marketable securities.............................. 102 35
Purchases of marketable securities.......................... (18) --
Equity investment distributions and sales................... 1,845 785
Equity investment contributions and purchases............... (177) (2,364)
Net dispositions (acquisitions) of businesses, net of cash
disposed/acquired......................................... 4,827 (16,614)
Other investing activities, net............................. (121) (91)
NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING
OPERATIONS................................................ (35) (26,436)
FINANCING ACTIVITIES
Proceeds from long-term debt issuances...................... 195 739
Retirement of long-term debt................................ (1,618) (1,954)
(Decrease) increase in short-term borrowings, net........... (9,580) 17,363
Repayment of borrowings from AT&T Wireless.................. (5,803) --
Issuance of convertible preferred securities and warrants... 9,811 --
Redemption of redeemable securities......................... -- (152)
Issuance of AT&T common shares.............................. 133 --
Issuance of AT&T Wireless Group common shares............... 54 10,291
Net issuance (acquisition) of treasury shares............... 23 (588)
Dividends paid on common stock.............................. (416) (2,221)
Dividends paid on preferred securities...................... (190) (147)
Other financing activities, net............................. (41) (30)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES OF
CONTINUING OPERATIONS..................................... (7,432) 23,301
Net cash provided by (used in) discontinued operation....... 4,860 (5,686)
Net increase (decrease) in cash and cash equivalents........ 4,134 (707)
Cash and cash equivalents at beginning of year.............. 64 1,018
Cash and cash equivalents at end of period.................. $ 4,198 $ 311
The notes are an integral part of the consolidated financial statements
L-8
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
(a) BASIS OF PRESENTATION
The consolidated financial statements have been prepared by AT&T Corp.
(AT&T) pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC) and, in the opinion of management, include all adjustments
necessary for a fair presentation of the consolidated results of operations,
financial position and cash flows for each period presented. The consolidated
results for interim periods are not necessarily indicative of results for the
full year. These financial results should be read in conjunction with AT&T's
Form 10-K/A for the year ended December 31, 2000, AT&T's Form 8-K filed on
September 24, 2001, restating the company's financial results for the year ended
December 31, 2000 to reflect AT&T Wireless as a discontinued operation, AT&T's
Form 10-Q/A for the quarter ended March 31, 2001 and AT&T's Form 10-Q for the
quarter ended June 30, 2001. We have reclassified certain prior period amounts
to conform with our current presentation.
(b) RESTRUCTURING OF AT&T
On October 25, 2000, AT&T announced a restructuring plan designed to fully
separate or issue separately tracked stocks intended to reflect the financial
performance and economic value of each of AT&T's four major operating units. If
the plan is completed as announced, AT&T Wireless, AT&T Broadband, AT&T Business
and AT&T Consumer would all be represented by asset-based or tracking stocks.
On July 8, 2001, Comcast Corp. (Comcast) made an unsolicited offer to
acquire AT&T Broadband. On July 18, AT&T's Board of Directors unanimously voted
to reject Comcast's proposal to acquire AT&T Broadband. The Board has directed
management to explore financial and strategic alternatives relating to AT&T
Broadband, including the previously announced restructuring plans, with the goal
to provide the greatest long-term value to shareowners. The Board also decided
to delay finalizing and mailing to shareowners the proxy materials, filed
preliminary with the SEC on July 3, 2001, for its current restructuring plans.
However, AT&T remains committed to separate AT&T Consumer and AT&T Business from
AT&T Broadband.
Nevertheless, AT&T's restructuring plan is complicated and involves a
substantial number of steps and transactions, including obtaining various
conditions, such as Internal Revenue Service rulings. AT&T expects that
transactions associated with AT&T's restructuring plan will be tax-free to U.S.
shareowners. Future financial conditions, superior alternatives or other factors
may arise or occur that make it inadvisable to proceed with part or all of
AT&T's restructuring plans. Any or all of the elements of AT&T's restructuring
plan may not occur as we currently expect or in the time frames that we
currently contemplate, or at all. Alternative forms of restructuring, including
sales of interests in these businesses, would reduce what is available for
distribution to shareowners in the restructuring.
On May 25, 2001, AT&T completed an exchange offer of AT&T common stock for
AT&T Wireless stock. Under the terms of the exchange offer, AT&T issued 1.176
shares of AT&T Wireless Group tracking stock in exchange for each share of AT&T
common stock validly tendered. A total of 372.2 million shares of AT&T common
stock were tendered in exchange for 437.7 million shares of AT&T Wireless Group
tracking stock.
On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a
separate, independently-traded company (see note d).
On August 10, 2001, AT&T completed the split-off of Liberty Media
Corporation (LMC) as an independent, publicly-traded company (see note e).
L-9
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) RECLASSIFICATION ADJUSTMENT OF OTHER COMPREHENSIVE INCOME
AT&T has investment holdings classified as "available-for-sale" under the
scope of Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." These securities are
carried at fair value with any unrealized gains or losses, net of income taxes,
being included within other comprehensive income as a component of shareowners'
equity. Under SFAS No. 115, when the "available-for-sale" securities are sold,
the previously unrealized gains or losses shall be recognized in earnings. In
addition, upon the adoption of SFAS No. 133, we reclassified certain securities
to "trading," resulting in the recognition in earnings of previously unrealized
losses (see note n). Following is a summary of the "Recognition of previously
unrealized losses (gains) on available-for-sale securities" and the income
statement line items impacted for the nine months ended September 30, 2001 and
2000.
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
2001 2000
------------------ -------------------
PRETAX AFTER-TAX PRETAX AFTER-TAX
------ --------- ------- ---------
AT&T Group:
Other income:
Reclassification of securities to "trading" in
conjunction with the adoption of "SFAS No.
133"(1)......................................... $1,154 $713 $ -- $ --
Sale of various securities........................ 159 98 -- --
Liberty Media Group:
Earnings (losses) from Liberty Media Group:
Sale of various securities........................ 173 105 (2,434) (1,479)
Cumulative effect of accounting change:(1)........... (144) (87) -- --
Total recognition of previously unrealized losses
(gains) on available-for-sale securities............. $1,342 $829 $(2,434) $(1,479)
---------------
(1) See note (n) for further discussion.
(d) DISCONTINUED OPERATIONS
Pursuant to AT&T's restructuring plan (see note b), AT&T completed the
split-off of AT&T Wireless as a separate, independently-traded company on July
9, 2001. All AT&T Wireless tracking stock was converted into AT&T Wireless
common stock on a one-for-one basis and 1,136 million shares of AT&T Wireless
common stock, held by AT&T, were distributed to AT&T common shareowners on a
basis of 0.3218 of a share of AT&T Wireless for each AT&T share outstanding.
AT&T common shareowners received whole shares of AT&T Wireless and cash payments
for fractional shares. The Internal Revenue Service (IRS) ruled that the
transaction qualified as tax-free for AT&T and its shareowners for U.S. federal
income tax purposes, with the exception of cash received for fractional shares.
AT&T retained approximately $3 billion, or 7.3%, of AT&T Wireless common stock,
about half of which was used in a debt-for-equity exchange in July and
approximately $0.6 billion was monetized in October. We expect to either sell,
exchange or monetize the remaining portion of these holdings by the end of 2001.
The consolidated financial statements of AT&T have been restated to reflect
AT&T Wireless as a discontinued operation. Accordingly, the revenue, costs and
expenses, assets and liabilities and cash flows of AT&T Wireless have been
excluded from the respective captions in the Consolidated Statements of
Operations, Consolidated Balance Sheets and Consolidated Statements of Cash
Flows, and have been reported through June 30, 2001, the deemed effective
split-off date for accounting purposes, as "Income from discontinued
operations," net of applicable income taxes; as "Net assets of discontinued
operations;"
L-10
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and as "Net cash provided by (used in) discontinued operations." The impact of
the operating results from July 1 through July 9, 2001, were deemed immaterial
to our consolidated results.
Revenue for discontinued operations was $6,592 for the year-to-date period
ended September 30, 2001, and $2,799 and $7,474 for the quarter and year-to-date
period ended September 30, 2000, respectively.
At December 31, 2000, "Net Assets of Discontinued Operations" included
assets of $35,087 and total liabilities of $7,822. Total assets were comprised
primarily of licensing costs, property, plant and equipment, goodwill and
investments at December 31, 2000. Total liabilities at December 31, 2000, were
comprised primarily of deferred income taxes, accounts payable and other
short-term liabilities. Net assets of discontinued operations also included
minority interest of $41 at December 31, 2000.
Interest expense of $153 for the year-to-date period ended September 30,
2001, and $84 and $243 for the quarter and year-to-date period ended September
30, 2000, respectively, was allocated to discontinued operations based on the
debt of AT&T Corp. that was attributable to AT&T Wireless. This debt was repaid
to AT&T prior to June 30, 2001, in connection with the split-off of AT&T
Wireless.
In connection with the split-off of AT&T Wireless, AT&T wrote-up the net
assets of AT&T Wireless to fair value. This resulted in a tax-free gain of $13.5
billion, which represents the difference between the fair value of the Wireless
tracking stock at the date of the split-off and AT&T's book value in AT&T
Wireless Services. This gain was recorded in the third quarter of 2001 as a
"Gain on disposition of discontinued operations."
The noncash impacts of the split-off of AT&T Wireless include the reduction
of total assets of approximately $39.7 billion and reduced shareowners' equity
of approximately $39.7 billion.
In addition, AT&T used approximately $1.6 billion of the $3.0 billion of
AT&T Wireless common stock we retained upon split-off, in a noncash
debt-for-equity exchange in July 2001.
(e) INVESTMENT IN LIBERTY MEDIA GROUP
As a result of our merger with TCI in March 1999, we acquired Liberty Media
Group (LMG). Although LMG was wholly-owned, we accounted for it under the equity
method since we did not have a controlling financial interest. On August 10,
2001, AT&T completed the split-off of Liberty Media Corporation (LMC) as an
independent, publicly-traded company. AT&T redeemed each outstanding share of
Class A and Class B Liberty Media Group tracking stock for one share of Liberty
Media Corporation's Series A and Series B common stock, respectively. The IRS
ruled that the split-off of LMC qualified as a tax-free transaction for AT&T,
Liberty Media and their shareowners. The operating results of LMG through July
31, 2001, the deemed effective split-off date for accounting purposes, and the
three and nine months ended September 30, 2000, were reflected as "Equity
earnings (losses) from Liberty Media Group" in the accompanying Consolidated
Statements of Operations. The impact of the operating results from August 1
through August 10, 2001, were deemed immaterial to our consolidated results.
Upon the split-off, AT&T paid LMG $0.8 billion related to TCI net operating
losses generated prior to AT&T's merger with TCI. In addition, AT&T received
approximately $0.1 billion from LMG related to taxes pursuant to a tax-sharing
agreement between LMG and AT&T Broadband which existed prior to the TCI merger.
At December 31, 2000, this receivable was included in "Investment in Liberty
Media Group and related receivables, net" in our consolidated balance sheet.
The noncash impacts of the split-off of Liberty Media Group included the
reduction of total assets of approximately $34.1 billion and reduced
shareowners' equity of approximately $34.1 billion.
L-11
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(f) MERGER WITH MEDIAONE GROUP, INC.
On June 15, 2000, AT&T completed a merger with MediaOne Group, Inc.
(MediaOne) in a cash and stock transaction valued at approximately $45 billion.
For each share of MediaOne stock, MediaOne shareowners received, in the
aggregate, 0.95 of a share of AT&T common stock and $36.27 per share in cash,
consisting of $30.85 per share as stipulated in the merger agreement and $5.42
per share based on AT&T's stock price preceding the merger, which was below a
predetermined amount. AT&T issued approximately 603 million shares of common
stock in the transaction, of which approximately 60 million were treasury
shares. The AT&T shares had an aggregate market value of approximately $21
billion and cash payments totaled approximately $24 billion.
The merger was accounted for under the purchase method. Accordingly, the
results of MediaOne have been included in the accompanying consolidated
financial statements since the date of acquisition as part of AT&T Broadband.
Approximately $17 billion of the purchase price of $45 billion has been
attributed to agreements with local franchise authorities that allow access to
homes in our broadband service areas ("franchise costs") and is being amortized
on a straight-line basis over 40 years. Also included in the purchase price was
approximately $22 billion related to nonconsolidated investments, including
investments in Time Warner Entertainment Company, L.P. (TWE) and Vodafone Group
plc (Vodafone), approximately $5 billion related to property, plant and
equipment, and approximately $5 billion of other net assets. In addition,
included was approximately $13 billion in deferred income tax liabilities,
approximately $10 billion of MediaOne debt, and approximately $1 billion of
minority interest in Centaur Funding Corporation, a subsidiary of MediaOne. The
purchase resulted in goodwill of approximately $20 billion, which is being
amortized on a straight-line basis over 40 years.
PRO FORMA RESULTS
Following is a summary of the pro forma results of AT&T as if the merger
with MediaOne had closed effective January 1, 2000:
(UNAUDITED)
SHARES IN MILLIONS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
-------------------------
Revenue..................................................... $42,948
Income from continuing operations........................... 8,530
Weighted-average AT&T common shares......................... 3,765
Weighted-average AT&T common shares and potential common
shares.................................................... 3,840
Weighted-average Liberty Media Group shares................. 2,573
AT&T Common Stock Group earnings from continuing operations
per common share:
Basic.................................................. $ 1.48
Diluted................................................ $ 1.46
Liberty Media Group earnings per common share:
Basic and diluted...................................... $ 1.15
Pro forma data may not be indicative of the results that would have been
obtained had these events actually occurred at the beginning of the periods
presented, nor does it intend to be a projection of future results.
L-12
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(g) OTHER ACQUISITIONS, EXCHANGES AND DISPOSITIONS
CONCERT AND AT&T CANADA
On October 16, 2001, AT&T announced a decision to unwind Concert, its
global venture with British Telecommunications plc (BT). Under the agreement,
each of the partners generally will reclaim the customer contracts and assets
contributed to the joint venture. In addition, AT&T will assume certain other
assets that BT originally contributed to the joint venture. AT&T also will
acquire BT's 9% interest in AT&T Canada and assume BT's obligation to purchase a
portion of the publicly owned shares of AT&T Canada. As a result of the
agreement to dissolve the Concert venture, AT&T recorded a $3.5 billion pretax
charge in the third quarter of 2001 included in "Other (expense) income" in the
accompanying Consolidated Statement of Operations. Approximately $2.9 billion of
this charge primarily relates to the difference between the fair market value of
the net assets AT&T will receive in the transaction and the carrying value of
AT&T's investment in Concert. Our investment in Concert was accounted for as an
equity investment and included a note receivable from Concert of approximately
$1.1 billion. The remaining carrying value of our investment in Concert was
approximately $0.2 billion at September 30, 2001. The remaining $0.6 billion of
the charge relates to the assumption of BT's portion of the obligation to
purchase the publicly owned shares of AT&T Canada. The agreement to dissolve
Concert remains subject to regulatory approval in the United States, Europe and
other jurisdictions and is expected to close by the middle of 2002. Also, AT&T
recorded a $1.8 billion pretax charge reflecting an estimated loss on AT&T's
existing obligation for the purchase of the publicly owned shares of AT&T
Canada. The charge related to the AT&T Canada investment reflects the
differences between the underlying value of AT&T Canada shares and the price
AT&T has committed to pay for them. This charge was included in "Other (expense)
income" in the accompanying Consolidated Statement of Operations. AT&T currently
owns approximately 21% of the outstanding equity of AT&T Canada and has the
right to acquire BT's 9% interest in the outstanding equity of AT&T Canada.
Accordingly, AT&T does not currently consolidate AT&T Canada into its results.
AT&T has agreed to purchase all the outstanding shares of AT&T Canada that it
does not own in the event that Canadian foreign ownership restrictions are
removed. Prior to such removal, AT&T also has the right at any time to trigger
the purchase of such shares through a structure that complies with such
ownership restrictions, including designating a Canadian investor to purchase
such shares. In the event AT&T acquires more than 50% of the equity or vote of
AT&T Canada, AT&T Canada's results will be consolidated into AT&T results.
EXCITE@HOME
On September 28, 2001, At Home Corporation filed for bankruptcy under
Chapter 11 in the U.S. Bankruptcy Court, for the Northern District of
California. It also signed a definitive agreement with AT&T to sell essentially
all of its broadband Internet access businesses and related services to AT&T for
$0.3 billion in cash. Excite@Home's results remained consolidated in AT&T's
Consolidated Statements of Operations for the three and nine months ended
September 30, 2001, however, the assets and liabilities were deconsolidated from
AT&T's Consolidated Balance Sheet as of September 30, 2001.
The noncash impacts of the deconsolidation of At Home Corporation primarily
included a reduction to property, plant and equipment of approximately $0.3
billion, goodwill of approximately $0.3 billion and debt of approximately $1.0
billion. This resulted in the recording of a liability of approximately $0.4
billion as of September 30, 2001. This liability will continue to be evaluated.
In addition, AT&T recorded a deferred tax benefit of $0.7 billion as a result of
the deconsolidation.
L-13
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMCAST
On June 30, 2001, AT&T transferred its 99.75% interest in an entity owning
the Baltimore Maryland cable-system serving approximately 115 thousand customers
to Comcast Corp. (Comcast) for approximately $0.5 billion in cash. The
transaction resulted in a pretax gain of $0.1 billion.
On April 30, 2001, AT&T received 63.9 million shares of AT&T common stock
held by Comcast in exchange for an entity owning cable-systems which serves
approximately 590 thousand customers in six states. The transaction resulted in
a pretax loss of $0.3 billion.
COX AND COMCAST
On May 18, 2001, AT&T, Cox Communications (Cox) and Comcast revised an
agreement on the terms of the put options related to Excite@Home. Under the new
agreement, which was no longer a tax-free exchange, Cox and Comcast retained
their stakes in Excite@Home and AT&T issued 75 million of AT&T common shares to
Cox and more than 80 million of AT&T common shares to Comcast. We recorded an
approximate $0.8 billion loss in "Other (expense) income" for this put option
settlement in the second quarter of 2001. The new agreement resulted in a tax
benefit to AT&T, which essentially offset this loss.
JAPAN TELECOM
On April 27, 2001, AT&T completed the sale announced on February 27, 2001,
of our 10% stake in Japan Telecom Co. Ltd to Vodafone Group plc for $1.35
billion in cash. The proceeds from the transaction were split evenly between
AT&T and AT&T Wireless Group since AT&T Wireless Group held approximately
one-half of AT&T's investment. The transaction resulted in a pretax gain of
approximately $0.5 billion recorded in "Other (expense) income" in AT&T's
continuing operations and a pretax gain of approximately $0.5 billion recorded
in "Income from discontinued operations."
CABLEVISION
On January 8, 2001, AT&T and Cablevision Systems Corporation (Cablevision)
completed the transfer of cable-systems in which AT&T received cable-systems
serving 358 thousand subscribers in Boston and Eastern Massachusetts. In
exchange, Cablevision received cable-systems serving approximately 130 thousand
subscribers in the northern New York suburbs, and 44 million shares of AT&T
common stock valued at approximately $0.9 billion, and approximately $0.2
billion in cash. Cablevision recorded a gain as a result of the transaction. Due
to AT&T's ownership interest in Cablevision, AT&T recorded an after-tax gain of
approximately $0.1 billion included within "Net losses from other equity
investments."
INSIGHT COMMUNICATIONS COMPANY LP
Effective January 1, 2001, AT&T sold to Insight Communications Company LP
(Insight) several Illinois cable-systems serving approximately 98 thousand
customers for $0.4 billion. Insight subsequently contributed the purchased
cable-system and additional cable-systems serving approximately 177 thousand
customers to Insight Midwest L.P. in which AT&T has a 50% interest. AT&T also
contributed entities owning cable-systems serving approximately 248 thousand
customers in Illinois to Insight Midwest L.P. The transactions resulted in a
pretax gain of $0.2 billion, which was deferred due to a debt support agreement
with Insight Midwest, L.P.
(h) NET RESTRUCTURING AND OTHER CHARGES
During the third quarter of 2001, $399 of net restructuring and other
charges were recorded by Excite@Home. Included in these charges were $376 of
asset impairment charges and $23 million of
L-14
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
restructuring and exit costs, primarily due to continued weakness in the on-line
media market and the recent bankruptcy filing. These charges included the
write-off of goodwill and other intangible assets, warrants granted in
connection with distributing the @Home service and fixed assets. The
restructuring and exits costs, consisted of $4 for severance costs, $14 related
to facility closings and $5 primarily related to termination of contractual
obligations. Since we consolidate, but only own approximately 23% of
Excite@Home, a portion of the charges recorded by Excite@Home was not included
as a reduction to AT&T's net income, but rather eliminated in our September 30,
2001 Consolidated Statement of Operations as a component of "Minority interest
income (expense)."
The severance costs, for approximately 860 employees, primarily resulted
from continued cost reduction efforts by Excite@Home. Nearly 79% of the affected
employees have left their positions as of September 30, 2001, and the remaining
employees will leave the Company by the end of 2001.
Net restructuring and other charges for the nine months ended September 30,
2001, totaled $1,494. The charge includes $1,171 of asset impairment charges
related to Excite@Home, $323 for restructuring and exits costs, which consisted
of $151 for severance costs, $156 for facility closings and $16 primarily
related to termination of contractual obligations.
The asset impairment charges recorded during the nine months ended
September 30, 2001 included $1,032 recorded by Excite@Home primarily due to
continued weakness in the on-line media market and the recent bankruptcy filing.
These charges included the write-down of goodwill and other intangible assets
related to various acquisitions, primarily Excite, warrants granted in
connection with distributing the @Home service, and fixed assets. In addition,
AT&T recorded a related goodwill impairment charge of $139 associated with its
acquisition goodwill of Excite@Home. Since we consolidate, but only own
approximately 23% of Excite@Home, a portion of the charges recorded by
Excite@Home was not included as a reduction to AT&T's net income, but rather
eliminated in our September 30, 2001 Consolidated Statement of Operations as a
component of "Minority interest income (expense)."
The severance costs, for approximately 7,700 employees, primarily resulted
from synergies created by the MediaOne merger as well as continued cost
reduction efforts by Excite@Home. Approximately 36% of the affected employees
are management employees and 64% are non-management employees. Nearly 84% of the
affected employees have left their positions as of September 30, 2001, and the
remaining employees will leave the Company by the end of 2001.
The following table displays the activity and balances of the restructuring
reserve account from January 1, 2001, to September 30, 2001:
TYPE OF COST
--------------------------------------
EMPLOYEE FACILITY
SEPARATIONS CLOSINGS OTHER TOTAL
----------- -------- ----- -----
Balance at January 1, 2001......................... $ 259 $ 173 $ 36 $ 468
Additions.......................................... 151 156 16 323
Deductions......................................... (281) (172) (20) (473)
Balance at September 30, 2001...................... $ 129 $ 157 $ 32 $ 318
Total deductions include $121 related to the deconsolidation of AT&T's
investment in Excite@Home (see Note g) and also reflect cash payments of $265
related to employee separations, $68 related to facility closings and $10
related to litigation, as well as $9 noncash utilization associated with
deferred payments primarily related to executives. The cash outlay for AT&T's
restructuring was primarily funded through cash from operations.
During the third quarter of 2000, AT&T recorded $24 of net restructuring
and other charges. The charge resulted from synergies associated with the
MediaOne merger and related to cash termination
L-15
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
benefits associated with the involuntary separation of approximately 490
employees. Approximately one-half of the individuals were management employees
and one-half were nonmanagement employees.
During the nine months ended September 30, 2000, AT&T recorded $797 of net
restructuring and other charges, which included $706 of restructuring and exit
costs primarily associated with AT&T's initiative to reduce costs by the end of
2000, and $91 related to the government-mandated disposition of AT&T
Communications (U.K.) Ltd., which would have competed directly with Concert.
The charge for the nine months ended September 30, 2000 included cash
termination benefits of $482 associated with the involuntary separation of
approximately 6,700 employees. Approximately one-half of the individuals were
management employees and one-half were non-management employees.
The charge also included $62 of network lease and other contract
termination costs associated with penalties incurred as part of notifying
vendors of the termination of these contracts during the first quarter 2000 and
$144 of benefit curtailment costs associated with employee separations as part
of these exit plans.
During the nine months ended September 30, 2000, AT&T also recorded an
asset impairment charge of $18 related to the write-down of unrecoverable assets
in certain businesses in which the carrying value was no longer supported by
estimated future cash flows.
(i) EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE
(Loss) earnings attributable to the different classes of AT&T common stock
are as follows:
AT&T
AT&T COMMON WIRELESS
STOCK GROUP GROUP LIBERTY MEDIA GROUP
FOR THE THREE MONTHS ENDED ---------------- ----------- -------------------
SEPTEMBER 30, 2001 2000 2001 2000 2001 2000
-------------------------- ------- ------ ---- ---- --------- -------
(Loss) income from continuing
operations....................... $(2,206) $1,318 $-- $-- $ 111 $1,756
Dividend requirements of preferred
stock............................ 235 -- -- -- -- --
(Loss) income from continuing
operations available to common
shareowners...................... (2,441) 1,318 -- -- 111 1,756
Income (loss) from discontinued
operations....................... -- 1 -- (3) -- --
Gain on disposition of discontinued
operations....................... 13,503 -- -- -- -- --
Net income (loss) available to
common shareowners............... $11,062 $1,319 $-- $(3) $ 111 $1,756
L-16
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T
AT&T COMMON WIRELESS
STOCK GROUP GROUP LIBERTY MEDIA GROUP
FOR THE NINE MONTHS ENDED ---------------- ----------- -------------------
SEPTEMBER 30, 2001 2000 2001 2000 2001 2000
------------------------- ------- ------ ---- ---- --------- -------
(Loss) income from continuing
operations $(2,740) $4,616 $-- $-- $ (2,711) $2,965
Dividend requirements of preferred
stock 652 -- -- -- -- --
Premium on Wireless tracking stock
exchange 80 -- -- -- -- --
(Loss) income from continuing
operations available to common
shareowners (3,472) 4,616 -- -- (2,711) 2,965
Income from discontinued operations 115 189 35 19 -- --
Gain on disposition of discontinued
operations 13,503 -- -- -- -- --
Cumulative effect of accounting
change 359 -- -- -- 545 --
Net income (loss) available to
common shareowners $10,505 $4,805 $35 $19 $ (2,166) $2,965
Basic earnings (loss) per share for AT&T Common Stock Group were computed
by dividing AT&T Common Stock Group income by the weighted-average number of
shares outstanding of 3,534 million and 3,752 million for the three months ended
September 30, 2001 and 2000, respectively, and 3,677 million and 3,397 million
for the nine months ended September 30, 2001 and 2000, respectively.
Since AT&T recorded a loss from continuing operations for the three and
nine months ended September 30, 2001, the diluted loss per share is the same as
basic, as any potentially dilutive securities would be antidilutive. There were
76 million potentially dilutive AT&T securities outstanding at September 30,
2001.
Diluted earnings per share (EPS) for AT&T Common Stock Group for the three
months and nine months ended September 30, 2000 were computed by dividing AT&T
Common Stock Group income, adjusted for the conversion of securities, by the
weighted-average number of shares and dilutive potential shares outstanding
during the period, assuming conversion of the potential shares at the beginning
of the periods presented. Shares issuable upon conversion of preferred stock of
subsidiaries, convertible put options and stock options have been included in
the diluted calculation of weighted-average shares to the extent that the
assumed issuance of such shares would have been dilutive, as illustrated below.
The convertible quarterly income preferred securities were antidilutive and
were excluded from the computation of diluted EPS for the three and nine-month
periods ended September 30, 2000. The dividends of these securities would have
an after-tax impact to earnings of approximately $40 and $120 for the three and
nine-month periods ended September 30, 2001 and 2000, respectively. Assuming
conversion of the securities, the dividends would no longer have to be included
as a reduction to net income and the securities would convert into approximately
67 million shares of AT&T common stock.
L-17
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the income and share components for diluted EPS
calculations with respect to AT&T Common Stock Group is as follows:
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
------------------ ------------------
AT&T Common Stock Group:
Income from continuing operations................... $1,318 $4,616
Income impact of assumed conversion of preferred
stock of subsidiary............................... 8 24
Income impact of mark-to-market on convertible put
options........................................... 13 13
Income adjusted for conversion of securities........ $1,339 $4,653
Shares (in millions)
Weighted-average common shares...................... 3,752 3,397
Stock options....................................... 17 23
Preferred stock of subsidiary....................... 40 40
Convertible put options............................. 33 11
Weighted-average common shares and potential common
shares............................................ 3,842 3,471
Basic earnings (loss) per share for LMG was computed by dividing the LMG
income (loss) by the weighted-average number of shares outstanding of LMG of
2,588 million and 2,582 million, for the third quarter and the year-to-date
periods through July 31, 2001, the deemed effective split-off date for
accounting purposes (see note e), respectively, and 2,578 million and 2,573
million for the three and nine months ended September 30, 2000, respectively.
Since LMG recorded a loss for the year-to-date period through July 31,
2001, the diluted loss per share is the same as basic, as any potentially
dilutive securities would be antidilutive. Diluted earnings per share (EPS) for
LMG for the third quarter of 2001 and for the quarter and the nine months ended
September 30, 2000, were computed by dividing LMG income by the weighted-average
number of shares outstanding during the period. Potentially dilutive securities,
including fixed and nonvested performance awards and stock options, have not
been factored into the dilutive calculations because past history has indicated
that these contracts are generally settled in cash.
(j) CONVERTIBLE PREFERRED STOCK
On January 22, 2001, NTT DoCoMo invested approximately $9.8 billion for
812,511.778 shares of a new class of AT&T preferred stock with a par value of $1
per share; and five-year warrants to purchase the equivalent of an additional
41.7 million shares of AT&T Wireless Group tracking stock at $35 per share. The
$9.8 billion of proceeds were recorded based on their relative fair values as
$9.2 billion for the preferred shares, $0.3 billion for the warrants in other
current liabilities and $0.3 billion for the amortizable beneficial conversion
feature. Prior to the split-off of AT&T Wireless Group, the preferred shares,
convertible at NTT DoCoMo's option, were economically equivalent to 406 million
shares (a 16 percent interest) of AT&T Wireless Group tracking stock.
On July 9, 2001, in conjunction with the split-off of AT&T Wireless Group,
these preferred shares were converted into AT&T Wireless common stock. Upon
conversion, AT&T reduced its portion of the financial performance and economic
value in the AT&T Wireless Group by 178 million shares, and the balance of the
406 million shares came from the issuance of 228 million new shares of AT&T
Wireless common stock.
L-18
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Since NTT DoCoMo converted their preferred stock in connection with the
Wireless Group split-off, we fully amortized, in the third quarter, the
remaining beneficial conversion feature balance of $0.2 billion.
(k) SECURITIZATION OF RECEIVABLES
On June 22, 2001, AT&T initiated a 364-day accounts receivable
securitization program providing for up to $2.2 billion of funding. Under the
program, AT&T Business accounts receivable were sold on a discounted, revolving
basis, to a special purpose, wholly-owned subsidiary of AT&T, which assigns
interests in such receivables to unrelated third-party financing entities. The
securitization proceeds of $2.1 billion were recorded as a borrowing and
included in "Debt maturing within one year" in the accompanying Consolidated
Balance Sheet at September 30, 2001. The interest payment for the associated
loan was approximately $21 and $27 for the quarter and year-to-date period
ending September 30, 2001, respectively. Interest is paid monthly based on a
floating rate set by the corresponding agreements. At September 30, 2001, the
borrowing was collateralized by $5.6 billion of accounts receivable.
On June 20, 2001, AT&T amended an existing accounts receivable
securitization program for a new 364-day term providing for up to $0.5 billion
of funding. Under the program, AT&T Consumer accounts receivable were sold on a
discounted, revolving basis, to a special purpose, wholly-owned subsidiary of
AT&T, which assigns interests in such receivables to unrelated third-party
financing entities. The $0.5 billion of proceeds were included in "Debt maturing
within one year" in the accompanying Consolidated Balance Sheet at September 30,
2001. The interest payment for the associated loan was approximately $4 and $11
for the quarter and year-to-date period ending September 30, 2001, respectively.
Interest is paid monthly based on a floating rate set by the corresponding
agreements. At September 30, 2001, the borrowing was collateralized by $1.0
billion of accounts receivable.
(l) SETTLEMENT OF EXCHANGEABLE NOTES
In the third quarter of 2001, exchangeable notes that were indexed to a
portion of our holdings of Vodafone securities matured. Prior to the settlement,
the carrying value of the notes was $1.6 billion. These notes were settled with
approximately 70 million shares of Vodafone ADR's and $252 in cash.
Approximately 57 million shares of the Vodafone ADR's used in the settlement
were accounted for as "trading" securities and the remainder was accounted for
as "available-for-sale" securities under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The settlement resulted in a pretax
loss of approximately $392, of which $394 was reclassified from other
comprehensive income to other (expense) income in the Statement of Operations.
(m) RELATED PARTY TRANSACTIONS
AT&T has various related party transactions with Concert.
Included in revenue was $0.3 billion for each of the three-month periods
ended September 30, 2001 and 2000, and $0.8 billion for each of the nine-month
periods ended September 30, 2001 and 2000, for services provided to Concert.
Included in access and other connection expenses are charges from Concert
representing costs incurred on our behalf to connect calls made to foreign
countries (international settlements) and costs paid by AT&T to Concert for
distributing Concert products. Such charges totaled $0.4 billion and $1.5
billion, for the three and nine months ended September 30, 2001, respectively,
and $0.6 billion and $1.7 billion for the three and nine months ended September
30, 2000, respectively.
Included in accounts receivable was $0.5 billion, at both September 30,
2001 and December 31, 2000, related to transactions with Concert. Included in
accounts payable was $0.5 billion at both September 30, 2001 and December 31,
2000, respectively, related to transactions with Concert.
L-19
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in other receivables was $0.7 billion and $1.1 billion, at
September 30, 2001 and December 31, 2000, respectively, related to transactions
associated with Concert. Included in other current liabilities was $0.9 billion
and $1.0 billion, at September 30, 2001 and December 31, 2000, respectively,
related to transactions associated with Concert.
In addition, we had various related party transactions with Liberty Media
Group(LMG). Included in "Costs of services and products" were programming
expenses related to services from LMG. Those expenses amounted to $27 and $199,
respectively, for the quarter and year-to-date periods through July 31, 2001,
the deemed effective LMG split-off date for accounting purposes, and $69 and
$171, respectively, for the quarter and year-to-date periods ended September 30,
2000.
(n) STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133 "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES"
Effective January 1, 2001, AT&T adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and its corresponding amendments
under SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. All derivatives, whether designated
in hedging relationships or not, are required to be recorded on the balance
sheet at fair value. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and of the hedged item attributable
to the hedged risk are recognized in earnings. If the derivative is designated
as a cash flow hedge, the effective portions of changes in the fair value of the
derivative are recorded in other comprehensive income (OCI) and are recognized
in the income statement when the hedged item affects earnings. Changes in fair
values of derivative instruments not designated as hedging instruments and
ineffective portions of hedges, if any, are recognized in earnings in the
current period.
The adoption of SFAS No. 133 on January 1, 2001, resulted in a pretax
cumulative-effect increase to income of $1.5 billion ($0.9 billion net-of-tax).
$0.6 billion ($0.4 billion net-of-tax) and $0.9 billion ($0.5 billion
net-of-tax) were attributable to AT&T Group (other than LMG) and Liberty Media
Group, respectively.
AT&T GROUP
AT&T Group's cumulative-effect increase to net income of $0.4 billion was
attributable primarily to equity based derivative instruments embedded in
indexed debt instruments, and warrants held in both public and private
companies.
Included in the after-tax cumulative effect benefit of $0.4 billion, was a
$0.2 billion benefit for the separation of embedded derivative instruments from
the indexed debt instruments and $0.2 billion benefit for changes in the fair
value of warrants.
Upon adoption, AT&T Group, as permitted by SFAS No. 133, reclassified $9.3
billion of securities from "available-for-sale" to "trading." This
reclassification resulted in the recognition, in the income statement, of losses
previously recorded within accumulated OCI. A portion of the loss ($1.6 billion
pretax; $1.0 billion net-of-tax) was recorded as part of the cumulative effect
of adoption. This loss completely offset a gain for amounts also previously
recorded within accumulated OCI on the indexed debt obligation that had been
considered a hedge of Comcast, Microsoft and Vodafone available-for-sale
securities. The reclassification of securities also resulted in a pretax charge
of $1.2 billion ($0.7 billion net-of-tax) recorded in other (expense) income.
In addition, the adoption of SFAS No. 133 also resulted in a cumulative
pretax charge to OCI of $10 ($6 net-of-tax) on cash flow hedges. The net
derivative loss included in OCI as of January 1, 2001 will be reclassified into
earnings over the life of the instruments, of which the last expires in February
2005.
L-20
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOREIGN CURRENCY RISK
We enter into foreign currency exchange contracts, including forward and
option contracts, to manage our exposure to changes in currency exchange rates
related to foreign-currency-denominated transactions. In third quarter 2001,
this consisted primarily of the Euro, Japanese yen and Brazilian reais.
COLLARS AND EQUITY SECURITIES PRICE RISK
We enter into option agreements to hedge our exposure on debt that is
collateralized by securities we own. From time to time, AT&T Group uses options
and collars to manage the risk from changes in fair values and cash flows on
certain equity securities, primarily on those being used to collateralize
underlying debt instruments. The securities selected for hedging are determined
by market conditions, up-front costs, and other relevant factors. Once
established, the hedges are not dynamically managed or traded, and are generally
not removed until maturity of the option contracts.
INTEREST RATE SWAP AGREEMENTS
We enter into interest rate swaps to manage our exposure to changes in
interest rates and to lower our overall costs of financing. We enter into swap
agreements to manage the fixed/floating mix of our debt portfolio in order to
reduce aggregate risk to interest rate movements. Interest rate swaps also allow
us to raise funds at floating rates and effectively swap them into fixed rates
that are lower than those available to us if fixed-rate borrowings were made
directly. These agreements involve the exchange of floating-rate for fixed-rate
payments, fixed-rate for floating-rate payments or floating-rate for other
floating-rate payments without the exchange of the underlying principal amount.
OTHER DERIVATIVES
In addition, AT&T Group may hold warrants to purchase securities of other
companies. Warrants that can be net share settled are deemed derivative
financial instruments and are generally not eligible to be designated as hedging
instruments as there is no corresponding underlying exposure. This includes
warrants held in both public and private companies.
Hedge ineffectiveness, determined in accordance with SFAS No. 133, had no
impact on earnings for the three and nine months ended September 30, 2001. No
fair value hedges or cash flow hedges were derecognized or discontinued for the
three and nine months ended September 30, 2001.
For the three and nine months ended September 30, 2001, "Other (expense)
income" included net gains of $132 and $373, respectively, relating to ongoing
fair value adjustments of derivatives and trading securities. The fair value
adjustments for these periods included net gains of $980 and $1,964,
respectively, for equity based derivative instruments embedded in indexed debt
instruments, net gains (losses) of $(61) and $76, respectively, for changes in
the fair value of warrants, swaps and foreign currency transactions, and losses
of $(787) and $(1,667), respectively, for trading securities.
For the three and nine-month periods ending September 30, 2001, we
reclassified $19 and $60, respectively, from OCI (pretax) to interest expense
representing the recognition of mark-to-market amounts on the prepaid interest
rate swaps.
LIBERTY MEDIA GROUP (LMG)
LMG's cumulative-effect increase to income of $0.5 billion was attributable
primarily to separately recording the embedded call option obligations
associated with LMG's senior exchangeable debentures. Also included in the
cumulative-effect was $87 previously included in OCI related primarily to
changes in the fair value of LMG's warrants and options to purchase certain
available-for-sale securities.
L-21
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DERIVATIVE INSTRUMENTS:
LMG uses various derivative instruments including equity collars, put
spread collars, interest rate swaps and forward foreign exchange contracts to
manage fair value risk associated with certain investments, interest rate risk
on certain indebtedness, and foreign exchange rate risk. Derivative instruments
are generally not used for speculative purposes. The derivative instruments may
involve elements of credit and market risk in excess of amounts recognized in
the financial statements. LMG monitors its positions and the credit quality of
counter-parties, consisting primarily of major financial institutions, and does
not anticipate nonperformance by any counter-party.
For derivatives designed either as fair value or cash flow hedges, changes
in the time value of the derivatives are excluded from the assessment of hedge
effectiveness and are recognized in earnings. Hedge ineffectiveness, determined
in accordance with SFAS No. 133, had no impact on LMG's earnings for the quarter
and the year-to-date period through July 31, 2001. No fair value hedges or cash
flow hedges were derecognized or discontinued during the quarter and the
year-to-date period through July 31, 2001.
For the nine months ended September 30, 2001, included in "Equity earnings
(losses) from LMG" were unrealized losses on financial instruments which
consisted of a $38 net loss related to call option obligations, a $440 net loss
for changes in the fair value of derivative instruments related to
available-for-sale securities and other derivatives not designated as hedging
instruments, and an $142 net gain for changes in the time value of options for
fair value hedges.
(o) SEGMENT REPORTING
AT&T's results are segmented according to the way we manage our business:
AT&T Business, AT&T Consumer and AT&T Broadband. In connection with our
corporate restructuring program set forth in late 2000, our existing segments
reflect certain managerial changes since the publication of our 2000 annual
report. The changes are as follows: AT&T Business was expanded to include the
results of international operations and ventures. In addition, certain corporate
costs that were previously recorded within the Corporate and Other Group have
been allocated to the respective segments in an effort to ultimately have the
results of these businesses reflect all direct corporate costs as well as
overhead for shared services. All prior period results have been restated to
reflect these changes. Total assets for our reportable segments generally
include all assets, except intercompany receivables.
Reflecting the dynamics of our business, we continuously review our
management model and structure, which may result in additional adjustments to
our operating segments in the future.
L-22
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- -------------------
2001 2000 2001 2000
--------- --------- -------- --------
Revenue
AT&T Business external revenue.................... $ 6,750 $ 7,022 $20,550 $21,172
AT&T Business internal revenue.................... 135 200 597 529
Total AT&T Business revenue............................ 6,885 7,222 21,147 21,701
AT&T Consumer external revenue......................... 3,822 4,651 11,614 14,651
AT&T Broadband external revenue................... 2,390 2,416 7,411 5,687
AT&T Broadband internal revenue................... 3 4 12 6
Total AT&T Broadband revenue........................... 2,393 2,420 7,423 5,693
Total reportable segments.............................. 13,100 14,293 40,184 42,045
Corporate and Other(a)................................. (13) (117) (220) (422)
Total revenue.......................................... $13,087 $14,176 $39,964 $41,623
---------------
(a) Includes revenue related to Excite@Home of $140 and $418 for the third
quarter and year-to-date period of 2001, respectively, and $79 for the
quarter and year-to-date period ended September 30, 2000.
RECONCILIATION OF EARNINGS BEFORE INTEREST AND TAXES (EBIT) TO INCOME BEFORE
INCOME TAXES
FOR THE THREE
MONTHS ENDED FOR THE NINE MONTHS
SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------- --------------------
2001 2000 2001 2000
------- ------ --------- --------
AT&T Business............................................ $(4,377) $1,690 $(1,933) $4,428
AT&T Consumer............................................ 1,282 1,806 3,817 5,271
AT&T Broadband........................................... (538) (640) (1,834) (771)
Total reportable segments.............................. (3,633) 2,856 50 8,928
Corporate and Other(a)................................... (21) 106 (3,505) (297)
Deduct: Pretax minority interest income (expense)........ 171 64 922 (87)
Add: Pretax losses from other equity investments......... 224 374 725 1,034
Interest expense......................................... 786 896 2,426 2,000
Total (loss) income from continuing operations before
income taxes........................................... $(4,387) $2,376 $(6,078) $7,752
---------------
(a) Includes $(294) and $(235) related to Excite@Home for the third quarter of
2001 and 2000, respectively. Also includes $(714) and $(699) related to
Excite@Home for the nine months ended September 30, 2001 and 2000,
respectively.
L-23
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ASSETS
AT SEPTEMBER 30, AT DECEMBER 31,
2001 2000
---------------- ---------------
AT&T Business............................................... $ 40,236 $ 42,747
AT&T Consumer............................................... 2,555 3,150
AT&T Broadband.............................................. 104,054 114,848
Total reportable segments................................. 146,845 160,745
Corporate and Other:
Other segments.............................................. 1,152 1,174
Prepaid pension costs....................................... 3,269 3,003
Deferred income taxes....................................... 1,362 406
Other corporate assets(a)................................... 7,421 7,518
Investment in Liberty Media Group and related receivables,
net....................................................... -- 34,290
Net assets of discontinued operations....................... -- 27,224
Total assets................................................ $160,049 $234,360
---------------
(a) Includes $2,541 related to Excite@Home at December 31, 2000.
(p) GUARANTEE OF PREFERRED SECURITIES
TCI Securities:
Prior to the consummation of the TCI merger, TCI issued mandatorily
redeemable preferred securities through subsidiary trusts that held subordinated
debt securities of TCI. At September 30, 2001, $1,244 of the guaranteed
redeemable preferred securities remained outstanding.
MediaOne Securities:
Prior to the consummation of the MediaOne merger, MediaOne issued
mandatorily redeemable preferred securities through subsidiary trusts that held
subordinated debt securities of MediaOne. At September 30, 2001, $776 of the
guaranteed redeemable preferred securities remained outstanding.
AT&T provides a full and unconditional guarantee on the outstanding
securities issued by TCI Communications Financing I, II and IV and the
outstanding securities issued by MediaOne Financing I and II and MediaOne
Finance II and III. The following are the condensed consolidating financial
statements of AT&T Corp., which include the financial results of TCI and
MediaOne for each of the corresponding periods. The results of MediaOne have
been included in the financial results of AT&T since the date of acquisition on
June 15, 2000, and the results of TCI have been included since the March 9,
1999, date of acquisition.
L-24
AT&T CORP.
CONSOLIDATING CONDENSED INCOME STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(DOLLARS IN MILLIONS)
GUARANTOR GUARANTOR GUARANTOR TCI TCI TCI
AT&T SUBSIDIARY SUBSIDIARY FINANCING FINANCING FINANCING
PARENT TCI MEDIAONE I II IV
--------- ---------- ---------- --------- --------- ---------
Revenue........................................ $14,832 $ -- $ -- $ -- $ -- $ --
Operating Expenses
Costs of services and products................. 2,564 1
Access and other connection.................... 4,948
Selling, general and administrative............ 1,583 246 2
Depreciation and other amortization............ 1,284 44
Amortization of goodwill, franchise costs and
other purchased intangibles.................. 72 3 376
Net restructuring and other charges............
Total operating expenses....................... 10,451 293 379
Operating income (loss)........................ 4,381 (293) (379)
Other income (expense)......................... 763 97 1,076 32 35 13
Interest expense (benefit)..................... 3,485 1,015 212 32 35 13
Income (loss) from continuing operations before
income taxes, minority interest, earnings
(losses) from equity investments and
cumulative effect of accounting change....... 1,659 (1,211) 485
Provision (benefit) for income taxes........... 619 (454) 329
Minority interest income (expenses)............ (120)
Equity losses from Liberty Media Group......... 2,711
Net earnings (losses) from other equity
investments.................................. 133 (1,896) (1,839)
Income (loss) from continuing operations before
cumulative effect of accounting change....... 1,053 (5,364) (1,683)
Income (loss) from discontinued operations (net
of income taxes).............................
Gain on the disposition of discontinued
operations................................... 13,503
Income (loss) before cumulative effect of
accounting change............................ 14,556 (5,364) (1,683)
Cumulative effect of accounting change......... 508 545 540
Net income (loss).............................. 15,064 (4,819) (1,143)
Dividend requirements on preferred stock....... 652
Premium on Wireless tracking stock exchange.... 80
Net income (loss) available to common
shareowners.................................. $14,332 $(4,819) $(1,143) $ -- $ -- $ --
MEDIAONE MEDIAONE MEDIAONE MEDIAONE ELIMINATION AND
FINANCING FINANCING FINANCE FINANCE NON-GUARANTOR CONSOLIDATION
I II II III SUBSIDIARIES ADJUSTMENTS
--------- --------- -------- -------- ------------- ---------------
Revenue........................................ $ -- $ -- $ -- $ -- $26,859 $(1,727)
Operating Expenses
Costs of services and products................. 9,411 (1,518)
Access and other connection.................... 4,523 (182)
Selling, general and administrative............ 6,317 (4)
Depreciation and other amortization............ 3,788
Amortization of goodwill, franchise costs and
other purchased intangibles.................. 1,469
Net restructuring and other charges............ 1,494
Total operating expenses....................... 27,002 (1,704)
Operating income (loss)........................ (143) (23)
Other income (expense)......................... 3 3 16 35 (6,709) (2,559)
Interest expense (benefit)..................... 2 2 15 34 672 (3,091)
Income (loss) from continuing operations before
income taxes, minority interest, earnings
(losses) from equity investments and
cumulative effect of accounting change....... 1 1 1 1 (7,524) 509
Provision (benefit) for income taxes........... (3,240)
Minority interest income (expenses)............ 1,135
Equity losses from Liberty Media Group.........
Net earnings (losses) from other equity
investments.................................. 43 3,136
Income (loss) from continuing operations before
cumulative effect of accounting change....... 1 1 1 1 (3,106) 3,645
Income (loss) from discontinued operations (net
of income taxes)............................. 178 (28)
Gain on the disposition of discontinued
operations...................................
Income (loss) before cumulative effect of
accounting change............................ 1 1 1 1 (2,928) 3,617
Cumulative effect of accounting change......... (689)
Net income (loss).............................. 1 1 1 1 (3,617) 3,617
Dividend requirements on preferred stock.......
Premium on Wireless tracking stock exchange....
Net income (loss) available to common
shareowners.................................. $ 1 $ 1 $ 1 $ 1 $(3,617) $ 3,617
CONSOLIDATED
AT&T CORP.
------------
Revenue........................................ $39,964
Operating Expenses
Costs of services and products................. 10,458
Access and other connection.................... 9,289
Selling, general and administrative............ 8,144
Depreciation and other amortization............ 5,116
Amortization of goodwill, franchise costs and
other purchased intangibles.................. 1,920
Net restructuring and other charges............ 1,494
Total operating expenses....................... 36,421
Operating income (loss)........................ 3,543
Other income (expense)......................... (7,195)
Interest expense (benefit)..................... 2,426
Income (loss) from continuing operations before
income taxes, minority interest, earnings
(losses) from equity investments and
cumulative effect of accounting change....... (6,078)
Provision (benefit) for income taxes........... (2,746)
Minority interest income (expenses)............ 1,015
Equity losses from Liberty Media Group......... 2,711
Net earnings (losses) from other equity
investments.................................. (423)
Income (loss) from continuing operations before
cumulative effect of accounting change....... (5,451)
Income (loss) from discontinued operations (net
of income taxes)............................. 150
Gain on the disposition of discontinued
operations................................... 13,503
Income (loss) before cumulative effect of
accounting change............................ 8,202
Cumulative effect of accounting change......... 904
Net income (loss).............................. 9,106
Dividend requirements on preferred stock....... 652
Premium on Wireless tracking stock exchange.... 80
Net income (loss) available to common
shareowners.................................. $ 8,374
L-25
AT&T CORP.
CONSOLIDATING CONDENSED INCOME STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
(DOLLARS IN MILLIONS)
GUARANTOR GUARANTOR GUARANTOR TCI TCI TCI
AT&T SUBSIDIARY SUBSIDIARY FINANCING FINANCING FINANCING
PARENT TCI MEDIAONE I II IV
--------- ---------- ---------- --------- --------- ---------
Revenue.............................................. $ 4,847 $ $ $ $ $
Operating Expenses
Costs of services and products....................... 876
Access and other connection.......................... 1,610
Selling, general and administrative.................. 522 2 (7)
Depreciation and other amortization.................. 444 15 (6)
Amortization of goodwill, franchise costs and other
purchased intangibles............................... 25 123
Net restructuring and other charges..................
Total operating expenses............................. 3,477 17 110
Operating income (loss).............................. 1,370 (17) (110)
Other income (expense)............................... 1,336 8 (36) 10 12 4
Interest expense (benefit)........................... 956 150 57 10 12 4
Income (loss) before income taxes, minority interest,
earnings (losses) from equity investments and
cumulative effect of accounting change.............. 1,750 (159) (203)
Provision (benefit) for income taxes................. 665 (59) (31)
Minority interest income (expenses).................. (40)
Equity earnings (losses) from Liberty Media Group.... 111
Net earnings (losses) from other equity
investments......................................... (2,284) (424) (273)
(Loss) income from continuing operations before
cumulative effect of accounting change.............. (1,239) (413) (445)
Income (loss) from discontinued operations (net of
income taxes).......................................
Gain on the disposition of discontinued operations
(net of income taxes)............................... 13,503
Income (loss) before cumulative effect of accounting
change.............................................. 12,264 (413) (445)
Cumulative effect of accounting change...............
Net income (loss).................................... 12,264 (413) (445)
Dividend requirements on preferred stock............. 235
Premium on Wireless tracking stock exchange..........
Net income (loss) available to common shareowners.... $12,029 $(413) $(445) $ $ $
MEDIAONE MEDIAONE MEDIAONE MEDIAONE
FINANCING FINANCING FINANCE FINANCE NON-GUARANTOR
I II II III SUBSIDIARIES
--------- --------- -------- -------- -------------
Revenue.............................................. $ $ $ $ $ 8,743
Operating Expenses
Costs of services and products....................... 3,040
Access and other connection.......................... 1,484
Selling, general and administrative.................. 2,025
Depreciation and other amortization.................. 1,229
Amortization of goodwill, franchise costs and other
purchased intangibles............................... 444
Net restructuring and other charges.................. 399
Total operating expenses............................. 8,621
Operating income (loss).............................. 122
Other income (expense)............................... 1 1 6 12 (5,532)
Interest expense (benefit)........................... 1 1 5 11 367
Income (loss) before income taxes, minority interest,
earnings (losses) from equity investments and
cumulative effect of accounting change.............. 1 1 (5,777)
Provision (benefit) for income taxes................. (2,667)
Minority interest income (expenses).................. 217
Equity earnings (losses) from Liberty Media Group....
Net earnings (losses) from other equity
investments......................................... (88)
(Loss) income from continuing operations before
cumulative effect of accounting change.............. 1 1 (2,981)
Income (loss) from discontinued operations (net of
income taxes).......................................
Gain on the disposition of discontinued operations
(net of income taxes)...............................
Income (loss) before cumulative effect of accounting
change.............................................. 1 1 (2,981)
Cumulative effect of accounting change...............
Net income (loss).................................... 1 1 (2,981)
Dividend requirements on preferred stock.............
Premium on Wireless tracking stock exchange..........
Net income (loss) available to common shareowners.... $ $ $1 $ 1 $(2,981)
ELIMINATION AND
CONSOLIDATION CONSOLIDATED
ADJUSTMENTS AT&T CORP.
--------------- ------------
Revenue.............................................. $ (503) $13,087
Operating Expenses
Costs of services and products....................... (440) 3,476
Access and other connection.......................... (61) 3,033
Selling, general and administrative.................. (2) 2,540
Depreciation and other amortization.................. 1,682
Amortization of goodwill, franchise costs and other
purchased intangibles............................... 592
Net restructuring and other charges.................. 399
Total operating expenses............................. (503) 11,722
Operating income (loss).............................. 1,365
Other income (expense)............................... (788) (4,966)
Interest expense (benefit)........................... (788) 786
Income (loss) before income taxes, minority interest,
earnings (losses) from equity investments and
cumulative effect of accounting change.............. (4,387)
Provision (benefit) for income taxes................. (2,092)
Minority interest income (expenses).................. 177
Equity earnings (losses) from Liberty Media Group.... 111
Net earnings (losses) from other equity
investments......................................... 2,981 (88)
(Loss) income from continuing operations before
cumulative effect of accounting change.............. 2,981 (2,095)
Income (loss) from discontinued operations (net of
income taxes).......................................
Gain on the disposition of discontinued operations
(net of income taxes)............................... 13,503
Income (loss) before cumulative effect of accounting
change.............................................. 2,981 11,408
Cumulative effect of accounting change...............
Net income (loss).................................... 2,981 11,408
Dividend requirements on preferred stock............. 235
Premium on Wireless tracking stock exchange..........
Net income (loss) available to common shareowners.... $2,981 $11,173
L-26
AT&T CORP.
CONSOLIDATING CONDENSED BALANCE SHEETS
AS OF SEPTEMBER 30, 2001
(DOLLARS IN MILLIONS)
GUARANTOR GUARANTOR GUARANTOR TCI TCI TCI MEDIAONE MEDIAONE
AT&T SUBSIDIARY SUBSIDIARY FINANCING FINANCING FINANCING FINANCING FINANCING
PARENT TCI MEDIAONE I II IV I II
--------- ---------- ---------- --------- --------- --------- --------- ---------
ASSETS
Cash and cash equivalents...... $ 3,595 $ -- $ -- $ -- $ -- $ -- $-- $--
Investments....................
Deferred income taxes.......... 568
Other current assets........... 14,691 668 152 11 12 4 1 1
TOTAL CURRENT ASSETS........... 18,854 668 152 11 12 4 1 1
Property, plant & equipment,
net........................... 10,091 102
Franchise costs, net........... 1,702 21
Goodwill, net.................. 152 19,284
Investment in Liberty Media
Group and related receivables,
net
Other investments and related
advances...................... 132,536 13,230 25,262
Other assets................... 4,514 70 527 513 204 51 44
TOTAL ASSETS................... $167,849 $14,091 $44,698 $538 $525 $208 $52 $45
LIABILITIES
Debt maturing within one
year.......................... $ 41,723 $ 398 $ 28 $ -- $ -- $ -- $-- $--
Other current liabilities...... 8,472 522 66 11 12 4 1 1
TOTAL CURRENT LIABILITIES...... 50,195 920 94 11 12 4 1 1
Long-term debt................. 14,920 11,162 1,307 527 513 204 30 28
Deferred income taxes.......... 1,016 973
Other long-term liabilities and
deferred credits.............. 6,896 80 4
TOTAL LIABILITIES.............. 73,027 12,162 2,378 538 525 208 31 29
Minority Interest..............
Company-Obligated Convertible
Quarterly Income Preferred
Securities of Subsidiary Trust
Holding Solely Subordinated
Debt Securities of AT&T....... 4,718
SHAREOWNERS' EQUITY
AT&T Common Stock.............. 3,536
AT&T Wireless Group common
stock......................... 0
Liberty Media Group Class A
Common Stock.................. 0
Liberty Media Group Class B
Common Stock.................. 0
Preferred Stock issued to
subsidiaries.................. 10,559
Other shareowners' equity...... 76,009 1,929 42,320 21 16
TOTAL SHAREOWNERS' EQUITY...... 90,104 1,929 42,320 21 16
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY........... $167,849 $14,091 $44,698 $538 $525 $208 $52 $45
MEDIAONE MEDIAONE ELIMINATION AND
FINANCE FINANCE NON-GUARANTOR CONSOLIDATION CONSOLIDATED
II III SUBSIDIARIES ADJUSTMENTS AT&T CORP.
-------- -------- ------------- --------------- ------------
ASSETS
Cash and cash equivalents...... $ -- $ -- $ 603 $ -- $ 4,198
Investments.................... 0 0
Deferred income taxes.......... 1,055 1,623
Other current assets........... 6 11 43,478 (48,398) 10,637
TOTAL CURRENT ASSETS........... 6 11 45,136 (48,398) 16,458
Property, plant & equipment,
net........................... 30,555 40,748
Franchise costs, net........... 41,564 43,287
Goodwill, net.................. 5,338 24,774
Investment in Liberty Media
Group and related receivables,
net
Other investments and related
advances...................... 60,141 (206,901) 24,268
Other assets................... 230 516 8,882 (5,037) 10,514
TOTAL ASSETS................... $236 $527 $191,616 $(260,336) $160,049
LIABILITIES
Debt maturing within one
year.......................... $ -- $ -- $ 9,702 $ (33,402) $ 18,449
Other current liabilities...... 6 11 13,011 (8,689) 13,428
TOTAL CURRENT LIABILITIES...... 6 11 22,713 (42,091) 31,877
Long-term debt................. 214 504 10,587 (9,989) 30,007
Deferred income taxes.......... 25,186 27,175
Other long-term liabilities and
deferred credits.............. 5,951 (2,479) 10,452
TOTAL LIABILITIES.............. 220 515 64,437 (54,559) 99,511
Minority Interest.............. 3,622 3,622
Company-Obligated Convertible
Quarterly Income Preferred
Securities of Subsidiary Trust
Holding Solely Subordinated
Debt Securities of AT&T....... 4,718
SHAREOWNERS' EQUITY
AT&T Common Stock.............. 3,536
AT&T Wireless Group common
stock.........................
Liberty Media Group Class A
Common Stock..................
Liberty Media Group Class B
Common Stock..................
Preferred Stock issued to
subsidiaries.................. (10,559) --
Other shareowners' equity...... 16 12 123,557 (195,218) 48,662
TOTAL SHAREOWNERS' EQUITY...... 16 12 123,557 (205,777) 52,198
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY........... $236 $527 $191,616 $(260,336) $160,049
L-27
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(DOLLARS IN MILLIONS)
GUARANTOR GUARANTOR GUARANTOR TCI TCI TCI
AT&T SUBSIDIARY SUBSIDIARY FINANCING FINANCING FINANCING
PARENT TCI MEDIAONE I II IV
--------- ---------- ---------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES OF CONTINUING OPERATIONS.......... $2,367 $(1,116) $746 $ -- $ -- $ --
INVESTING ACTIVITIES
Capital expenditures and other additions....... (1,313) (15)
Equity investment distributions and sales...... 694 19,048
Net dispositions (acquisitions) of businesses,
net of cash disposed/acquired................ 14
Other.......................................... 3,658 162 (494)
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES OF CONTINUING OPERATIONS.......... 3,053 19,195 (494)
FINANCING ACTIVITIES
Proceeds from long-term debt issuances.........
Proceeds from debt from AT&T................... 2,670
Retirement of long-term debt................... (976) (252)
Retirement of AT&T debt........................ (5,169) (20,419)
Issuance of convertible preferred securities
and warrants................................. 9,811
Repayment of borrowings from AT&T Wireless..... (5,803)
(Decrease) increase in short-term borrowings,
net.......................................... (9,839) (330)
Other.......................................... 10,151
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES OF CONTINUING OPERATIONS.......... (1,825) (18,079) (252)
Net cash provided by (used in) discontinued
operations...................................
Net (decrease) increase in cash and cash
equivalents.................................. 3,595
Cash and cash equivalents at beginning of
year.........................................
Cash and cash equivalents at end of period..... $3,595 $ -- $ -- $ -- $ -- $ --
MEDIAONE MEDIAONE MEDIAONE MEDIAONE ELIMINATION AND
FINANCING FINANCING FINANCE FINANCE NON-GUARANTOR CONSOLIDATION
I II II III SUBSIDIARIES ADJUSTMENTS
--------- --------- -------- -------- ------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES OF CONTINUING OPERATIONS.......... $ 1 $ 1 $ 1 $ 1 $ 4,624 $ 116
INVESTING ACTIVITIES
Capital expenditures and other additions....... (5,122)
Equity investment distributions and sales...... 1,151 (19,048)
Net dispositions (acquisitions) of businesses,
net of cash disposed/acquired................ 4,813
Other.......................................... 1,807 (5,390)
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES OF CONTINUING OPERATIONS.......... 2,649 (24,438)
FINANCING ACTIVITIES
Proceeds from long-term debt issuances......... 195
Proceeds from debt from AT&T................... (2,670)
Retirement of long-term debt................... (390)
Retirement of AT&T debt........................ 823 24,765
Issuance of convertible preferred securities
and warrants.................................
Repayment of borrowings from AT&T Wireless.....
(Decrease) increase in short-term borrowings,
net.......................................... 5,964 (5,375)
Other.......................................... (1) (1) (1) (1) (18,025) 7,441
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES OF CONTINUING OPERATIONS.......... (1) (1) (1) (1) (11,433) 24,161
Net cash provided by (used in) discontinued
operations................................... 4,699 161
Net (decrease) increase in cash and cash
equivalents.................................. 539
Cash and cash equivalents at beginning of
year......................................... 64
Cash and cash equivalents at end of period..... $ -- $ -- $ -- $ -- $ 603 $ --
CONSOLIDATED
AT&T CORP.
------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES OF CONTINUING OPERATIONS.......... $6,741
INVESTING ACTIVITIES
Capital expenditures and other additions....... (6,450)
Equity investment distributions and sales...... 1,845
Net dispositions (acquisitions) of businesses,
net of cash disposed/acquired................ 4,827
Other.......................................... (257)
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES OF CONTINUING OPERATIONS.......... (35)
FINANCING ACTIVITIES
Proceeds from long-term debt issuances......... 195
Proceeds from debt from AT&T...................
Retirement of long-term debt................... (1,618)
Retirement of AT&T debt........................
Issuance of convertible preferred securities
and warrants................................. 9,811
Repayment of borrowings from AT&T Wireless..... (5,803)
(Decrease) increase in short-term borrowings,
net.......................................... (9,580)
Other.......................................... (437)
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES OF CONTINUING OPERATIONS.......... (7,432)
Net cash provided by (used in) discontinued
operations................................... 4,860
Net (decrease) increase in cash and cash
equivalents.................................. 4,134
Cash and cash equivalents at beginning of
year......................................... 64
Cash and cash equivalents at end of period..... $4,198
L-28
AT&T CORP.
CONSOLIDATING CONDENSED INCOME STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(DOLLARS IN MILLIONS)
GUARANTOR GUARANTOR GUARANTOR TCI TCI TCI
AT&T SUBSIDIARY SUBSIDIARY FINANCING FINANCING FINANCING
PARENT TCI MEDIAONE I II IV
--------- ---------- ---------- --------- --------- ---------
Revenue........................................ $16,836 $ -- $ -- $ -- $ -- $ --
Operating Expenses
Costs of services and products................. 2,188
Access and other connection.................... 5,339
Selling, general and administrative............ 1,532 68 25
Depreciation and other amortization............ 1,335 41 4
Amortization of goodwill, franchise costs and
other purchased intangibles.................. 36 4 121
Net restructuring and other charges............ 663 40
Total operating expenses....................... 11,093 153 150
Operating income (loss)........................ 5,743 (153) (150)
Other income (expense)......................... 752 14 64 32 35 13
Interest expense (benefit)..................... 3,406 1,278 90 32 35 13
Income (loss) from continuing operations before
income taxes, minority interest, earnings
(losses) from equity investments............. 3,089 (1,417) (176)
Provision (benefit) for income taxes........... 1,129 (531) (21)
Minority interest income (expense)............. (120)
Equity Earnings from Liberty Media Group....... 2,965
Net income (losses) from other equity
investments.................................. 4,681 (521) (135)
Income (loss) from continuing operations....... 6,521 1,558 (290)
Income from discontinued operations (net of
income taxes)................................
Net income (loss).............................. 6,521 1,558 (290)
MEDIAONE MEDIAONE MEDIAONE MEDIAONE ELIMINATION AND
FINANCING FINANCING FINANCE FINANCE NON-GUARANTOR CONSOLIDATION
I II II III SUBSIDIARIES ADJUSTMENTS
--------- --------- -------- -------- ------------- ---------------
Revenue........................................ $ -- $ -- $ -- $ -- $26,209 $(1,422)
Operating Expenses
Costs of services and products................. 8,265 (1,204)
Access and other connection.................... 5,026 (185)
Selling, general and administrative............ 5,749 (8)
Depreciation and other amortization............ 2,824
Amortization of goodwill, franchise costs and
other purchased intangibles.................. 1,272
Net restructuring and other charges............ 94
Total operating expenses....................... 23,230 (1,397)
Operating income (loss)........................ 2,979 (25)
Other income (expense)......................... 1 1 6 13 3,446 (3,019)
Interest expense (benefit)..................... 1 1 6 13 141 (3,016)
Income (loss) from continuing operations before
income taxes, minority interest, earnings
(losses) from equity investments............. 6,284 (28)
Provision (benefit) for income taxes........... 1,955
Minority interest income (expense)............. 131
Equity Earnings from Liberty Media Group.......
Net income (losses) from other equity
investments.................................. (614) (4,026)
Income (loss) from continuing operations....... 3,846 (4,054)
Income from discontinued operations (net of
income taxes)................................ 180 28
Net income (loss).............................. 4,026 (4,026)
CONSOLIDATED
AT&T CORP.
------------
Revenue........................................ $41,623
Operating Expenses
Costs of services and products................. 9,249
Access and other connection.................... 10,180
Selling, general and administrative............ 7,366
Depreciation and other amortization............ 4,204
Amortization of goodwill, franchise costs and
other purchased intangibles.................. 1,433
Net restructuring and other charges............ 797
Total operating expenses....................... 33,229
Operating income (loss)........................ 8,394
Other income (expense)......................... 1,358
Interest expense (benefit)..................... 2,000
Income (loss) from continuing operations before
income taxes, minority interest, earnings
(losses) from equity investments............. 7,752
Provision (benefit) for income taxes........... 2,532
Minority interest income (expense)............. 11
Equity Earnings from Liberty Media Group....... 2,965
Net income (losses) from other equity
investments.................................. (615)
Income (loss) from continuing operations....... 7,581
Income from discontinued operations (net of
income taxes)................................ 208
Net income (loss).............................. 7,789
L-29
AT&T CORP.
CONSOLIDATING CONDENSED INCOME STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
(DOLLARS IN MILLIONS)
GUARANTOR GUARANTOR GUARANTOR TCI TCI TCI
AT&T SUBSIDIARY SUBSIDIARY FINANCING FINANCING FINANCING
PARENT TCI MEDIAONE I II IV
--------- ---------- ---------- --------- --------- ---------
Revenue......................................... $5,314 $ $ $ $ $
Operating Expenses
Costs of services and products.................. 648
Access and other connection..................... 1,619
Selling, general and administrative............. 451 (5) 22
Depreciation and other amortization............. 424 10 3
Amortization of goodwill, franchise costs and
other purchased intangibles................... 14 1 99
Net restructuring and other charges............. 24
Total operating expenses........................ 3,156 30 124
Operating income (loss)......................... 2,158 (30) (124)
Other income (expense).......................... 149 1 (2) 10 11 4
Interest expense (benefit)...................... 1,323 493 81 10 11 4
Income (loss) from continuing operations before
income taxes, minority interest and earnings
(losses) from equity investments.............. 984 (522) (207)
Provision (benefit) for income taxes............ 377 (196) (40)
Minority interest income (expense).............. (39) 0
Equity Earnings from Liberty Media Group........ 1,756
Net income (losses) from other equity
investments................................... 1,511 (182) (88)
Income (loss) from continuing operations........ 2,079 1,248 (255)
(Loss) income from discontinued operations (net
of income taxes)..............................
Net income (loss)............................... 2,079 1,248 (255)
MEDIAONE MEDIAONE MEDIAONE MEDIAONE ELIMINATION AND
FINANCING FINANCING FINANCE FINANCE NON-GUARANTOR CONSOLIDATION
I II II III SUBSIDIARIES ADJUSTMENTS
--------- --------- -------- -------- ------------- ---------------
Revenue......................................... $ $ $ $ $9,390 $ (528)
Operating Expenses
Costs of services and products.................. 3,100 (466)
Access and other connection..................... 1,578 (50)
Selling, general and administrative............. 1,996 (3)
Depreciation and other amortization............. 1,131
Amortization of goodwill, franchise costs and
other purchased intangibles................... 673
Net restructuring and other charges............. 0
Total operating expenses........................ 8,478 (519)
Operating income (loss)......................... 912 (9)
Other income (expense).......................... 1 1 5 11 1,333 (1,159)
Interest expense (benefit)...................... 1 1 5 11 97 (1,141)
Income (loss) from continuing operations before
income taxes, minority interest and earnings
(losses) from equity investments.............. 2,148 (27)
Provision (benefit) for income taxes............ 798
Minority interest income (expense).............. 142
Equity Earnings from Liberty Media Group........
Net income (losses) from other equity
investments................................... (221) (1,242)
Income (loss) from continuing operations........ 1,271 (1,269)
(Loss) income from discontinued operations (net
of income taxes).............................. (29) 27
Net income (loss)............................... 1,242 (1,242)
CONSOLIDATED
AT&T CORP.
------------
Revenue......................................... $14,176
Operating Expenses
Costs of services and products.................. 3,282
Access and other connection..................... 3,147
Selling, general and administrative............. 2,461
Depreciation and other amortization............. 1,568
Amortization of goodwill, franchise costs and
other purchased intangibles................... 787
Net restructuring and other charges............. 24
Total operating expenses........................ 11,269
Operating income (loss)......................... 2,907
Other income (expense).......................... 365
Interest expense (benefit)...................... 896
Income (loss) from continuing operations before
income taxes, minority interest and earnings
(losses) from equity investments.............. 2,376
Provision (benefit) for income taxes............ 939
Minority interest income (expense).............. 103
Equity Earnings from Liberty Media Group........ 1,756
Net income (losses) from other equity
investments................................... (222)
Income (loss) from continuing operations........ 3,074
(Loss) income from discontinued operations (net
of income taxes).............................. (2)
Net income (loss)............................... 3,072
L-30
AT&T CORP.
CONSOLIDATING CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 2000
(DOLLARS IN MILLIONS)
GUARANTOR GUARANTOR GUARANTOR TCI TCI
AT&T SUBSIDIARY SUBSIDIARY FINANCING FINANCING
PARENT TCI MEDIAONE I II
--------- ---------- ---------- --------- ---------
ASSETS
Cash and cash equivalents................................... $ -- $ -- $ -- $ -- $ --
Receivables................................................. 11,424 2,577 78
Investments.................................................
Deferred income taxes....................................... 811
Other current assets........................................ 1,103 11
TOTAL CURRENT ASSETS........................................ 13,338 2,588 78
Property, plant & equipment, net............................ 9,463 102 22
Franchise costs, net........................................ 838 30
Goodwill, net............................................... 161 19,786
Investment in Liberty Media Group and related receivables,
net........................................................ 34,290
Other investments and related advances...................... 164,844 32,650 27,712
Other assets................................................ 5,500 186 528 514
Net assets of discontinued operations.......................
TOTAL ASSETS................................................ $194,144 $69,846 $47,598 $528 $514
LIABILITIES
Debt maturing within one year............................... $ 52,556 $ 664 $ 2,337 $ $
Liability under put options.................................
Other current liabilities................................... 9,535 1,129 76
TOTAL CURRENT LIABILITIES................................... 62,091 1,793 2,413
Long-term debt.............................................. 21,333 30,096 1,702 528 514
Deferred income taxes....................................... 569 230
Other long-term liabilities and deferred credits............ 7,341 773 129
TOTAL LIABILITIES........................................... 91,334 32,662 4,474 528 514
Minority Interest...........................................
Company-Obligated Convertible Quarterly Income Preferred
Securities of Subsidiary Trust Holding Solely Subordinated
Debt Securities of AT&T.................................... 4,710
SHAREOWNERS' EQUITY
AT&T Common Stock........................................... 4,176
AT&T Wireless Group common stock............................ 362
Liberty Media Group Class A
Common Stock............................................... 2,364
Liberty Media Group Class B
Common Stock............................................... 206
Other shareowners' equity................................... 90,992 37,184 43,124
TOTAL SHAREOWNERS' EQUITY................................... 98,100 37,184 43,124
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY................... $194,144 $69,846 $47,598 $528 $514
TCI MEDIAONE MEDIAONE MEDIAONE MEDIAONE
FINANCING FINANCING FINANCING FINANCE FINANCE
IV I II II III
--------- --------- --------- -------- --------
ASSETS
Cash and cash equivalents................................... $ -- $-- $-- $ -- $ --
Receivables.................................................
Investments.................................................
Deferred income taxes.......................................
Other current assets........................................
TOTAL CURRENT ASSETS........................................
Property, plant & equipment, net............................
Franchise costs, net........................................
Goodwill, net...............................................
Investment in Liberty Media Group and related receivables,
net........................................................
Other investments and related advances......................
Other assets................................................ 204 51 44 230 516
Net assets of discontinued operations.......................
TOTAL ASSETS................................................ $204 $51 $44 $230 $516
LIABILITIES
Debt maturing within one year............................... $ $ $ $ $
Liability under put options.................................
Other current liabilities...................................
TOTAL CURRENT LIABILITIES...................................
Long-term debt.............................................. 204 30 28 214 504
Deferred income taxes.......................................
Other long-term liabilities and deferred credits............
TOTAL LIABILITIES........................................... 204 30 28 214 504
Minority Interest...........................................
Company-Obligated Convertible Quarterly Income Preferred
Securities of Subsidiary Trust Holding Solely Subordinated
Debt Securities of AT&T....................................
SHAREOWNERS' EQUITY
AT&T Common Stock...........................................
AT&T Wireless Group common stock............................
Liberty Media Group Class A
Common Stock...............................................
Liberty Media Group Class B
Common Stock...............................................
Other shareowners' equity................................... 21 16 16 12
TOTAL SHAREOWNERS' EQUITY................................... 21 16 16 12
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY................... $204 $51 $44 $230 $516
ELIMINATION AND
NON-GUARANTOR CONSOLIDATION CONSOLIDATED
SUBSIDIARIES ADJUSTMENTS AT&T CORP.
------------- --------------- ------------
ASSETS
Cash and cash equivalents................................... $ 64 $ -- $ 64
Receivables................................................. 48,896 (51,922) 11,053
Investments................................................. 2,102 2,102
Deferred income taxes....................................... (91) 720
Other current assets........................................ (328) (5) 781
TOTAL CURRENT ASSETS........................................ 50,643 (51,927) 14,720
Property, plant & equipment, net............................ 31,685 (3) 41,269
Franchise costs, net........................................ 47,350 48,218
Goodwill, net............................................... 6,835 26,782
Investment in Liberty Media Group and related receivables,
net........................................................ 34,290
Other investments and related advances...................... 19,673 (214,004) 30,875
Other assets................................................ 15,714 (12,505) 10,982
Net assets of discontinued operations....................... 24,876 2,348 27,224
TOTAL ASSETS................................................ $196,776 $(276,091) $234,360
LIABILITIES
Debt maturing within one year............................... $ 5,432 $ (29,151) $ 31,838
Liability under put options................................. 2,564 2,564
Other current liabilities................................... 11,219 (8,386) 13,573
TOTAL CURRENT LIABILITIES................................... 19,215 (37,537) 47,975
Long-term debt.............................................. 2,558 (24,622) 33,089
Deferred income taxes....................................... 31,255 32,054
Other long-term liabilities and deferred credits............ 331 (81) 8,493
TOTAL LIABILITIES........................................... 53,359 (62,240) 121,611
Minority Interest........................................... 4,841 4,841
Company-Obligated Convertible Quarterly Income Preferred
Securities of Subsidiary Trust Holding Solely Subordinated
Debt Securities of AT&T.................................... 4,710
SHAREOWNERS' EQUITY
AT&T Common Stock........................................... (416) 3,760
AT&T Wireless Group common stock............................ 362
Liberty Media Group Class A
Common Stock............................................... 2,364
Liberty Media Group Class B
Common Stock............................................... 206
Other shareowners' equity................................... 138,992 (213,851) 96,506
TOTAL SHAREOWNERS' EQUITY................................... 138,576 (213,851) 103,198
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY................... $196,776 $(276,091) $234,360
L-31
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(DOLLARS IN MILLIONS)
GUARANTOR GUARANTOR GUARANTOR TCI TCI TCI MEDIAONE
AT&T SUBSIDIARY SUBSIDIARY FINANCING FINANCING FINANCING FINANCING
PARENT TCI MEDIAONE I II IV I
--------- ---------- ---------- --------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES OF CONTINUING OPERATIONS......... $ 334 $(3,634) $ 130 $ -- $ -- $ -- $ --
INVESTING ACTIVITIES
Capital expenditures and other additions...... (762) (53)
Equity investment contributions and
purchases................................... (1,783) (6,583)
Net dispositions (acquisitions) of businesses
net of cash disposed/acquired............... (23,839)
Other......................................... 956 (9) 839
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES OF CONTINUING OPERATIONS......... (25,428) (6,645) 839
FINANCING ACTIVITIES
Proceeds from long-term debt issuances........ 739
Proceeds from debt from AT&T.................. 5,738 12,816 725
Retirement of long-term debt.................. (494) (77)
Retirement of AT&T debt....................... (1,724) (1,694)
Issuance of AT&T Wireless Group common
shares...................................... 10,291
Dividends paid on common stock................ (2,221)
(Decrease) increase in short-term borrowings,
net......................................... 16,248 (902)
Other......................................... (5,207) 166
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES OF CONTINUING OPERATIONS......... 25,094 10,279 (969)
Net cash (used in) provided by discontinued
operations..................................
Net (decrease) in cash and cash equivalents...
Cash and cash equivalents at beginning of
year........................................
Cash and cash equivalents at end of period.... $ -- $ -- $ -- $ -- $ -- $ -- $ --
MEDIAONE MEDIAONE MEDIAONE ELIMINATION AND
FINANCING FINANCE FINANCE NON-GUARANTOR CONSOLIDATION CONSOLIDATED
II II III SUBSIDIARIES ADJUSTMENTS AT&T CORP.
--------- -------- -------- ------------- --------------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES OF CONTINUING OPERATIONS......... $ -- $ -- $ -- $11,242 $ 42 $ 8,114
INVESTING ACTIVITIES
Capital expenditures and other additions...... (6,938) (7,753)
Equity investment contributions and
purchases................................... (581) 6,583 (2,364)
Net dispositions (acquisitions) of businesses
net of cash disposed/acquired............... 7,225 (16,614)
Other......................................... (9,414) 7,923 295
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES OF CONTINUING OPERATIONS......... (9,708) 14,506 (26,436)
FINANCING ACTIVITIES
Proceeds from long-term debt issuances........ 739
Proceeds from debt from AT&T.................. (19,279)
Retirement of long-term debt.................. (1,383) (1,954)
Retirement of AT&T debt....................... 3,418
Issuance of AT&T Wireless Group common
shares...................................... 10,291
Dividends paid on common stock................ (2,221)
(Decrease) increase in short-term borrowings,
net......................................... 662 1,355 17,363
Other......................................... 4,194 (70) (917)
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES OF CONTINUING OPERATIONS......... 3,473 (14,576) 23,301
Net cash (used in) provided by discontinued
operations.................................. (5,714) 28 (5,686)
Net (decrease) in cash and cash equivalents... (707) (707)
Cash and cash equivalents at beginning of
year........................................ 1,018 1,018
Cash and cash equivalents at end of period.... $ -- $ -- $ -- $ 311 $ -- $ 311
L-32
(q) NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," which supercedes Accounting Principles Board
(APB) Opinion No. 16. SFAS No. 141 requires all business combinations initiated
after June 30, 2001 be accounted for under the purchase method. In addition,
SFAS No. 141 establishes criteria for the recognition of intangible assets
separately from goodwill. These requirements are effective for fiscal years
beginning after December 15, 2001, which for AT&T means January 1, 2002. AT&T
does not expect that the adoption of SFAS No. 141 will have a material effect on
AT&T's results of operations, financial position or cash flows.
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which supercedes APB Opinion No. 17. Under SFAS No. 142,
goodwill and indefinite lived intangible assets will no longer be amortized, but
rather will be tested for impairment upon adoption and at least annually
thereafter. In addition, the amortization period of intangible assets with
finite lives will no longer be limited to 40 years. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001, which for AT&T means the
standard will be adopted on January 1, 2002. In connection with the adoption of
this standard, AT&T's unamortized goodwill balance will no longer be amortized,
but will continue to be tested for impairment. Therefore, we expect that this
standard will have a significant impact on our future operating results. We are
assessing the impact of the standard on other indefinite lived assets and the
total impact, including adoption impairment impacts, if any, of such standard on
our results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This standard requires that obligations associated with
the retirement of tangible long-lived assets be recorded as liabilities when
those obligations are incurred, with the amount of the liability initially
measured at fair value. Upon initially recognizing a liability for an asset
retirement obligation, an entity must capitalize the cost by recognizing an
increase in the carrying amount of the related long-lived asset. Over time,this
liability is accreted to its present value, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. SFAS No. 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002, which for AT&T
means the standard will be adopted on January 1, 2003. AT&T does not expect that
the adoption of this statement will have a material impact on AT&T's results of
operations, financial position or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS No. 144 applies to all long-lived assets, including
discontinued operations, and consequently amends APB Opinion No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." Based on SFAS No. 121, SFAS No. 144 develops one accounting model
for long-lived assets that are to be disposed of by sale, as well as addresses
the principal implementation issues. SFAS No. 144 requires that long-lived
assets that are to be disposed of by sale be measured at the lower of book value
or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
SFAS No. 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001, which for AT&T means the standard will be
adopted on January 1, 2002. AT&T does not expect that the adoption of SFAS No.
144 will have a material impact on AT&T's results of operations, financial
position or cash flows.
(r) SUBSEQUENT EVENTS
On October 23, 2001, AT&T sold approximately 19.2 million shares of
Cablevision NY Group Class A common stock and, through a trust, 23.4 million
shares of a mandatorily exchangeable trust security that will be exchangeable
into up to 23.4 million shares of Cablevision NY Group Class A common stock at
maturity in three years. The offering price was $36.05 per share for both the
common shares and the exchangeable securities. The offerings generated
approximately $1.3 billion of pretax proceeds, net of underwriting fees. The
sale resulted in a pretax loss of approximately $0.2 billion. In
L-33
addition, the underwriters' have exercised a portion of their over-allotment
options, which resulted in the sale of an additional 3.5 million shares of the
exchangeable securities through the trust. AT&T received additional proceeds of
approximately $0.1 billion from this transaction.
In October 2001, AT&T completed the disposition of 45 million shares of
AT&T Wireless generating proceeds of approximately $0.6 billion. In December of
2001, AT&T completed the disposition of its remaining interest in AT&T Wireless
through the monetization of 45.8 million AT&T Wireless shares generating
proceeds of approximately $0.7 billion.
On November 21, 2001 AT&T closed a $10.1 billion global bond offering
consisting of five tranches: $1.5 billion in five-year notes; $2.75 billion in
ten-year notes; $2.75 billion in 30-year notes; 1.5 billion euros of two-year
notes; and 2.0 billion euros of five-year notes. The proceeds from the offering
will primarily be used to retire short-term debt.
On December 14, 2001, AT&T entered into a 364-day, $8 billion syndicated
revolving-credit facility.
On December 18, 2001, AT&T sold 14.7 million shares of Rainbow Media Group
Class A tracking stock and 9.8 million shares of a trust security that will be
exchangeable into up to 9.8 million shares of Rainbow Media Group Class A
tracking stock at maturity in approximately three years. The offerings generated
approximately $487 million of pretax net proceeds.
On December 19, 2001, AT&T and Comcast Corporation announced an agreement
to combine AT&T Broadband with Comcast in a transaction valuing AT&T Broadband.
Under the terms of the agreement, AT&T will spin-off AT&T Broadband and
simultaneously merge it with Comcast, forming a new company to be called AT&T
Comcast Corporation. AT&T shareholders will receive a number of shares of AT&T
Comcast common stock calculated pursuant to a formula specified in the merger
agreement. If determined as of the date of the merger agreement, the exchange
ratio would have been approximately .34, assuming the AT&T shares held by
Comcast are included in the number of shares of AT&T common stock outstanding.
Assuming Comcast retains its AT&T shares and converts them into exchangeable
preferred stock of AT&T as contemplated by the merger agreement, the exchange
ratio would be approximately 0.35 as of the date of the execution of the merger
agreement. AT&T shareowners will own a 56% economic stake and have a 66% voting
interest, calculated as of the date of the merger agreement, in the new company.
The merger remains subject to regulatory review, shareholder approval by both
companies and certain other conditions and is expected to close by the end of
2002. AT&T also reaffirmed its commitment to create a tracking stock designed to
reflect the economic value and financial performance of its AT&T Consumer
business. The tracking stock is expected to be distributed to AT&T shareholders
following shareholder approval in 2002.
In January and February of 2002, AT&T announced that it will redeem $1.3
billion of trust preferred securities in February and March of 2002. These
amounts are classified as long-term debt in the accompanying consolidated
balance sheets.
In January 2002, AT&T Corp. entered into a $2.6 billion five-year agreement
with Accenture Ltd. for Accenture to provide management, new technology and
training for AT&T Consumer Services. Under the terms of the agreement, Accenture
will be responsible for providing new technology development and ongoing
management direction to improve AT&T Consumer Services' customer care
operations, with goals of reducing costs, raising productivity, and improving
sales and customer service. AT&T Consumer Services will continue to develop and
implement its overall business and marketing strategies and new product
offerings.
In connection with the adoption of SFAS No. 142, AT&T believes that
franchise cost represents an indefinite-lived asset as defined in SFAS No. 142.
Accordingly, effective January 1, 2002, AT&T will no longer amortize franchise
costs, but will test the asset for impairment. As of September 30, 2001, AT&T
had franchise costs of $43.3 billion and goodwill of $24.8 billion, both of
which will no longer be amortized. For the nine months ended September 30, 2001,
amortization of these intangible assets was $1,636. In addition, AT&T had excess
basis related to our equity method investments of $8.6 billion at September 30,
2001, with related amortization of $179 for the nine months ended September 30,
2001. In accordance with this statement these costs will no longer be amortized
beginning January 1, 2002. We are continuing to assess the adoption impairment
impacts of such standard on our results of operations.
L-34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of AT&T Corp.:
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of income, changes in shareowners' equity and of cash flows present fairly, in
all material respects, the financial position of AT&T Corp. and its subsidiaries
(AT&T) at December 31, 2000 and 1999, and the results of their operations and
their cash flows for each of the three years ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of AT&T's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of Liberty Media Group,
an equity method investee, which was acquired by AT&T on March 9, 1999. AT&T's
financial statements include an investment of $34,290 million and $38,460
million as of December 31, 2000 and 1999, respectively, and equity method
earnings (losses) of $1,488 million and $(2,022) million, for the years ended
December 31, 2000 and 1999, respectively. Those statements were audited by other
auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for Liberty
Media Group, as of and for the years ended December 31, 2000 and 1999, is based
solely on the report of the other auditors. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
PRICEWATERHOUSECOOPERS LLP
New York, New York
March 16, 2001, except for Note 6 as to which the date is May 29, 2001, and Note
23 as to which the date is August 10, 2001
L-35
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
Revenue..................................................... $55,533 $54,973 $47,817
Operating Expenses
Access and other connection................................. 13,140 14,439 15,116
Costs of services and products (excluding depreciation of
$4,410, $4,215 and $2,763 included below)................. 12,795 11,013 8,285
Selling, general and administrative......................... 9,752 10,894 10,693
Depreciation and other amortization......................... 5,924 5,137 3,533
Amortization of goodwill, franchise costs and other
purchased intangibles..................................... 2,665 1,057 44
Net restructuring and other charges......................... 7,029 975 2,514
Total operating expenses.................................... 51,305 43,515 40,185
Operating income............................................ 4,228 11,458 7,632
Other income................................................ 1,150 826 812
Interest expense............................................ 2,964 1,503 293
Income from continuing operations before income taxes,
minority interest and earnings (losses) from equity
investments............................................... 2,414 10,781 8,151
Provision for income taxes.................................. 3,284 4,016 2,989
Minority interest income (expense).......................... 4,103 (126) (1)
Equity earnings (losses) from Liberty Media Group........... 1,488 (2,022) --
Net losses from other equity investments.................... 588 756 109
Income from continuing operations........................... 4,133 3,861 5,052
Discontinued Operations
Income from discontinued operations (net of income taxes of
$307, $(238) and $158).................................... 536 (433) 193
Gain on sale of discontinued operations (net of income taxes
of $799).................................................. -- -- 1,290
Income before extraordinary loss............................ 4,669 3,428 6,535
Extraordinary loss (net of income taxes of $80)............. -- -- 137
Net income.................................................. $ 4,669 $ 3,428 $ 6,398
------- ------- -------
AT&T Common Stock Group -- per basic share:
Income from continuing operations........................... $ 0.76 $ 1.91 $ 1.89
Income (loss) from discontinued operations.................. 0.13 (0.14) 0.07
Gain on sale of discontinued operations..................... -- -- 0.48
Extraordinary loss.......................................... -- -- 0.05
AT&T Common Stock Group earnings............................ $ 0.89 $ 1.77 $ 2.39
------- ------- -------
AT&T Common Stock Group -- per diluted share:
Income from continuing operations........................... $ 0.75 $ 1.87 $ 1.87
Income (loss) from discontinued operations.................. 0.13 (0.13) 0.07
Gain on sale of discontinued operations..................... -- -- 0.48
Extraordinary loss.......................................... -- -- 0.05
AT&T Common Stock Group earnings............................ $ 0.88 $ 1.74 $ 2.37
------- ------- -------
AT&T Wireless Group:
Earnings per share:
Basic and diluted....................................... $ 0.21 $ -- $ --
Liberty Media Group:
Earnings (loss) per share:
Basic and diluted....................................... $ 0.58 $ (0.80) $ --
The notes are an integral part of the consolidated financial statements.
L-36
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents................................. $ 64 $ 1,018
Receivables, less allowances of $1,185 and $1,151......... 9,408 8,657
Other receivables......................................... 1,645 585
Investments............................................... 2,102 --
Deferred income taxes..................................... 720 1,160
Other current assets...................................... 781 924
Total Current Assets.................................. 14,720 12,344
Property, plant and equipment, net........................ 41,269 33,366
Franchise costs, net of accumulated amortization of $1,664
and $697................................................ 48,218 32,693
Goodwill, net of accumulated amortization of $609 and
$195.................................................... 26,782 5,310
Investment in Liberty Media Group and related receivables,
net..................................................... 34,290 38,460
Other investments and related advances.................... 30,875 14,856
Prepaid pension costs..................................... 3,003 2,464
Other assets.............................................. 7,979 6,601
Net assets of discontinued operations..................... 27,224 17,363
Total Assets.......................................... $234,360 $163,457
-------- --------
LIABILITIES
Accounts payable.......................................... $ 5,382 $ 5,848
Payroll and benefit-related liabilities................... 1,991 2,360
Debt maturing within one year............................. 31,838 12,480
Liability under put options............................... 2,564 --
Other current liabilities................................. 6,200 5,330
Total Current Liabilities............................. 47,975 26,018
Long-term debt............................................ 33,089 23,214
Long-term benefit-related liabilities..................... 3,670 3,964
Deferred income taxes..................................... 32,054 20,507
Other long-term liabilities and deferred credits.......... 4,823 3,755
Total Liabilities..................................... 121,611 77,458
Minority Interest......................................... 4,841 2,372
Company-Obligated Convertible Quarterly Income Preferred
Securities of Subsidiary Trust Holding Solely
Subordinated Debt Securities of AT&T.................... 4,710 4,700
SHAREOWNERS' EQUITY
Common Stock:
AT&T Common Stock, $1 par value, authorized 6,000,000,000
shares; issued and outstanding 3,760,151,185 shares (net
of 416,887,452 treasury shares) at December 31, 2000,
and 3,196,436,757 shares (net of 287,866,419 treasury
shares) at December 31, 1999............................ 3,760 3,196
AT&T Wireless Group Common Stock, $1 par value, authorized
6,000,000,000 shares; issued and outstanding 361,802,200
shares at December 31, 2000............................. 362 --
Liberty Media Group Class A Common Stock, $1 par value,
authorized 4,000,000,000 shares; issued and outstanding
2,363,738,198 shares (net of 59,512,496 treasury shares)
at December 31, 2000, and 2,313,557,460 shares at
December 31, 1999....................................... 2,364 2,314
Liberty Media Group Class B Common Stock, $1 par value,
authorized 400,000,000 shares; issued and outstanding
206,221,288 shares (net of 10,607,776 treasury shares)
at December 31, 2000, and 216,842,228 shares at December
31, 1999................................................ 206 217
Additional paid-in capital................................ 90,496 59,526
Guaranteed ESOP obligation................................ -- (17)
Retained earnings......................................... 7,408 6,712
Accumulated other comprehensive income.................... (1,398) 6,979
Total Shareowners' Equity............................. 103,198 78,927
Total Liabilities and Shareowners' Equity............. $234,360 $163,457
-------- --------
The notes are an integral part of the consolidated financial statements.
L-37
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
---------- --------- ---------
(DOLLARS IN MILLIONS)
AT&T Common Shares
Balance at beginning of year.............................. $ 3,196 $ 2,630 $ 2,684
Shares issued (acquired), net:
Under employee plans................................... 3 -- 2
For acquisitions....................................... 607 566 (56)
Other*................................................. (46) -- --
Balance at end of year...................................... 3,760 3,196 2,630
AT&T Wireless Group Common Stock
Balance at beginning of year.............................. -- -- --
Shares issued:
For stock offering..................................... 360 -- --
Under employee plans................................... 2 -- --
Balance at end of year...................................... 362 -- --
Liberty Media Group Class A Common Stock
Balance at beginning of year.............................. 2,314 -- --
Shares issued (acquired), net:
For acquisitions....................................... 62 2,280 --
Other.................................................. (12) 34 --
Balance at end of year...................................... 2,364 2,314 --
Liberty Media Group Class B Common Stock
Balance at beginning of year.............................. 217 -- --
Shares issued (acquired), net:
For acquisitions....................................... (11) 220 --
Other.................................................. -- (3) --
Balance at end of year...................................... 206 217 --
Additional Paid-In Capital
Balance at beginning of year.............................. 59,526 15,195 17,121
Shares issued (acquired), net:
Under employee plans................................... 98 431 67
For acquisitions....................................... 23,097 42,425 (2,105)
Other*................................................. (2,767) 323 112
Proceeds in excess of par value from issuance of AT&T
Wireless common stock.................................. 9,915 -- --
Common stock warrants issued.............................. -- 306 --
Gain on issuance of common stock by affiliates............ 530 667 --
Other..................................................... 97 179 --
Balance at end of year...................................... 90,496 59,526 15,195
L-38
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
---------- --------- ---------
(DOLLARS IN MILLIONS)
Guaranteed ESOP Obligation
Balance at beginning of year.............................. (17) (44) (70)
Amortization.............................................. 17 27 26
Balance at end of year...................................... -- (17) (44)
Retained Earnings
Balance at beginning of year.............................. 6,712 7,800 3,981
Net income................................................ 4,669 3,428 6,398
Dividends declared........................................ (2,485) (2,807) (2,230)
Treasury shares issued at less than cost.................. (1,488) (1,709) (370)
Other changes............................................. -- -- 21
Balance at end of year...................................... 7,408 6,712 7,800
Accumulated Comprehensive Income
Balance at beginning of year.............................. 6,979 (59) (38)
Other comprehensive income................................ (8,377) 7,038 (21)
Balance at end of year...................................... (1,398) 6,979 (59)
Total Shareowners' Equity................................... $103,198 $78,927 $25,522
-------- ------- -------
Summary of Total Comprehensive Income:
Net income.................................................. $ 4,669 $ 3,428 $ 6,398
Other comprehensive income [net of income taxes of $(5,348),
$4,600 and $(53)]......................................... (8,377) 7,038 (21)
Comprehensive Income........................................ $ (3,708) $10,466 $ 6,377
-------- ------- -------
---------------
* Activity in 2000 primarily represents AT&T stock received from Cox
Communications, Inc. in exchange for an entity owning cable systems and
certain other assets.
AT&T accounts for treasury stock as retired stock, and as of December 31, 2000
and 1999, had 417 million and 288 million treasury shares, respectively, of
which 346 million and 216 million shares, respectively, were owned by AT&T
Broadband subsidiaries. In addition, 70 million treasury shares related to the
purchase of AT&T shares previously owned by Liberty Media Group.
We have 100 million authorized shares of preferred stock at $1 par value. No
preferred stock was issued or outstanding.
The notes are an integral part of the consolidated financial statements.
L-39
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN MILLIONS)
OPERATING ACTIVITIES
Net income................................................ $ 4,669 $ 3,428 $ 6,398
Deduct: Income (loss) from discontinued operations........ 536 (433) 193
Gain on sale of discontinued operations................. -- -- 1,290
Add: Extraordinary loss on retirement of debt............. -- -- 137
Income from continuing operations......................... 4,133 3,861 5,052
Adjustments to reconcile net income to net cash provided
by operating activities of continuing operations:
Net gains on sales of businesses and investments........ (1,321) (585) (408)
Net restructuring and other charges..................... 6,793 678 2,362
Depreciation and amortization........................... 8,589 6,194 3,577
Provision for uncollectible receivables................. 1,080 1,216 1,290
Deferred income taxes................................... 341 354 (105)
Minority interest (income) expense...................... (4,329) 24 5
Net equity (earnings) losses from Liberty Media Group... (1,488) 2,022 --
Net losses from other equity investments................ 1,017 1,224 177
Increase in receivables................................. (2,512) (2,409) (1,299)
Decrease in accounts payable............................ (577) (165) (456)
Net change in other operating assets and liabilities.... (376) (1,785) 130
Other adjustments, net.................................. 315 (120) (381)
Net cash provided by operating activities of
continuing operations................................ 11,665 10,509 9,944
INVESTING ACTIVITIES
Capital expenditures and other additions.................. (11,511) (11,876) (6,822)
Proceeds from sale or disposal of property, plant and
equipment............................................... 600 286 104
(Increase) decrease in other receivables.................. (1,052) 17 6,403
Sales of marketable securities............................ 96 -- 2,003
Purchases of marketable securities........................ -- -- (1,696)
Equity investment distributions and sales................. 992 1,574 146
Equity investment contributions and purchases............. (2,394) (7,837) (125)
Net (acquisitions) dispositions of businesses including
cash acquired........................................... (16,657) (5,969) 4,183
Other investing activities, net........................... (119) (79) (61)
Net cash (used in) provided by investing activities of
continuing operations................................ (30,045) (23,884) 4,135
FINANCING ACTIVITIES
Proceeds from long-term debt issuances.................... 4,601 8,396 17
Retirement of long-term debt.............................. (2,118) (2,255) (2,594)
Issuance of convertible securities........................ -- 4,638 --
Redemption of redeemable securities....................... (152) -- --
Issuance of AT&T common shares............................ 99 -- 32
Issuance of AT&T Wireless Group common shares............. 10,314 -- --
Net acquisition of treasury shares........................ (581) (4,624) (3,321)
Dividends paid on common stock............................ (3,047) (2,712) (2,187)
Dividends on preferred securities......................... (294) (135) --
Increase (decrease) in short-term borrowings, net......... 16,973 10,173 (3,091)
Other financing activities, net........................... (63) 373 93
Net cash provided by (used in) financing activities of
continuing operations................................ 25,732 13,854 (11,051)
Net cash used in discontinued operations.............. (8,306) (2,594) (207)
Net (decrease) increase in cash and cash equivalents........ (954) (2,115) 2,821
Cash and cash equivalents at beginning of year.............. 1,018 3,133 312
Cash and cash equivalents at end of year.................... $ 64 $ 1,018 $ 3,133
-------- -------- --------
The notes are an integral part of the consolidated financial statements.
L-40
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED
(EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include all controlled subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation. Investments in majority-owned subsidiaries where control does not
exist and investments in which we exercise significant influence but do not
control (generally a 20% to 50% ownership interest) are accounted for under the
equity method of accounting. This represents the majority of our investments.
Investments in which we have less than a 20% ownership interest and in which
there is no significant influence are accounted for under the cost method of
accounting.
FOREIGN CURRENCY TRANSLATION
For operations outside the United States that prepare financial statements
in currencies other than the U.S. dollar, we translate income statement amounts
at average exchange rates for the year, and we translate assets and liabilities
at year-end exchange rates. We present these translation adjustments as a
component of accumulated other comprehensive income within shareowners' equity.
Gains and losses from foreign currency transactions are included in results of
operations.
REVENUE RECOGNITION
We recognize long distance and local services revenue based upon minutes of
traffic processed or contracted fee schedules. Cable installation revenue is
recognized in the period the installation services are provided to the extent of
direct selling costs. Any remaining amount is deferred and recognized over the
estimated average period that customers are expected to remain connected to the
cable distribution systems. Customer activation fees, along with the related
costs, are deferred and amortized over the customer relationship period. We
recognize other products and services revenue when the products are delivered
and accepted by customers and when services are provided in accordance with
contract terms. During 2000, we adopted Securities and Exchange Commission (SEC)
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements." The adoption did not have a material impact on our results of
operations or financial condition.
ADVERTISING AND PROMOTIONAL COSTS
We expense costs of advertising and promotions, including cash incentives
used to acquire customers, as incurred. Advertising and promotional expenses
were $1,377, $1,418 and $1,576 in 2000, 1999 and 1998, respectively. Of these
amounts, $288, $320 and $622 were cash incentives to acquire customers in 2000,
1999 and 1998, respectively.
INVESTMENT TAX CREDITS
We amortize investment tax credits as a reduction to the provision for
income taxes over the useful lives of the assets that produced the credits.
CASH EQUIVALENTS
We consider all highly liquid investments with original maturities of
generally three months or less to be cash equivalents.
L-41
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
We state property, plant and equipment at cost and determine depreciation
based upon the assets' estimated useful lives using either the group or unit
method. The useful lives of communications and network equipment range from
three to 15 years. The useful lives of other equipment ranges from three to
seven years. The useful lives of buildings and improvements range from 10 to 40
years. The group method is used for most depreciable assets, including the
majority of communications and network equipment. When we sell or retire assets
depreciated using the group method, the cost is deducted from property, plant
and equipment and charged to accumulated depreciation, without recognition of a
gain or loss. The unit method is primarily used for large computer systems and
support assets. When we sell assets that were depreciated using the unit method,
we include the related gains or losses in other income.
We use accelerated depreciation methods primarily for certain
high-technology computer-processing equipment and digital equipment used in the
telecommunications network, except for switching equipment placed in service
before 1989, where a straight-line method is used. All other plant and
equipment, including capitalized software, is depreciated on a straight-line
basis.
FRANCHISE COSTS
Franchise costs include the value attributed to agreements with local
authorities that allow access to homes in cable service areas acquired in
connection with business combinations. Such amounts are amortized on a
straight-line basis over 40 years.
GOODWILL
Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for under the purchase
method. We amortize goodwill on a straight-line basis over the periods
benefited, ranging from five to 40 years.
SOFTWARE CAPITALIZATION
Certain direct development costs associated with internal-use software are
capitalized, including external direct costs of material and services, and
payroll costs for employees devoting time to the software projects. These costs
are included within other assets and are amortized over a period not to exceed
five years beginning when the asset is substantially ready for use. Costs
incurred during the preliminary project stage, as well as maintenance and
training costs, are expensed as incurred. AT&T also capitalizes initial
operating-system software costs and amortizes them over the life of the
associated hardware.
AT&T also capitalizes costs associated with the development of application
software incurred from the time technological feasibility is established until
the software is ready to provide service to customers. These capitalized costs
are included in property, plant and equipment and are amortized over a useful
life not to exceed five years.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets, such as property, plant and equipment, franchise costs,
goodwill, investments and software, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount may not be
recoverable. If the total of the expected future undiscounted cash flows is less
than the carrying amount of the asset, a loss is recognized for the difference
between the fair value and carrying value of the asset. In addition, in
accordance with Accounting Principles Board (APB) Opinion No. 17, "Intangible
Assets," we continue to evaluate the amortization periods to determine whether
events or circumstances warrant revised amortization periods.
L-42
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
We use various financial instruments, including derivative financial
instruments, for purposes other than trading. We do not use derivative financial
instruments for speculative purposes. Derivatives, used as part of our
risk-management strategy, must be designated at inception as a hedge and
measured for effectiveness both at inception and on an ongoing basis. Gains and
losses related to qualifying hedges of foreign currency firm commitments are
deferred in current assets or liabilities and recognized as part of the
underlying transactions as they occur. All other foreign exchange contracts are
marked to market on a current basis, and the respective gains or losses are
recognized in other income. Interest rate differentials associated with interest
rate swaps used to hedge AT&T's debt obligations are recorded as an adjustment
to interest payable or receivable, with the offset to interest expense over the
life of the swaps. If we terminate an interest rate swap agreement, the gain or
loss is deferred and amortized over the remaining life of the liability. Cash
flows from financial instruments are classified in the Consolidated Statements
of Cash Flows under the same categories as the cash flows from the related
assets, liabilities or anticipated transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenue and expenses during the period reported. Actual results
could differ from those estimates. Estimates are used when accounting for
certain items such as long-term contracts, allowance for doubtful accounts,
depreciation and amortization, employee benefit plans, taxes, restructuring
reserves and contingencies.
CONCENTRATIONS
As of December 31, 2000, we do not have any significant concentration of
business transacted with a particular customer, supplier or lender that could,
if suddenly eliminated, severely impact our operations. We also do not have a
concentration of available sources of labor, services, franchises or other
rights that could, if suddenly eliminated, severely impact our operations. We
invest our cash with several high-quality credit institutions.
ISSUANCE OF COMMON STOCK BY AFFILIATES
Changes in our proportionate share of the underlying equity of a subsidiary
or equity method investee, which result from the issuance of additional equity
securities by such entity, are recognized as increases or decreases to
additional paid-in capital in the Consolidated Statements of Shareowners'
Equity.
RECLASSIFICATIONS AND RESTATEMENTS
We reclassified certain amounts for previous years to conform to the 2000
presentation. In addition, we restated prior year share and per share amounts to
reflect the June 2000 two-for-one split of Liberty Media Group common stock.
2. RESTRUCTURING OF AT&T
On October 25, 2000, AT&T announced a restructuring plan designed to fully
separate or issue separately tracked stocks intended to reflect the financial
performance and economic value of each of AT&T's four major operating units. If
the plan is completed as announced, AT&T Wireless, AT&T
L-43
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Broadband, AT&T Business and AT&T Consumer would all be represented by
asset-based or tracking stocks.
On July 8, 2001, Comcast Corp. (Comcast) made an unsolicited offer to
acquire AT&T Broadband. On July 18, AT&T's Board of Directors unanimously voted
to reject Comcast's proposal to acquire AT&T Broadband. The Board has directed
management to explore financial and strategic alternatives relating to AT&T
Broadband, including the previously announced restructuring plans, with the goal
to provide the greatest long-term value to shareowners. The Board also decided
to delay finalizing and mailing to shareowners the proxy materials, filed
preliminary with the SEC on July 3, 2001, for its current restructuring plans.
However, AT&T remains committed to separate AT&T Consumer and AT&T Business from
AT&T Broadband and to creating a separate tracking stock designed to represent
the financial performance of AT&T Consumer.
On May 25, 2001, AT&T completed an exchange offer of AT&T common stock for
AT&T Wireless stock. Under the terms of the exchange offer, AT&T issued 1.176
shares of AT&T Wireless Group tracking stock in exchange for each share of AT&T
common stock validly tendered. A total of 372.2 million shares of AT&T common
stock were tendered in exchange for 437.7 million shares of AT&T Wireless Group
tracking stock.
On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a
separate, independently-traded company. All AT&T Wireless tracking stock was
converted into AT&T Wireless common stock on a one-for-one basis and 1,136
million shares of AT&T Wireless common stock, held by AT&T, were distributed to
AT&T common shareowners on a basis of 0.3218 of a share of AT&T Wireless for
each AT&T share outstanding. AT&T common shareowners received whole shares of
AT&T Wireless and cash payments for fractional shares. The Internal Revenue
Service (IRS) ruled that the transaction qualified as tax-free for AT&T and its
shareowners for U.S. federal income tax purposes, with the exception of cash
received for fractional shares. AT&T retained approximately $3 billion, or 7.3%,
of AT&T Wireless common stock, about half of which was used in a debt-for-equity
exchange in July. The remaining shares will be sold, exchanged or monetized
within the next six months. AT&T Wireless will continue trading on the New York
Stock Exchange (NYSE) under the symbol "AWE."
On August 10, 2001, AT&T completed the split-off of Liberty Media
Corporation as an independent, publicly-traded company. AT&T redeemed each
outstanding share of Class A and Class B Liberty Media Group (LMG) tracking
stock for one share of Liberty Media Corporation's Series A and Series B common
stock, respectively. The IRS ruled that the split-off of Liberty Media
Corporation qualified as a tax-free transaction for AT&T, Liberty Media and
their shareowners. Liberty Media Corporation's Series A common stock and Series
B common stock is now listed on the NYSE under the symbols "LMC.A" and "LMC.B,"
respectively.
AT&T's restructuring plan is complicated and involves a substantial number
of steps and transactions, including obtaining various conditions, such as
Internal Revenue Service rulings. AT&T expects that the transactions associated
with AT&T's restructuring plan will be tax-free to U.S. shareowners. In
addition, future financial conditions, superior alternatives or other factors
may arise or occur that make it inadvisable to proceed with part or all of
AT&T's restructuring plans. Any or all of the elements of AT&T's restructuring
plan may not occur as we currently expect or in the time frames that we
currently contemplate, or at all. Alternative forms of restructuring, including
sales of interests in these businesses, would reduce what is available for
distribution to shareowners in the restructuring.
L-44
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ---- ----
INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Research and development expenses........................... $ 402 $550 $513
====== ==== ====
OTHER INCOME
Investment-related income................................... $ 512 $203 $374
Net gains on sales of businesses and investments............ 1,321 585 408
Mark-to-market charge on put options........................ (537) -- --
Investment impairment charges............................... (248) (40) --
Miscellaneous, net.......................................... 102 78 30
------ ---- ----
Total other income.......................................... $1,150 $826 $812
====== ==== ====
DEDUCTED FROM INTEREST EXPENSE
Capitalized interest........................................ $ 177 $143 $106
====== ==== ====
SUPPLEMENTARY BALANCE SHEET INFORMATION
AT DECEMBER 31, 2000 1999
--------------- -------- --------
PROPERTY, PLANT AND EQUIPMENT
Communications, network and other equipment................. $ 60,232 $ 50,971
Buildings and improvements.................................. 8,643 7,855
Land and improvements....................................... 523 579
-------- --------
Total property, plant and equipment......................... 69,398 59,405
Accumulated depreciation.................................... (28,129) (26,039)
-------- --------
Property, plant and equipment, net.......................... $ 41,269 $ 33,366
======== ========
SUPPLEMENTARY SHAREOWNERS' EQUITY INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------- ------ ----
OTHER COMPREHENSIVE INCOME
Net foreign currency translation adjustment [net of income
taxes of $(181), $87 and $(3)]............................ $ (309) $ 148 $ (5)
Net revaluation of securities [net of income taxes of
$(5,166), $4,506 and $(35)]............................... (8,067) 6,878 (25)
Net minimum pension liability adjustment [net of income
taxes of $(1), $7 and $(15)].............................. (1) 12 9
------- ------ ----
Total other comprehensive income............................ $(8,377) $7,038 $(21)
======= ====== ====
In 2000, other comprehensive income included LMG's foreign currency
translation adjustments totaling $(202), net of applicable income taxes,
revaluation of LMG's available-for-sale securities totaling $(6,117), net of
applicable income taxes, and the recognition of previously unrecognized
available-for-sale securities totaling $(635), net of applicable income taxes.
L-45
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1999, other comprehensive income included LMG's foreign currency
translation adjustments totaling $60, net of applicable income taxes, and
revaluation of LMG's available-for-sale securities totaling $6,497, net of
applicable income taxes.
SUPPLEMENTARY CASH FLOW INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------ ------
Interest payments, net of amounts capitalized............... $3,234 $1,162 $ 287
Income tax payments......................................... 2,369 3,948 2,761
4. MERGERS WITH MEDIAONE GROUP, INC. AND TELE-COMMUNICATIONS, INC.
MERGER WITH MEDIAONE GROUP, INC.
On June 15, 2000, AT&T completed a merger with MediaOne Group, Inc.
(MediaOne) in a cash and stock transaction valued at approximately $45 billion.
For each share of MediaOne stock, MediaOne shareowners received, in the
aggregate, 0.95 of a share of AT&T common stock and $36.27 per share in cash,
consisting of $30.85 per share as stipulated in the merger agreement and $5.42
per share based on AT&T's stock price preceding the merger, which was below a
predetermined amount. AT&T issued approximately 603 million shares of common
stock in the transaction, of which approximately 60 million were treasury
shares. The AT&T shares had an aggregate market value of approximately $21
billion and cash payments totaled approximately $24 billion.
The merger was accounted for under the purchase method. Accordingly, the
results of MediaOne have been included in the accompanying consolidated
financial statements since the date of acquisition as part of our Broadband
segment.
Approximately $16 billion of the purchase price of $45 billion has been
attributed to agreements with local franchise authorities that allow access to
homes in our broadband service areas ("franchise costs") and is being amortized
on a straight-line basis over 40 years. Also included in the purchase price was
approximately $22 billion related to nonconsolidated investments, including
investments in Time Warner Entertainment Company, L.P. (TWE) and Vodafone Group
plc (Vodafone), approximately $5 billion related to property, plant and
equipment, and approximately $7 billion of other net assets. In addition,
included was approximately $14 billion in deferred income liabilities,
approximately $10 billion attributable to MediaOne debt, and approximately $1
billion of minority interest in Centaur Funding Corporation, a subsidiary of
MediaOne. The purchase resulted in preliminary goodwill of approximately $20
billion, which is being amortized on a straight-line basis over 40 years. AT&T
may make refinements to the allocation of the purchase price in future periods
as the related fair value appraisals of certain assets and liabilities are
finalized.
MERGER WITH TELE-COMMUNICATIONS, INC.
On March 9, 1999, AT&T completed a merger with Tele-Communications, Inc.
(TCI), renamed AT&T Broadband, in an all-stock transaction valued at
approximately $52 billion. Each share of TCI Group Series A common stock was
converted into 1.16355 shares of AT&T common stock, and each share of TCI Group
Series B common stock was converted into 1.27995 shares of AT&T common stock.
AT&T issued approximately 664 million shares of common stock in the transaction,
of which approximately 149 million were treasury shares. The AT&T shares had an
aggregate market value of approximately $27 billion. Certain subsidiaries of TCI
held TCI Group Series A common stock, which was converted into 216 million
shares of AT&T common stock. These subsidiaries continue to hold these shares,
which are reflected as treasury stock in the accompanying Consolidated Balance
Sheets.
L-46
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, TCI simultaneously combined its Liberty Media Group
programming business with its TCI Ventures Group technology investment business,
forming LMG. In connection with the closing, AT&T issued separate tracking stock
in exchange for the TCI Liberty Media Group and TCI Ventures Group tracking
shares previously outstanding. We issued 2,280 million shares of Liberty Media
Group Class A tracking stock (including 120 million shares related to the
conversion of convertible notes) and 220 million shares of Liberty Media Group
Class B tracking stock. The tracking stock is designed to reflect the separate
financial performance and economic value of LMG. These shares had an aggregate
market value of approximately $23 billion.
AT&T does not have a controlling financial interest for financial
accounting purposes in LMG. Therefore, our investment in LMG has been reflected
as an investment accounted for under the equity method in the accompanying
consolidated financial statements. The amounts attributable to LMG are reflected
as "Equity earnings (losses) from Liberty Media Group" and "Investment in
Liberty Media Group and related receivables, net" in the accompanying
consolidated financial statements. As a separate tracking stock, all of the
earnings or losses related to LMG are excluded from the earnings available to
the holders of AT&T common stock.
Each share of Liberty Media Group Class A common stock is entitled to
0.0375 of a vote, and each share of Liberty Media Group Class B common stock is
entitled to 0.375 of a vote.
The TCI merger was accounted for under the purchase method. Accordingly,
the results of TCI have been included in the financial results of AT&T since the
date of acquisition. The operating results of TCI have been included in the
accompanying consolidated financial statements at their fair value since March
1, 1999, the deemed effective date of acquisition for accounting purposes. The
impact of the results from March 1 through March 9, 1999, were deemed immaterial
to our consolidated results.
Approximately $20 billion of the purchase price of $52 billion was
attributed to franchise costs and is being amortized on a straight-line basis
over 40 years. Pursuant to Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes," AT&T recorded an approximate $13 billion
deferred tax liability in connection with this franchise intangible, which is
also included in franchise costs. We do not expect that this deferred tax
liability will ever be paid. This deferred tax liability is being amortized on a
straight-line basis over 40 years and is included in the provision for income
taxes. Also included was approximately $11 billion related to nonconsolidated
investments, approximately $5 billion related to property, plant and equipment,
approximately $11 billion of TCI long-term debt and approximately $7 billion
related to other net liabilities. In addition, our investment in LMG was
recorded at approximately $34 billion, including approximately $11 billion of
goodwill that is being amortized on a straight- line basis over 20 years as a
component of "Equity earnings (losses) from Liberty Media Group."
L-47
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of the pro forma results of AT&T as if the mergers
with MediaOne and TCI had closed effective January 1, 1999:
2000 1999
FOR THE YEARS ENDED DECEMBER 31, ------- -------
-------------------------------- (UNAUDITED)
Shares in millions
Revenue..................................................... $56,858 $58,609
Income from continuing operations........................... 5,081 6,885
Weighted-average AT&T common shares......................... 3,762 3,784
Weighted-average AT&T common shares and potential common
shares.................................................... 3,821 3,906
Weighted-average Liberty Media Group shares................. 2,572 2,519
AT&T Common Stock Group earnings from continuing operations
per common share:
Basic.................................................. $ 0.96 $ 2.41
Diluted................................................ $ 0.95 $ 2.34
Liberty Media Group earnings (loss) per share:
Basic and diluted...................................... $ 0.58 $ (0.89)
Pro forma data may not be indicative of the results that would have been
obtained had these events actually occurred at the beginning of the periods
presented, nor does it intend to be a projection of future results.
5. OTHER MERGERS, ACQUISITIONS, STOCK OFFERING, VENTURE, AND DISPOSITIONS
AT HOME CORPORATION
On August 28, 2000, AT&T and At Home Corporation (Excite@Home) announced
shareholder approval of a new board of directors and governance structure for
Excite@Home and completion of the extension of distribution contracts with AT&T,
Cox Communications, Inc. (Cox) and Comcast Corporation (Comcast). AT&T was given
the right to designate six of the 11 Excite@Home board members. In addition,
Excite@Home converted approximately 50 million of AT&T's Series A shares into
Series B shares, each of which has 10 votes. As a result of these governance
changes, AT&T gained a controlling interest and began consolidating
Excite@Home's results upon the closing of the transaction on September 1, 2000.
As of December 31, 2000, AT&T had, on a fully diluted basis, approximately 23%
of the economic interest and 74% of the voting interest in Excite@Home.
In exchange for Cox and Comcast relinquishing their rights under the
shareholder agreement, AT&T granted put options to Cox and Comcast on a combined
total of 60.4 million shares of Excite@Home Series A common stock. The put
options provide Cox and Comcast with the right to convert their Excite@Home
shares into either AT&T stock or cash at their option, at any time between
January 1, 2001 and June 4, 2002, at the higher of (i) $48 per share or (ii) the
30-day average trading price at the time of exercise (beginning 15 trading days
prior to the exercise date, and ending 15 days after the exercise date). The
maximum amount that AT&T would be required to pay in cash or stock is
approximately $2.9 billion based on the $48 strike price. The obligation under
these put options was recorded at fair value, with gains or losses resulting
from changes in fair value being recorded as a component of other income. For
the year, changes in fair market value resulted in a pretax expense of $537.
Subsequent to December 31, 2000, Cox and Comcast exercised their put options,
electing to receive AT&T common shares (see Note 23).
Also, in connection with the distribution agreements which extend through
2008, AT&T obtained the right to purchase up to approximately 25 million
Excite@Home Series A shares and 25 million Series B
L-48
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares. In addition, Cox and Comcast will each receive new warrants to purchase
two Series A shares for each home its cable system passes. These warrants will
vest in installments every six months beginning in June 2001, and will be fully
vested by June 2006 if Cox and Comcast elect to continue their extended
non-exclusive distribution agreements through that period.
The consolidation of Excite@Home resulted in minority interest of
approximately $2.2 billion, goodwill of approximately $2.4 billion, short-term
liabilities of approximately $2.4 billion (including an initial put option
liability), other net assets of approximately $1.2 billion and the removal of
our investment in Excite@Home of approximately $1.9 billion.
AT&T WIRELESS GROUP
On April 27, 2000, AT&T created a new class of stock and completed a public
stock offering of 360 million shares, which represented 15.6% of AT&T Wireless
Group tracking stock at a price of $29.50 per share. This stock was intended to
track the financial performance and economic value of AT&T's wireless services'
business. The net proceeds to AT&T after deducting underwriter's discount and
related fees and expenses were $10.3 billion. AT&T allocated $7.0 billion of the
net proceeds to AT&T Wireless Group, which were used for acquisitions, network
expansion, capital expenditures and for general corporate purposes. The
remaining net proceeds of $3.3 billion were utilized by AT&T for general
corporate purposes. On July 9, 2001, AT&T completed the split-off of AT&T
Wireless (see Note 23).
COX COMMUNICATIONS, INC.
On March 15, 2000, AT&T received 50.3 million shares of AT&T common stock
held by Cox in exchange for an entity owning cable television systems serving
approximately 312,000 customers and certain other net assets. Specifically, AT&T
exchanged $1.1 billion of investments and related advances, $0.9 billion of
franchise costs and $0.5 billion of other net assets for stock valued at $2.7
billion on March 15, 2000. The transaction resulted in a pretax gain of $189.
LENFEST COMMUNICATIONS, INC.
On January 18, 2000, AT&T sold its ownership in Lenfest Communications,
Inc. to a subsidiary of Comcast. In connection with the sale, we received 47.3
million shares of Comcast Class A Special common stock. The transaction resulted
in a pretax gain of $224.
CONCERT
On January 5, 2000, AT&T and British Telecommunications plc (BT) announced
financial closure of Concert, their global communications joint venture. AT&T
contributed all of its international gateway-to-gateway assets, as well as the
economic value of approximately 270 multinational customers specifically
targeted for direct sales by Concert.
ACC EUROPE
On November 5, 1999, AT&T sold ACC Corp. (ACC) in Europe, including ACC's
principal operations in the United Kingdom as well as ACC's operating companies
in France, Germany and Italy, to WORLDxCHANGE Communications. We were required
to dispose of this investment pursuant to a government mandate since it would
have competed directly with Concert. The transaction resulted in a pretax loss
of $179.
L-49
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
IBM GLOBAL NETWORK
On April 30, 1999, AT&T completed its acquisition of the IBM Global Network
business (renamed AT&T Global Network Services or AGNS) and its assets in the
United States. The non-U.S. acquisitions were completed in phases throughout
1999 and during the first quarter of 2000. Under the terms of the agreement,
AT&T acquired the global network of IBM, and the two companies entered into
outsourcing agreements with each other. The acquisition was accounted for under
the purchase method. Accordingly, the operating results of AGNS have been
included in the accompanying consolidated financial statements since the date of
acquisition. The pro forma impact of AGNS on historical AT&T results is not
material.
TELEPORT COMMUNICATIONS GROUP INC.
On July 23, 1998, AT&T completed a merger with Teleport Communications
Group Inc. (TCG) pursuant to an agreement and plan of merger dated January 8,
1998. Each share of TCG common stock was exchanged for 1.4145 shares of AT&T
common stock, resulting in the issuance of 272.4 million shares in the
transaction. The merger was accounted for as a pooling of interests, and
accordingly, AT&T's results of operations, financial position and cash flows
were restated to reflect the merger. In 1998, we recognized $85 of
merger-related expenses. Premerger TCG revenue was $455, and net losses were
$118, for the six months ended June 30, 1998. Elimination entries between AT&T
and TCG were not material. On April 22, 1998, TCG purchased ACC for an aggregate
value of approximately $1,100, including approximately $700 in goodwill.
OTHER DISPOSITIONS
On March 3, 1998, AT&T sold AT&T Solutions Customer Care to MATRIXX
Marketing Inc., a teleservices unit of Cincinnati Bell, for $625. AT&T
recognized a pretax gain of $350 in 1998 on the sale.
6. DISCONTINUED OPERATIONS
Pursuant to AT&T's restructuring plan (see Note 2), AT&T completed the
split-off of AT&T Wireless as a separate, independently-traded company on July
9, 2001. The split-off of AT&T Wireless will result in a non-cash gain of
approximately $13 billion, which represents the difference between the fair
value of the Wireless tracking stock at the date of the split-off and AT&T's
book value in AT&T Wireless Services. This gain will be recorded in the third
quarter of 2001 and be reflected as "Gain on the disposition of discontinued
operations."
On April 2, 1998, AT&T sold AT&T Universal Card Services Inc. (UCS) for
$3,500 to Citigroup, Inc. The after-tax gain resulting from the disposal of UCS
was $1,290, or $0.48 per diluted share. Included in the transaction was a
cobranding and joint-marketing agreement. In addition, we received $5,722 in
settlement of receivables from UCS.
The consolidated financial statements of AT&T reflect AT&T Wireless and UCS
as discontinued operations. Accordingly, the revenue, costs and expenses, assets
and liabilities and cash flows of these discontinued operations have been
excluded from the respective captions in the Consolidated Statements of
Operations, Consolidated Balance Sheets and Consolidated Statements of Cash
Flows and have been reported as "Income from discontinued operations," net of
applicable income taxes; as "Net assets of discontinued operations"; and as "Net
cash used in discontinued operations" for all periods presented. The gain
associated with the sale of UCS in 1998 is reflected as "Gain on sale of
discontinued operations," net of applicable income taxes.
Revenue for discontinued operations was $10,448, $7,627, and $5,771 for
2000, 1999 and 1998, respectively.
L-50
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net assets of discontinued operations included assets of $35,087 and
$23,312 at December 31, 2000 and 1999, respectively, and total liabilities of
$7,822 and $5,929 at December 31, 2000 and 1999, respectively. Total assets were
comprised primarily of licensing costs, property, plant and equipment, goodwill
and investments. Total liabilities were comprised primarily of deferred income
taxes, other short-term liabilities and accounts payable. Net assets of
discontinued operations also included minority interest of $41 and $20 at
December 31, 2000 and 1999, respectively.
Interest expense of $330, $253 and $221 was allocated to AT&T Wireless
discontinued operations in 2000, 1999 and 1998, respectively, based on the debt
of AT&T Corp. that was attributable to AT&T Wireless. This debt was repaid to
AT&T in connection with the subsequent distribution of AT&T Wireless. No
interest was allocated to UCS in 1998 due to the immateriality of the amounts;
however, UCS recorded direct interest expense of $85 in 1998, primarily related
to amounts payable to AT&T.
ACQUISITION-RELATED INTANGIBLE ASSETS
As a result of our evaluation of recent changes in our industry and the
views of regulatory authorities, AT&T expects that the amortization period for
all franchise costs and goodwill associated with newly acquired
telecommunications and cable operations will not exceed 25 years.
7. EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE
Income (loss) attributable to the different classes of AT&T common stock is
as follows:
AT&T COMMON STOCK GROUP AT&T WIRELESS GROUP LIBERTY MEDIA GROUP
------------------------ --------------------- -----------------------
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998 2000 1999 1998 2000 1999 1998
-------------------------------- ------ ------ ------ ----- ----- ----- ------ ------- ----
Income (loss) from continuing
operations................. $2,645 $5,883 $5,052 $-- $-- $-- $1,488 $(2,022) $--
Income (loss) from discontinued
operations................. 460 (433) 193 76 -- -- -- -- --
Gain on sale of discontinued
operations................. -- -- 1,290 -- -- -- -- -- --
Extraordinary loss........... -- -- 137 -- -- -- -- -- --
Net income (loss) available to
common shareowners......... $3,105 $5,450 $6,398 $76 $-- $-- $1,488 $(2,022) $--
Basic earnings per share (EPS) for AT&T Common Stock Group for 2000, 1999
and 1998 were computed by dividing AT&T Common Stock Group income by the
weighted-average number of shares outstanding during the year.
Diluted EPS for AT&T Common Stock Group was computed by dividing AT&T
Common Stock Group income, adjusted for the conversion of securities, by the
weighted-average number of shares and dilutive potential shares outstanding
during the year, assuming conversion of the potential shares at the beginning of
the years presented. Shares issuable upon conversion of preferred stock of
subsidiaries, convertible debt securities of subsidiary, stock options and other
performance awards have been included in the diluted calculation of
weighted-average shares to the extent that the assumed issuance of such shares
would have been dilutive, as illustrated below. The convertible quarterly income
preferred securities were antidilutive and were excluded from the computation of
diluted EPS. Computed on a yearly basis, the dividends would have an after-tax
impact to earnings of approximately $155. Assuming conversion of the securities,
the dividends would no longer be included as a reduction to net income and the
securities would convert into 67 million shares of AT&T common stock.
L-51
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the income and share components for basic and diluted
EPS calculations with respect to AT&T Common Stock Group continuing operations
is as follows:
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------ ------
AT&T Common Stock Group:
Income from continuing operations.......................... $2,645 $5,883 $5,052
Income impact of assumed conversion of preferred stock of
subsidiary............................................... 32 26 --
Income adjusted for conversion of securities............... $2,677 $5,909 $5,052
Shares in millions
Weighted-average common shares............................. 3,486 3,082 2,676
Stock options.............................................. 19 35 24
Preferred stock of subsidiary.............................. 40 33 --
Convertible debt securities of subsidiary.................. -- 2 --
Weighted-average common shares and potential common
shares................................................... 3,545 3,152 2,700
Basic EPS from discontinued operations for AT&T Wireless Group for the
period from April 27, 2000, the stock offering date, through December 31, 2000,
was computed by dividing AT&T Wireless Group income by the weighted-average
number of shares outstanding of AT&T Wireless Group of 361 million. There were
no potentially dilutive securities outstanding at December 31, 2000.
Basic EPS for LMG was computed by dividing LMG income (loss) by the
weighted-average number of shares outstanding of LMG of 2,572 million in 2000
and 2,519 million from the March 9, 1999, date of issuance through December 31,
1999. Potentially dilutive securities, including fixed and nonvested performance
awards and stock options, have not been factored into the dilutive calculations
because past history has indicated that these contracts are generally settled in
cash. There were 96 million and 124 million of these potentially dilutive
securities outstanding at December 31, 2000 and 1999, respectively. The diluted
earnings per share calculation for 2000 also excludes approximately 700,000
warrants outstanding at December 31, 2000, which were antidilutive. In addition,
since LMG had a loss in 1999, the impact of any potential shares would have been
antidilutive.
8. NET RESTRUCTURING AND OTHER CHARGES
During 2000, we recorded $7,029 of net restructuring and other charges,
which included $6,179 of asset impairment charges related to Excite@Home, $759
for restructuring and exit costs associated with AT&T's initiative to reduce
costs, and $91 related to the government-mandated disposition of AT&T
Communications (U.K.) Ltd., which would have competed directly with Concert.
The charges related to Excite@Home included $4,609 of asset impairment
charges recorded by Excite@Home associated with the impairment of goodwill from
various acquisitions, including Excite, and a related goodwill impairment charge
of $1,570 recorded by AT&T associated with goodwill from the acquisition of our
investment in Excite@Home.
The impairments resulted from the deterioration of the market conditions
and market valuations of Internet-related companies during the fourth quarter of
2000, which caused Excite@Home to conclude that intangible assets related to
their acquisitions of Internet-related companies may not be recoverable. In
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," Excite@Home conducted a
detailed assessment of the recoverability of the carrying amounts of acquired
intangible assets. This assessment resulted in a determination that certain
acquired intangible assets, including goodwill, related to these acquisitions,
including Excite, were impaired
L-52
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as of December 31, 2000. As a result, we recorded impairment charges of $4,609
in December 2000, representing the excess of the carrying amount of the impaired
assets over their fair value.
The review for impairment included a review of publicly-traded Internet
companies that are comparable to the companies that Excite@Home acquired. These
companies experienced a substantial decline in stock price and market
capitalization during the fourth quarter of 2000.
Excite@Home also reviewed the business climate for Internet advertising and
web-based infrastructure companies as of December 31, 2000, and observed the
following: (1) investor and consumer enthusiasm for the Internet sector severely
deteriorated during the fourth quarter of 2000; (2) many Internet companies,
including those acquired by Excite@Home, experienced significant decelerations
in their growth both as a result of economic conditions and due to
Internet-sector specific issues such as competition and the weakening of the
Internet advertising market; and (3) funding sources for Internet-based consumer
businesses, which require considerable amounts of capital, had substantially
evaporated as of December 31, 2000. As a result, Excite@Home concluded that
fundamental, permanent and significant adverse changes had occurred during the
fourth quarter of 2000 in the business climate for companies providing Internet
advertising and other web-based services.
In addition, Excite@Home reviewed operating and cash flow projections that
existed at the time Excite@Home made the acquisitions and that were used as a
basis upon which the decisions to complete the acquisitions were made. These
operating and cash flow projections indicated that the acquired companies, over
their useful lives, would be profitable and generate positive cash flows. The
operating and cash flow projections were compared to operating results after the
date of the acquisitions through December 31, 2000, as well as to projected
operating results for 2001. These comparisons indicated that certain
acquisitions generated operating and cash flow losses through the end of 2000,
and were projected to continue generating operating and cash flow losses for the
foreseeable future.
As a result of these factors, Excite@Home determined that the intangible
assets related to the acquisitions might not be recoverable and conducted
impairment tests.
Generally, the impairment tests were performed at an asset group level
corresponding to the lowest level at which cash flows independent of other
assets could be identified. Each asset group consisted of the goodwill and
acquired identifiable intangible assets related to a specific acquisition.
Acquired intangible assets were combined for those acquisitions where separately
identifiable cash flows that are largely independent of the cash flows of other
groups of assets could not be identified.
For each of the asset groups to be tested for impairment, Excite@Home
projected undiscounted cash flows over a future projection period of five years,
based on Excite@Home's determination of the current remaining useful lives of
the asset groups, plus an undiscounted terminal period cash flow to reflect
disposition of the entities at the end of their useful lives. Undiscounted
future cash flows were estimated using projected net realizable value in a sales
transaction (undiscounted cash flows during the expected remaining holding
period until disposition were estimated as negligible). The undiscounted future
cash flows were compared to the carrying amount of each asset group and for
those asset groups where the carrying amount exceeded the undiscounted future
cash flows, Excite@Home concluded that the asset group was impaired.
Excite@Home measured the impairment loss related to impaired asset groups
based on the amount by which the carrying amount of the asset group exceeded the
fair value of the asset group. Measurement of fair value was based on an
analysis by Excite@Home utilizing the best information available in the
circumstances using reasonable and supportable assumptions and projections, and
including the discounted cash flow and market comparison valuation techniques.
The discounted cash flow analysis considered the likelihood of possible outcomes
and was based on Excite@Home's best estimate of projected future cash flows,
including terminal value cash flows expected to result from the disposition of
the asset at the end of
L-53
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
its useful life, discounted at our weighted average cost of capital. Weighted
average cost of capital was based on historical risk premiums required by
investors for companies of Excite@Home's size, industry and capital structure
and included risk factors specific to Excite@Home. The market comparison model
represented Excite@Home's estimate of the prices that a buyer would be willing
to pay currently for similar assets, based on comparable products and services,
customer base, risks, earnings capabilities and other factors.
Based on the foregoing, Excite@Home recorded an impairment write-down of
$4,609 in the aggregate, which was allocated to each asset group based on a
comparison of carrying values and fair values. The impairment write-down within
each asset group was allocated first to goodwill, and if goodwill was reduced to
zero, to identifiable intangible assets in proportion to carrying values.
Also as a result of the foregoing, AT&T recorded a goodwill and
acquisition-related impairment charge associated with the acquisition of our
investment in Excite@Home. The write-down of our investment to fair value was
determined utilizing discounted expected future cash flows.
Since we own approximately 23% of Excite@Home, 77% of the charge recorded
by Excite@Home was not included as a reduction to AT&T's net income, but rather
was eliminated in our 2000 Consolidated Statement of Income as "Minority
interest income (expense)."
The $759 charge for restructuring and exit plans was primarily due to
headcount reductions, mainly in network operations and Business Services,
including the consolidation of customer-care and call centers, as well as
synergies created by the MediaOne merger.
Included in exit costs was $503 of cash termination benefits associated
with the separation of approximately 7,300 employees as part of voluntary and
involuntary termination plans. Approximately one-half of the separations were
management employees and one-half were nonmanagement employees. Approximately
6,700 employee separations were related to involuntary terminations and
approximately 600 to voluntary terminations.
We also recorded $62 of network lease and other contract termination costs
associated with penalties incurred as part of notifying vendors of the
termination of these contracts during the year, and net losses of $32 related to
the disposition of facilities primarily due to synergies created by the MediaOne
merger.
The following table displays the activity and balances of the restructuring
reserve account:
TYPE OF COST
EMPLOYEE FACILITY
SEPARATIONS CLOSINGS OTHER TOTAL
----------- ------------ ----- -----
Balance at January 1, 1998..................... $ 413 $ 434 $ 60 $ 907
Additions.................................... 150 125 -- 275
Deductions................................... (445) (190) (30) (665)
Balance at December 31, 1998................... 118 369 30 517
Additions.................................... 142 -- 3 145
Deductions................................... (110) (130) (12) (252)
Balance at December 31, 1999................... 150 239 21 410
Additions.................................... 503 32 62 597
Deductions................................... (394) (98) (47) (539)
Balance at December 31, 2000................... $ 259 $ 173 $ 36 $ 468
Deductions reflect cash payments of $245, $209 and $369, for 1998, 1999 and
2000, respectively. These payments included cash termination benefits of $124,
$40 and $257, respectively, which were primarily funded through cash from
operations. Deductions also reflect noncash utilization of $420, $43
L-54
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and $170 for 1998, 1999 and 2000, respectively. Noncash utilization included
deferred severance payments primarily related to executives, and a reversal in
1998 of $348 related to the 1995 restructuring plan. Nearly 75% of the employees
affected by the 1999 and 2000 restructuring charges have left their positions as
of December 31, 2000.
Also included in restructuring and exit costs in 2000 was $144 of benefit
plan curtailment costs associated with employee separations as part of these
exit plans. Further, we recorded an asset impairment charge of $18 related to
the write-down of unrecoverable assets in certain businesses where the carrying
value was no longer supported by estimated future cash flows.
During 1999, we recorded $975 of net restructuring and other charges.
A $594 in-process research and development charge was recorded reflecting
the estimated fair value of research and development projects at TCI, as of the
date of acquisition, which had not yet reached technological feasibility or had
no alternative future use. The projects identified related to efforts to offer
voice over Internet protocol (IP), product-integration efforts for advanced
set-top devices that would enable the offering of next-generation digital
services and cost-savings efforts for broadband-telephony implementation. In
addition, Excite@Home had research and development efforts underway, including
projects to allow for self-provisioning of devices and the development of
next-generation client software, network and back-office infrastructure to
enable a variety of network devices beyond personal computers, and improved
design for the regional data centers' infrastructure. We began testing
IP-telephony equipment in the field in late-2000, we anticipate beginning field
trials for next-generation digital services in late-2001, and have completed
trials related to our telephony cost reductions and implementation has begun in
certain markets. Although there are technological issues to overcome to
successfully complete the acquired in-process research and development, we
expect successful completion. If, however, AT&T is unable to establish
technological feasibility and produce commercially viable products/services,
anticipated incremental future cash flows attributable to expected profits from
such new products/services may not be realized.
Also in 1999, a $145 charge for restructuring and exit costs was recorded
as part of AT&T's initiative to reduce costs. The restructuring and exit plans
primarily focused on the maximization of synergies through headcount reductions
in Business Services and network operations, including the consolidation of
customer-care and call centers.
Included in exit costs was $142 of cash termination benefits associated
with the separation of approximately 2,800 employees as part of voluntary and
involuntary termination plans. Approximately one-half of the separations were
management employees and one-half were nonmanagement employees. Approximately
1,700 employee separations were related to involuntary terminations and
approximately 1,100 to voluntary terminations.
We also recorded net losses of $307 related to the government-mandated
disposition of certain international businesses that would have competed
directly with Concert, and $50 related to a contribution agreement Broadband
entered into with Phoenixstar, Inc. That agreement requires Broadband to satisfy
certain liabilities owed by Phoenixstar and its subsidiaries. In addition, we
recorded benefits of $121 related to the settlement of pension obligations for
former employees who accepted AT&T's 1998 voluntary retirement incentive program
(VRIP) offer.
During 1998, we recorded $2,514 of net restructuring and other charges. The
bulk of the charge was associated with our overall cost-reduction program and
the approximately 15,300 management employees who accepted the VRIP offer. A
restructuring charge of $2,724 was composed of $2,254 and $169 for pension and
postretirement special-termination benefits, respectively, $263 of benefit plan
curtailment losses and $38 of other administrative costs. We also recorded
charges of $125 for related facility costs and $150 for executive-separation
costs. These charges were partially offset by benefits of $940 as we settled
L-55
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pension benefit obligations of 13,700 of the total VRIP employees. In addition,
the VRIP charges were partially offset by the reversal of $256 of 1995 business
restructuring reserves primarily resulting from the overlap of VRIP on certain
1995 projects.
Also included in the 1998 net restructuring and other charges were asset
impairment charges totaling $718, of which $633 was related to our decision not
to pursue Total Service Resale (TSR) as a local-service strategy. We also
recorded an $85 asset impairment charge related to the write-down of
unrecoverable assets in certain international operations where the carrying
value was no longer supported by future cash flows. This charge was made in
connection with the review of certain operations that would have competed
directly with Concert.
Additionally, $85 of merger-related expenses was recorded in 1998 in
connection with the TCG merger, which was accounted for as a pooling of
interests. Partially offsetting these charges was a $92 reversal of the 1995
restructuring reserve. This reversal reflected reserves no longer deemed
necessary. The reversal primarily included separation costs attributed to
projects completed at a cost lower than originally anticipated. Consistent with
the three-year plan, the 1995 restructuring initiatives were substantially
completed by the end of 1998.
9. INVESTMENT IN LIBERTY MEDIA GROUP
As a result of our merger with TCI, we acquired Liberty Media Group, a
wholly-owned investment accounted for under the equity method (see Note 4).
Summarized results of operations for Liberty Media Group were as follows:
FOR THE YEAR ENDED FOR THE TEN MONTHS ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999
------------------ ------------------------
Revenue....................................... $1,526 $ 729
Operating income (loss)....................... 436 (2,214)
Net income (loss)............................. 1,488 (2,022)
AT DECEMBER 31,
-----------------
2000 1999
------- -------
Current assets.............................................. $ 2,954 $ 3,387
Noncurrent assets........................................... 51,314 55,297
Current liabilities......................................... 2,962 3,370
Noncurrent liabilities...................................... 16,668 16,853
Minority interest........................................... 348 1
During 2000 and 1999, certain investees of Liberty Media Group issued
common stock. Changes in the equity of the investees, net of the dilution of
LMG's ownership interest, resulted in an increase to AT&T's additional paid-in
capital of $355 and $109 in 2000 and 1999, respectively.
10. OTHER INVESTMENTS
We have investments in various companies and partnerships that are
accounted for under the equity method and included within "Other investments and
related advances" in the accompanying Consolidated Balance Sheets. Under the
equity method, investments are stated at initial cost, and are adjusted for
subsequent contributions and our share of earnings, losses and distributions. At
December 31, 2000 and 1999, we had equity investments (other than LMG) of
$10,494 and $13,921, respectively. The carrying value of these investments
exceeded our share of the underlying reported net assets by approximately $8,274
and $11,979, at December 31, 2000 and 1999, respectively. The goodwill is being
amortized over periods ranging from 15 to 40 years. Pretax amortization of
goodwill was $546 and $477 in 2000 and 1999,
L-56
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. There was no amortization of goodwill in 1998. The amortization is
shown net of income taxes as a component of "Net losses from other equity
investments" in the accompanying Consolidated Statements of Income.
Distributions from equity investments totaled $13, $85 and $127, for the years
ended December 31, 2000, 1999 and 1998, respectively.
Ownership of significant equity investments was as follows:
AT DECEMBER 31, 2000 1999
--------------- ----- -----
Cablevision Systems Corporation............................. 27.98%(a) 32.04%(a)
Concert..................................................... 50.00%(b) --
Time Warner Texas........................................... 50.00% 50.00%
Net2Phone, Inc.............................................. 31.34%(c) --
Insight Midwest LP.......................................... 50.00% 50.00%
Century-TCI California, LP.................................. 25.00% 25.00%
Kansas City Cable Partners.................................. 50.00% 50.00%
Parnassos, LP............................................... 33.33% 33.33%
At Home Corporation......................................... --(d) 25.00%(d)
Lenfest Communications, Inc................................. -- 50.00%
Bresnan Communications Group LLC............................ -- 50.00%
---------------
(a) At December 31, 2000 and 1999, we owned 48,942,172 shares of Cablevision
Systems Corporation Class A common stock, which had a closing market price
of $84.94 and $75.50 per share, respectively, on those dates. Cablevision
Systems Corporation (Cablevision) redeemed all of its outstanding preferred
stock and issued additional common stock, and issued shares of its common
stock for acquisitions. As a result of these transactions, AT&T's ownership
interest in Cablevision decreased from 32.04% to 27.98%. Due to the dilution
of AT&T's ownership interest in Cablevision, net of the increase in
Cablevision's equity, AT&T recorded a net decrease to additional paid-in
capital of $170 in 2000.
(b) On January 5, 2000, we formed Concert, our global-communications joint
venture with BT.
(c) At December 31, 2000, we owned 18,900,000 shares of Net2Phone, Inc. Class A
common stock, which had a closing market price of $7.38 per share on that
date.
(d) On August 28, 2000, AT&T and Excite@Home announced the closing of their
extension contracts and governance reorganization. As a result of the
governance changes, AT&T gained a controlling interest and began
consolidating Excite@Home's results on September 1, 2000. As of December 31,
2000, AT&T had an approximate 23% economic interest and 74% voting interest
in Excite@Home. We owned 7,924,422 and 63,720,000 shares of Excite@Home
Class A common stock at December 31, 2000 and 1999, respectively, which had
closing market prices of $5.53 and $42.88 per share, respectively, on those
dates. We also owned 86,595,578 and 30,800,000 shares of Excite@Home Class B
common stock at December 31, 2000 and 1999, respectively, which are not
publicly traded. During 2000 and 1999, Excite@Home issued shares of its
common stock for various acquisitions. As a result of these transactions,
AT&T's economic interest in Excite@Home decreased from 25% to 23% in 2000,
and from 38% to 25% in 1999, respectively. Due to the resulting increase in
Excite@Home's equity, net of the dilution of AT&T's ownership interest in
Excite@Home, AT&T recorded an increase to additional paid-in capital of $116
and $527 in 2000 and 1999, respectively.
L-57
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized unaudited combined financial information for investments
accounted for under the equity method was as follows:
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------- ----------- ------
(UNAUDITED)
Revenue................................................... $27,211 $9,285 $2,422
Operating loss............................................ 385 1,243 210
Loss from continuing operations before extraordinary items
and cumulative effect of a change in accounting
principle............................................... 1,844 2,511 306
Net loss.................................................. 2,212 2,707 400
AT DECEMBER 31, 2000 1999
--------------- ------- ------
(UNAUDITED)
Current assets.............................................. $10,643 $4,716
Noncurrent assets........................................... 29,055 29,140
Current liabilities......................................... 10,690 4,994
Noncurrent liabilities...................................... 18,741 16,302
Redeemable preferred stock.................................. 1,548 637
Minority interest........................................... 621 1,729
In addition, we have a 25.51% interest in TWE. This investment is
"held-for-sale" at December 31, 2000. Accordingly, we are no longer recording
equity earnings (losses) on this investment.
We also have investments accounted for under the cost method of accounting.
Under this method, investments are stated at cost, and earnings are recognized
to the extent distributions are received from the accumulated earnings of the
investee. Distributions received in excess of accumulated earnings are
recognized as a reduction of our investment balance. These investments, which
are covered under the scope of SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," are classified as "available-for-sale" and are
carried at fair value with any unrealized gain or loss, net of income taxes,
being included within other comprehensive income as a component of shareowners'
equity. Approximately $2,102 of these investments have been classified as
current assets since they are indexed to certain currently maturing debt
instruments.
11. DEBT OBLIGATIONS
DEBT MATURING WITHIN ONE YEAR
AT DECEMBER 31, 2000 1999
--------------- ------- -------
Commercial paper............................................ $16,234 $ 5,974
Short-term notes............................................ 11,505 5,000
Currently maturing long-term debt........................... 3,724 1,355
Other....................................................... 375 151
Total debt maturing within one year......................... $31,838 $12,480
Weighted-average interest rate of short-term debt........... 6.5% 5.3%
In February 2000, we entered into a 364-day, $10 billion syndicated credit
facility upon the expiration of existing credit facilities. On December 28,
2000, we entered into a new 364-day, $25 billion credit facility syndicated to
39 banks. As a result, the outstanding $10 billion credit facility was
terminated. The credit facility is for commercial paper back-up and was unused
at December 31, 2000. The credit facility agreement contains a financial
covenant that requires AT&T to maintain a net debt-to-EBITDA ratio (as
L-58
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
defined in the credit agreement) not exceeding 3.00 to 1.00 for four consecutive
quarters ending on the last day of each fiscal quarter. At December 31, 2000, we
were in compliance with this covenant.
At December 31, 1999, we had a 364-day, $7 billion revolving-credit
facility with a consortium of 42 lenders. We also had additional 364-day,
revolving-credit facilities of $3 billion. These lines were for commercial paper
back-up and were unused at December 31, 1999.
LONG-TERM OBLIGATIONS
AT DECEMBER 31, 2000 1999
--------------- ------- -------
DEBENTURES, NOTES AND TRUST PREFERRED SECURITIES(a)
Interest Rates(b) Maturities
4.00% -- 6.00% 2001-2018.................................... $ 6,639 $ 5,251
6.25% -- 6.50% 2001-2029.................................... 6,660 4,367
6.55% -- 7.50% 2001-2037.................................... 6,470 3,701
7.53% -- 8.50% 2001-2097.................................... 5,267 4,762
8.60% -- 11.13% 2001-2045................................... 7,317 5,386
Variable rate 2001-2054..................................... 4,164 867
Total debentures, notes and trust preferred securities...... 36,517 24,334
Other....................................................... 360 362
Unamortized discount, net................................... (64) (127)
Total long-term obligations................................. 36,813 24,569
Less: Currently maturing long-term debt..................... 3,724 1,355
Net long-term obligations................................... $33,089 $23,214
---------------
(a) Included in these balances was $946 and $975 representing the remaining
excess of the fair value over the recorded value of debt in connection with
the TCI and MediaOne mergers at December 31, 2000 and December 31, 1999,
respectively. The excess is being amortized over the remaining lives of the
underlying debt obligations.
(b) The actual interest paid on our debt obligations may have differed from the
stated amount due to our entering into interest rate swap contracts to
manage our exposure to interest rate risk and our strategy to reduce finance
costs (see Note 13).
On January 26, 1999, AT&T filed a registration statement with the SEC for
the offering and sale of up to $10 billion of notes and warrants to purchase
notes, resulting in a total available shelf registration of $13.1 billion. On
March 26, 1999, AT&T issued $8 billion in notes. We received net proceeds of
approximately $7.9 billion from the sale of the notes. The proceeds were
utilized to repay commercial paper issued in connection with the TCI merger and
toward funding the share repurchase program. On September 14, 1999, AT&T
completed a $450 bond offering in connection with the same registration
statement. The proceeds from the issuance were utilized for general corporate
purposes.
Included in long-term debt are subsidiary-obligated mandatorily redeemable
preferred securities of subsidiary trusts holding solely subordinated debt
securities, exchangeable notes and other exchangeable debt acquired in
connection with the TCI and MediaOne mergers.
L-59
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY SUBORDINATED DEBT SECURITIES
Certain subsidiary trusts of TCI (TCI Trusts) had preferred securities
outstanding at December 31, 2000 and 1999, as follows:
{CARRYING AMOUNT
INTEREST MATURITY -----------------
RATE DATE 2000 1999
-------- -------- ------- -------
TCI Communications Financing I.................... 8.72% 2045 $ 528 $ 528
TCI Communications Financing II................... 10.00% 2045 514 521
TCI Communications Financing III.................. 9.65% 2027 357 360
TCI Communications Financing IV................... 9.72% 2036 204 217
Total............................................. $1,603 $1,626
------ ------
The TCI Trusts were created for the exclusive purpose of issuing trust
preferred securities and investing the proceeds thereof into subordinated
deferrable interest notes (subordinated debt securities) of TCI. The
subordinated debt securities have interest rates equal to the interest rate of
the corresponding trust preferred securities and have maturity dates ranging
from 30 to 49 years from the date of issuance. The preferred securities are
mandatorily redeemable upon repayment of the subordinated debt securities, and
are callable by AT&T. The Financing I and II trust preferred securities are
callable at face value beginning in January and May 2001, respectively.
Financing III trust preferred securities are callable at 104.825% of face value
beginning in March 2007. Financing IV trust preferred securities are callable at
face value beginning in March 2002. TCI effectively provides a full and
unconditional guarantee of the TCI Trusts' obligations under the trust preferred
securities. In 2000, AT&T provided a full and unconditional guarantee of the
trust preferred securities for TCI Communications Financing I, II and IV
subsidiary trusts (see Note 20).
AT&T has the right to defer interest payments up to 20 consecutive
quarters; as a consequence, dividend payments on the trust preferred securities
can be deferred by the trusts during any such interest-payment period.
Certain subsidiary trusts of MediaOne (MediaOne Trusts) had preferred
securities outstanding at December 31, 2000, as follows:
INTEREST MATURITY CARRYING
RATE DATE AMOUNT
-------- -------- --------
MediaOne Financing I...................................... 7.96% 2025 $ 30
MediaOne Financing II..................................... 8.25% 2036 28
MediaOne Finance II....................................... 9.50% 2036 214
MediaOne Finance III...................................... 9.04% 2038 504
Total..................................................... $776
----
The MediaOne Trusts exist for the purpose of issuing the trust preferred
securities and investing the proceeds thereof into subordinated deferrable
interest notes (subordinated deferrable notes) of MediaOne Group Funding, Inc.,
a wholly owned subsidiary of MediaOne. The subordinated deferrable notes have
the same interest rate and maturity date as the trust preferred securities to
which they relate. All of the subordinated deferrable notes are redeemable by
MediaOne Group Funding, Inc. or MediaOne at a redemption price of $25.00 per
security, plus accrued and unpaid interest. Upon redemption of the subordinated
deferrable notes, the trust preferred securities will be mandatorily redeemable,
at a price of $25.00 per share, plus accrued and unpaid distributions. The 7.96%
subordinated deferrable notes became redeemable after September 11, 2000. The
9.50% and 8.25% subordinated deferrable notes are redeemable
L-60
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
after October 29, 2001. The 9.04% subordinated deferrable notes are redeemable
after October 28, 2003. MediaOne has effectively provided a full and
unconditional guarantee of the MediaOne Trusts' obligations under the trust
preferred securities. In 2000, AT&T provided a full and unconditional guarantee
of MediaOne's trust preferred securities (see Note 20).
AT&T has the right to defer interest payments up to 20 consecutive
quarters; as a consequence, dividend payments on the trust preferred securities
can be deferred by the trusts during any such interest-payment period.
EXCHANGEABLE NOTES
During 2000, we issued debt (exchangeable notes) which is mandatorily
redeemable at AT&T's option into shares of Comcast and Microsoft Corporation
(Microsoft) common stock, as applicable, or its cash equivalent. During 1999 and
1998, MediaOne issued exchangeable notes which are mandatorily redeemable at
MediaOne's option into (i) Vodafone American Depository Receipts (ADRs) held by
MediaOne, (ii) the cash equivalent, or (iii) a combination of cash and Vodafone
ADRs. The maturity value of these exchangeable notes varies based upon the fair
market value of the security it is indexed to.
Following is a summary of the exchangeable notes outstanding at December
31, 2000, which are indexed to 25 million shares of Comcast common stock:
MATURITY DATE 2003 2004 2005
------------- ------ ------ ------
Face value................................................. $ 371 $ 314 $ 329
Interest rate.............................................. 6.75% 5.50% 4.63%
Put price.................................................. 41.50 41.06 39.13
Call price................................................. 49.80 49.27 46.96
Carrying value at December 31, 2000........................ $ 371 $ 314 $ 329
At maturity, the exchangeable notes will be redeemed, at AT&T's option,
with (i) a number of shares of Comcast common stock equal to the underlying
shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The
exchange ratio will be calculated at maturity in the following manner:
(a) If the fair market value of a share of Comcast common stock is
greater than the call price, the exchange ratio will be 0.8333;
(b) If the fair market value of a share of Comcast common stock is
less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Comcast common stock is
less than or equal to the call price but greater than the put price, the
exchange ratio will be be a fraction, the numerator of which is equal to
the put price, and the denominator of which is equal to the fair market
value of a share of Comcast common stock.
Following is a summary of the exchangeable notes outstanding at December
31, 2000, which are indexed to 10 million shares of Microsoft common stock:
MATURITY DATE 2003 2004 2005
------------- ------ ------- -------
Face value............................................... $ 227 $ 226 $ 226
Interest rate............................................ 6.96% 7.00% 7.04%
Put price................................................ 67.87 67.87 67.87
Call price............................................... 97.39 111.64 128.60
Carrying value at December 31, 2000...................... $ 145 $ 144 $ 144
L-61
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At maturity, the exchangeable notes will be redeemed, at AT&T's option,
with (i) a number of shares of Microsoft common stock equal to the underlying
shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The
exchange ratio will be calculated at maturity in the following manner:
(a) If the fair market value of a share of Microsoft common stock is
greater than the call price, the exchange ratio will be a fraction, the
numerator of which is equal to the sum of (i) the put price, plus (ii) the
excess of the fair market value of a share of Microsoft common stock over
the call price, and the denominator of which is equal to the fair market
value of a share of Microsoft common stock;
(b) If the fair market value of a share of Microsoft common stock is
less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Microsoft common stock is
less than or equal to the call price but greater than the put price, the
exchange ratio will be a fraction, the numerator of which is equal to the
put price, and the denominator of which is equal to the fair market value
of a share of Microsoft common stock.
Following is a summary of the exchangeable notes outstanding at December
31, 2000, which are indexed to 22.3 million shares of Comcast common stock:
MATURITY DATE 2003 2004 2005
------------- ------ ------ ------
Face value................................................. $ 267 $ 267 $ 267
Interest rate.............................................. 6.76% 6.80% 6.84%
Put price.................................................. 35.89 35.89 35.89
Call price................................................. 50.64 58.39 67.97
Carrying value at December 31, 2000........................ $ 267 $ 267 $ 267
At maturity, the exchangeable notes will be redeemed, at AT&T's option,
with (i) a number of shares of Comcast common stock equal to the underlying
shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The
exchange ratio will be calculated at maturity in the following manner:
(a) If the fair market value of a share of Comcast common stock is
greater than or equal to the call price, the exchange ratio will be a
fraction, the numerator of which is equal to the sum of (i) the put price,
plus (ii) the excess of the fair market value of a share of Comcast common
stock over the call price, and the denominator of which is equal to the
fair market value of a share of Comcast common stock;
(b) If the fair market value of a share of Comcast common stock is
less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Comcast common stock is
less than the call price but greater than the put price, the exchange ratio
will be a fraction, the numerator of which is equal to the put price, and
the denominator of which is equal to the fair market value of a share of
Comcast common stock.
L-62
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of the exchangeable notes outstanding at December
31, 2000, which are indexed to Vodafone ADRs:
MATURITY DATE 2001 2002
------------- ------ ------
Face value.................................................. $1,686 $1,129
Interest rate............................................... 6.25% 7.00%
Put price................................................... 19.65 43.44
Call price.................................................. 25.10 51.26
Carrying value at December 31, 2000......................... $2,337 $1,012
The exchangeable notes that mature in 2001 are indexed to 29 million
Vodafone ADRs, and will be exchanged at maturity based upon a redemption value
of $9.00 in cash plus 2 1/2 times the fair market value of a Vodafone ADR
(maturity price), as follows:
(a) If the maturity price is greater than or equal to $9.00 plus
2 1/2 times the call price per share, each exchangeable note is equivalent
to 0.8101 of the maturity price;
(b) If the maturity price is less than or equal to $9.00 plus 2 1/2
times the put price per share, each exchangeable note is equivalent to the
maturity price; or
(c) If the maturity price is less than $71.75 per share but greater
than $58.125 per share, each exchangeable note is equivalent to $58.125.
The exchangeable notes that mature in 2002 are indexed to 26 million
Vodafone ADRs, and will be exchanged at maturity as follows:
(a) If the fair market value of a Vodafone ADR is greater than or
equal to the call price, each exchangeable note is equivalent to 0.8475 of
a Vodafone ADR;
(b) If the fair market value of a Vodafone ADR is less than or equal
to the put price, each exchangeable note is equivalent to one Vodafone ADR;
or
(c) If the fair market value of a Vodafone ADR is less than the call
price but greater than the put price, each exchangeable note is equivalent
to a fraction of a Vodafone ADR equal to (i) the put price divided by (ii)
the fair market value of a Vodafone ADR.
The exchangeable notes are being accounted for as indexed debt instruments
since the maturity value of the debt is dependent upon the fair market value of
the underlying Comcast, Microsoft and Vodafone securities. The exchangeable
notes contain embedded options that hedge the market risk of a decline in value
of Comcast, Microsoft and Vodafone securities. The market risk of a decline in
Comcast and Microsoft stock, and Vodafone ADRs, below the respective put prices
has been eliminated. In addition, any market gains we may earn have been limited
to the call prices, with the exception of certain debt indexed to Comcast stock
and the debt indexed to the Vodafone ADRs, which provides for our participation
in a portion of the market gains above the call price.
Since the Comcast, Microsoft, and Vodafone securities are cost method
investments being accounted for as "available-for-sale" securities under SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
changes in the maturity value of the exchangeable notes and the underlying
securities are being recorded as unrealized gains or losses, net of income
taxes, within other comprehensive income as a component of shareowners' equity.
The exchangeable notes indexed to Comcast common stock and Microsoft common
stock are secured by the Comcast and Microsoft investments AT&T owns. The
exchangeable notes indexed to Vodafone
L-63
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADRs are unsecured obligations, ranking equally in right of payment with all
other unsecured and unsubordinated obligations of AT&T.
OTHER EXCHANGEABLE DEBT
During 2000, we entered into a series of purchased and written options on
21.9 million shares of Microsoft common stock, and issued floating rate debt.
The carrying value of the debt at December 31, 2000, was $1,369, which pays
interest at the three-month London Inter-Bank Offered Rate (LIBOR) plus 0.4%.
The debt matures annually with $458 maturing in 2003 and 2004, and $453 maturing
in 2005, and is repayable at AT&T's option in either Microsoft stock or cash.
In addition, during 1999 two subsidiaries of MediaOne, MediaOne SPC IV and
MediaOne SPC VI, entered into a series of purchased and written options on
Vodafone ADRs contributed to them by MediaOne, and issued floating rate debt.
The carrying value of the debt at December 31, 2000, was $1,739, which pays
interest at the three-month LIBOR plus 0.5%. This debt matures in equal
quarterly installments beginning in 2003 and ending in 2005. The assets of
MediaOne SPC IV, which are primarily 29.1 million Vodafone ADRs, are available
only to pay the creditors of MediaOne SPC IV. Likewise, the assets of MediaOne
SPC VI, which are primarily 18.0 million Vodafone ADRs, are available only to
pay the creditors of MediaOne SPC VI.
This table shows the maturities at December 31, 2000, of the $36,813 in
total long-term obligations:
2001 2002 2003 2004 2005 LATER YEARS
------ ------ ------ ------ ------ -----------
$3,724 $2,661 $3,673 $4,692 $4,050 $18,013
12. OTHER SECURITIES
PREFERRED STOCK OF SUBSIDIARIES
Prior to the TCI merger, TCI Pacific Communications Inc. (Pacific) issued
5% Class A Senior Cumulative Exchangeable preferred stock, which remains
outstanding. There were 6.3 million shares authorized and outstanding at
December 31, 2000 and 1999. Each share is exchangeable, from and after August 1,
2001, for approximately 6.3 shares of AT&T common stock, subject to certain
antidilution adjustments. Additionally, Pacific may elect to make any dividend,
redemption or liquidation payment in cash, shares of AT&T common stock or a
combination of the foregoing. The Pacific preferred stock is reflected within
"Minority Interest" in the accompanying Consolidated Balance Sheets, and
aggregated $2.1 billion at December 31, 2000 and 1999.
Prior to the TCI merger, TCI issued Class B 6% Cumulative Redeemable
Exchangeable Junior preferred stock (Class B preferred stock). There were 1.6
million shares outstanding as of December 31, 1999, net of shares held by a
subsidiary, out of an authorized 1.7 million shares. Class B preferred stock and
accumulated dividends aggregated $152 at December 31, 1999, and were reflected
within "Minority Interest" in the accompanying 1999 Consolidated Balance Sheet.
On February 22, 2000, all outstanding shares of Class B preferred stock were
redeemed at $105.88 per share.
COMPANY-OBLIGATED CONVERTIBLE QUARTERLY INCOME PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY SUBORDINATED DEBT SECURITIES OF AT&T AND
RELATED WARRANTS
On June 16, 1999, AT&T Finance Trust I (AT&T Trust), a wholly owned
subsidiary of AT&T, completed the private sale of 100 million shares of 5.0%
cumulative quarterly income preferred securities (quarterly preferred
securities) to Microsoft. Proceeds of the issuance were invested by the AT&T
Trust in
L-64
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
junior subordinated debentures (debentures) issued by AT&T due 2029, which
represent the sole asset of the AT&T Trust.
The quarterly preferred securities pay dividends at an annual rate of 5.0%
of the liquidation preference of $50 per security, and are convertible at any
time prior to maturity into 66.667 million shares of AT&T common stock. The
quarterly preferred securities are subject to mandatory redemption upon
repayment of the debentures at maturity or their earlier redemption. The
conversion feature can be terminated, under certain conditions, after three
years.
The debentures will make a quarterly payment in arrears of 62.5 cents per
security on the last day of March, June, September and December of each year.
AT&T has the right to defer such interest payments up to 20 consecutive
quarters. As a consequence, quarterly dividend payments on the quarterly
preferred securities can be deferred by the AT&T Trust during any such
interest-payment period. If AT&T defers any interest payments, we may not, among
other things, pay any dividends on our common stock until all interest in
arrears is paid to the AT&T Trust.
Dividends on the quarterly preferred securities were $250 and $135 for the
years ended December 31, 2000 and 1999, respectively, and are reported within
"Minority interest income (expense)" in the accompanying Consolidated Statements
of Income.
On June 16, 1999, AT&T also issued to Microsoft 40 million warrants, each
to purchase one share of AT&T common stock at a price of $75 per share at the
end of three years. Alternatively, the warrants are exercisable on a cashless
basis. If the warrants are not exercised on the three-year anniversary of the
closing date, the warrants expire.
A discount on the quarterly preferred securities equal to the value of the
warrants of $306 was recognized and is being amortized over the 30-year life of
the quarterly preferred securities as a component of "Minority interest income
(expense)" in the accompanying Consolidated Statements of Income.
CENTAUR FUNDING CORPORATION
Centaur Funding Corporation (Centaur), a subsidiary of MediaOne, issued
three series of preferred shares prior to AT&T's acquisition of MediaOne.
Centaur was created for the principal purpose of raising capital through the
issuance of preferred shares and investing those proceeds into notes issued by
MediaOne SPC II, a subsidiary of MediaOne. Principal and interest payments from
the notes are expected to be Centaur's primary source of funds to make dividend
and redemption payments on the preferred shares. In addition, the dividend and
certain redemption payments on the preferred shares will be determined by
reference to the dividend and redemption activity of the preferred stock of
AirTouch Communications, Inc. (ATI Shares) held by MediaOne SPC II. Payments on
the preferred shares are neither guaranteed nor secured by MediaOne or AT&T. The
assets of MediaOne SPC II, which include the ATI shares, are available only to
pay the creditors of MediaOne SPC II. These securities remained outstanding at
December 31, 2000 as follows:
DIVIDEND RATE MATURITY DATE CARRYING AMOUNT
------------- -------------- ---------------
Series A.................................. Variable None $ 100
Series B.................................. 9.08% April 21, 2020 927
Series C.................................. None April 21, 2020 118
Total..................................... $1,145
------
The Auction Market Preference Shares, Series A, have a liquidation value of
$250 thousand per share and dividends are payable quarterly when declared by
Centaur's board of directors out of funds legally available. The 9.08%
Cumulative Preference Shares, Series B, have a liquidation value of $1 thousand
per
L-65
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
share and dividends are payable quarterly in arrears when declared by Centaur's
board of directors out of funds legally available. In addition, dividends may be
declared and paid only to the extent that dividends have been declared and paid
on the ATI shares. The preference shares, Series C, have a liquidation value of
$1 thousand per share at maturity. The value of the Series C will be accreted to
reach its liquidation value upon maturity. The Series B shares rank equally with
the Series C shares as to redemption payments and upon liquidation, and the
Series B and Series C shares rank senior to the Series A shares as to redemption
payments and upon liquidation. The preference shares issued by Centaur are
reflected within "Minority interest" in the accompanying 2000 Consolidated
Balance Sheet.
Dividends on the preferred shares were $55 for the period ended December
31, 2000, and were included within "Minority interest income (expense)" in the
Consolidated Statement of Income.
13. FINANCIAL INSTRUMENTS
In the normal course of business, we use various financial instruments,
including derivative financial instruments, for purposes other than trading. We
do not use derivative financial instruments for speculative purposes. These
instruments include letters of credit, guarantees of debt, interest rate swap
agreements, foreign currency exchange contracts, option contracts and equity
hedges. Collateral is generally not required for these types of instruments.
By their nature, all such instruments involve risk, including the credit
risk of nonperformance by counterparties, and our maximum potential loss may
exceed the amount recognized in our balance sheet. However, at December 31, 2000
and 1999, in management's opinion, there was no significant risk of loss in the
event of nonperformance of the counterparties to these financial instruments. We
control our exposure to credit risk through credit approvals, credit limits and
monitoring procedures. We do not have any significant exposure to any individual
customer or counterparty, nor do we have any major concentration of credit risk
related to any financial instruments.
LETTERS OF CREDIT
Letters of credit are purchased guarantees that ensure our performance or
payment to third parties in accordance with specified terms and conditions.
Letters of credit do not create any additional risk to AT&T.
GUARANTEES OF DEBT
From time to time, we guarantee the debt of our subsidiaries and certain
unconsolidated joint ventures. Prior to the merger, TCI had agreed to take
certain steps to support debt compliance with respect to obligations aggregating
$1,461 and $1,720 at December 31, 2000 and 1999, respectively, of certain cable
television partnerships in which TCI has a non-controlling ownership interest.
Although there can be no assurance, management believes that it will not be
required to meet its obligations under such guarantees. Additionally, in
connection with the restructuring of AT&T in 1996, we issued guarantees for
certain debt obligations of our former subsidiaries AT&T Capital Corp. and NCR.
The amount of guaranteed debt associated with AT&T Capital Corp. and NCR was $48
and $56 at December 31, 2000 and 1999, respectively.
INTEREST RATE SWAP AGREEMENTS
We enter into interest rate swaps to manage our exposure to changes in
interest rates and to lower our overall costs of financing. We enter into swap
agreements to manage the fixed/floating mix of our debt portfolio in order to
reduce aggregate risk to interest rate movements. Interest rate swaps also allow
us to raise funds at floating rates and effectively swap them into fixed rates
that are lower than those available to
L-66
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
us if fixed-rate borrowings were made directly. These agreements involve the
exchange of floating-rate for fixed-rate payments, fixed-rate for floating-rate
payments or floating-rate for other floating-rate payments without the exchange
of the underlying principal amount. Fixed interest rate payments at December 31,
2000, were at rates ranging from 6.05% to 8.20%. Floating-rate payments are
based on rates tied to the LIBOR. In addition, we also have combined interest
rate, foreign currency swap agreements for foreign-currency-denominated debt,
which hedge our risk to both interest rate and currency movements.
The following table indicates the types of swaps in use at December 31,
2000 and 1999, and their weighted-average interest rates. Average variable rates
are those in effect at the reporting date and may change significantly over the
lives of the contracts.
2000 1999
---- ------
Fixed to variable swaps--notional amount.................... $750 $1,800
Average receive rate...................................... 8.16% 6.89%
Average pay rate.......................................... 8.16% 6.67%
Variable to fixed swaps--notional amount.................... $218 $ 229
Average receive rate...................................... 6.81% 6.30%
Average pay rate.......................................... 7.31% 6.77%
Variable to variable swaps--notional amount................. $739 $ 495
Average receive rate...................................... 1.74% 6.63%
Average pay rate.......................................... 5.42% 6.53%
The weighted-average remaining terms of the swap contracts were 11 and
seven years at December 31, 2000 and 1999, respectively.
FOREIGN EXCHANGE
We enter into foreign currency exchange contracts, including forward and
option contracts, to manage our exposure to changes in currency exchange rates
related to foreign-currency-denominated transactions. In 2000, this consisted
principally of Brazilian reais and Swiss francs related to debt. In 1999, this
consisted principally of European Union currency (Euro), British pounds sterling
and Japanese Yen contracts related to the reimbursement to foreign telephone
companies for their portion of the revenue billed by AT&T for calls placed in
the United States to a foreign country and other foreign currency payables and
receivables. In addition, we are subject to foreign exchange risk related to
other foreign-currency-denominated transactions.
COLLARS
We enter into option agreements to hedge our exposure on debt that is
indexed to securities we own. During 2000, we entered into a series of purchased
and written options related to a portion of our holdings in Microsoft stock
(Microsoft collar), which is indexed to floating rate debt. The collar has been
designated and is effective as a hedge of the market risk associated with our
investment in Microsoft stock. The Microsoft collar is carried at fair value,
with unrealized gains or losses, net of income taxes, being recorded within
other comprehensive income as a component of shareowners' equity, together with
any change in the fair value of the Microsoft stock. The carrying value of the
Microsoft collar was $419 at December 31, 2000.
At the expiration of the Microsoft collar, if the price of a Microsoft
share is equal to or less than the put price of $62.48, we would exercise the
put option and deliver all underlying shares of Microsoft common stock and
receive cash equal in value to (i) the put price, multiplied by (ii) the
underlying share
L-67
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amount. Alternatively, at our option, we can elect not to deliver the underlying
shares and instead settle the put option by receiving cash equal in value to the
(i) the difference between the put price minus the fair value of one Microsoft
share, multiplied by (ii) the underlying share amount. If the price of a
Microsoft share is greater then the call price, which range from $86.26 to
$118.36, then the call option would be exercised and we would deliver all
underlying shares and receive cash equal in value to (i) the call price,
multiplied by (ii) the underlying share amount. At our option, we can elect not
to deliver the underlying shares and instead settle the call option by paying
cash equal in value to the (i) the difference between the call price minus the
fair value of one Microsoft share, multiplied by (ii) the underlying share
amount. Any cash received by AT&T from the exercise or settlement of either put
or call option would be used to retire the floating rate debt. We would retain
cash in excess of the call price from a call option exercise. If the price of a
Microsoft share is between the put price and the call price, the collar will
expire without value.
Prior to our merger with MediaOne, two subsidiaries of MediaOne, MediaOne
SPC IV and MediaOne SPC VI, entered into a series of purchased and written
options (Vodafone collars) on Vodafone ADRs contributed to them by MediaOne, and
issued floating rate debt. The Vodafone collars have been designated and are
effective as a hedge of the market risk associated with our investment in
Vodafone ADRs. The Vodafone collars are carried at fair value, with unrealized
gains or losses, net of income taxes, being recorded within other comprehensive
income as a component of shareowners' equity, together with any change in the
fair value of the Vodafone ADRs. The carrying value of the Vodafone collars was
$453 at December 31, 2000.
At the expiration of the MediaOne SPC IV collar, we will receive cash if
the market value of a Vodafone ADR is less than approximately $34.00 per share,
effectively eliminating downside risk on the stock below $34.00 per share.
Conversely, if the market value of a Vodafone ADR is greater than approximately
$49.00 per share, we will be required to pay cash, which will be offset by the
corresponding increase in the value of the Vodafone ADR. This Vodafone collar
expires quarterly beginning in 2003 and ending in 2005.
At the expiration of the MediaOne SPC VI collar, we will receive cash if
the market value of a Vodafone ADR is less than approximately $40.00 per share,
effectively eliminating downside risk on the stock below $40.00 per share.
Conversely, if the market value of a Vodafone ADR is greater than approximately
$58.00 per share, we will be required to pay cash, which will be offset by the
corresponding increase in the value of the Vodafone ADR. This Vodafone collar
expires quarterly beginning in 2003 and ending in 2005.
EQUITY HEDGES
We enter into equity hedges to manage our exposure to changes in equity
prices associated with stock appreciation rights of affiliated companies.
FAIR VALUES OF FINANCIAL INSTRUMENTS INCLUDING DERIVATIVE FINANCIAL INSTRUMENTS
The following table summarizes the notional amounts of material financial
instruments. The notional amounts represent agreed-upon amounts on which
calculations of dollars to be exchanged are based. They do not represent amounts
exchanged by the parties and, therefore, are not a measure of our exposure. Our
exposure is limited to the fair value of the contracts with a positive fair
value plus interest receivable, if any, at the reporting date.
L-68
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DERIVATIVES AND OFF BALANCE SHEET INSTRUMENTS
2000 1999
CONTRACT/ CONTRACT/
NOTIONAL NOTIONAL
AMOUNT AMOUNT
--------- ---------
Interest rate swap agreements............................... $ 968 $2,524
Combined interest rate foreign currency swap agreements..... 739 --
Foreign exchange forward contracts.......................... 71 1,881
Option contracts............................................ 3,108 --
Equity hedges............................................... 392 495
Letters of credit........................................... 833 243
Guarantees of debt.......................................... 1,557 1,848
The following tables show the valuation methods, the carrying amounts and
estimated fair values of material financial instruments.
FINANCIAL INSTRUMENT VALUATION METHOD
-------------------- ----------------
Debt excluding capital leases............. Market quotes or rates available to us for debt
with similar terms and maturities
Letters of credit......................... Fees paid to obtain the obligations
Guarantees of debt........................ There are no quoted market prices for similar
agreements available
Interest rate swap agreements............. Market quotes obtained from dealers
Combined interest rate foreign currency
swap agreements......................... Market quotes obtained from dealers
Foreign exchange contracts................ Market quotes
Option contracts.......................... Black-Scholes option-pricing model
Equity hedges............................. Market quotes
Preferred securities...................... Market quotes*
---------------
* It is not practicable to estimate the fair market value of our quarterly
preferred securities that aggregated $4,710 and $4,700 at December 31, 2000
and 1999, respectively. There are no current market quotes available on this
private placement.
2000 1999}
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
Debt excluding capital leases.................. $64,430 $61,574 $35,350 $33,935
Pacific preferred stock........................ 2,121 595 2,121 1,929
L-69
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000 1999
----------------------------- -----------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- ------------- -------------
ASSET LIAB. ASSET LIAB. ASSET LIAB. ASSET LIAB.
----- ----- ----- ----- ----- ----- ----- -----
Interest rate swap
agreements.................. $4 $ 5 $4 $ 5 $ 28 $27 $ 6 $29
Combined interest rate foreign
currency swap agreements.... 1 3 1 3 -- -- -- --
Foreign exchange forward
contracts................... -- 1 1 2 -- 26 1 28
Equity hedges................. 2 100 2 100 313 2 313 --
14. PENSION, POSTRETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS
We sponsor noncontributory, defined benefit pension plans covering the
majority of our employees. Pension benefits for management employees are based
principally on career-average pay. Pension benefits for occupational employees
are not directly related to pay. Pension trust contributions are made to trust
funds held for the sole benefit of plan participants. Our benefit plans for
current and certain future retirees include health-care benefits, life insurance
coverage and telephone concessions.
The following table shows the components of the net periodic benefit costs
included in our Consolidated Statements of Income:
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------- ------------------------
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998 2000 1999 1998
-------------------------------- ------- ------- ------- ------ ------ ------
Service cost benefits earned
during the period............. $ 248 $ 247 $ 275 $ 35 $ 54 $ 56
Interest cost on benefit
obligations................... 991 919 940 352 324 322
Amortization of unrecognized
prior service cost............ 174 159 135 4 13 (2)
Credit for expected return on
plan assets................... (1,821) (1,458) (1,570) (230) (200) (173)
Amortization of transition
asset......................... (156) (158) (175) -- -- --
Amortization of gains........... (332) (10) -- (16) (1) --
Charges for special termination
benefits*..................... -- -- 2,254 16 5 169
Net curtailment losses
(gains)*...................... 121 -- 140 (14) -- 141
Net settlement losses
(gains)*...................... 8 (121) (921) -- -- --
Net periodic benefit (credit)
cost.......................... $ (767) $ (422) $ 1,078 $ 147 $ 195 $ 513
---------------
* Primarily included in "Net restructuring and other charges" in the
Consolidated Statements of Income.
On January 26, 1998, we offered a voluntary retirement incentive program
(VRIP) to employees who were eligible participants in the AT&T Management
Pension Plan. Approximately 15,300 management employees accepted the VRIP offer.
In connection with the VRIP, we recorded pretax charges in 1998 for pension and
postretirement plan special-termination benefits of $2,254 and $169,
respectively. We also recorded pension and postretirement plan pretax charges of
$120 and $143, respectively, which are included within net curtailment losses in
1998. The special-termination benefits reflect the value of pension benefit
improvements and expanded eligibility for postretirement benefits. The VRIP also
permitted employees to choose either a total lump-sum distribution of their
pension benefits or periodic future annuity payments.
L-70
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1999, all 15,300 employees had terminated employment
under the VRIP. AT&T has settled the pension obligations covering about 15,100
of these employees, the remainder of which either chose to defer commencing
their pension benefits or elected to receive an annuity distribution. Lump-sum
pension settlements totaling $5.2 billion, including a portion of the
special-pension termination benefits referred to above, resulted in settlement
gains of $121 and $940 recorded in 1999 and 1998, respectively.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets, and a statement of the funded
status:
POSTRETIREMENT
PENSION BENEFITS BENEFITS
----------------- -----------------
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 2000 1999
-------------------------------- ------- ------- ------- -------
Change in benefit obligations:
Benefit obligation, beginning of year.......... $12,868 $14,443 $ 4,642 $ 5,168
Service cost................................... 248 247 35 54
Interest cost.................................. 991 919 352 324
Plan amendments................................ 32 558 (45) 4
Actuarial losses (gains)....................... 5 (1,683) 203 (579)
Acquisition.................................... 204 -- 38 --
Benefit payments............................... (1,228) (1,062) (362) (334)
Special termination benefits................... -- -- 16 5
Settlements.................................... (57) (554) -- --
Curtailment losses............................. -- -- 7 --
Benefit obligation, end of year................ $13,063 $12,868 $ 4,886 $ 4,642
------- ------- ------- -------
Change in fair value of plan assets:
Fair value of plan assets, beginning of year... $21,854 $18,567 $ 2,852 $ 2,476
Actual return on plan assets................... 995 4,855 (128) 385
Employer contributions......................... 94 48 159 325
Acquisition.................................... 205 -- 5 --
Benefit payments............................... (1,228) (1,062) (362) (334)
Settlements.................................... (57) (554) -- --
Fair value of plan assets, end of year......... $21,863 $21,854 $ 2,526 $ 2,852
------- ------- ------- -------
AT DECEMBER 31,
---------------
Funded (unfounded) benefit obligation.......... $ 8,800 $ 8,986 $(2,360) $(1,790)
Unrecognized net gain.......................... (7,301) (8,457) (188) (800)
Unrecognized transition asset.................. (123) (279) -- --
Unrecognized prior service cost................ 1,100 1,362 (9) 55
Net amount recorded............................ $ 2,476 $ 1,612 $(2,557) $(2,535)
------- ------- ------- -------
At December 31, 2000, our pension plan assets included $34 of AT&T common
stock, $26 of Liberty Media Group Series A common stock, and $2 of AT&T Wireless
Group common stock. At December 31, 1999, our pension plan assets included $82
of AT&T common stock and $34 of Liberty Media Group Series A common stock.
L-71
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides the amounts recorded in our Consolidated
Balance Sheets:
POSTRETIREMENT
PENSION BENEFITS BENEFITS
----------------- -----------------
AT DECEMBER 31, 2000 1999 2000 1999
--------------- ------- ------- ------- -------
Prepaid pension cost............................. $3,003 $2,464 $ -- $ --
Benefit related liabilities...................... (579) (918) (2,557) (2,535)
Intangible asset................................. 30 46 -- --
Accumulated other comprehensive income........... 22 20 -- --
Net amount recorded.............................. $2,476 $1,612 $(2,557) $(2,535)
------ ------ ------- -------
Our nonqualified pension plans had an unfunded accumulated benefit
obligation of $125 and $118 at December 31, 2000 and 1999, respectively. Our
postretirement health and telephone concession benefit plans had accumulated
postretirement benefit obligations of $4,282 and $4,021 at December 31, 2000 and
1999, respectively, which were in excess of plan assets of $1,413 and $1,635 at
December 31, 2000 and 1999, respectively.
The assumptions used in the measurement of the pension and postretirement
benefit obligations are shown in the following table:
AT DECEMBER 31, 2000 1999 1998
--------------- ---- ---- ----
Weighted-average assumptions:
Discount rate............................................... 7.5% 7.75% 6.5%
Expected return on plan assets.............................. 9.5% 9.5% 9.5%
Rate of compensation increase............................... 4.5% 4.5% 4.5%
We assumed a rate of increase in the per capita cost of covered health-care
benefits (the health-care cost trend rate) of 7.6%. This rate was assumed to
gradually decline after 2000 to 4.5% by 2010 and then remain level. Assumed
health-care cost trend rates have a significant effect on the amounts reported
for the health-care plans. A one percentage point increase or decrease in the
assumed health-care cost trend rate would increase or decrease the total of the
service and interest-cost components of net periodic postretirement health-care
benefit cost by $9 and $9, respectively, and would increase or decrease the
health-care component of the accumulated postretirement benefit obligation by
$125 and $122, respectively.
We also sponsor savings plans for the majority of our employees. The plans
allow employees to contribute a portion of their pretax and/or after-tax income
in accordance with specified guidelines. We match a percentage of the employee
contributions up to certain limits. Our contributions amounted to $220 in 2000,
$197 in 1999 and $173 in 1998.
15. STOCK-BASED COMPENSATION PLANS
Under the 1997 Long-term Incentive Program (Program), which was effective
June 1, 1997, and amended on May 19, 1999 and March 14, 2000, we grant stock
options, performance shares, restricted stock and other awards on AT&T common
stock as well as stock options on AT&T Wireless Group tracking stock.
Under the Program, there were 150 million shares of AT&T common stock
available for grant with a maximum of 22.5 million common shares that could be
used for awards other than stock options. Beginning with January 1, 2000, the
remaining shares available for grant at December 31 of the prior year, plus
1.75% of the shares of AT&T common stock outstanding on January 1 of each year,
become available for grant. There are a maximum of 37.5 million shares that may
be used for awards other than stock
L-72
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options. The exercise price of any stock option is equal to the stock price when
the option is granted. Generally, the options vest over three or four years and
are exercisable up to 10 years from the date of grant.
Under the Program, performance share units are awarded to key employees in
the form of either common stock or cash at the end of a three-year period, based
on AT&T's total shareholder return and certain financial-performance targets.
Under the 1987 Long-term Incentive Program, performance share units with the
same terms were also awarded to key employees based on AT&T's return-to-equity
performance compared with a target.
On April 27, 2000, AT&T created a new class of stock and completed an
offering of AT&T Wireless Group tracking stock. Under the Program, 5% of the
outstanding AT&T Wireless Group shares became available for grant with a maximum
of 1.25% of the outstanding shares that may be used for awards other than
options. Beginning with January 1, 2001, the remaining AT&T Wireless Group
shares available for grant at December 31 of the prior year, plus 2% of the
outstanding AT&T Wireless Group shares on January 1 of each year, become
available for grant. The exercise price of any stock option is equal to the
stock price when the option is granted. Generally, the options vest over two to
three and one-half years and are exercisable up to 10 years from the date of
grant. In 2000, there were no grants of awards other than stock options. On
April 27, 2000, substantially all employees were granted AT&T Wireless Group
tracking stock options.
Under the AT&T 1996 Employee Stock Purchase Plan (Plan), which was
effective July 1, 1996, we are authorized to sell up to 75 million shares of
AT&T common stock to our eligible employees. Under the terms of the Plan,
employees may have up to 10% of their earnings withheld to purchase AT&T's
common stock. The purchase price of the stock on the date of exercise is 85% of
the average high and low sale prices of shares on the New York Stock Exchange
for that day. Under the Plan, we sold approximately 6 million shares to
employees in 2000 and 3 million shares to employees in both 1999 and 1998.
We apply APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations in accounting for our plans. Accordingly, no
compensation expense has been recognized for our stock-based compensation plans
other than for our performance-based and restricted stock awards and stock
appreciation rights (SARs). Stock based-compensation income (expense) was $253,
$(462) and $(157) in 2000, 1999 and 1998, respectively. These amounts included
income (expense) of $269 and $(382) in 2000 and 1999, respectively, related to
grants of SARs of affiliated companies held by certain employees subsequent to
the TCI merger. We also entered into an equity hedge in 1999 to offset potential
future compensation costs associated with these SARs. (Expense) income related
to this hedge was $(297) and $247 in 2000 and 1999, respectively.
L-73
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the AT&T common stock option transactions is shown below:
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES IN THOUSANDS 2000 PRICE 1999 PRICE 1998 PRICE
------------------- ------- --------- ------- --------- ------- ---------
Outstanding at January
1,...................... 168,763 $37.42 131,904 $30.41 110,972 $24.77
Options assumed in
mergers................. 29,613 $24.71 11,770 $14.79 -- --
Options granted........... 74,570 $36.12 47,927 $57.13 46,148 $41.69
Options and SARs
exercised............... (11,446) $22.07 (17,858) $22.87 (18,894) $21.95
Options canceled or
forfeited............... (12,474) $45.61 (4,980) $42.44 (6,322) $31.64
At December 31:
Options outstanding....... 249,026 $35.82 168,763 $37.42 131,904 $30.41
Options exercisable....... 131,450 $30.44 57,894 $28.21 35,472 $23.13
Shares available for
grant................... 34,204 41,347 91,838
All of the 11.8 million stock options assumed in connection with the TCI
merger were in tandem with SARs, which were canceled on April 30, 1999. During
1999, 386,000 SARs (including 137,000 for TCI) were exercised. At December 31,
2000, there were no AT&T SARs outstanding.
The following table summarizes information about the AT&T common stock
options outstanding at December 31, 2000:
L-74
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- ----------------------------------
WEIGHTED-
AVERAGE WEIGHTED- NUMBER WEIGHTED-
NUMBER OUTSTANDING REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF EXERCISE PRICES AT DECEMBER 31, 2000 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 2000 EXERCISE PRICE
------------------------ -------------------- ---------------- -------------- ----------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
$ 2.69 - $18.08....... 21,182 5.0 $11.23 20,206 $10.99
$18.15 - $24.49....... 16,914 6.2 $22.51 11,808 $22.57
$24.50................ 15,451 6.6 $24.50 15,451 $24.50
$24.55 - $26.18....... 8,664 6.2 $25.33 8,664 $25.33
$26.21................ 17,299 6.1 $26.21 17,299 $26.21
$26.33 - $31.97....... 20,246 6.6 $30.31 12,501 $29.98
$32.09................ 25,551 9.6 $32.09 141 $32.09
$32.19 - $42.04....... 26,908 8.5 $36.91 10,147 $39.57
$42.10................ 26,975 7.1 $42.10 17,531 $42.10
$42.19 - $45.44....... 20,017 9.1 $45.25 1,927 $44.45
$45.48 - $59.75....... 23,581 8.6 $51.33 9,293 $50.40
$59.88 - $62.13....... 26,238 8.1 $59.89 6,482 $59.89
------- -------
249,026 7.5 $35.82 131,450 $30.44
======= =======
A summary of the AT&T Wireless Group tracking stock option transactions is
shown below:
WEIGHTED-AVERAGE
SHARES IN THOUSANDS 2000 EXERCISE PRICE
------------------- ------ ----------------
Outstanding at January 1,................................... -- $ --
Options granted............................................. 76,983 $29.29
Options exercised........................................... -- $ --
Options canceled or forfeited............................... (3,357) $29.43
At December 31:
Options outstanding......................................... 73,626 $29.29
Options exercisable......................................... 12,391 $29.48
Shares available for grant.................................. 41,874
The following table summarizes information about the AT&T Wireless Group
tracking stock options outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ----------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF EXERCISE PRICES DECEMBER 31, 2000 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 2000 EXERCISE PRICE
------------------------ ----------------- ---------------- -------------- ----------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
$17.06 - $21.00....... 305 9.9 $17.91 -- $ --
$24.47................ 1,741 9.8 $24.47 -- $ --
$26.00 - $28.53....... 1,865 9.5 $27.62 122 $27.21
$29.50................ 69,715 9.3 $29.50 12,269 $29.50
------ ------
73,626 9.3 $29.29 12,391 $29.48
====== ======
L-75
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." If AT&T had elected to recognize
compensation costs based on the fair value at the date of grant for awards in
2000, 1999 and 1998, consistent with the provisions of SFAS No. 123, net income
and earnings per share amounts would have been as follows:
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------ ------
AT&T Common Stock Group:
Income from continuing operations........................... $2,342 $5,685 $4,932
Income (loss) from discontinued operations.................. 283 (492) 153
Gain on sale of discontinued operations..................... -- -- 1,290
Extraordinary loss.......................................... -- -- 137
Income...................................................... $2,625 $5,193 $6,238
Earnings (loss) per AT&T Common Stock Group common
share-basic:
Continuing operations....................................... $ 0.67 $ 1.84 $ 1.84
Discontinued operations..................................... 0.08 (0.16) 0.06
Gain on sale of discontinued operations..................... -- -- 0.48
Extraordinary loss.......................................... -- -- 0.05
AT&T Common Stock Group earnings............................ $ 0.75 $ 1.68 $ 2.33
Earnings (loss) per AT&T Common Stock Group common
share-diluted:
Continuing operations....................................... $ 0.66 $ 1.80 $ 1.82
Discontinued operations..................................... 0.08 (0.15) 0.06
Gains on sale of discontinued operations.................... -- -- 0.48
Extraordinary loss.......................................... -- -- 0.05
AT&T Common Stock Group earnings............................ $ 0.74 $ 1.65 $ 2.31
AT&T Wireless Group:
Income...................................................... $ 51 $ -- $ --
Earnings per share:
Basic and diluted........................................... $ 0.14 $ -- $ --
The pro forma effect on net income for 1998 may not be representative of
the pro forma effect on net income of future years because the SFAS No. 123
method of accounting for pro forma compensation expense has not been applied to
options granted prior to January 1, 1995.
The weighted-average fair values at date of grant for AT&T common stock
options granted during 2000, 1999 and 1998 were $12.10, $15.64 and $9.75,
respectively, and were estimated using the Black-Scholes option-pricing model.
The weighted-average risk-free interest rates applied for 2000, 1999 and 1998
were 6.29%, 5.10% and 5.33%, respectively. The following assumptions were
applied for 2000, 1999 and 1998, respectively: (i) expected dividend yields of
1.6%, 1.7% and 2.1%, (ii) expected volatility rates of 33.5%, 28.3% and 23.8%
and (iii) expected lives of 4.7 years in 2000 and 4.5 years for 1999 and 1998.
The weighted-average fair values at date of grant for AT&T Wireless Group
tracking stock options granted during 2000 was $14.20 and was estimated using
the Black-Scholes option-pricing model. The following weighted-average
assumptions were applied for 2000: (i) risk-free rate of 6.53%, (ii) expected
volatility rate of 55.0% and (iii) expected life of 3.9 years.
L-76
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. INCOME TAXES
The following table shows the principal reasons for the difference between
the effective income tax rate and the U.S. federal statutory income tax rate:
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------ ------
U.S. federal statutory income tax rate..................... 35% 35% 35%
Federal income tax at statutory rate....................... $ 845 $3,774 $2,853
Amortization of investment tax credits..................... (23) (10) (14)
State and local income taxes, net of federal income tax
effect................................................... 176 279 190
In-process research and development write-off.............. -- 208 --
Amortization of intangibles................................ 91 26 17
Foreign rate differential.................................. 104 56 30
Taxes on repatriated and accumulated foreign income, net of
tax credits.............................................. (84) (45) (36)
Research and other credits................................. (37) (61) (83)
Valuation allowance........................................ -- (76) 38
Investment dispositions, acquisitions and legal entity
restructurings........................................... (445) (94) (153)
Operating losses and charges relating to Excite@Home....... 2,757 -- --
Other differences, net..................................... (100) (41) 147
Provision for income taxes................................. $3,284 $4,016 $2,989
Effective income tax rate.................................. 136.1% 37.3% 36.7%
The U.S. and foreign components of income from continuing operations before
income taxes and the provision for income taxes are presented in this table:
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------- ------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
United States............................................. $2,823 $10,449 $7,953
Foreign................................................... (409) 332 198
Total..................................................... $2,414 $10,781 $8,151
------ ------- ------
PROVISION FOR INCOME TAXES
CURRENT
Federal................................................. $2,323 $ 2,896 $2,714
State and local......................................... 281 417 220
Foreign................................................. 89 100 41
2,693 3,413 2,975
DEFERRED
Federal................................................. 633 593 (45)
State and local......................................... (14) 12 73
Foreign................................................. (5) 8 --
614 613 28
Deferred investment tax credits........................... (23) (10) (14)
Provision for income taxes................................ $3,284 $ 4,016 $2,989
------ ------- ------
L-77
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, we also recorded current and deferred income tax expenses
(benefits) related to minority interest and net equity losses on other equity
investments in the amounts of $(279) and $(251) in 2000, $(273) and $(249) in
1999 and $51 and $(119) in 1998, respectively.
Deferred income tax liabilities are taxes we expect to pay in future
periods. Similarly, deferred income tax assets are recorded for expected
reductions in taxes payable in future periods. Deferred income taxes arise
because of differences in the book and tax bases of certain assets and
liabilities.
Deferred income tax liabilities and assets consist of the following:
AT DECEMBER 31, 2000 1999
--------------- ------- -------
LONG-TERM DEFERRED INCOME TAX LIABILITIES
Property, plant and equipment............................. $ 5,393 $ 4,447
Investments............................................... 9,558 6,477
Franchise costs........................................... 18,571 11,998
Other..................................................... 2,694 1,059
Total long-term deferred income tax liabilities........... 36,216 23,981
LONG-TERM DEFERRED INCOME TAX ASSETS
Business restructuring.................................... 127 120
Net operating loss/credit carryforwards................... 602 644
Employee pensions and other benefits, net................. 1,470 1,359
Reserves and allowances................................... 99 145
Other..................................................... 2,604 1,429
Valuation allowance....................................... (740) (223)
Total net long-term deferred income tax assets.............. 4,162 3,474
Net long-term deferred income tax liabilities............... $32,054 $20,507
------- -------
CURRENT DEFERRED INCOME TAX LIABILITIES
Investments............................................... $ 670 $ --
Other..................................................... 310 417
Total current deferred income tax liabilities............. 980 417
CURRENT DEFERRED INCOME TAX ASSETS
Business restructuring.................................... 155 47
Employee pensions and other benefits...................... 377 549
Reserves and allowances................................... 621 574
Other..................................................... 586 407
Valuation allowance....................................... (39) --
Total net current deferred income tax assets................ 1,700 1,577
Net current deferred income tax assets...................... $ 720 $ 1,160
------- -------
At December 31, 2000, we had net operating loss carryforwards
(tax-effected), excluding Excite@Home, for federal and state income tax purposes
of $36 and $125, respectively, expiring through 2015. In addition, we had
federal tax credit carryforwards of $116, of which $35 have no expiration date
and $81 expire through 2005. We also had state tax credit carryforwards
(tax-effected) of $32 expiring through 2003. In connection with the TCI merger,
we acquired certain federal and state net operating loss carryforwards subject
to a valuation allowance of $59. If, in the future, the realization of these
acquired
L-78
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deferred tax assets becomes more likely than not, any reduction of the
associated valuation allowance will be allocated to reduce franchise costs and
other purchased intangibles.
At December 31, 2000, Excite@Home had net operating loss carryforwards (tax
effected) for federal and state income tax purposes of $290 expiring through
2020. Utilization of Excite@Home's net operating loss carryforwards may be
subject to a minor annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986, as amended, and similar state
provisions. The annual limitation may result in the expiration of a portion of
Excite@Home's net operating loss carryforwards before utilization. The
realization of Excite@Home's net deferred tax asset is dependent upon
Excite@Home's future earnings, if any, the timing and amount of which are
uncertain. In addition, Excite@Home is a separate taxpayer and is not a member
of the AT&T consolidated tax group. Accordingly, Excite@Home provided a
valuation allowance in an amount equal to its net deferred tax assets of $702 as
of December 31, 2000. Approximately $142 of Excite@Home's valuation allowance at
December 31, 2000, is attributable to stock option deductions, the benefit of
which will be credited to paid-in capital when realized. Approximately $269 of
Excite@Home's valuation allowance at December 31, 2000, is attributable to
deferred tax assets that, if realized, will be allocated to first reduce
goodwill, then other purchased intangibles, and then income tax expense.
On August 10, 2001, AT&T completed the split-off of LMG. The IRS ruled that
the split-off qualified as a tax-free transaction for AT&T, Liberty Media and
their shareowners. Pursuant to the tax-sharing agreement dated March 9, 1999
between AT&T and LMG, AT&T is required to reimburse LMG approximately $816 for
the value of certain TCI pre-acquisition net operating loss carryforwards. Also,
in connection with a tax-sharing agreement between LMG and TCI that was executed
prior to AT&T's acquisition of TCI, LMG is obligated to pay AT&T approximately
$138 upon its split-off from AT&T.
17. COMMITMENTS AND CONTINGENCIES
In the normal course of business we are subject to proceedings, lawsuits
and other claims, including proceedings under laws and regulations related to
environmental and other matters. Such matters are subject to many uncertainties,
and outcomes are not predictable with assurance. Consequently, we are unable to
ascertain the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at December 31, 2000. These matters could
affect the operating results of any one quarter when resolved in future periods.
However, we believe that after final disposition, any monetary liability or
financial impact to us beyond that provided for at year-end would not be
material to our annual consolidated financial statements.
We lease land, buildings and equipment through contracts that expire in
various years through 2017. Our rental expense under operating leases was $705
in 2000, $622 in 1999 and $558 in 1998. The total of minimum rentals to be
received in the future under noncancelable operating subleases as of December
31, 2000, was $209.
L-79
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows our future minimum commitments due under
noncancelable operating and capital leases at December 31, 2000:
OPERATING LEASES CAPITAL LEASES
---------------- --------------
2001..................................................... $ 514 $149
2002..................................................... 433 137
2003..................................................... 383 87
2004..................................................... 342 66
2005..................................................... 304 63
Later years.............................................. 1,027 175
------ ----
Total minimum lease payments............................. $3,003 677
======
Less: Amount representing interest....................... (179)
----
Present value of net minimum lease payments.............. $498
====
AT&T has an agreement with Motorola, Inc. to purchase a minimum of 1.25
million digital set-top devices at an average price of $248 per unit in 2001.
During 2000, AT&T satisfied its obligation under a previous agreement with
Motorola, Inc. to purchase set-top devices.
Through a joint venture (70% owned by AT&T and 30% owned by BT), AT&T and
BT have a 31% ownership of AT&T Canada Corp. as a result of the 1999 merger
between AT&T Canada Corp. and MetroNet Communications, Corp. In connection with
this merger, the AT&T and BT joint venture has the right to call, or arrange for
another entity to call, the remaining 69% of AT&T Canada for the greater of
Cdn$40.56 per share, which represented the projected value as of December 31,
2000, with an accretion of 4% each quarter that began on June 30, 2000, or the
then-appraised fair market value. If we do not exercise our call rights by June
30, 2003, the shares would be put up for auction, and the AT&T and BT joint
venture would have to make the shareholders whole for the difference between the
proceeds received in auction and the greater of the fair market value or the
accreted value. The exact timing of any purchase will likely be partially
dependent upon the future status of Canadian foreign-ownership regulations.
18. RELATED PARTY TRANSACTIONS
AT&T has various related party transactions with Concert as a result of the
closure of this global venture in early January 2000.
Included in revenue for the year ended December 31, 2000, is $1,080, for
services provided to Concert.
Included in access and other connection expenses for the year ended
December 31, 2000, are charges from Concert representing costs incurred on our
behalf to connect calls made to foreign countries (international settlements)
and costs paid by AT&T to Concert for distributing Concert products totaling
$2,364.
During the first quarter of 2000, AT&T contributed property, plant and
equipment of approximately $1,600 to Concert. AT&T also loaned $1,000 to
Concert; that loan is included within "Other investments and related advances"
in the accompanying 2000 Consolidated Balance Sheet. Interest income of $67 was
recognized for the year ended December 31, 2000.
At December 31, 2000, AT&T had a floating rate loan payable to Concert in
the amount of $126. The loan, which is due on demand, is included in "Debt
maturing within one year" in the accompanying Consolidated Balance Sheet.
Interest expense was $6 for the year ended December 31, 2000.
L-80
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in accounts receivable and accounts payable at December 31, 2000,
was $462 and $518, respectively, related to transactions with Concert. Included
in other receivables and other current liabilities at December 31, 2000, was
$1,106 and $1,032, respectively, related to transactions associated with
Concert.
In addition, we had various related party transactions with LMG. Included
in costs of services and products were programming expenses related to services
from LMG. These expenses amounted to $239 for the year ended December 31, 2000
and $184 for the 10 months ended December 31, 1999, respectively.
Included in "Investment in Liberty Media Group and related receivables,
net" was $155 and $27 at December 31, 2000 and 1999, respectively, primarily
related to taxes pursuant to a tax-sharing agreement between LMG and Broadband.
That agreement existed prior to the TCI merger.
19. SEGMENT REPORTING
AT&T's results are segmented according to the way we manage our business:
Business Services, Consumer Services and Broadband.
Our Business Services segment offers a variety of global communications
services, including long distance, local, and data and Internet protocol (IP)
networking, to small and medium-sized businesses, large domestic and
multinational businesses and government agencies. Business Services is also a
provider of voice, data and IP transport to service resellers (wholesale
services). Also included in the Business Services segment is AT&T Solutions, our
outsourcing and network-management business.
Our Consumer Services segment provides a variety of any-distance
communications services, including long distance, local toll (intrastate calls
outside the immediate local area) and Internet access to residential customers.
In addition, Consumer Services provides prepaid calling card and
operator-handled calling services. Local phone service is also provided in
certain areas.
Our Broadband segment offers a variety of services through our cable
broadband network, including traditional analog video and new services such as
digital video, high-speed data and broadband telephony.
The balance of AT&T's operations (excluding LMG) is included in a
"Corporate and Other" category. This category reflects corporate staff functions
and the elimination of transactions between segments, as well as the results of
Excite@Home and international operations and ventures. LMG is not an operating
segment of AT&T because AT&T does not have a controlling financial interest in
LMG for financial accounting purposes. Therefore, we account for this investment
under the equity method. Additionally, LMG's results are not reviewed by the
chief operating decision-makers for purposes of determining resources to be
allocated.
Total assets for our reportable segments generally include all assets,
except intercompany receivables. Prepaid pension assets and corporate-owned or
leased real estate are generally held at the corporate level and therefore, are
included in the Corporate and Other category. Shared network assets are
allocated to the segments and reallocated each January based on two years of
volumes. Capital additions for each segment include capital expenditures for
property, plant and equipment, acquisitions of licenses, additions to
nonconsolidated investments, increases in franchise costs and additions to
internal-use software.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (see Note 1). AT&T evaluates
performance based on several factors, of which the primary financial measure is
earnings before interest and taxes, including pretax minority interest and net
pretax losses from other equity investments (EBIT).
Generally, AT&T accounts for Business Services' and Broadband's
intersegment transactions at market prices.
L-81
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------- ------- -------
Business Services external revenue..................... $28,157 $28,087 $25,001
Business Services internal revenue..................... 743 605 356
------- ------- -------
Total Business Services revenue............................. 28,900 28,692 25,357
Consumer Services external revenue.......................... 18,894 21,753 22,763
Broadband external revenue............................. 8,212 5,069 --
Broadband internal revenue............................. 14 1 --
------- ------- -------
Total Broadband revenue..................................... 8,226 5,070 --
Total reportable segments............................ 56,020 55,515 48,120
Corporate and Other(1)...................................... (487) (542) (303)
------- ------- -------
Total revenue............................................... $55,533 $54,973 $47,817
======= ======= =======
---------------
(1) Includes $248 and $10 related to Excite@Home in 2000 and 1999, respectively.
DEPRECIATION AND AMORTIZATION(1)
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------ ------
Business Services........................................... $4,220 $4,219 $3,357
Consumer Services........................................... 167 184 116
Broadband................................................... 3,063 1,636 --
------ ------ ------
Total reportable segments.............................. 7,450 6,039 3,473
Corporate and Other(2)...................................... 1,139 155 104
------ ------ ------
Total depreciation and amortization......................... $8,589 $6,194 $3,577
====== ====== ======
---------------
(1) Includes the amortization of goodwill, franchise costs and other purchased
intangibles.
(2) Includes $991 and $38 related to Excite@Home in 2000 and 1999, respectively.
L-82
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS (LOSSES) FROM OTHER EQUITY INVESTMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ----- ----- -----
Business Services........................................... $ 35 $ (72) $(128)
Broadband................................................... (215) (396) --
----- ----- -----
Total reportable segments.............................. (180) (468) (128)
Corporate and Other(1)...................................... (408) (288) 19
----- ----- -----
Total net (losses) from other equity investments............ $(588) $(756) $(109)
===== ===== =====
---------------
(1) Includes $(382) and $(311) related to Excite@Home in 2000 and 1999,
respectively.
RECONCILIATION OF EBIT TO INCOME BEFORE INCOME TAXES
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------- ------
Business Services........................................... $5,990 $ 5,248 $4,017
Consumer Services........................................... 6,893 7,619 6,289
Broadband................................................... (1,240) (1,545) --
------ ------- ------
Total reportable segments.............................. 11,643 11,322 10,306
Corporate and Other(1)...................................... (3,279) (441) (2,040)
Less: Pretax minority interest income (expense)............. 4,003 (180) (1)
Add: Pretax losses from other equity investments............ 1,017 1,223 177
Interest expense............................................ (2,964) (1,503) (293)
------ ------- ------
Total income from continuing operations before income
taxes..................................................... $2,414 $10,781 $8,151
====== ======= ======
---------------
(1) Includes $(3,603) and $(686) related to Excite@Home in 2000 and 1999,
respectively. The Excite@Home EBIT impact in 2000 includes $2,630 of net
restructuring and other charges.
L-83
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ASSETS
AT DECEMBER 31, 2000 1999 1998
--------------- -------- -------- -------
Business Services........................................... $ 42,747 $ 37,974 $27,320
Consumer Services........................................... 3,150 3,781 3,732
Broadband................................................... 114,848 53,810 --
Total reportable segments.............................. 160,745 95,565 31,052
-------- -------- -------
Corporate and Other assets:
Other segments......................................... 1,174 1,204 1,227
Prepaid pension costs.................................. 3,003 2,464 2,074
Deferred income taxes.................................. 406 527 815
Other corporate assets(1).............................. 7,518 7,874 4,966
Net assets of discontinued operations.................. 27,224 17,363 14,051
Investment in Liberty Media Group and related receivables,
net....................................................... 34,290 38,460 --
-------- -------- -------
Total assets................................................ $234,360 $163,457 $54,185
======== ======== =======
---------------
(1) Includes $2,541 and $2,726 related to Excite@Home for 2000 and 1999,
respectively.
EQUITY INVESTMENTS (EXCLUDING LMG)
AT DECEMBER 31, 2000 1999 1998
--------------- ------- ------- ----
Business Services........................................... $ 2,355 $ 582 $ 51
Broadband................................................... 6,473 10,327 --
------- ------- ----
Total reportable segments.............................. 8,828 10,909 51
Corporate and Other(1)...................................... 1,666 3,012 344
------- ------- ----
Total equity investments.................................... $10,494 $13,921 $395
======= ======= ====
---------------
(1) Includes $35 and $2,726 related to Excite@Home for 2000 and 1999,
respectively.
CAPITAL ADDITIONS
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------- ------- ------
Business Services........................................... $ 6,839 $ 9,091 $6,773
Consumer Services........................................... 148 299 99
Broadband................................................... 4,968 4,759 --
------- ------- ------
Total reportable segments.............................. 11,955 14,149 6,872
Corporate and Other(1)...................................... 1,683 271 310
------- ------- ------
Total capital additions..................................... $13,638 $14,420 $7,182
======= ======= ======
---------------
(1) Includes $92 related to Excite@Home in 2000.
Geographic information is not presented due to the immateriality of revenue
attributable to international customers.
L-84
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reflecting the dynamics of our business, we continually review our
management model and structure and make adjustments accordingly.
20. GUARANTEE OF PREFERRED SECURITIES
TCI Securities:
Prior to the consummation of the TCI merger, TCI issued mandatorily
redeemable preferred securities through subsidiary trusts that held subordinated
debt securities of TCI. At December 31, 2000, $1,246 of the guaranteed
redeemable preferred securities remained outstanding.
MediaOne Securities:
Prior to the consummation of the MediaOne merger, MediaOne issued
mandatorily redeemable preferred securities through subsidiary trusts that held
subordinated debt securities of MediaOne. At December 31, 2000, $776 of the
guaranteed securities remained outstanding.
AT&T provides a full and unconditional guarantee on the outstanding
securities issued by TCI Communications Financing I, II and IV and the
outstanding securities issued by MediaOne Financing I and II and MediaOne
Finance II and III. Following are the condensed consolidating financial
statements of AT&T Corp., which include the financial results of TCI and
MediaOne for each of the corresponding periods. The results of MediaOne have
been included in the financial results of AT&T since the date of acquisition on
June 15, 2000, and the results of TCI have been included since the March 9,
1999, date of acquisition.
L-85
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 2000
GUARANTOR GUARANTOR GUARANTOR TCI TCI
AT&T SUBSIDIARY SUBSIDIARY FINANCING FINANCING
PARENT TCI MEDIAONE I II
--------- ---------- ---------- --------- ---------
ASSETS
Cash and cash equivalents................................... $ -- $ -- $ -- $ -- $ --
Receivables................................................. 11,424 2,577 78
Investments.................................................
Deferred income taxes....................................... 811
Other current assets........................................ 1,103 11
TOTAL CURRENT ASSETS........................................ 13,338 2,588 78
Property, plant & equipment, net............................ 9,463 102 22
Franchise costs, net........................................ 838 30
Goodwill, net............................................... 161 19,786
Investment in Liberty Media Group and related receivables,
net........................................................ 34,290
Other investments and related advances...................... 164,844 32,650 27,712
Other assets................................................ 5,500 186 528 514
Net assets of discontinued operations.......................
TOTAL ASSETS................................................ $194,144 $69,846 $47,598 $528 $514
LIABILITIES
Debt maturing within one year............................... $ 52,556 $ 664 $ 2,337 $ -- $ --
Liability under put options.................................
Other current liabilities................................... 9,535 1,129 76
TOTAL CURRENT LIABILITIES................................... 62,091 1,793 2,413
Long-term debt.............................................. 21,333 30,096 1,702 528 514
Deferred income taxes....................................... 569 230
Other long-term liabilities and deferred credits............ 7,341 773 129
TOTAL LIABILITIES........................................... 91,334 32,662 4,474 528 514
Minority Interest...........................................
Company-Obligated Convertible
Quarterly Income Preferred Securities of Subsidiary Trust
Holding Solely Subordinated Debt Securities of AT&T........ 4,710
SHAREOWNERS' EQUITY
AT&T Common Stock........................................... 4,176
AT&T Wireless Group common stock............................ 362
Liberty Media Group Class A Common Stock.................... 2,364
Liberty Media Group Class B Common Stock.................... 206
Other shareowners' equity................................... 90,992 37,184 43,124
TOTAL SHAREOWNERS' EQUITY................................... 98,100 37,184 43,124
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY................... $194,144 $69,846 $47,598 $528 $514
TCI MEDIAONE MEDIAONE MEDIAONE MEDIAONE
FINANCING FINANCING FINANCING FINANCE FINANCE
IV I II II III
--------- --------- --------- -------- --------
ASSETS
Cash and cash equivalents................................... $ -- $-- $-- $ -- $ --
Receivables.................................................
Investments.................................................
Deferred income taxes.......................................
Other current assets........................................
TOTAL CURRENT ASSETS........................................
Property, plant & equipment, net............................
Franchise costs, net........................................
Goodwill, net...............................................
Investment in Liberty Media Group and related receivables,
net........................................................
Other investments and related advances......................
Other assets................................................ 204 51 44 230 516
Net assets of discontinued operations.......................
TOTAL ASSETS................................................ $204 $51 $44 $230 $516
LIABILITIES
Debt maturing within one year............................... $ -- $-- $-- $ -- $ --
Liability under put options.................................
Other current liabilities...................................
TOTAL CURRENT LIABILITIES...................................
Long-term debt.............................................. 204 30 28 214 504
Deferred income taxes.......................................
Other long-term liabilities and deferred credits............
TOTAL LIABILITIES........................................... 204 30 28 214 504
Minority Interest...........................................
Company-Obligated Convertible
Quarterly Income Preferred Securities of Subsidiary Trust
Holding Solely Subordinated Debt Securities of AT&T........
SHAREOWNERS' EQUITY
AT&T Common Stock...........................................
AT&T Wireless Group common stock............................
Liberty Media Group Class A Common Stock....................
Liberty Media Group Class B Common Stock....................
Other shareowners' equity................................... 21 16 16 12
TOTAL SHAREOWNERS' EQUITY................................... 21 16 16 12
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY................... $204 $51 $44 $230 $516
ELIMINATION AND
NON-GUARANTOR CONSOLIDATION CONSOLIDATED
SUBSIDIARIES ADJUSTMENTS AT&T CORP.
------------- --------------- ------------
ASSETS
Cash and cash equivalents................................... $ 64 $ -- $ 64
Receivables................................................. 48,896 (51,922) 11,053
Investments................................................. 2,102 2,102
Deferred income taxes....................................... (91) 720
Other current assets........................................ (328) (5) 781
TOTAL CURRENT ASSETS........................................ 50,643 (51,927) 14,720
Property, plant & equipment, net............................ 31,685 (3) 41,269
Franchise costs, net........................................ 47,350 48,218
Goodwill, net............................................... 6,835 26,782
Investment in Liberty Media Group and related receivables,
net........................................................ 34,290
Other investments and related advances...................... 19,673 (214,004) 30,875
Other assets................................................ 15,714 (12,505) 10,982
Net assets of discontinued operations....................... 24,876 2,348 27,224
TOTAL ASSETS................................................ $196,776 $(276,091) $234,360
LIABILITIES
Debt maturing within one year............................... $ 5,432 $ (29,151) $ 31,838
Liability under put options................................. 2,564 2,564
Other current liabilities................................... 11,219 (8,386) 13,573
TOTAL CURRENT LIABILITIES................................... 19,215 (37,537) 47,975
Long-term debt.............................................. 2,558 (24,622) 33,089
Deferred income taxes....................................... 31,255 32,054
Other long-term liabilities and deferred credits............ 331 (81) 8,493
TOTAL LIABILITIES........................................... 53,359 (62,240) 121,611
Minority Interest........................................... 4,841 4,841
Company-Obligated Convertible
Quarterly Income Preferred Securities of Subsidiary Trust
Holding Solely Subordinated Debt Securities of AT&T........ 4,710
SHAREOWNERS' EQUITY
AT&T Common Stock........................................... (416) 3,760
AT&T Wireless Group common stock............................ 362
Liberty Media Group Class A Common Stock.................... 2,364
Liberty Media Group Class B Common Stock.................... 206
Other shareowners' equity................................... 138,992 (213,851) 96,506
TOTAL SHAREOWNERS' EQUITY................................... 138,576 (213,851) 103,198
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY................... $196,776 $(276,091) $234,360
L-86
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2000
GUARANTOR GUARANTOR GUARANTOR TCI TCI TCI
AT&T SUBSIDIARY SUBSIDIARY FINANCING FINANCING FINANCING
PARENT TCI MEDIAONE I II IV
--------- ---------- ---------- --------- --------- ---------
Revenue........................................ $22,234 $ -- $ -- $ -- $ -- $ --
Operating Expenses
Costs of services and products................. 2,961
Access and other connection.................... 7,047
Selling, general and administrative............ 2,071 19 29
Depreciation and other amortization............ 1,806 52 7
Amortization of goodwill, franchise costs and
other purchased intangibles.................. 50 6 226
Net restructuring and other charges............ 443 60
Total operating expenses....................... 14,378 137 262
Operating income (loss)........................ 7,856 (137) (262)
Other income (expense)......................... 971 30 64 43 46 18
Interest expense (benefit)..................... 4,786 1,793 170 43 46 18
Income (loss) from continuing operations before
income taxes, minority interest and earnings
(losses) from equity investments............. 4,041 (1,900) (368)
Provision (benefit) for income taxes........... 1,505 (727) (54)
Minority interest income (expense)............. (161)
Equity earnings from Liberty Media Group....... 1,488
Net earnings (losses) from other equity
investments.................................. 6,258 (3,765) (202)
Income (loss) from continuing operations..... 8,633 (3,450) (516)
Income from discontinued operations (net of
income taxes)
Net income (loss).............................. 8,633 (3,450) (516)
Dividend requirements on preferred stock held
by AT&T, net.................................
Net income (loss) after preferred stock
dividends.................................... $ 8,633 $(3,450) $(516) $ -- $ -- $ --
MEDIAONE MEDIAONE MEDIAONE MEDIAONE ELIMINATION AND
FINANCING FINANCING FINANCE FINANCE NON-GUARANTOR CONSOLIDATION
I II II III SUBSIDIARIES ADJUSTMENTS
--------- --------- -------- -------- ------------- ---------------
Revenue........................................ $ -- $ -- $-- $-- $35,386 $(2,087)
Operating Expenses
Costs of services and products................. 11,536 (1,702)
Access and other connection.................... 6,425 (332)
Selling, general and administrative............ 7,649 (16)
Depreciation and other amortization............ 4,059
Amortization of goodwill, franchise costs and
other purchased intangibles.................. 2,383
Net restructuring and other charges............ 6,526
Total operating expenses....................... 38,578 (2,050)
Operating income (loss)........................ (3,192) (37)
Other income (expense)......................... 2 2 11 25 4,242 (4,304)
Interest expense (benefit)..................... 1 1 11 24 311 (4,240)
Income (loss) from continuing operations before
income taxes, minority interest and earnings
(losses) from equity investments............. 1 1 1 739 (101)
Provision (benefit) for income taxes........... 1 2,559
Minority interest income (expense)............. 4,264
Equity earnings from Liberty Media Group.......
Net earnings (losses) from other equity
investments.................................. (586) (2,293)
Income (loss) from continuing operations..... 1 1 1,858 (2,394)
Income from discontinued operations (net of
income taxes) 546 (10)
Net income (loss).............................. 1 1 2,404 (2,404)
Dividend requirements on preferred stock held
by AT&T, net................................. 111 (111)
Net income (loss) after preferred stock
dividends.................................... $ 1 $ 1 $-- $-- $ 2,293 $(2,293)
CONSOLIDATED
AT&T CORP.
------------
Revenue........................................ $55,533
Operating Expenses
Costs of services and products................. 12,795
Access and other connection.................... 13,140
Selling, general and administrative............ 9,752
Depreciation and other amortization............ 5,924
Amortization of goodwill, franchise costs and
other purchased intangibles.................. 2,665
Net restructuring and other charges............ 7,029
Total operating expenses....................... 51,305
Operating income (loss)........................ 4,228
Other income (expense)......................... 1,150
Interest expense (benefit)..................... 2,964
Income (loss) from continuing operations before
income taxes, minority interest and earnings
(losses) from equity investments............. 2,414
Provision (benefit) for income taxes........... 3,284
Minority interest income (expense)............. 4,103
Equity earnings from Liberty Media Group....... 1,488
Net earnings (losses) from other equity
investments.................................. (588)
Income (loss) from continuing operations..... 4,133
Income from discontinued operations (net of
income taxes) 536
Net income (loss).............................. 4,669
Dividend requirements on preferred stock held
by AT&T, net.................................
Net income (loss) after preferred stock
dividends.................................... $ 4,699
L-87
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
GUARANTOR GUARANTOR GUARANTOR TCI TCI TCI MEDIAONE
AT&T SUBSIDIARY SUBSIDIARY FINANCING FINANCING FINANCING FINANCING
PARENT TCI MEDIAONE I II IV I
--------- ---------- ---------- --------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES OF CONTINUING OPERATIONS......... $ 2,735 $ (374) $ (138) $ -- $ -- $ -- $1
INVESTING ACTIVITIES
Capital expenditures and other additions...... (51) (79) (21)
Equity investment distributions and sales..... 363 1,384
Equity investment contributions and
purchases................................... (1,700) (7,360)
Net (acquisitions) dispositions of businesses
net of cash acquired/disposed............... (23,943)
Other......................................... (2,057) (48)
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES OF CONTINUING OPERATIONS......... (27,388) (7,487) 1,363
FINANCING ACTIVITIES
Proceeds from long-term debt issuances........ 739
Proceeds from debt from AT&T.................. 5,867 13,743 275
Retirement of long-term debt.................. (498) (1,058)
Retirement of AT&T debt....................... (4,990) (1,500)
Issuance of AT&T
Wireless Group common shares................ 10,314
Dividends paid on common stock................ (3,047)
Increase (decrease) in short-term borrowings,
net......................................... 12,108
Other......................................... (830) 166 (1)
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES OF CONTINUING OPERATIONS......... 24,653 7,861 (1,225) (1)
Net cash provided by (used in) discontinued
operations..................................
Net (decrease) increase in cash and cash
equivalents.................................
Cash and cash equivalents at beginning of
year........................................
Cash and cash equivalents at end of period.... $ -- $ -- $ -- $ -- $ -- $ -- $--
MEDIAONE MEDIAONE MEDIAONE ELIMINATION AND
FINANCING FINANCE FINANCE NON-GUARANTOR CONSOLIDATION CONSOLIDATED
II II III SUBSIDIARIES ADJUSTMENTS AT&T CORP.
--------- -------- -------- ------------- --------------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES OF CONTINUING OPERATIONS......... $1 $ -- $ -- $ 9,079 $ 361 $ 11,665
INVESTING ACTIVITIES
Capital expenditures and other additions...... (10,760) (10,911)
Equity investment distributions and sales..... 629 (1,384) 992
Equity investment contributions and
purchases................................... (694) 7,360 (2,394)
Net (acquisitions) dispositions of businesses
net of cash acquired/disposed............... 7,286 (16,657)
Other......................................... (6,186) 7,216 (1,075)
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES OF CONTINUING OPERATIONS......... (9,725) 13,192 (30,045)
FINANCING ACTIVITIES
Proceeds from long-term debt issuances........ 3,862 4,601
Proceeds from debt from AT&T.................. 4,595 (24,480)
Retirement of long-term debt.................. (562) (2,118)
Retirement of AT&T debt....................... 6,490
Issuance of AT&T
Wireless Group common shares................ 10,314
Dividends paid on common stock................ (3,047)
Increase (decrease) in short-term borrowings,
net......................................... 706 4,159 16,973
Other......................................... (1) (1,242) 917 (991)
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES OF CONTINUING OPERATIONS......... (1) 7,359 (12,914) 25,732
Net cash provided by (used in) discontinued
operations.................................. (7,667) (639) (8,306)
Net (decrease) increase in cash and cash
equivalents................................. (954) (954)
Cash and cash equivalents at beginning of
year........................................ 1,018 1,018
Cash and cash equivalents at end of period.... $-- $ -- $ -- $ 64 $ -- $ 64
L-88
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1999
ELIMINATION
GUARANTOR GUARANTOR TCI TCI TCI AND
AT&T SUBSIDIARY FINANCING FINANCING FINANCING NON-GUARANTOR CONSOLIDATION
PARENT TCI I II IV SUBSIDIARIES ADJUSTMENTS
--------- ---------- --------- --------- --------- ------------- -------------
ASSETS
Cash and cash
equivalents.............. $ -- $ -- $ -- $ -- $ -- $ 1,018 $ --
Receivables................ 12,513 5 40,968 (44,244)
Deferred income taxes...... 945 215
Other current assets....... 381 3 545 (5)
TOTAL CURRENT ASSETS....... 13,839 8 42,746 (44,249)
Property, plant &
equipment, net........... 11,078 128 22,160
Franchise costs, net....... 8 32,685
Goodwill, net.............. 88 5,222
Investment in Liberty Media
Group and related
receivables, net......... 38,460
Other investments and
related advances......... 111,056 34,046 18,829 (149,075)
Other assets............... 5,143 74 528 521 217 9,368 (6,786)
Net assets of discontinued
operations............... 17,449 (86)
TOTAL ASSETS............... $141,204 $72,724 $528 $521 $217 $148,459 $(200,196)
LIABILITIES
Debt maturing within one
year..................... $ 40,246 $ 1,136 $ -- $ -- $ -- $ 5,988 $ (34,890)
Other current
liabilities.............. 6,319 1,462 13,855 (8,098)
TOTAL CURRENT
LIABILITIES.............. 46,565 2,598 19,843 (42,988)
Long-term debt............. 13,429 18,873 528 521 217 889 (11,243)
Deferred income taxes...... 78 20,429
Other long-term liabilities
and deferred credits..... 6,600 153 1,069 (103)
TOTAL LIABILITIES.......... 66,672 21,624 528 521 217 42,230 (54,334)
Minority Interest.......... 5 2,367
Company-Obligated
Convertible Quarterly
Income Preferred
Securities of Subsidiary
Trust Holding Solely
Subordinated Debt
Securities of AT&T....... 4,700
SHAREOWNERS' EQUITY
AT&T Common Stock.......... 3,483 (287)
Liberty Media Group Class A
Common Stock............. 2,314
Liberty Media Group Class B
Common Stock............. 217
Other shareowners'
equity................... 63,813 51,100 104,149 (145,862)
TOTAL SHAREOWNERS'
EQUITY................... 69,827 51,100 103,862 (145,862)
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY...... $141,204 $72,724 $528 $521 $217 $148,459 $(200,196)
CONSOLIDATED
AT&T CORP.
------------
ASSETS
Cash and cash
equivalents.............. $ 1,018
Receivables................ 9,242
Deferred income taxes...... 1,160
Other current assets....... 924
TOTAL CURRENT ASSETS....... 12,344
Property, plant &
equipment, net........... 33,366
Franchise costs, net....... 32,693
Goodwill, net.............. 5,310
Investment in Liberty Media
Group and related
receivables, net......... 38,460
Other investments and
related advances......... 14,856
Other assets............... 9,065
Net assets of discontinued
operations............... 17,363
TOTAL ASSETS............... $163,457
LIABILITIES
Debt maturing within one
year..................... $ 12,480
Other current
liabilities.............. 13,538
TOTAL CURRENT
LIABILITIES.............. 26,018
Long-term debt............. 23,214
Deferred income taxes...... 20,507
Other long-term liabilities
and deferred credits..... 7,719
TOTAL LIABILITIES.......... 77,458
Minority Interest.......... 2,372
Company-Obligated
Convertible Quarterly
Income Preferred
Securities of Subsidiary
Trust Holding Solely
Subordinated Debt
Securities of AT&T....... 4,700
SHAREOWNERS' EQUITY
AT&T Common Stock.......... 3,196
Liberty Media Group Class A
Common Stock............. 2,314
Liberty Media Group Class B
Common Stock............. 217
Other shareowners'
equity................... 73,200
TOTAL SHAREOWNERS'
EQUITY................... 78,927
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY...... $163,457
L-89
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1999
ELIMINATION
GUARANTOR GUARANTOR TCI TCI TCI NON- AND
AT&T SUBSIDIARY FINANCING FINANCING FINANCING GUARANTOR CONSOLIDATION
PARENT TCI I II IV SUBSIDIARIES ADJUSTMENTS
--------- ---------- --------- --------- --------- ------------ -------------
Revenue....................... $24,755 $ -- $-- $-- $-- $31,879 $(1,661)
Operating Expenses
Costs of services and
products.................... 1,536 10,707 (1,230)
Access and other connection... 8,403 6,232 (196)
Selling, general and
administrative.............. 4,363 575 5,960 (4)
Depreciation and other
amortization................ 2,072 49 3,016
Amortization of goodwill,
franchise costs and other
purchased intangibles....... 34 4 1,019
Net restructuring and other
charges..................... 18 326 631
Total operating expenses...... 16,426 954 27,565 (1,430)
Operating income (loss)....... 8,329 (954) 4,314 (231)
Other income (expense)........ 539 6 36 40 16 2,734 (2,545)
Interest expense (benefit).... 3,186 342 36 40 16 634 (2,751)
Income (loss) from continuing
operations before income
taxes, minority interest and
earnings (losses) from
equity investments.......... 5,682 (1,290) 6,414 (25)
Provision (benefit) for income
taxes....................... 2,118 (363) 2,261
Minority interest income
(expense)................... (87) (39)
Equity earnings from Liberty
Media Group................. (2,022)
Net earnings (losses) from
other equity investments.... 4,171 (1,271) (779) (2,877)
Income (loss) from continuing
operations.................. 7,648 (4,220) 3,335 (2,902)
Income from discontinued
operations (net of income
taxes)...................... (458) 25
Net income (loss)............. $ 7,648 $(4,220) $-- $-- $-- $ 2,877 $(2,877)
CONSOLIDATED
AT&T
CORP.
------------
Revenue....................... $54,973
Operating Expenses
Costs of services and
products.................... 11,013
Access and other connection... 14,439
Selling, general and
administrative.............. 10,894
Depreciation and other
amortization................ 5,137
Amortization of goodwill,
franchise costs and other
purchased intangibles....... 1,057
Net restructuring and other
charges..................... 975
Total operating expenses...... 43,515
Operating income (loss)....... 11,458
Other income (expense)........ 826
Interest expense (benefit).... 1,503
Income (loss) from continuing
operations before income
taxes, minority interest and
earnings (losses) from
equity investments.......... 10,781
Provision (benefit) for income
taxes....................... 4,016
Minority interest income
(expense)................... (126)
Equity earnings from Liberty
Media Group................. (2,022)
Net earnings (losses) from
other equity investments.... (756)
Income (loss) from continuing
operations.................. 3,861
Income from discontinued
operations (net of income
taxes)...................... (433)
Net income (loss)............. $ 3,428
L-90
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
ELIMINATION
GUARANTOR GUARANTOR TCI TCI TCI AND
AT&T SUBSIDIARY FINANCING FINANCING FINANCING NON-GUARANTOR CONSOLIDATION
PARENT TCI I II IV SUBSIDIARIES ADJUSTMENTS
--------- ---------- --------- --------- --------- ------------- -------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES OF
CONTINUING OPERATIONS......... $ 2,672 $ (578) $ -- $ -- $ -- $ 8,613 $ (198)
INVESTING ACTIVITIES
Capital expenditures and other
additions..................... (1,733) (60) -- -- (9,797) --
Equity investment distributions
and sales..................... 61 -- -- -- 1,513 --
Equity investment contributions
and purchases................. (5,473) (1,857) -- -- (2,364) 1,857
Net (acquisitions) dispositions
of businesses net of cash
acquired/disposed............. (6,405) -- -- -- 436 --
Other........................... (203) 103 -- -- (15,056) 15,094
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES OF
CONTINUING OPERATIONS......... (13,753) (1,814) -- -- (25,268) 16,951
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances..................... 8,396 -- -- -- --
Proceeds from debt from AT&T.... -- 5,866 -- -- 5,365 (11,231)
Retirement of long-term debt.... (1,014) (1,365) -- -- 124 --
Retirement of AT&T debt......... -- (2,109) -- -- 2,109
Issuance of AT&T convertible
securities.................... 4,694 -- -- -- (56) --
Net acquisitions of treasury
shares........................ (4,624) -- -- -- --
Dividends paid on common
stock......................... (2,685) -- -- -- (27) --
Increase (decrease) in
short-term borrowings, net.... 19,154 -- -- -- (1,207) (7,774)
Other........................... (13,215) -- -- -- 13,365 88
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES OF
CONTINUING OPERATIONS......... 10,706 2,392 -- -- 17,564 (16,808)
Net cash provided by (used in)
discontinued operations....... -- -- -- -- (2,649) 55
Net (decrease) increase in cash
and cash equivalents.......... (375) -- -- -- (1,740) --
Cash and cash equivalents at
beginning of year............. 375 -- -- -- 2,758 --
Cash and cash equivalents at end
of period..................... $ -- $ -- $ -- $ -- $ -- $ 1,018 $ --
CONSOLIDATED
AT&T CORP.
------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES OF
CONTINUING OPERATIONS......... $ 10,509
INVESTING ACTIVITIES
Capital expenditures and other
additions..................... (11,590)
Equity investment distributions
and sales..................... 1,574
Equity investment contributions
and purchases................. (7,837)
Net (acquisitions) dispositions
of businesses net of cash
acquired/disposed............. (5,969)
Other........................... (62)
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES OF
CONTINUING OPERATIONS......... (23,884)
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances..................... 8,396
Proceeds from debt from AT&T.... --
Retirement of long-term debt.... (2,255)
Retirement of AT&T debt......... --
Issuance of AT&T convertible
securities.................... 4,638
Net acquisitions of treasury
shares........................ (4,624)
Dividends paid on common
stock......................... (2,712)
Increase (decrease) in
short-term borrowings, net.... 10,173
Other........................... 238
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES OF
CONTINUING OPERATIONS......... 13,854
Net cash provided by (used in)
discontinued operations....... (2,594)
Net (decrease) increase in cash
and cash equivalents.......... (2,115)
Cash and cash equivalents at
beginning of year............. 3,133
Cash and cash equivalents at end
of period..................... $ 1,018
L-91
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. QUARTERLY INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
2000
Revenue(1)................................................. $13,703 $13,744 $14,176 $13,910
Operating income (loss)(2)................................. 2,347 3,140 2,907 (4,166)
Income (loss) from continuing operations................... 2,650 1,857 3,074 (3,448)
Income (loss) from discontinued operations -- net of income
taxes.................................................... 33 177 (2) 328
Net income (loss).......................................... $ 2,683 $ 2,034 $ 3,072 $(3,120)
AT&T Common Stock Group:
Earnings (loss) per share -- basic:
Continuing operations.................................... $ .54 $ .49 $ .35 $ (.52)
Discontinued operations.................................. .01 .05 -- .07
Total.................................................... $ .55 $ .54 $ .35 $ (.45)
Earnings (loss) per share -- diluted:
Continuing operations.................................... $ .53 $ .48 $ .35 $ (.52)
Discontinued operations.................................. .01 .05 -- .07
Total.................................................... $ .54 $ .53 $ .35 $ (.45)
Dividends declared......................................... $ .22 $ .22 $ .22 $ .0375
AT&T Wireless Group(3):
Earnings (loss) from discontinued operations per share:
Basic and diluted........................................ $ -- $ .06 $ (.01) $ .16
Liberty Media Group(3):
Earnings (loss) per share:
Basic and diluted(4)..................................... $ .37 $ .10 $ .68 $ (.57)
Stock price(5):
AT&T common stock
High..................................................... $ 47.37 $ 45.67 $ 27.33 $ 23.30
Low...................................................... 34.41 24.27 21.16 12.81
Quarter-end close........................................ 43.68 24.56 22.81 13.40
AT&T Wireless Group common stock
High..................................................... -- 36.00 29.56 24.94
Low...................................................... -- 23.56 20.50 16.38
Quarter-end close........................................ -- 27.88 20.88 17.31
Liberty Media Group Class A common stock(4)
High..................................................... 30.72 29.94 26.56 19.25
Low...................................................... 24.44 19.19 17.44 10.75
Quarter-end close........................................ 29.63 24.25 18.00 13.56
Liberty Media Group Class B common stock(4)
High..................................................... 36.56 32.69 32.63 20.63
Low...................................................... 27.00 22.13 18.75 12.75
Quarter-end close........................................ 32.81 32.50 18.75 18.75
L-92
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
1999
Revenue(1)................................................. $12,554 $13,875 $14,283 $14,261
Operating income(2)........................................ 2,191 2,881 3,309 3,077
Income from continuing operations.......................... 1,079 991 1,415 376
(Loss) income from discontinued operations -- net of income
taxes.................................................... (61) 54 1 (427)
Net income (loss).......................................... $ 1,018 $ 1,045 $ 1,416 $ (51)
AT&T Common Stock Group:
Earnings (loss) per share -- basic:
Continuing operations.................................... $ .41 $ .48 $ .51 $ .49
Discontinued operations.................................. (.02) .02 -- (.13)
Total.................................................... $ .39 $ .50 $ .51 $ .36
Earnings (loss) per share -- diluted:
Continuing operations.................................... $ .40 $ .47 $ .50 $ .49
Discontinued operations.................................. (.02) .02 -- (.13)
Total.................................................... $ .38 $ .49 $ .50 $ .36
Dividends declared......................................... $ .22 $ .22 $ .22 $ .22
Liberty Media Group(3):
Loss per share:
Basic and diluted(4)..................................... $ .02 $ .21 $ .09 $ .48
Stock price(5):
AT&T common stock
High..................................................... $ 49.77 $ 48.93 $ 45.82 $ 47.37
Low...................................................... 39.28 38.88 32.47 32.23
Quarter-end close........................................ 41.32 43.34 33.78 39.46
Liberty Media Group Class A common stock(4)
High..................................................... 14.53 18.52 19.84 28.34
Low...................................................... 10.95 13.13 15.44 17.94
Quarter-end close........................................ 13.15 18.38 18.66 28.41
Liberty Media Group Class B common stock(4)
High..................................................... 14.56 18.63 19.88 34.38
Low...................................................... 11.13 13.69 16.00 19.31
Quarter-end close........................................ 13.44 18.63 19.88 34.38
---------------
(1) Results have been restated to reflect certain franchise tax expenses as
revenue and expense in the amount of $21 in first quarter 1999, $61 in
second quarter 1999, $63 in third quarter 1999, $64 in fourth quarter 1999
and $65 in first quarter 2000. This restatement had no impact on operating
income or net income.
(2) Operating income (loss) included net restructuring and other charges of $773
in first quarter 2000, $24 in third quarter 2000, $6,232 in fourth quarter
2000, $731 in first quarter 1999 and $273 in fourth quarter 1999. Second
quarter 1999 included a net restructuring and other charges benefit of $29.
(3) No dividends have been declared on AT&T Wireless Group or Liberty Media
Group (LMG) common stocks.
(4) Amounts have been restated to reflect the June 2000 two-for-one split of LMG
common stock.
(5) Stock prices obtained from the New York Stock Exchange Composite Tape.
L-93
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." Among
other provisions, it requires that entities recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. Gains and losses resulting from changes in the fair
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The effective date for
this standard was delayed via the issuance of SFAS No. 137. The effective date
for SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though
earlier adoption is encouraged and retroactive application is prohibited. For
AT&T, this means that the standard must be adopted no later than January 1,
2001.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," as an amendment to SFAS
No. 133. This statement provides clarification with regard to certain
implementation issues under SFAS No. 133 on specific types of hedges.
On January 1, 2001, AT&T adopted SFAS No. 133. We recorded a cumulative
effect of an accounting change, net of applicable income taxes, of approximately
$359 of income, or approximately $0.09 per diluted share, primarily attributable
to fair value adjustments of debt instruments, including those acquired in
conjunction with the MediaOne merger, as well as to our warrant portfolio. In
addition, in connection with the adoption of SFAS No. 133, we reclassified
certain investment securities, which support debt that is indexed to those
securities, from "available-for-sale" to "trading." This reclassification
resulted in the recognition of a charge of $713, or approximately $0.19 per
diluted share, net of applicable taxes, which was recorded as a reduction of
other income. As available-for-sale securities, changes in fair value were
previously included within other comprehensive income as a component of
shareowners' equity. In addition, LMG recorded a cumulative effect of an
accounting change, net of applicable income taxes, of approximately $545 of
income, or approximately $0.21 per share.
The impact of the adoption of SFAS No. 133, as amended by SFAS No. 138, on
AT&T's future results of operations is dependent upon the fair values of our
derivatives and related financial instruments and could result in pronounced
quarterly fluctuations in other income in future periods.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities -- a
Replacement of FASB Statement No. 125." This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Under these standards, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
This statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. This
statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. AT&T does not
expect that the adoption of SFAS No. 140 will have a material impact on AT&T's
results of operations, financial position or cash flows.
23. SUBSEQUENT EVENTS
Effective January 1, 2001, AT&T sold to Insight Communications Company LP
(Insight) several Illinois cable-systems serving approximately 98 thousand
customers for $0.4 billion. Insight subsequently contributed the purchased
cable-system and additional cable-systems serving approximately 177 thousand
customers to Insight Midwest L.P. in which AT&T has a 50% interest. AT&T also
contributed entities owning cable-systems serving approximately 248 thousand
customers in Illinois to Insight Midwest L.P.
L-94
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The transactions resulted in pretax gains of $0.2 billion, which were deferred
due to a debt support agreement with Insight Midwest, L.P.
On January 8, 2001, AT&T and Cablevision Systems Corporation (Cablevision)
completed the transfer of cable-systems in which AT&T received cable-systems
serving 358 thousand subscribers in Boston and Eastern Massachusetts. In
exchange, Cablevision received cable-systems serving approximately 130 thousand
subscribers in northern New York suburbs, and 44 million shares of AT&T common
stock valued at approximately $0.9 billion, and approximately $0.2 billion in
cash. Cablevision recorded a gain as a result of the transaction. Due to AT&T's
ownership interest in Cablevision, AT&T recorded an after-tax gain of
approximately $0.1 billion included within "Net losses from other equity
investments."
On January 12, 2001, AT&T announced that Cox and Comcast had exercised
their rights to sell a combined total of 60.4 million shares of Excite@Home
Series A common stock to AT&T as part of an agreement announced in August 2000
to reorganize Excite@Home's governance. On May 18, 2001, AT&T, Cox
Communications (Cox) and Comcast reached agreement on the terms of the
previously announced transaction on the put options related to Excite@Home.
Under the new agreement, which was no longer a tax-free exchange, Cox and
Comcast retained their stakes in Excite@Home and AT&T issued 75 million of AT&T
common shares to Cox and more than 80 million of AT&T common shares to Comcast.
We recorded a loss of approximately $0.8 billion in other income for this put
option settlement in the second quarter of 2001. The new agreement resulted in a
tax benefit to AT&T, which essentially offset this loss.
On January 22, 2001, NTT DoCoMo invested approximately $9.8 billion for
812,511.778 shares of a new class of AT&T preferred stock with a par value of $1
per share; and five-year warrants to purchase the equivalent of an additional
41.7 million shares of AT&T Wireless Group tracking stock at $35 per share. The
$9.8 billion of proceeds were recorded based on their relative fair values as
$9.2 billion for the preferred shares, $0.3 billion for the warrants in other
current liabilities and $0.3 billion for the beneficial conversion feature. The
preferred shares, convertible at NTT DoCoMo's option, were economically
equivalent to 406 million shares (a 16 percent interest) of AT&T Wireless Group
tracking stock at June 30, 2001. On July 9, 2001, in conjunction with the
split-off of AT&T Wireless Group, these preferred shares were converted into
AT&T Wireless common stock. Upon conversion, AT&T reduced its portion of the
financial performance and economic value in the AT&T Wireless Group by 178
million shares, and the balance of the 406 million shares came from the issuance
of 228 million new shares of AT&T Wireless common stock. Since NTT DoCoMo
converted their preferred stock in connection with the Wireless Group split-off,
we will recognize, in the third quarter of 2001, the remaining unamortized
beneficial conversion feature balance of $0.2 billion.
On April 27, 2001, AT&T completed the sale announced on February 27, 2001,
of our 10% stake in Japan Telecom Co. Ltd to Vodafone Group plc for $1.35
billion in cash. The proceeds from the transaction were split evenly between
AT&T and AT&T Wireless Group since AT&T Wireless Group held one-half of AT&T's
investment. The transaction resulted in a pretax gain of approximately $0.5
billion recorded in AT&T continuing operations and a pretax gain of
approximately $0.5 billion recorded in discontinued operations.
On April 30, 2001, AT&T received 63.9 million shares of AT&T common stock
held by Comcast Corp. (Comcast) in exchange for an entity owning cable-systems
which serves approximately 590 thousand customers in six states. The transaction
resulted in a pretax loss of $0.3 billion.
On May 25, 2001, AT&T completed an exchange offer of AT&T common stock for
AT&T Wireless stock. Under the terms of the exchange offer, AT&T issued 1.176
shares of AT&T Wireless Group tracking stock in exchange for each share of AT&T
common stock validly tendered. A total of
L-95
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
372.2 million shares of AT&T common stock were tendered in exchange for 437.7
million shares of AT&T Wireless Group tracking stock.
On June 20, 2001, AT&T amended an existing accounts receivable
securitization program for a new 364-day term providing for up to $0.5 billion
of funding. Under the program, AT&T Consumer accounts receivable were sold on a
discounted, revolving basis, to a special purpose, wholly-owned subsidiary of
AT&T, which assigns interests in such receivables to unrelated third-party
financing entities. Interest is paid monthly based on a floating rate set by the
corresponding agreements. The borrowing was collateralized by approximately $1.0
billion of accounts receivable.
On June 22, 2001, AT&T initiated a 364-day accounts receivable
securitization program providing for up to $2.2 billion of funding. Under the
program, AT&T Business accounts receivable were sold on a discounted, revolving
basis, to a special purpose, wholly-owned subsidiary of AT&T, which assigns
interests in such receivables to unrelated third-party financing entities.
Interest is paid monthly based on a floating rate set by the corresponding
agreements. The borrowing was collateralized by approximately $5.7 billion of
accounts receivable.
On June 30, 2001, AT&T transferred its 99.75% interest in an entity owning
Baltimore Maryland cable-system serving approximately 115 thousand customers to
Comcast for approximately $0.5 billion in cash. The transaction resulted in a
pretax gain of $0.1 billion.
On July 8, 2001, Comcast made an unsolicited offer to acquire AT&T
Broadband. On July 18, AT&T's Board of Directors unanimously voted to reject
Comcast's proposal to acquire AT&T Broadband. The Board has directed management
to explore financial and strategic alternatives relating to AT&T Broadband,
including the previously announced restructuring plans, with the goal to provide
the greatest long-term value to shareowners. The Board also decided to delay
finalizing and mailing to shareowners the proxy materials, filed preliminary
with the SEC on July 3, 2001, for its current restructuring plans. However, AT&T
remains committed to separate AT&T Consumer and AT&T Business from AT&T
Broadband and to creating a separate tracking stock designed to represent the
financial performance of AT&T Consumer.
On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a
separate, independently-traded company. All AT&T Wireless tracking stock was
converted into AT&T Wireless common stock on a one-for-one basis and 1,136
million shares of AT&T Wireless common stock, held by AT&T, was distributed to
AT&T common shareowners on a basis of 0.3218 of a share of AT&T Wireless for
each AT&T share outstanding. The split-off of AT&T Wireless will result in a
non-cash gain of approximately $13 billion, which represents the difference
between the fair value of the Wireless tracking stock at the date of the
split-off and AT&T's book value in AT&T Wireless Services. This gain will be
recorded in the third quarter of 2001 and be reflected as "Gain on the
disposition of discontinued operations." In addition, AT&T retained
approximately $3 billion, or 7.3%, of AT&T Wireless common stock, about half of
which was used in a debt-for-equity exchange in July which will result in a
pretax gain of approximately $0.5 billion to be recorded in other income. The
remaining shares are expected to be sold, exchanged or monetized within six
months of the split-off.
On August 10, 2001, AT&T completed the split-off of Liberty Media
Corporation as an independent, publicly-traded company. AT&T redeemed each
outstanding share of Class A and Class B Liberty Media Group (LMG) tracking
stock for one share of Liberty Media Corporation's Series A and Series B common
stock, respectively. The split-off will be recorded as a book value transaction,
therefore, no gain or loss will be recorded on the transaction.
L-96
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- -----------------
2001 2000 2001 2000
------ ------ ------- -------
(UNAUDITED)
(DOLLARS IN MILLIONS)
Revenue.................................................. $2,500 $2,493 $ 7,756 $ 5,766
Operating expenses:
Costs of services (excluding depreciation of $453,
$412, $1,374 and $872, included below).............. 1,325 1,303 4,245 3,105
Selling, general and administrative.................... 608 668 1,951 1,454
Depreciation and other amortization.................... 629 510 1,952 1,073
Amortization of goodwill, franchise costs and other
purchased intangibles............................... 512 716 1,681 1,226
Asset impairment, restructuring and other charges...... 399 24 1,494 40
------ ------ ------- -------
Total operating expenses................................. 3,473 3,221 11,323 6,898
------ ------ ------- -------
Operating loss......................................... (973) (728) (3,567) (1,132)
Other (expense) income................................... (252) 67 (2,156) 547
Interest expense......................................... 386 390 1,347 909
------ ------ ------- -------
Loss before income taxes, net losses from equity
investments, minority interest and cumulative effect
of accounting change................................ 1,611 1,051 7,070 1,494
Benefit for income taxes................................. 1,036 247 3,214 845
Net losses from equity investments....................... 53 219 37 636
Minority interest income (expense)....................... 169 83 905 (21)
------ ------ ------- -------
Loss before cumulative effect of accounting change..... 459 940 2,988 1,306
Cumulative effect of accounting change (net of income
taxes of $142)......................................... -- -- 229 --
------ ------ ------- -------
Net loss............................................... $ 459 $ 940 $ 2,759 $ 1,306
====== ====== ======= =======
The notes are an integral part of the combined financial statements.
L-97
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents................................... $ 253 $ 61
Trade receivables, less allowances of $69 and $74........... 604 774
Investments................................................. -- 2,204
Other current assets........................................ 570 467
-------- --------
Total current assets................................... 1,427 3,506
Property, plant and equipment, net of accumulated
depreciation of $2,647 and $2,078......................... 14,292 15,187
Franchise costs, net of accumulated amortization of $2,226
and $1,664................................................ 43,287 48,218
Goodwill, net of accumulated amortization of $615 and
$240...................................................... 19,393 21,139
Investments................................................. 22,492 25,045
Other assets, net of accumulated amortization of $515 and
$578...................................................... 3,370 4,439
-------- --------
Total assets........................................... $104,261 $117,534
======== ========
LIABILITIES AND COMBINED ATTRIBUTED NET ASSETS
Accounts payable............................................ $ 700 $ 1,250
Payroll and benefit-related liabilities..................... 438 570
Debt maturing within one year............................... 572 3,073
Short-term debt due to AT&T................................. 5,390 5,830
Deferred income tax liability............................... -- 486
Liability under put options................................. -- 2,564
Other current liabilities................................... 1,783 2,177
-------- --------
Total current liabilities.............................. 8,883 15,950
Long-term debt.............................................. 17,312 19,517
Deferred income taxes....................................... 25,659 28,550
Other long-term liabilities and deferred credits............ 974 1,069
-------- --------
Total liabilities...................................... 52,828 65,086
Minority interest........................................... 3,319 4,421
Company-Obligated Convertible Quarterly Income Preferred
Securities of Subsidiary Trust Holding Solely Subordinated
Debt Securities of AT&T................................... 4,718 4,710
Combined attributed net assets.............................. 43,396 43,317
-------- --------
Total liabilities and combined attributed net assets... $104,261 $117,534
======== ========
The notes are an integral part of the combined financial statements.
L-98
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF CHANGES IN COMBINED ATTRIBUTED NET ASSETS
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2001 2000
--------- ---------
(UNAUDITED)
(DOLLARS IN MILLIONS)
COMBINED ATTRIBUTED NET ASSETS:
Balance at beginning of period............................ $43,317 $14,889
Net loss.................................................. (2,759) (1,306)
Contributions from AT&T, net.............................. 2,485 35,616
Issuance of common stock by affiliates.................... 39 (60)
Net revaluation of financial instruments.................. (671) (1,373)
Recognition of previously unrealized losses............... 950 --
Other comprehensive income................................ 35 --
------- -------
Balance at end of period.................................. $43,396 $47,766
======= =======
SUMMARY OF TOTAL COMPREHENSIVE LOSS:
Losses before cumulative effect of accounting change...... $(2,988) $(1,306)
Cumulative effect of accounting change.................... 229 --
------- -------
Net loss.................................................. (2,759) (1,306)
Net revaluation of financial instruments (net of income
taxes of $422 and $863)................................ (671) (1,373)
Recognition of previously unrealized losses (net of income
taxes of $598)......................................... 950 --
Other comprehensive income (net of income taxes of $7).... 35 --
------- -------
Total comprehensive loss.................................. $(2,445) $(2,679)
======= =======
The notes are an integral part of the combined financial statements.
L-99
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2001 2000
------- -------
(UNAUDITED)
(DOLLARS IN
MILLIONS)
OPERATING ACTIVITIES:
Net loss.................................................. $(2,759) $(1,306)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Cumulative effect of accounting change, net of income
taxes.................................................. (229) --
Loss (gain) on sales of businesses and investments...... 451 (453)
Asset impairment, restructuring and other charges, net
of cash payments....................................... 1,386 24
Depreciation and amortization........................... 3,633 2,299
Provision for uncollectibles............................ 181 94
Losses from equity investments.......................... 43 1,030
Deferred income taxes................................... (3,353) (521)
Put option settlement and mark-to-market charge......... 838 21
Minority interest (income) expense...................... (936) 63
Net revaluation of trading securities................... 924 --
Decrease in accounts receivable......................... 78 2
Decrease in accounts payable............................ (393) (229)
Net change in other operating assets and liabilities.... (774) (491)
Other adjustments, net.................................. 131 (112)
------- -------
Net cash (used in) provided by operating activities... (779) 421
------- -------
INVESTING ACTIVITIES:
Capital expended for property and equipment, net of
proceeds from disposal.................................. (2,521) (3,067)
Sales of marketable securities............................ 102 35
Purchases of marketable securities........................ (18) --
Equity investment distributions and sales................. 379 508
Equity investment contributions and purchases............. (273) (579)
Net cash received (paid) for acquisitions/dispositions of
businesses.............................................. 4,812 (83)
Other investing activities, net........................... (153) (22)
------- -------
Net cash provided by (used in) investing activities... 2,328 (3,208)
------- -------
FINANCING ACTIVITIES:
Proceeds from long-term debt issuances.................... 98 --
Retirements of long-term debt............................. (905) (1,270)
Retirements of redeemable securities...................... -- (152)
Dividends paid on preferred securities.................... (190) (147)
Change in short-term debt due to AT&T, net................ (440) 4,763
Transfers from AT&T, net.................................. 80 168
Other financing activities, net........................... -- (399)
------- -------
Net cash (used in) provided by financing activities... (1,357) 2,963
------- -------
Net change in cash and cash equivalents..................... 192 176
------- -------
Cash and cash equivalents at beginning of period............ 61 --
------- -------
Cash and cash equivalents at end of period.................. $ 253 $ 176
======= =======
The notes are an integral part of the combined financial statements.
L-100
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
(UNAUDITED)
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS AND UNLESS OTHERWISE NOTED)
(1) BASIS OF PRESENTATION
AT&T Broadband Group is an integrated business of AT&T Corp. and not a
stand-alone entity. AT&T will assign and transfer substantially all the assets,
liabilities and business of AT&T Broadband Group to AT&T Broadband Corp., a
newly formed holding company for AT&T's broadband business, which will be
subsequently merged with Comcast Corporation ("Comcast") as discussed below.
AT&T Broadband Group consists primarily of the assets, liabilities and business
of AT&T Broadband, LLC (formerly Tele-Communications, Inc. ("TCI")), acquired by
AT&T on March 9, 1999 in the TCI merger and MediaOne Group, Inc. ("MediaOne")
acquired by AT&T on June 15, 2000 in the MediaOne acquisition. AT&T Broadband,
LLC ("ATTBLLC") and MediaOne are both separate subsidiaries of AT&T. AT&T
Broadband Group is one of the nation's largest broadband communications
providers, providing cable television, high-speed cable Internet and broadband
telephone services.
Comcast and AT&T have agreed to a merger of Comcast and AT&T Broadband
Corp. (the "AT&T Comcast Merger"). The AT&T Comcast Merger is pursuant to, and
subject to the terms and conditions set forth in the Agreement and Plan of
Merger, dated as of December 19, 2001 (the "Merger Agreement"). The AT&T Comcast
Merger will occur in several steps, which are expected to occur on the closing
date of the AT&T Comcast Merger. First, AT&T will assign and transfer to AT&T
Broadband Corp. substantially all of the assets and liabilities of AT&T's
broadband business. Following the transfer, AT&T will spin off AT&T Broadband
Corp. to AT&T shareholders by distributing one share of AT&T Broadband Corp.
common stock to each holder of record of a share of AT&T common stock, NYSE
symbol "T," as of the close of business on the record date for the AT&T
Broadband Corp. spin-off ("AT&T Broadband spin-off"). Immediately following the
AT&T Broadband spin-off, AT&T Broadband Corp. will merge with AT&T Broadband
Acquisition Corp., a newly formed, wholly owned shell subsidiary of AT&T Comcast
Corporation ("AT&T Comcast"), with AT&T Broadband Corp. continuing as the
surviving corporation. At approximately the same time, Comcast will merge with
Comcast Acquisition Corp., a newly formed, wholly owned shell subsidiary of AT&T
Comcast, with Comcast continuing as the surviving entity. As a result of these
mergers, AT&T Comcast will become the parent company of both AT&T Broadband
Corp. and Comcast.
AT&T Comcast will issue shares of AT&T Comcast common stock to the AT&T
shareholders who received shares of AT&T Broadband Corp. common stock in the
AT&T Broadband spin-off. As of the date of execution of the Merger Agreement, it
was estimated that each holder of AT&T Broadband Corp. common stock would have
received 0.34 of a share of AT&T Comcast common stock for each of such holder's
shares of AT&T Broadband Corp. common stock. The exchange ratio is dependent on
a number of factors that may change between the date of execution of the Merger
Agreement and the date of completion of the AT&T Comcast transaction, including
the number of outstanding shares of AT&T common stock, the value of options and
stock appreciation rights and the price of Comcast Class A common stock.
AT&T will pay Comcast a termination fee in the amount of $1.5 billion in
cash if the Merger Agreement is terminated because (i) the AT&T Board withdraws
or modifies, in a manner adverse to Comcast, its recommendation of the AT&T
Comcast transaction, (ii) AT&T willfully and materially breaches certain terms
of the Merger Agreement and (iii) if the AT&T shareholders fail to approve the
AT&T Comcast Merger because a competing acquisition proposal made by a third
party is pending at the time of the AT&T shareholder meeting and within one year
of the AT&T meeting, AT&T enters into an agreement relating to an alternative
material transaction. Comcast will pay to AT&T a sum of $1.5 billion
L-101
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
(CONTINUED)
termination fee in cash if the Merger Agreement is terminated because the
Comcast shareholders fail to approve the AT&T Comcast Merger.
Consummation of the AT&T Comcast Merger is subject to the satisfaction or
waiver of several conditions, including but not limited to, approval by the
shareholders of AT&T and Comcast and receipt of all necessary governmental
consents and approvals. As a result, there can be no assurance that the AT&T
Comcast Merger will be consummated, or if the AT&T Comcast Merger is
consummated, as to the date of such consummation.
The combined financial statements of AT&T Broadband Group are prepared in
accordance with generally accepted accounting principles and in management's
opinion, include all adjustments necessary for a fair presentation of combined
operations, financial position and cash flows for the periods presented. The
combined financial statements of AT&T Broadband Group reflect the assets,
liabilities, revenue and expenses directly attributable to AT&T Broadband Group,
as well as allocations deemed reasonable by management, to present the results
of operations, financial position, and cash flows of AT&T Broadband Group on a
stand-alone basis. The allocation methodologies have been described within the
notes to the combined financial statements where appropriate, and management
considers the allocations to be reasonable. All significant intercompany
accounts and transactions within the AT&T Broadband Group have been eliminated.
The financial information included herein may not necessarily reflect the
combined results of operations, financial position, changes in combined
attributed net assets and cash flows of AT&T Broadband Group in the future or
what they would have been had AT&T Broadband Group been a separate, stand-alone
entity during the periods presented. In addition, the combined results for
interim periods presented are not necessarily indicative of results for the full
year. Earnings per share disclosure has not been presented as AT&T Broadband
Group is a business unit of AT&T and earnings per share data is not considered
meaningful. The combined financial statements of AT&T Broadband Group should be
read in conjunction with AT&T's Form 10-K/A for the year ended December 31,
2000, AT&T's Form 8-K filed on September 24, 2001 restating AT&T's financial
results for the year ended December 31, 2000 to reflect AT&T Wireless as a
discontinued operation, AT&T's Form 10-Q for the quarter ended September 30,
2001, and AT&T Broadband Group financial statements for the year ended December
31, 2000 included elsewhere herein.
AT&T Broadband Group's operations have been dependent on cash infusions
from AT&T in order for AT&T Broadband Group to operate and execute on its
business and growth strategies. If, for any reason, AT&T is unwilling or cannot
provide the level of financing necessary to fund future operations, AT&T
Broadband Group will need to seek additional financing from third parties.
Debt attributed to AT&T Broadband Group includes the third party
obligations of ATTBLLC, MediaOne and monetization debt backed by assets held by
AT&T Broadband Group. Additional intercompany debt has been allocated to AT&T
Broadband Group to achieve a total debt level based on several factors including
prospective financing requirements, desired stand-alone credit profile, working
capital and capital expenditure requirements, expected sources of future
deleveraging, and comparable company profiles. Changes in historical
intercompany debt are based on historical cash flows. Such cash flows include
capital expenditures, cash flows from operating activities and investments in
cable companies. The historical interest expense on the allocated intercompany
debt was calculated based on a rate intended to be equivalent to the rate AT&T
Broadband Group would receive if it were a stand-alone entity. AT&T's expected
deleveraging activities that relate to AT&T Broadband Group include, but may not
be limited, to the following: proceeds from the sale and monetization of shares
of Cablevision Systems Corp. and Rainbow Media Group (see note 9) and any
proceeds that may result from the exercise of AT&T's registration rights in Time
Warner Entertainment ("TWE").
L-102
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
(CONTINUED)
As a result of the above methodology, AT&T Broadband Group may advance
funds to AT&T. These advances will be accounted for as short-term borrowings
between entities and bear interest at a market rate that is substantially equal
to the rate at which AT&T would be able to borrow from third parties on a
short-term basis.
AT&T performs cash management functions on behalf of the AT&T Broadband
Group. Substantially all of the AT&T Broadband Group's cash balances are swept
to AT&T on a daily basis, where they are managed and invested by AT&T. Transfers
of cash to and from AT&T, after giving consideration to the debt allocation
methodology, are reflected as a component of combined attributed net assets. Net
transfers to or from AT&T are assumed to be settled in cash. AT&T's capital
contributions for purchase business combinations and initial investments in
joint ventures and partnerships which AT&T attributed to AT&T Broadband Group
have been treated as noncash transactions.
General corporate overhead related to AT&T's corporate headquarters and
common support divisions has been allocated to AT&T Broadband Group as it was
not deemed practicable to specifically identify such common costs to AT&T
Broadband Group. The allocation of corporate overhead is divided into an
allocation of shared services (e.g., payroll and finance) and other corporate
overhead. Costs of shared services are allocated to AT&T Broadband Group based
on transaction based prices. Other corporate overhead is allocated to AT&T
Broadband Group based on the ratio of AT&T Broadband Group's external costs and
expenses adjusted for any functions AT&T Broadband Group performs on its own.
The costs of these services charged to AT&T Broadband Group are not necessarily
indicative of the costs that would have been incurred if AT&T Broadband Group
had performed these functions entirely as a stand-alone entity, nor are they
indicative of costs that will be charged or incurred in the future. However,
management believes such allocations are reasonable.
Consolidated income tax provisions or benefits, related tax payments or
refunds, and deferred tax balances of AT&T have been allocated to AT&T Broadband
Group based principally on the taxable income and tax credits directly
attributable to AT&T Broadband Group, resulting in essentially a stand-alone
presentation. AT&T and AT&T Broadband Corp. entered into a tax sharing
agreement, effective as of January 1, 2002, which, consistent with the
principles described in the preceding sentence, provides for tax sharing
payments based on the tax expense or tax benefits of a hypothetical affiliated
group consisting of AT&T Broadband Group and AT&T. Based on this agreement, the
consolidated tax liability before credits are allocated between the groups,
based on each group's contribution to consolidated taxable income of the
hypothetical group. Consolidated tax credits of the hypothetical group are
allocated between groups based on each group's contribution to such tax credit.
(2) RECLASSIFICATION ADJUSTMENT OF OTHER COMPREHENSIVE INCOME
AT&T Broadband Group has investment holdings classified as
"available-for-sale" under the scope of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." These securities are carried at fair value with any
unrealized gain or loss, net of income taxes, being included within other
comprehensive income as a component of combined attributed net assets. Under
SFAS No. 115, when the "available-for-sale" securities are sold, the previously
unrealized gain or loss shall be recognized in earnings. In addition, upon the
adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," AT&T Broadband Group reclassified certain securities to "trading",
resulting in the recognition in earnings of previously unrealized losses (see
note 6). Following is a summary of the recognition of previously unrealized
losses which impacted other comprehensive income and other income (expense) for
the nine months ended September 30, 2001.
L-103
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
(CONTINUED)
PRETAX AFTER-TAX
------ ---------
Reclassification of securities to "trading" in conjunction
with the adoption of "SFAS No. 133"(a).................... $1,154 $708
Settlement of exchangeable notes(b)......................... 394 242
------ ----
Total recognition of previously unrealized losses........... $1,548 $950
====== ====
---------------
(a) See note 6 for further discussion.
(b) See note 5 for further discussion.
(3) MERGERS, ACQUISITIONS, VENTURES, DISPOSITIONS AND EXCHANGES
MERGER WITH MEDIAONE
On June 15, 2000, AT&T completed a merger with MediaOne in a cash and stock
transaction valued at approximately $45 billion (the "MediaOne Merger"). The
AT&T shares had an aggregate market value of approximately $21 billion and cash
payments totaled approximately $24 billion.
The MediaOne Merger was accounted for under the purchase method of
accounting. Accordingly, the results of MediaOne have been included in the
accompanying combined financial statements since the date of acquisition.
Approximately $17 billion of the $45 billion purchase price has been
attributed to franchise costs and is being amortized on a straight-line basis
over 40 years. Also included in the purchase price was approximately $22 billion
related to nonconsolidated investments, including investments in TWE and
Vodafone Group plc ("Vodafone"), approximately $5 billion related to property,
plant and equipment, and approximately $5 billion related to other net assets.
In addition, included was approximately $13 billion in deferred income tax
liabilities, approximately $10 billion of debt and approximately $1 billion of
minority interest in Centaur Funding Corporation, a subsidiary of MediaOne. AT&T
did not attribute $7 billion of cash acquired in the MediaOne Merger to AT&T
Broadband Group. The purchase resulted in goodwill of $20 billion, which is
being amortized on a straight-line basis over 40 years.
Pro Forma Results (unaudited)
Following is a summary of the pro forma results of AT&T Broadband Group as
if the MediaOne Merger had closed effective January 1, 2000:
NINE MONTHS ENDED
SEPTEMBER 30, 2000
------------------
Revenue..................................................... $7,091
Operating loss.............................................. $1,559
Net loss.................................................... $ 357
Pro forma data may not be indicative of the results that would have been
obtained had the events actually occurred at the beginning of the period
presented, nor does it intend to be a projection of future results.
Excite@Home
On August 28, 2000, AT&T and Excite@Home announced shareholder approval of
a new board of directors and governance structure for Excite@Home. As a result
of these governance changes, AT&T Broadband Group began consolidating
Excite@Home's results upon the closing of the transaction on
L-104
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
(CONTINUED)
September 1, 2000, at which time ATTBLLC had an approximate 24% economic
interest and 74% voting interest in Excite@Home.
On September 28, 2001, Excite@Home filed for bankruptcy protection under
Chapter 11 in the U.S. Bankruptcy Court, for the Northern District of
California. Excite@Home's results remained consolidated in AT&T Broadband
Group's statements of operations and cash flows for the three and nine months
ended September 30, 2001, however, as a result of the bankruptcy filing, the
assets and liabilities of Excite@Home were deconsolidated from AT&T Broadband
Group's balance sheet as of September 30, 2001. In December 2001, AT&T Broadband
converted its high-speed cable Internet customers from the Excite@Home network
to a new AT&T-operated network.
The noncash impacts of the deconsolidation of Excite@Home primarily
included a reduction to property, plant and equipment of approximately $320, to
goodwill of approximately $326 and to debt of approximately $988. This
deconsolidation resulted in the recording of a liability of approximately $357
as of September 30, 2001. This liability will continue to be evaluated. AT&T
Broadband Group also recorded a deferred tax benefit of $673 as a result of the
deconsolidation of Excite@Home.
COX AND COMCAST AGREEMENT
On May 18, 2001, AT&T, Cox Communications, Inc. ("Cox") and Comcast reached
an agreement on the terms of a previously announced transaction on the put
options related to Excite@Home. Under the new agreement, which was no longer a
tax-free exchange, Cox and Comcast retained their stakes in Excite@Home and AT&T
issued 75 million of AT&T common shares to Cox and more than 80 million of AT&T
common shares to Comcast. AT&T Broadband Group recorded an approximate $838 and
$21 loss in other (expense) income related to the settlement and mark-to-market
of the put option in 2001 and 2000, respectively. The new agreement resulted in
a tax benefit to AT&T Broadband Group, which essentially offset this loss.
INSIGHT COMMUNICATIONS COMPANY LP
Effective January 1, 2001, entities attributed to AT&T Broadband Group sold
to Insight Communications Company LP ("Insight"), for net cash proceeds of $391,
several Illinois systems serving approximately 98,400 customers. Insight
contributed the customers to Insight Midwest L.P., an entity in which AT&T
Broadband Group, through its attributed entities, has a 50% interest. Entities
attributed to AT&T Broadband Group also contributed several Illinois systems
serving approximately 247,500 customers to Insight Midwest, L.P. The
transactions resulted in a pre tax gain of $168, which was deferred due to a
debt support agreement with Insight Midwest, L.P.
KEARNS-TRIBUNE, LLC
On January 2, 2001, AT&T, through ATTBLLC, completed the sale of
Kearns-Tribune, LLC to MediaNews Group for $200 in cash. The transaction
resulted in a pretax gain of approximately $117.
CABLEVISION SYSTEMS CORPORATION
On January 8, 2001, a subsidiary of AT&T and Cablevision Systems
Corporation ("Cablevision") completed the transfer of cable systems in which
AT&T received cable systems serving 358,000 customers in Boston and Eastern
Massachusetts. In exchange, Cablevision received cable systems serving
approximately 130,000 customers in northern New York suburbs, 44 million shares
of AT&T common stock valued at approximately $871, and approximately $204 in
cash. Cablevision recorded a gain as a
L-105
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
(CONTINUED)
result of the transaction. Due to ATTBLLC's ownership interest in Cablevision,
AT&T Broadband Group recorded its $143 portion, net of tax, of Cablevision's
gain in "net losses from equity investments."
COMCAST
On April 30, 2001, a subsidiary of AT&T sold to Comcast certain cable
systems attributed to AT&T Broadband Group serving approximately 590,000
customers in New Mexico, Maryland, New Jersey, Pennsylvania, Delaware and
Tennessee in exchange for 63.9 million shares of AT&T stock held by Comcast
which were valued at $1,423. The transaction resulted in a pretax loss of $297.
Effective June 30, 2001, AT&T, together with certain subsidiaries
attributed to AT&T Broadband Group, transferred its 99.75% interest in an entity
owning the Baltimore, Maryland cable systems serving approximately 115,000
customers to Comcast for approximately $510 in net cash proceeds. The
transaction resulted in a pretax gain of $149.
MEDIACOM COMMUNICATIONS
On June 29, 2001, a subsidiary of AT&T sold to MediaCom Communications
Corporation ("MediaCom") cable systems attributed to AT&T Broadband Group
serving approximately 94,000 customers in Missouri for approximately $295 in net
cash proceeds. The transaction resulted in a pretax gain of $5.
On July 18, 2001, subsidiaries of AT&T sold to MediaCom cable systems
attributed to AT&T Broadband Group serving approximately 710,000 customers
located primarily in Georgia, Iowa and Southern Illinois for approximately
$1,724 in net cash proceeds. The transaction resulted in a pretax loss of $93.
CHARTER COMMUNICATIONS
On June 30, 2001, a subsidiary of AT&T transferred to Charter
Communications, Inc. ("Charter") cable systems attributed to AT&T Broadband
Group serving approximately 563,000 customers in Alabama, California, Illinois,
Missouri and Nevada. AT&T Broadband Group, through its attributed entities,
received $1,497 in net proceeds, $222 in cash restricted for future acquisitions
of cable systems, and a cable system in Florida serving 9,000 customers. The
transaction resulted in a pretax loss of $42.
(4) ASSET IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES
During the third quarter of 2001, $399 of asset impairment, restructuring
and other charges were recorded related to Excite@Home. Included in these
charges were $376 of asset impairment charges and $23 of restructuring and exit
costs, primarily due to continued weakness in the on-line media market and the
recent bankruptcy filing of Excite@Home. These charges included the write-off of
goodwill and other intangible assets, warrants granted in connection with
distributing the @Home service and property, plant and equipment. Restructuring
and exits costs, consisted of $4 for severance costs, $14 related to facility
closings and $5 related to termination costs of contractual obligations. Since
AT&T Broadband Group, through ATTBLLC, consolidated Excite@Home through
September 30, 2001, but only owned approximately 23% of Excite@Home, a portion
of the charges recorded by Excite@Home has been eliminated in the September 30,
2001 statement of operations as a component of minority interest income
(expense).
The severance costs, for approximately 860 employees, primarily resulted
from continued cost reduction efforts by Excite@Home. Nearly 79% of the affected
employees have left their positions as of
L-106
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
(CONTINUED)
September 30, 2001, and substantially all of the remaining employees will leave
the company by the end of 2001.
Asset impairment, restructuring and other charges for the nine months ended
September 30, 2001, totaled $1,494. The charge includes $1,171 of asset
impairment charges related to Excite@Home and $323 for restructuring and exit
costs, which consisted of $151 for severance costs, $156 for facilities closing
and $16 for termination costs of contractual obligations.
The asset impairment charges recorded during the nine months ended
September 30, 2001 included $1,032 due to the write down of goodwill and other
intangible assets related to Excite@Home, warrants granted in connection with
distributing the @Home service, and property, plant and equipment of
Excite@Home. These write downs are primarily due to the continued weakness in
the online media market and the recent bankruptcy filing of Excite@Home. In
addition, AT&T Broadband Group, through ATTBLLC, recorded a related goodwill
impairment charge of $139 associated with its acquisition goodwill of
Excite@Home. Since AT&T Broadband Group, through ATTBLLC, consolidated
Excite@Home but only owned approximately 23% of Excite@Home, a portion of the
charges recorded by Excite@Home has been eliminated in the statement of
operations as minority interest income (expense).
The severance costs of $151, for approximately 7,700 employees, primarily
resulted from synergies created by the MediaOne Merger as well as continued cost
reduction efforts by Excite@Home. Approximately 36% of the affected employees
are management employees and 64% are non-management employees. Nearly 84% of the
affected employees have left their positions as of September 30, 2001, and the
remaining employees will leave the company by the end of 2001.
The following table displays the activity and balances of the restructuring
reserve account from January 1, 2001 to September 30, 2001.
JANUARY 1, SEPTEMBER 30,
2001 2001
TYPE OF COST BALANCE ADDITIONS DEDUCTIONS BALANCE
------------ ---------- --------- ---------- -------------
Employee separations...................... $16 151 (136) $31
Facility closings and lease
terminations............................ -- 156 (144) 12
Other..................................... -- 16 (16) --
=== === ==== ===
Total................................ $16 323 (296) $43
=== === ==== ===
Total deductions included $121 related to the deconsolidation of AT&T
Broadband Group's investment in Excite@Home and cash payments of $175 related to
employee separations, facility closings, litigation and contractual obligations.
During the third quarter of 2000, AT&T Broadband Group recorded $24 of
asset impairment, restructuring and other charges. The charge resulted from
synergies associated with the MediaOne Merger and related to cash termination
benefits associated with the involuntary separation of approximately 490
employees. Approximately one-half of the individuals were management employees
and one-half were non-management employees.
During the nine months ended September 30, 2000, AT&T Broadband Group
recorded $40 of asset impairment, restructuring and other charges, related to
restructuring and exit costs resulting from synergies created by the MediaOne
Merger and cost reduction efforts. The charge for the nine months ended
September 30, 2000 included cash termination benefits of $40 associated with the
involuntary separation of approximately 525 employees. Approximately half of the
individuals were management employees and half were non-management employees.
L-107
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
(CONTINUED)
(5) SETTLEMENT OF EXCHANGEABLE NOTES
In the third quarter of 2001, exchangeable notes that were indexed to a
portion of holdings of Vodafone securities matured. Prior to the settlement, the
carrying value of the notes was $1,636. These notes were settled with
approximately 70 million shares of Vodafone ADR's and $252 in cash.
Approximately 57 million shares of the Vodafone ADR's used in the settlement
were accounted for as "trading" securities and the remaining shares were
accounted for as "available-for-sale" securities under SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." The settlement resulted
in a pretax loss of approximately $392, of which $394 was reclassified from
other comprehensive income to other (expense) income in the statement of
operations.
(6) STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 133 "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES"
Effective January 1, 2001, AT&T Broadband Group adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", and its
corresponding amendments under SFAS No. 138. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are required to
be recorded on the balance sheet at fair value. If the derivative is designated
as a fair value hedge, the changes in the fair value of the derivative and of
the hedged item attributable to the hedged risk are recognized in earnings. If
the derivative is designated as a cash flow hedge, the effective portions of
changes in the fair value of the derivative are recorded in other comprehensive
income ("OCI") within combined attributed net assets and are recognized in the
income statement when the hedged item affects earnings. Changes in fair values
of derivative instruments not designated as hedging instruments and ineffective
portions of hedges, if any, are recognized in earnings in the current period.
The adoption of SFAS No. 133 on January 1, 2001, resulted in a pretax
cumulative-effect decrease to net loss of $371 ($229 net-of-tax).
Included in the after tax cumulative effect benefit of $229 was a $185
benefit for recording the indexed debt instruments at fair value and $44 benefit
for recording the fair value of warrants.
Upon adoption, as permitted by SFAS No. 133, AT&T Broadband Group
reclassified $9.3 billion of securities from "available-for-sale" to "trading".
This reclassification resulted in the recognition, in the statement of
operations, of losses previously recorded within accumulated OCI. A portion of
the loss ($1,638 pretax; $1,005 net-of-tax) was recorded as part of the
cumulative effect of adoption. This loss completely offset a gain for amounts
also previously recorded within accumulated OCI on the indexed debt obligation
that had been considered a hedge of Comcast, Microsoft and Vodafone
"available-for-sale" securities. The reclassification of securities also
resulted in a pretax charge of $1,154 ($708 net-of-tax) recorded in other
(expense) income.
COLLARS AND EQUITY SECURITIES PRICE RISK
Option contracts are entered into to hedge exposure on debt that is
collateralized by securities owned by AT&T Broadband Group. From time to time,
AT&T Broadband Group uses options and collars to manage the risk from changes in
fair values and cash flows on certain equity securities, primarily on those
being used to collateralize underlying debt instruments. The securities selected
for hedging are determined by market conditions, up-front costs, and other
relevant factors. Once established, the hedges are not dynamically managed or
traded, and are generally not removed until maturity of the option contracts.
L-108
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
(CONTINUED)
INTEREST RATE SWAP AGREEMENTS
Interest rate swaps are entered into to manage exposure to changes in
interest rates and to lower overall costs of financing. Swap agreements are
entered into to manage the fixed/floating mix of the debt portfolio in order to
reduce aggregate risk to interest rate movements. Interest rate swaps also allow
AT&T Broadband Group to raise funds at floating rates and effectively swap them
into fixed rates that are lower than those available to AT&T Broadband Group if
fixed-rate borrowings were made directly. These agreements involve the exchange
of floating-rate for fixed-rate payments, fixed-rate for floating-rate payments
or floating-rate for other floating-rate payments without the exchange of the
underlying principal amount.
OTHER DERIVATIVES
In addition, AT&T Broadband Group, through ATTBLLC and MediaOne, may hold
warrants to purchase securities of other companies. Warrants that can be net
share settled are deemed derivative financial instruments and are generally not
eligible to be designated as hedging instruments as there is no corresponding
underlying exposure. This includes warrants held in both public and private
companies.
Hedge ineffectiveness, determined in accordance with SFAS No. 133, had no
impact on earnings for the three and nine months ended September 30, 2001. No
fair value hedges or cash flow hedges were derecognized or discontinued for the
three and nine months ended September 30, 2001.
For the three and nine months ended September 30, 2001, other (expense)
income included net gains of $141 and $230, respectively, relating to ongoing
fair value adjustments of derivatives and "trading" securities. The fair value
adjustments for these periods included net gains of $980 and $1,964,
respectively, for equity based derivative instruments embedded in indexed debt
instruments, net losses of $52 and $67, respectively, for changes in the fair
value of warrants, and losses of $787 and $1,667, respectively, for "trading"
securities.
For the three and nine months ended September 30, 2001, we reclassified $19
and $60, respectively, from OCI (pretax) to interest expense representing the
recognition of mark-to-market amounts on the prepaid interest rate swaps.
(7) RELATED PARTY TRANSACTIONS
As discussed in note 1, AT&T provides necessary working capital
requirements through intercompany debt and capital contributions to AT&T
Broadband Group. These amounts are reflected in the accompanying combined
balance sheets as short-term debt due to AT&T or a component of combined
attributed net assets. Short-term debt due to AT&T and interest was assumed
based upon the methodology outlined in note 1. Intercompany debt was $5,390 and
$5,830 at September 30, 2001 and December 31, 2000, respectively. Intercompany
interest expense was $53 and $89 for the three months ended September 30, 2001
and 2000, respectively, and $257 and $243 for the nine months ended September
30, 2001 and 2000, respectively.
AT&T Consumer Services Group provides AT&T Broadband Group with sales
support and customer care services at cost based prices which approximate market
prices. For the three months ended September 30, 2001 and 2000, such amounts
totaled $46 and $18, respectively, and for the nine months ended September 30,
2001 and 2000, such amounts totaled $142 and $48, respectively. Such amounts are
included in selling, general and administrative expenses in the accompanying
combined statements of operations.
L-109
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
(CONTINUED)
In addition, AT&T Business Services Group provides AT&T Broadband Group
with wireline communication and other services. For the three months ended
September 30, 2001 and 2000, charges for such services totaled $61 and $36,
respectively, and for the nine months ended September 30, 2001 and 2000, such
amounts totaled $171 and $61, respectively. Such amounts are included in costs
of services in the accompanying combined statements of operations.
Included in current liabilities at September 30, 2001 and December 31,
2000, was $10 and $98, respectively, related to amounts due AT&T Consumer
Services Group and AT&T Business Services Group for the above described
services.
AT&T allocates general corporate overhead expenses, including finance,
legal, marketing, use of the AT&T brand, planning and strategy and human
resources to AT&T Broadband Group, as well as costs for AT&T employees who
directly support the activities of AT&T Broadband Group. Charges for such
services amounted to $41, $43, $127 and $123 for the three months ended
September 30, 2001 and 2000, and the nine months ended September 30, 2001 and
2000, respectively. These amounts are included in selling, general and
administrative expenses in the accompanying combined statements of operations
and were determined based on the methodology described in note 1.
AT&T Broadband Group transferred $628 of marketable securities and equity
investments and $180 of related deferred tax liabilities to AT&T through
combined attributed net assets during the first quarter of 2001. No gain or loss
was recorded on this transaction.
AT&T Broadband Group has various related party transactions with Liberty
Media Group ("LMG"). Included in costs of services were programming expenses
related to services from LMG. Those expenses amounted to $27 and $199,
respectively, for the quarter-to-date and year-to-date periods through July 31,
2001, the deemed effective LMG spin-off date from AT&T for accounting purposes,
and $69 and $171, respectively, for the quarter and nine months ended September
30, 2000.
(8) COMMITMENT AND CONTINGENCIES
In July 1997, ATTBLLC's predecessor, TCI, and ATTBLLC's subsidiary,
Satellite Services, Inc., entered into a 25 year affiliation term sheet with
Starz Encore Group (formerly Encore Media Group), a subsidiary of LMG, pursuant
to which AT&T Broadband Group may be obligated to make fixed monthly payments in
exchange for unlimited access to Encore and Starz! programming. The commitment
increases annually from $288 million in 2001 to $315 million in 2003, and will
increase annually through 2022 with inflation. The affiliation term sheet
further provides that to the extent Starz Encore Group's programming costs
increase above certain levels, AT&T Broadband Group's payments under the term
sheet will be increased in proportion to the excess. Starz Encore Group
requested payment from AT&T Broadband Group of amounts it contends are AT&T
Broadband Group's proportionate share of what Starz Encore Group reported as its
excess programming costs during the first quarter of 2001 (which amount,
approximately $40 million, Starz Encore Group indicated it expected to represent
the bulk of what it considered AT&T Broadband Group's proportionate share of
excess programming costs Starz Encore Group considers to be payable for the year
2001). Excess programming costs Starz Encore Group is expected to contend to be
payable by AT&T Broadband Group in future years are not presently estimable, and
could be significantly larger. By letter dated May 29, 2001, AT&T Broadband
Group disputed the enforceability of the excess programming pass through
provisions of the term sheet and questioned the validity of the term sheet as a
whole. AT&T Broadband Group also has raised certain issues concerning the
uncertainty of the provisions of the term sheet and the contractual
interpretation and application of certain of its provisions to, among other
things, the acquisition and disposition of cable systems. In July 2001, Starz
Encore Group filed suit seeking payment of the 2001 excess programming costs and
a declaration that the term sheet is a binding and enforceable contract. In
October 2001, AT&T Broadband
L-110
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
(CONTINUED)
Group and Starz Encore Group agreed to stay the litigation until August 31, 2002
to allow the parties time to continue negotiations toward a potential business
resolution of this dispute. The Court granted the stay on October 30, 2001. The
terms of the stay order allow either party to petition the Court to lift the
stay after April 30, 2002 and to proceed with the litigation.
(9) NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," which supercedes Accounting Principles Board
("APB") Opinion No. 16. SFAS No. 141 requires all business combinations
initiated after June 30, 2001 be accounted for under the purchase method. In
addition, SFAS No. 141 establishes criteria for the recognition of intangible
assets separately from goodwill. These requirements are effective for fiscal
years beginning after December 15, 2001, which for AT&T Broadband Group means
January 1, 2002. AT&T Broadband Group does not expect the adoption of SFAS No.
141 will have a material effect on AT&T Broadband Group's results of operations,
financial position or cash flow.
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which supercedes APB Opinion No. 17. Under SFAS No. 142
goodwill and indefinite lived intangible assets will no longer be amortized, but
rather will be tested for impairment upon adoption and at least annually
thereafter. In addition, the amortization period of intangible assets with
finite lives will no longer be limited to 40 years. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001, which for AT&T Broadband
Group means the standard will be adopted on January 1, 2002. In connection with
the adoption of this standard, AT&T Broadband Group's unamortized goodwill
balance will no longer be amortized, but will continue to be tested for
impairment. The goodwill balance as of September 30, 2001 was $19.4 billion with
related amortization expense for the nine months ended September 30, 2001 of
$534. The excess basis related to AT&T Broadband Group's equity method
investments as of September 30, 2001 was $8.6 billion with related amortization
of $120. In accordance with this statement these costs will no longer be
amortized beginning January 1, 2002. In addition, AT&T Broadband Group has
determined that franchise costs are indefinite lived assets and therefore, as of
January 1, 2002 will no longer be subject to amortization, but will continue to
be tested for impairment. The franchise cost balance as of September 30, 2001
was $43.3 billion with related amortization expense for the nine months ended
September 30, 2001 of $929. AT&T Broadband Group is continuing to assess the
adoption impairment impacts of such standard on our results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This standard requires that obligations associated with
the retirement of tangible long-lived assets be recorded as liabilities when
those obligations are incurred, with the amount of the liability initially
measured at fair value. Upon initially recognizing a liability for an asset
retirement obligation, an entity must capitalize the cost by recognizing an
increase in the carrying amount of the related long-lived asset. Over time, this
liability is accreted to its present value, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. SFAS No. 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002, which for AT&T
Broadband Group means the standard will be adopted on January 1, 2003. AT&T
Broadband Group does not expect that the adoption of this statement will have a
material impact on AT&T Broadband Group's results of operations, financial
position or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS No. 144 applies to all long-lived assets,
L-111
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
(CONTINUED)
including discontinued operations, and consequently amends APB Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." Based on SFAS No. 121, SFAS No. 144 develops one
accounting model for long-lived assets that are to be disposed of by sale, as
well as addresses the principal implementation issues. SFAS No. 144 requires
that long-lived assets that are to be disposed of by sale be measured at the
lower of book value or fair value less cost to sell. Additionally, SFAS No. 144
expands the scope of discontinued operations to include all components of an
entity with operations that (1) can be distinguished from the rest of the entity
and (2) will be eliminated from the ongoing operations of the entity in a
disposal transaction. SFAS No. 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001, which for AT&T Broadband
Group means the standard will be adopted on January 1, 2002. AT&T Broadband
Group does not expect that the adoption of SFAS No. 144 will have a material
impact on AT&T Broadband Group's results of operations, financial position or
cash flows.
(10) SUBSEQUENT EVENTS
In October 2001, AT&T Broadband Group, through ATTBLLC, sold approximately
19.2 million shares of Cablevision NY Group Class A common stock and, through a
trust, 23.4 million shares of a mandatorily exchangeable trust security that
will be exchangeable into up to 23.4 million shares of Cablevision NY Group
Class A common stock at maturity in three years. The offering price was $36.05
per share for both the common shares and the exchangeable securities. The
offerings generated approximately $1,323 of pretax cash proceeds, net of
underwriting fees. The sale resulted in a pretax loss of approximately $271. In
addition, the underwriters' exercised a portion of their over-allotment options,
which resulted in the sale of an additional 3.5 million shares of the
exchangeable securities through the trust. AT&T received additional cash
proceeds of approximately $99 from this transaction.
In December 2001, AT&T Broadband Group sold approximately 12.8 million
shares of Cablevision's Rainbow Media Group Class A tracking stock and, through
a trust, 8.5 million shares of a mandatorily exchangeable trust security that
will be exchangeable into up to 8.5 million shares of Rainbow Media Group Class
A tracking stock at maturity in three years. The offering price was $22.50 per
share for both the tracking stock shares and the exchangeable trust securities.
The offerings generated approximately $424 of pretax cash proceeds, net of
underwriting fees. The sale resulted in a pretax gain of approximately $66. In
addition, the underwriters' exercised their over-allotment options, which
resulted in the sale of an additional 1.9 million tracking stock shares and,
through the trust, 1.3 million shares of the exchangeable securities. AT&T
Broadband Group received additional cash proceeds of approximately $63 net of
underwriting fees from this transaction.
During the fourth quarter of 2001, AT&T Broadband Group recorded an
impairment charge of $450. The impairment charge primarily resulted from
management's conclusion that declines in fair value were not temporary or the
investment could not be held for a period of time to allow for recoverability of
fair value as in the case of exchangeable notes due in late 2002 that can be
settled with shares of Vodafone ADRs.
In January and February 2002, AT&T announced that it will redeem $1,312 of
trust preferred securities in February and March of 2002. These amounts are
classified as long-term debt in the accompanying combined balance sheet.
L-112
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of AT&T Corp.:
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations and changes in combined attributed net assets
and of cash flows present fairly, in all material respects, the financial
position of AT&T Broadband Group at December 31, 2000 and 1999, and the results
of their operations and their cash flows for the year ended December 31, 2000
and for the ten-month period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of AT&T Broadband Group's
management; our responsibility is to express our opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
AT&T Broadband Group is a fully integrated business unit of AT&T Corp.;
consequently, as indicated in Note 1, these combined financial statements have
been derived from the consolidated financial statements and accounting records
of AT&T Corp. and reflect certain assumptions and allocations. Moreover, as
indicated in Note 1, AT&T Broadband Group relies on AT&T Corp. for
administrative, management and other services. The financial position, results
of operations and cash flows of AT&T Broadband Group could differ from those
that would have resulted had AT&T Broadband Group operated autonomously or as an
entity independent of AT&T Corp. As more fully discussed in Note 1, the combined
financial statements of AT&T Broadband Group should be read in conjunction with
the audited consolidated financial statements of AT&T Corp.
PricewaterhouseCoopers LLP
New York, New York
May 9, 2001
L-113
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF OPERATIONS
TEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
(DOLLARS IN MILLIONS)
REVENUE..................................................... $ 8,445 $5,080
Operating expenses:
Costs of services (excluding depreciation of $1,291 and
$663 for 2000 and 1999, respectively, included
below)................................................. 4,600 2,686
Selling, general and administrative....................... 2,180 1,253
Depreciation and other amortization....................... 1,674 805
Amortization of goodwill, franchise costs and other
purchased intangibles.................................. 2,377 869
Asset impairment, restructuring and other charges......... 6,270 644
------- ------
Total operating expenses.................................... 17,101 6,257
------- ------
Operating loss.............................................. 8,656 1,177
Other (expense) income.................................... (39) 50
Interest expense.......................................... 1,323 705
------- ------
Loss before income taxes, net losses from equity investments
and minority interest..................................... 10,018 1,832
Benefit for income taxes.................................... 1,183 465
Net losses from equity investments.......................... 597 707
Minority interest income (expense).......................... 4,062 (126)
------- ------
Net loss.................................................... $ 5,370 $2,200
======= ======
The notes are an integral part of the combined financial statements.
L-114
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED BALANCE SHEETS
DECEMBER 31,
---------------------
2000 1999
--------- --------
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents................................... $ 61 $ --
Trade receivables, less allowances of $74 and $25........... 774 407
Deferred income taxes....................................... -- 261
Investments................................................. 2,204 --
Other current assets........................................ 467 432
-------- -------
Total current assets................................... 3,506 1,100
Property, plant and equipment, net.......................... 15,187 7,780
Franchise costs, net of accumulated amortization of $1,664
and $697.................................................. 48,218 32,693
Goodwill, net of accumulated amortization of $240 and $5.... 21,139 129
Investments................................................. 25,045 13,334
Other assets, net of accumulated amortization of $578 and
$150...................................................... 4,439 3,192
-------- -------
Total assets........................................... $117,534 $58,228
======== =======
LIABILITIES AND COMBINED ATTRIBUTED NET ASSETS
Accounts payable............................................ $ 1,250 $ 1,047
Payroll and benefit-related liabilities..................... 570 720
Debt maturing within one year............................... 3,073 932
Short-term debt due to AT&T................................. 5,830 4,297
Deferred income tax liability............................... 486 --
Liability under put options................................. 2,564 --
Other current liabilities................................... 2,177 1,106
-------- -------
Total current liabilities.............................. 15,950 8,102
Long-term debt.............................................. 19,517 9,671
Deferred income taxes....................................... 28,550 18,142
Other long-term liabilities and deferred credits............ 1,069 397
-------- -------
Total liabilities...................................... 65,086 36,312
Minority interest........................................... 4,421 2,327
Company-Obligated Convertible Quarterly Income Preferred
Securities of Subsidiary Trust Holding Solely Subordinated
Debt Securities of AT&T................................... 4,710 4,700
Combined attributed net assets.............................. 43,317 14,889
-------- -------
Total liabilities and combined attributed net assets........ $117,534 $58,228
======== =======
The notes are an integral part of the combined financial statements.
L-115
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF CHANGES IN COMBINED
ATTRIBUTED NET ASSETS
TEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
(DOLLARS IN MILLIONS)
COMBINED ATTRIBUTED NET ASSETS:
Balance at beginning of period............................ $14,889 $14,377
Net loss.................................................. 5,370 2,200
Contributions from AT&T, net.............................. 35,101 2,128
Issuance of common stock by affiliates.................... (54) 515
Net revaluation of financial instruments.................. (1,256) 69
Other comprehensive income................................ 7 --
------- -------
Balance at end of period.................................. $43,317 $14,889
======= =======
SUMMARY OF TOTAL COMPREHENSIVE INCOME:
Net loss.................................................. $ 5,370 $ 2,200
Net revaluation of financial instruments (net of tax
(provision) benefit of $711 and $(36))................. (1,256) 69
Other comprehensive income................................ 7 --
------- -------
Total comprehensive loss............................... $ 6,619 $ 2,131
======= =======
The notes are an integral part of the combined financial statements.
L-116
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF CASH FLOW
TEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
(DOLLARS IN MILLIONS)
OPERATING ACTIVITIES:
Net loss.................................................... $ 5,370 $ 2,200
Adjustments to reconcile net loss to net cash provided by
operating activities:
Gains on sales of businesses and investments.............. (616) (39)
Asset impairment, restructuring and other charges, net of
cash payments.......................................... 6,216 594
Depreciation and amortization............................. 4,051 1,674
Provision for uncollectibles.............................. 154 75
Net losses from equity investments........................ 967 1,145
Deferred income taxes..................................... (880) (422)
Impairment of investments................................. 240 --
Market adjustment for put option.......................... 537 --
Minority interest......................................... (4,039) 180
Increase in accounts receivable........................... (263) (116)
Increase (decrease) in accounts payable................... (90) 447
Net change in other operating assets and liabilities...... (298) 143
Other adjustments, net.................................... 193 (101)
------- -------
Net cash provided by operating activities.............. 802 1,380
------- -------
INVESTING ACTIVITIES:
Capital expended for property and equipment, net of
proceeds from disposal................................. (4,426) (3,161)
Sales of marketable securities............................ 96 --
Purchase of marketable securities......................... (14) --
Equity investment distributions and sales................. 578 817
Equity investment contributions and purchases............. (593) (1,308)
Net cash received (paid) for acquisitions and dispositions
of businesses.......................................... (71) 740
Other investing activities, net........................... (81) (3)
------- -------
Net cash used in investing activities.................. (4,511) (2,915)
------- -------
FINANCING ACTIVITIES:
Proceeds from long-term debt issuances.................... 3,862 --
Issuance of convertible securities........................ -- 4,638
Retirements of long-term debt............................. (1,429) (2,031)
Retirements of redeemable securities...................... (152) --
Dividends paid on preferred securities.................... (294) (135)
Increase in short-term debt due to AT&T................... 1,533 4,297
Transfers from (to) AT&T, net............................. 765 (5,234)
Other financing activities, net........................... (515) --
------- -------
Net cash provided by financing activities.............. 3,770 1,535
------- -------
Net change in cash and cash equivalents..................... 61 --
------- -------
Cash and cash equivalents at beginning of period............ -- --
------- -------
Cash and cash equivalents at end of period.................. $ 61 $ --
======= =======
The notes are an integral part of the combined financial statements.
L-117
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND UNLESS OTHERWISE NOTED)
1. BASIS OF PRESENTATION
On October 25, 2000, AT&T announced a restructuring plan designed to fully
separate or issue separately tracked stocks intended to reflect the financial
performance and economic value of each of AT&T's four major operating units.
Upon completion of the plan, AT&T Wireless, AT&T Broadband, AT&T Business and
AT&T Consumer will all be represented by asset-based or tracking stocks. The
accompanying combined financial statements reflect the business of AT&T
Broadband Group.
AT&T Broadband Group is a fully integrated business unit of AT&T and is not
a separate legal entity. The AT&T Broadband Group consists primarily of the
assets, liabilities and business of AT&T Broadband, LLC (formerly
Tele-Communications, Inc. ("TCI")) and MediaOne Group, Inc. ("MediaOne"), and
includes At Home Corporation ("Excite@Home"). AT&T Broadband, LLC ("ATTBLLC")
and MediaOne are both separate subsidiaries of AT&T. The AT&T Broadband Group is
primarily engaged in the construction, acquisition, ownership and operation of
cable television systems throughout the United States. AT&T Broadband Group
offers a variety of services through its cable broadband network, including
traditional analog video and advanced services such as digital video service,
high-speed cable Internet service and broadband telephony service.
On March 9, 1999, AT&T acquired TCI in a merger (the "TCI Merger") which
was attributed to AT&T Broadband Group. The results of operations, financial
position, changes in combined attributed net assets and cash flows of the
business of AT&T Broadband, LLC which are included in AT&T Broadband Group have
been included since March 1, 1999, the deemed effective date of the TCI Merger
for accounting purposes. The impact of the results from March 1 through March 9,
1999 were deemed immaterial to the combined results. On June 15, 2000 AT&T
acquired MediaOne which was attributed to AT&T Broadband Group. The results of
operations, financial position, changes in combined attributed net assets and
cash flows of the businesses of MediaOne which are included in AT&T Broadband
Group have been included since June 15, 2000. See note 4.
The combined financial statements of AT&T Broadband Group are prepared in
accordance with generally accepted accounting principles. The combined financial
statements of AT&T Broadband Group reflect the assets, liabilities, revenue and
expenses directly attributable to AT&T Broadband Group, as well as allocations
deemed reasonable by management, to present the results of operations, financial
position, changes in combined attributed net assets, and cash flows of AT&T
Broadband Group on a stand-alone basis. The allocation methodologies have been
described within the notes to the combined financial statements where
appropriate, and management considers the allocations to be reasonable. All
significant intercompany accounts and transactions within the AT&T Broadband
Group have been eliminated. The financial information included herein may not
necessarily reflect the combined results of operations, financial position,
changes in combined attributed net assets and cash flows of AT&T Broadband Group
in the future or what they would have been had AT&T Broadband Group been a
separate, stand-alone entity during the periods presented. Earnings per share
disclosure has not been presented as AT&T Broadband Group is a business unit of
AT&T and earnings per share data is not considered meaningful. The combined
financial statements of AT&T Broadband Group should be read in conjunction with
AT&T's Form 10-K/A for the year ended December 31, 2000.
AT&T Broadband Group's operations have been dependent on cash infusions
from AT&T in order for AT&T Broadband Group to operate and execute on its
business and growth strategies. If, for any reason, AT&T is unwilling or cannot
provide the level of financing necessary to fund future operations, AT&T
Broadband Group will need to seek additional financing from third parties.
L-118
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Debt attributed to AT&T Broadband Group includes the third party
obligations of AT&T Broadband LLC (formerly Tele-Communications, Inc.) and
MediaOne Group, Inc. and all monetization debt backed by assets held by AT&T
Broadband Group. Additional intercompany debt has been allocated to AT&T
Broadband Group to achieve a total debt level based on several factors including
prospective financing requirements, desired standalone credit profile, working
capital and capital expenditure requirements, expected sources of future
deleveraging, and comparable company profiles. Increases in historical
intercompany debt are based on historical cash flows. Such cash outflows include
capital expenditures and investments in cable companies, offset by cash flow
from operations. By the time AT&T's restructuring activities are complete, the
then intercompany debt balance of AT&T Broadband Group will be replaced with an
equal amount of external debt in a manner to be determined. The historical
interest expense on the allocated intercompany debt was calculated based on a
rate intended to be equivalent to the rate AT&T Broadband Group would receive if
it were a stand-alone entity. Due to AT&T's deleveraging activities, the $28.4
billion of debt at December 31, 2000 is expected to be significantly lower in
the future. AT&T's expected deleveraging activities that relate to AT&T
Broadband Group include, but may not be limited, to the following: the announced
sale of rural cable systems which is expected to result in gross cash proceeds
of $3.3 billion and up to $0.5 billion of Charter Communications common stock;
any proceeds that may result from the exercise of AT&T's registration rights in
Time Warner Entertainment; and any proceeds from the sale of shares of
Cablevision Systems Corp.
AT&T performs cash management functions on behalf of the AT&T Broadband
Group. Substantially all of the AT&T Broadband Group's cash balances are swept
to AT&T on a daily basis, where they are managed and invested by AT&T. Transfers
of cash to and from AT&T, after giving consideration to the debt allocation
methodology, are reflected as a component of combined attributed net assets. Net
transfers to or from AT&T are assumed to be settled in cash. AT&T's capital
contributions for purchase business combinations and initial investments in
joint ventures and partnerships which AT&T attributed to AT&T Broadband Group
have been treated as noncash transactions.
General corporate overhead related to AT&T's corporate headquarters and
common support divisions has been allocated to AT&T Broadband Group as it was
not deemed practicable to specifically identify such common costs to AT&T
Broadband Group. The allocation of corporate overhead is divided into an
allocation of shared services (e.g., payroll and finance) and other corporate
overhead. Costs of shared services are allocated to AT&T Broadband Group based
on transaction based prices. Other corporate overhead is allocated to AT&T
Broadband Group based on the ratio of AT&T Broadband Group's external costs and
expenses adjusted for any functions AT&T Broadband Group performs on its own.
The costs of these services charged to AT&T Broadband Group are not necessarily
indicative of the costs that would have been incurred if AT&T Broadband Group
had performed these functions entirely as a stand-alone entity, nor are they
indicative of costs that will be charged or incurred in the future. However,
management believes such allocations are reasonable.
Consolidated income tax provisions or benefits, related tax payments or
refunds, and deferred tax balances of AT&T have been allocated to AT&T Broadband
Group based principally on the taxable income and tax credits directly
attributable to AT&T Broadband Group, essentially a stand-alone presentation.
AT&T and AT&T Broadband Group will enter into a tax sharing agreement which,
consistent with the principles described in the preceding sentence, will provide
for tax sharing payments based on the tax expense or tax benefits of a
hypothetical affiliated group consisting of AT&T Broadband Group and AT&T. Based
on this agreement, the consolidated tax liability before credits is allocated
between the groups, based on each group's contribution to consolidated taxable
income of the hypothetical group. Consolidated tax credits of the hypothetical
group are allocated between groups based on each group's contribution to such
tax credit.
L-119
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue for customer fees, equipment rental, advertising, and pay-per-view
programming is recognized in the period the services are delivered. Installation
revenue is recognized in the period the installation services are provided to
the extent of direct selling costs. Any remaining amount is deferred and
recognized over the estimated average period customers are expected to remain
connected to the cable distribution system.
During 2000, AT&T Broadband Group adopted Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue
Recognition in Financial Statements." The adoption of SAB No. 101 did not have a
material impact on combined results of operations or financial condition.
ADVERTISING AND PROMOTIONAL COSTS
Advertising and promotional costs are expensed as incurred. Advertising and
promotional expenses were $325, and $138 for the year ended December 31, 2000
and the ten months ended December 31, 1999, respectively.
INCOME TAXES
AT&T Broadband Group is not a separate taxable entity for federal and state
income tax purposes and its results of operations are included in the
consolidated federal and state income tax returns of AT&T and its affiliates.
The provision for income taxes is based on AT&T Broadband Group's contribution
to the overall income tax liability or benefit of AT&T and its affiliates.
STOCK-BASED COMPENSATION
Stock-based compensation is accounted for in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
AT&T Broadband Group follows the disclosure-only provisions of Statement of
Financial Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based
Compensation."
CASH EQUIVALENTS
All highly liquid investments with original maturities of three months or
less are considered to be cash equivalents.
INVESTMENTS
Investments in which AT&T Broadband Group exercises significant influence,
but does not control, are accounted for under the equity method of accounting.
Under the equity method, investments are stated at cost and are adjusted for
AT&T Broadband Group's subsequent contributions and share of earnings, losses
and distributions. The excess of the investment over the underlying book value
of the investee's net assets is being amortized over periods ranging from 25 to
40 years. Investments in which AT&T Broadband Group has no significant influence
over the investee are accounted for under the cost method of accounting. Under
the cost method, investments are stated at cost and earnings are recognized to
the extent distributions are received from the accumulated earnings of the
investee. Distributions in excess of accumulated earnings are recognized as a
reduction of the investment balance.
L-120
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Marketable equity securities are classified as available-for-sale and are
carried at fair market value with unrealized gains and losses, net of tax,
included in combined attributed net assets as a component of other comprehensive
income. The fair market value of these securities is based on quoted market
prices.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Construction costs, labor
and applicable overhead related to installations and interest during
construction are capitalized.
Depreciation is computed on a straight-line basis using estimated useful
lives of 3 to 15 years for distribution systems and 3 to 40 years for support
equipment and buildings.
Repairs and maintenance are charged to operations, and additions and
replacements are capitalized. At the time of ordinary retirements, sales or
other dispositions of property, the original cost and cost of removal of such
property are charged to accumulated depreciation, and salvage, if any, is
credited thereto. Gains or losses are only recognized in connection with the
sales of properties in their entirety.
FRANCHISE COSTS
Franchise costs include the value attributed to agreements with local
authorities that allow access to homes in cable service areas acquired in
connection with a business combination. Such amounts are generally amortized on
a straight-line basis over 40 years. Costs incurred by the AT&T Broadband Group
in negotiating and renewing franchise agreements are amortized on a
straight-line basis over the life of the franchise, generally 10 to 20 years.
GOODWILL
Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for as purchases. Goodwill is
amortized on a straight-line basis over 7 to 40 years.
SOFTWARE CAPITALIZATION
Certain direct development costs associated with internal-use software are
capitalized, including external direct costs of material and services, and
payroll costs for employees devoting time to the software projects. Such costs
are included within other assets and are amortized over a period not to exceed
five years beginning when the asset is substantially ready for use. Costs
incurred during the preliminary project stage, as well as maintenance and
training costs, are expensed as incurred. Initial operating-system software
costs are capitalized and amortized over the life of the associated hardware.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets such as property, plant and equipment, franchise costs,
goodwill, investments and software are reviewed for impairment whenever events
or changes in circumstances indicate the carrying amount may not be recoverable.
If the total of the expected future undiscounted cash flows is less than the
carrying amount of the asset, a loss is recognized for the difference between
the fair value and carrying value of the asset. Assets to be disposed of are
carried at the lower of their financial statement carrying value or fair value
less cost to sell. In addition, in accordance with Accounting Principles Board
("APB") Opinion No. 17, "Intangible assets," the amortization periods are
evaluated to determine whether events or circumstances warrant revised
amortization periods.
L-121
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
AT&T Broadband Group uses various financial instruments, including
derivative financial instruments, for purposes other than trading. Derivative
financial instruments are not used for speculative purposes. Derivatives, used
as part of the risk-management strategy, are designated at inception as a hedge
and measured for effectiveness both at inception and on an ongoing basis.
Interest rate differentials associated with interest rate swaps used to hedge
debt obligations are recorded as an adjustment to interest payable or receivable
with the offset to interest expense over the life of the swaps. If an interest
rate swap agreement is terminated, the gain or loss is deferred and amortized
over the remaining life of the liability. Purchased and written options
("Collars") are carried at fair value, with unrealized gains and losses, net of
tax, being recorded within other comprehensive income as a component of combined
attributed net assets. Cash flows from financial instruments are classified in
the combined statements of cash flows under the same categories as the cash
flows from the related assets, liabilities or anticipated transactions.
CASH FLOWS
For purposes of the combined statements of cash flows, all transactions
between AT&T Broadband Group and AT&T, except for purchase business combinations
and initial investments in joint ventures and partnerships which were funded by
AT&T and contributed by AT&T to AT&T Broadband Group, have been accounted for as
having been settled in cash at the time the transaction was recorded by AT&T
Broadband Group.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenue and expenses during the period reported. Actual results
could differ from those estimates. Estimates are used when accounting for
certain items such as long-term contracts, allowance for doubtful accounts,
depreciation and amortization, employee benefit plans, taxes, restructuring
reserves, impairment and contingencies.
CONCENTRATIONS
As of December 31, 2000, except for 80% of the billing services being
provided by a single vendor (see note 14), AT&T Broadband Group does not have
any significant concentration of business transacted with a particular customer,
supplier or lender that could, if suddenly eliminated, severely impact its
operations. AT&T Broadband Group does not have a concentration of available
sources of labor, services, or other rights that could, if suddenly eliminated,
severely impact its operations.
ISSUANCE OF COMMON STOCK BY AFFILIATES
Changes in the proportionate share of the underlying equity of an
attributed entity or equity method investee, which result from the issuance of
additional equity securities by such entity, are recognized as increases or
decreases to combined attributed net assets.
RECOGNITION OF GAINS ON ASSET DISPOSITIONS
From time to time, AT&T Broadband Group contributes cable television
systems to joint ventures and partnerships in exchange for a non-controlling
interest in such entity. In connection with such contributions, AT&T Broadband
Group may guarantee the debt of the joint venture or partnership. AT&T
L-122
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Broadband Group defers any gain associated with such transactions until such
time as AT&T Broadband Group has no remaining financial obligation to the joint
venture or partnership.
3. SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION
TEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
OTHER INCOME (EXPENSE), NET
Gains on sales of businesses and investments.............. $ 616 $39
Impairment of investments................................. (240) --
Interest and dividend income.............................. 77 8
Mark to market change on put option....................... (537) --
Other..................................................... 45 3
----- ---
Other (expense) income................................. $ (39) $50
===== ===
SUPPLEMENTARY BALANCE SHEET INFORMATION
DECEMBER 31,
----------------------------
2000 1999
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Land and improvements..................................... $ 135 $ 114
Distribution systems...................................... 13,133 5,577
Support equipment and buildings........................... 2,580 1,026
Construction in progress.................................. 1,417 1,696
Accumulated depreciation.................................. (2,078) (633)
------- ------
Property, plant and equipment, net..................... $15,187 $7,780
======= ======
SUPPLEMENTARY CASH FLOW INFORMATION
TEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Interest payments, net of amounts capitalized............... $1,016 $488
------ ----
Income tax payments......................................... $ 62 $ 8
------ ----
4. MERGERS, ACQUISITIONS, VENTURES, DISPOSITIONS AND EXCHANGES
MERGER WITH TELE-COMMUNICATIONS, INC.
The AT&T Broadband Group was created upon the merger of TCI with a
subsidiary of AT&T. The TCI Merger was completed on March 9, 1999, in an
all-stock transaction valued at approximately $52 billion. TCI simultaneously
combined its Liberty Media Group programming business with its TCI Ventures
Group technology investments business, forming Liberty Media Group ("LMG"). In
connection
L-123
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
with the TCI Merger, AT&T issued a separate tracking stock in exchange for the
TCI Liberty Media Group and TCI Ventures Group tracking shares previously
outstanding. LMG is excluded from AT&T Broadband Group.
The TCI Merger was accounted for under the purchase method of accounting,
accordingly, AT&T recorded the assets and liabilities of TCI at their fair
values and TCI results have been included since March 1, 1999, the deemed
effective date of the merger. Approximately $20 billion of the purchase price of
$52 billion was attributed to franchise costs and is being amortized on a
straight-line basis over 40 years. Franchise costs represent the value
attributable to the agreements with local franchise authorities that allow
access to homes in the broadband service areas. Pursuant to SFAS No. 109,
"Accounting for Income Taxes," AT&T recorded an approximate $13 billion deferred
tax liability in connection with this franchise intangible, which is also
included in franchise costs. AT&T does not expect that this deferred tax
liability will ever be paid. This deferred tax liability is being amortized on a
straight-line basis over 40 years and is included in the provision for income
taxes. Also included in the $52 billion purchase price was approximately $11
billion related to nonconsolidated investments, approximately $5 billion related
to property, plant and equipment, approximately $11 billion of long-term debt,
and $7 billion related to other net liabilities. In addition, $34 billion was
attributed to the investment in LMG which is excluded from the AT&T Broadband
Group.
MERGER WITH MEDIAONE
On June 15, 2000, AT&T completed a merger with MediaOne in a cash and stock
transaction valued at approximately $45 billion (the "MediaOne Merger"). The
AT&T shares had an aggregate market value of approximately $21 billion and cash
payments totaled approximately $24 billion.
The MediaOne Merger was accounted for under the purchase method of
accounting; accordingly the results of MediaOne have been included in the
accompanying combined financial statements since the date of acquisition.
Approximately $16 billion of the purchase price of $45 billion has been
attributed to franchise costs and is being amortized on a straight-line basis
over 40 years. Also included in the $45 billion purchase price was approximately
$22 billion related to nonconsolidated investments, including investments in TWE
and Vodafone Group, plc, approximately $5 billion related to property, plant and
equipment, and $7 billion of other net assets. In addition, included was
approximately $14 billion in deferred income tax liabilities, approximately $10
billion attributable to debt and approximately $1 billion of minority interest.
AT&T did not attribute $7 billion of cash acquired in the MediaOne merger to
AT&T Broadband Group. The purchase price resulted in preliminary goodwill of $20
billion, which is being amortized on a straight-line basis over 40 years.
Refinements to the allocation of purchase price may be made in future periods as
the related fair value appraisals of certain assets and liabilities are
finalized.
PRO FORMA RESULTS
Following is a summary of the pro forma results of AT&T Broadband Group as
if the MediaOne Merger had closed effective March 1, 1999:
TEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- -----------------
(UNAUDITED)
Revenue............................................ $ 9,770 $7,326
Operating loss..................................... $ 9,089 $1,832
Net income (loss).................................. $(4,422) $1,047
Pro forma data may not be indicative of the results that would have been
obtained had the events actually occurred at the beginning of the periods
presented, nor does it intend to be a projection of future results.
L-124
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Excite@Home. On August 28, 2000, AT&T and Excite@Home announced
shareholder approval of a new board of directors and governance structure for
Excite@Home and completion of the extension of distribution contracts with AT&T,
Cox Communications, Inc. ("Cox") and Comcast Corporation ("Comcast"). In
connection with the above described announcement, AT&T was given the right to
designate six of the 11 Excite@Home board members. In addition, Excite@Home
converted approximately 50 million shares of Excite@Home's Series A common stock
held by AT&T into Series B shares, each of which has 10 votes. As a result of
these governance changes, AT&T gained a controlling financial interest and AT&T
Broadband Group, through ATTBLLC, began consolidating Excite@Home's results upon
the closing of the transaction on September 1, 2000, at which time ATTBLLC had
an approximate 24% economic interest and 74% voting interest. As of December 31,
2000, ATBLLC had, on a fully diluted basis, an approximate 23% economic interest
and 74% voting interest in Excite@Home. Excite@Home has been attributed to AT&T
Broadband Group.
In exchange for Cox and Comcast relinquishing their rights under the
shareholder agreement, AT&T granted put options to Cox and Comcast on a combined
total of 60.4 million shares of Excite@Home Series A common stock. The put
options provide Cox and Comcast with the right to convert their Excite@Home
shares into either AT&T stock or cash at their option, at any time between
January 1, 2001 and June 4, 2002, at the higher of (i) $48 per share or (ii) the
30 day average trading price at the time of exercise (beginning 15 trading days
prior to the exercise date and ending 15 days after the exercise date). If the
average price is above $48 per share, the number of Excite@Home shares that AT&T
would acquire would be reduced proportionately from the original 60.4 million
shares. Accordingly, the maximum amount AT&T would be required to pay in cash or
stock is approximately $2,900 based on the $48 strike price. The obligation
under these put options has been attributed to AT&T Broadband Group and is
reflected in current liabilities on the balance sheet at the fair value of the
put options. Gains or losses resulting from changes in the fair value of the put
options are recorded as a component of other income (expense). For 2000, changes
in the fair value of the put options resulted in a pre-tax expense of $537.
Subsequent to December 31, 2000, Cox and Comcast exercised their put options
electing to receive AT&T Common shares. See note 17.
Also, in connection with the extension of certain distribution agreements
through 2008, AT&T obtained the right to purchase up to approximately 25 million
Excite@Home Series A shares and 25 million Series B shares. In addition, Cox and
Comcast each will receive new warrants to purchase two Series A shares for each
home their respective cable systems pass. Such warrants will vest in
installments every six months beginning in June 2001, and be fully vested by
June 2006, if Cox and Comcast elect to continue their extended non-exclusive
distribution agreements through that period.
The consolidation of Excite@Home resulted in minority interest of
approximately $2,200, goodwill of approximately $2,400, short-term liabilities
of approximately $2,400 (including an initial put option liability), other net
assets of approximately $1,200 and the removal of the investment in Excite@Home
of approximately $1,900.
Cox Communications, Inc. On March 15, 2000, AT&T Broadband Group, through
ATTBLLC, received 50.3 million shares of AT&T common stock held by Cox in
exchange for an entity owning cable television systems serving approximately
312,000 customers and certain other net assets. The AT&T common stock received
in such transaction has been included in combined attributed net assets.
Specifically, AT&T Broadband Group exchanged $1,088 of investments, $878 of
franchise costs and $503 of other net assets for stock valued at $2,658 on March
15, 2000. The transaction resulted in a pre-tax gain of $189.
Lenfest Communications, Inc. On January 18, 2000, AT&T Broadband Group,
through ATTBLLC, sold its ownership interest in Lenfest Communications, Inc., to
a subsidiary of Comcast. In connection
L-125
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
with the sale, AT&T Broadband Group received 47.3 million shares of Comcast
Class Special A common stock. The transaction resulted in a pretax gain of $224.
ACQUISITION-RELATED INTANGIBLE ASSETS
As a result of an evaluation of recent changes in our industry and the
views of regulatory authorities, AT&T Broadband Group expects that the
amortization period for all franchise costs and goodwill associated with newly
acquired cable operations will not exceed 25 years.
5. ASSET IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES
During 2000, AT&T Broadband Group recorded $6,270 of asset impairment,
restructuring and other charges which included $6,179 of asset impairment
charges related to Excite@Home.
The charges related to Excite@Home include $4,609 in asset impairment
charges taken by Excite@Home associated with the goodwill impairment from
various acquisitions and a related goodwill impairment of $1,570 recorded by
AT&T Broadband Group associated with its acquisition goodwill of Excite@Home.
The impairments resulted from the deterioration of the market conditions
and market valuations of Internet-related companies during the fourth quarter of
2000, which caused Excite@Home to conclude that intangible assets related to
their acquisitions of Internet-related companies may not be recoverable. In
accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," Excite@Home conducted a detailed
assessment of the recoverability of the carrying amounts of acquired intangible
assets. This assessment resulted in a determination that certain acquired
intangible assets, including goodwill, related to these acquisitions were
impaired as of December 31, 2000. As a result, AT&T Broadband Group recorded
impairment charges of $4,609 in December 2000, representing the excess of the
carrying amount of the impaired assets over their fair value.
The review for impairment included a review of publicly-traded Internet
companies that are comparable to the companies that Excite@Home acquired. These
companies experienced a substantial decline in stock price and market
capitalization during the fourth quarter of 2000.
Excite@Home also reviewed the business climate for Internet advertising and
web-based infrastructure companies as of December 31, 2000, and observed the
following: (1) investor and consumer enthusiasm for the Internet sector severely
deteriorated during the fourth quarter of 2000; (2) many Internet companies,
including those acquired by Excite@Home, experienced significant decelerations
in their growth both as a result of economic conditions and due to
Internet-sector specific issues such as competition and the weakening of the
Internet advertising market; and (3) funding sources for Internet-based consumer
businesses, which require considerable amounts of capital, had substantially
evaporated as of December 31, 2000. As a result, Excite@Home concluded that
fundamental, permanent and significant adverse changes had occurred during the
fourth quarter of 2000 in the business climate for companies providing Internet
advertising and other web-based services.
In addition, Excite@Home reviewed operating and cash flow projections that
existed at the time Excite@Home made the acquisitions and that were used as a
basis upon which the decisions to complete acquisition were made. These
operating and cash flow projections indicated that the acquired companies, over
their useful lives, would be profitable and generate positive cash flows. The
operating and cash flow projections were compared to operating results after the
date of the acquisitions through December 31, 2000, as well as to projected
operating results for 2001. These comparisons indicated that certain
acquisitions generated operating and cash flow losses through the end of 2000,
and were projected to continue generating operating and cash flow losses for the
foreseeable future.
L-126
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of these factors, Excite@Home determined that the intangible
assets related to the acquisitions might not be recoverable and conducted
impairment tests.
Generally, the impairment tests were performed at an asset group level
corresponding to the lowest level at which cash flows independent of other
assets could be identified. Each asset group consisted of the goodwill and
acquired identifiable intangible assets related to a specific acquisition.
Acquired intangible assets were combined for those acquisitions where separately
identifiable cash flows that are largely independent of the cash flows of other
groups of assets could not be identified.
For each of the asset groups to be tested for impairment, Excite@Home
projected undiscounted cash flows over a future projection period of five years,
based on Excite@Home's determination of the current remaining useful lives of
the asset groups, plus an undiscounted terminal period cash flow to reflect
disposition of the entities at the end of their useful lives. Undiscounted
future cash flows were estimated using projected net realizable value in a sales
transaction (undiscounted cash flows during the expected remaining holding
period until disposition were estimated as negligible). The undiscounted future
cash flows were compared to the carrying amount of each asset group and for
those asset groups where the carrying amount exceeded the undiscounted future
cash flows, Excite@Home concluded that the asset group was impaired.
Excite@Home measured the impairment loss related to impaired asset groups
based on the amount by which the carrying amount of the asset group exceeded the
fair value of the asset group. Measurement of fair value was based on an
analysis by Excite@Home, with assistance from independent valuation experts,
utilizing the best information available in the circumstances using reasonable
and supportable assumptions and projections, and including the discounted cash
flow and market comparison valuation techniques. The discounted cash flow
analysis considered the likelihood of possible outcomes and was based on
Excite@Home's best estimate of projected future cash flows, including terminal
value cash flows expected to result from the disposition of the asset at the end
of its useful life, discounted at Excite@Home's weighted average cost of
capital. Weighted average cost of capital was based on historical risk premiums
required by investors for companies of Excite@Home's size, industry and capital
structure and included risk factors specific to Excite@Home. The market
comparison model represented Excite@Home's estimate of the prices that a buyer
would be willing to pay currently for similar assets, based on comparable
products and services, customer base, risks, earnings capabilities and other
factors.
Based on the foregoing, Excite@Home recorded an impairment write-down of
$4,609 in aggregate, which was allocated to each asset group based on a
comparison of carrying values and fair values. The impairment write-down within
each asset group was allocated first to goodwill, and if goodwill was reduced to
zero, to identifiable intangible assets in proportion to carrying values.
Also as a result of the foregoing, AT&T Broadband Group recorded a goodwill
impairment charge associated with the acquisition of ATTBLLC's investment in
Excite@Home. The write-down of ATTBLLC's investment to fair value was similarly
based on independent appraisals, utilizing discounted expected future cash
flows.
Since AT&T Broadband Group, through ATTBLLC owns approximately 23% of
Excite@Home, 77% of the charge recorded by Excite@Home is not included as an
increase in AT&T Broadband Group's net loss, but rather is eliminated in the
statement of operations as minority interest income (expense).
In 2000, a $91 charge for restructuring and exit costs was recorded
primarily as part of the integration of MediaOne, the centralization of certain
functions, and the consolidation of call center facilities. The charge for the
year ended December 31, 2000, included termination benefits of $61 associated
with the involuntary separation of about 1,060 employees. Approximately 25% of
the individuals were management employees and 75% were non-management employees.
Approximately 74% of the affected employees have
L-127
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
left their positions as of December 31, 2000. The $91 charge included a loss of
$30 recognized on the disposition of facilities as a result of synergies created
by the MediaOne Merger.
The following table displays the activity and balances of the restructuring
reserve account from January 1, 2000, to December 31, 2000. There was no
activity in the restructuring reserve account from March 1, 1999 to December 31,
1999.
JANUARY 1, DECEMBER 31,
2000 2000
TYPE OF COST BALANCE ADDITIONS DEDUCTIONS BALANCE
------------ ---------- --------- ---------- ------------
Employee separations................... $-- $61 $(45) $16
Facility closings...................... -- 30 (30) --
-- --- ---- ---
Total............................. $-- $91 $(75) $16
== === ==== ===
Deductions reflect cash payments of $45 and noncash utilization of $30.
This cash outlay was funded primarily through cash from operations. Noncash
utilization included the loss on the disposition of facilities.
During 1999, AT&T Broadband Group recorded $644 of asset impairment,
restructuring and other charges. Such amount included a $594 in-process research
and development charge which reflected the estimated fair value of research and
development projects at AT&T Broadband Group, as of the date of the TCI Merger,
which had not yet reached technological feasibility or that had no alternative
future use. The projects identified related to TCI's efforts to offer voice over
Internet protocol ("IP"), product integration efforts for advanced set-top
devices that would enable AT&T Broadband Group to offer next-generation digital
services, and cost-savings efforts for cable telephony implementation. In
addition, Excite@Home had research and development efforts underway, including
projects to allow for self-provisioning of devices and the development of
next-generation client software, network and back-office infrastructure to
enable a variety of network devices, and improved design for the regional data
center's infrastructure. We began testing IP telephony equipment in the field in
the fourth quarter of 2000. We anticipate beginning field trials related to
product integration efforts for set-top devices in late 2001, and have completed
trials related to telephony reductions and implementation has begun in certain
markets. Although there are significant technological issues to overcome to
successfully complete the acquired in-process research and development, AT&T
Broadband Group expects successful completion. If, however, AT&T Broadband Group
is unable to establish technological feasibility and produce commercially viable
products/services, the anticipated incremental future cash flows attributable to
expected profits from such new products/services may not be realizable.
The 1999 charge also included a $50 loss related to a contribution
agreement TCI entered into with Phoenixstar, Inc. that requires AT&T Broadband
Group to satisfy certain liabilities owed by Phoenixstar, Inc. and its
subsidiaries. The remaining obligation under this contribution agreement and an
agreement that MediaOne has is $57, which was fully accrued at December 31,
2000.
6. INVESTMENTS
Subsidiaries of AT&T have investments in various companies and partnerships
accounted for under the equity method which have been attributed to AT&T
Broadband Group. At December 31, 2000 and 1999, equity investments of $6,350 and
$13,059, respectively, had been attributed to AT&T Broadband Group. The carrying
value of these investments exceeded AT&T Broadband Group's share of the
underlying reported net assets by approximately $5,455 and $10,894 at December
31, 2000 and 1999, respectively. The excess cost is being amortized over periods
ranging from 25 to 40 years. Pretax amortization of the excess cost of $485 and
$476 for the year ended December 31, 2000 and for the ten
L-128
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
months ended December 31, 1999, respectively, is reflected as a component of net
losses from equity investments, net of income tax benefit in the accompanying
combined statements of operations.
Ownership of significant equity investments attributed to AT&T Broadband
Group was as follows:
AT DECEMBER 31,
------------------
2000 1999
------ ------
Cablevision Systems Corporation............................. 27.98%(a) 32.04%(a)
Time Warner Texas........................................... 50.00% 50.00%
Insight Midwest LP.......................................... 50.00% 50.00%
Century-TCI California Communications, LP................... 25.00% 25.00%
Kansas City Cable Partners.................................. 50.00% 50.00%
Parnassos Communications, LP................................ 33.33% 33.33%
US Cable of Coastal-Texas, LP............................... 37.06% 37.06%
Mid Continent Communications................................ 50.00%(b) --
At Home Corporation......................................... -- 25.00%(c)
Lenfest Communications, Inc................................. -- 50.00%(d)
Bresnan Communications Group LLC............................ -- 50.00%(e)
---------------
(a) At December 31, 2000 and 1999, AT&T Broadband Group, through ATTBLLC, owned
48,942,172, shares of Cablevision Systems Corporation Class A common stock,
which had a closing market price of $84.94 and $75.50 per share,
respectively, on such dates. Cablevision System Corporation ("Cablevision")
exercised its right to redeem all of its outstanding preferred stock and
issued additional common stock. Cablevision also issued shares of its common
stock for acquisitions. As a result of these transactions, ATTBLLC's
ownership interest in Cablevision decreased from 32.04% to 27.98%. Due to
the resulting decrease in Cablevision's equity, net of the dilution of
ATTBLLC's ownership interest in Cablevision, AT&T Broadband Group recorded a
net decrease to "Combined attributed net assets" of $170 in 2000.
(b) On April 1, 2000, AT&T Broadband Group, through ATTBLLC, contributed cable
and ad sales systems to Mid Continent Communications, a newly formed
partnership, in exchange for a 50% interest in the partnership. A gain of $5
is being deferred due to a keep well agreement with the partnership.
(c) On August 28, 2000, AT&T and Excite@Home announced the closing of their
extension contracts and governance reorganization. As a result of the
governance changes, AT&T gained a controlling financial interest and AT&T
Broadband Group, through ATTBLLC, began consolidating Excite@Home's results
on September 1, 2000. As of December 31, 2000, ATTBLLC had an approximate
23% economic interest and 74% voting interest in Excite@Home. ATTBLLC owned
7,924,422 and 63,720,000 shares of Excite@Home Class A common stock at
December 31, 2000 and 1999, respectively, with closing market prices of
$5.53 and $42.88 per share, respectively. ATTBLLC also owned 86,595,578 and
30,800,000 shares of Excite@Home Class B common stock at December 31, 2000
and 1999, respectively, which are not publicly traded. During 2000 and 1999,
Excite@Home issued shares of its common stock for various acquisitions. As a
result of these transactions, ATTBLLC's economic interest in Excite@Home
decreased from 25% to 23% in 2000, and from 38% to 25% in 1999,
respectively. Due to the resulting increase in Excite@Home equity, net of
the dilution of ATTBLLC's ownership interest in Excite@Home, AT&T Broadband
Group recorded an increase to "combined attributed net assets" of $116 and
$527 in 2000 and 1999, respectively.
L-129
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(d) On January 18, 2000, AT&T Broadband Group, through ATTBLLC, sold its
interest in Lenfest Communications, Inc. to Comcast. See note 4.
(e) On February 14, 2000, AT&T Broadband Group, through ATTBLLC, sold its
interest in Bresnan Communications Group LLC to Charter Communications, Inc.
("Charter") for $285 in cash and a cost investment valued at $629 in Charter
Communications VIII, LLC. The transaction resulted in a pretax gain of $33.
Summarized unaudited combined financial information for investments
accounted for under the equity method was as follows:
FOR THE
FOR THE TEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
Revenue.................................................... $ 6,578 $ 6,148
Operating loss............................................. $ 1,419 $ 1,401
Net loss................................................... $ 2,447 $ 2,327
DECEMBER 31,
------------------
2000 1999
------- -------
(UNAUDITED)
Current assets.............................................. $ 1,092 $ 1,394
Noncurrent assets........................................... 17,763 20,815
Current liabilities......................................... 2,796 3,248
Noncurrent liabilities...................................... 14,910 12,441
Redeemable preferred stock.................................. 1,514 1,685
Minority interests.......................................... 586 614
At December 31, 2000, AT&T Broadband Group, through MediaOne, had a 25.51%
interest in TWE. This investment is "held-for-sale" at December 31, 2000.
Accordingly, AT&T Broadband Group is no longer recording equity earnings or
losses on this investment.
Subsidiaries of AT&T also have investments accounted for under the cost
method of accounting which have been attributed to AT&T Broadband Group.
Included in current investments is approximately $2,102 of Vodafone ADRs since
they are indexed to certain maturing debt instruments. Investments at December
31, 2000 for AT&T Broadband Group are as follows:
UNREALIZED
COST GAINS ESTIMATED
BASIS (LOSSES) FAIR VALUE
------- ---------- ----------
Common stock and warrants............................ $12,986 $(3,606) $ 9,380
Preferred stock...................................... 1,467 105 1,572
Cost investments and other........................... 1,050 -- 1,050
------- ------- -------
$15,503 $(3,501) $12,002
======= ======= =======
L-130
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Other investments at December 31, 1999 for AT&T Broadband Group are as
follows:
COST UNREALIZED ESTIMATED
BASIS GAINS FAIR VALUE
----- ---------- ----------
Common stock and warrants.............................. $168 $103 $271
Cost investments and other............................. 4 -- 4
---- ---- ----
$172 $103 $275
==== ==== ====
During the fourth quarter of 2000, AT&T Broadband Group recognized a loss
on the marketable equity security holdings for Telewest Communications, plc, of
$111 million. Management determined the loss was not temporary due to the
downturn in market conditions and its inability to hold the investment as a
result of requirements related to the regulatory approval of the MediaOne
Merger. The fair value was based on quoted market prices.
During the fourth quarter of 2000, Excite@Home recognized a loss on
investments totaling $129 which included a $107 loss on publicly held companies
and $22 on privately held investments. The loss recognized on the publicly held
investment was a result of Excite@Home's decision that the decline in market
value of certain investments was not temporary. The loss recognized on the
privately held companies was based on Excite@Home's determination that the
carrying value of certain investments was not recoverable, based on indicators
such as limited liquidity and poor prospects for additional funding. Since AT&T
Broadband Group, through ATTBLLC owns 23% of Excite@Home, 77% of the loss
recorded by Excite@Home is not included as a reduction of AT&T Broadband Group's
net income, but rather is eliminated in the statement of operations as minority
interest income (expense).
7. DEBT OBLIGATIONS
LONG-TERM DEBT
Debentures, notes and trust preferred securities(a):
DECEMBER 31,
INTEREST -----------------
RATES(B) MATURITIES 2000 1999
-------- ---------- ------- -------
4.00%-6.00% 2001-2018.......................................... 1,389 1
6.25%-6.50% 2001-2008.......................................... 3,210 917
6.55%-7.49% 2001-2037.......................................... 5,738 1,601
7.53%-8.50% 2001-2097.......................................... 3,370 2,363
8.60%-10.75% 2001-2045.......................................... 6,594 4,664
Variable
rate 2001-2005.......................................... 2,019 827
------- -------
Total debentures, notes and trust preferred securities........... 22,320 10,373
Other............................................................ 270 230
------- -------
Total long-term debt............................................. 22,590 10,603
Less currently maturing long-term debt........................... 3,073 932
------- -------
Net long-term debt............................................... $19,517 $ 9,671
======= =======
---------------
(a) Included in these balances was $946 and $975 representing the remaining
excess of the fair value over the recorded value of debt in connection with
the TCI Merger and MediaOne Merger at December 31, 2000 and 1999,
respectively. The excess is being amortized over the remaining lives of the
underlying debt obligations.
L-131
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(b) The actual interest paid on debt obligations may have differed from the
stated amount due to entering into interest rate swap contracts to manage
exposure to interest rate risk and the strategy to reduce finance costs (see
Note 10).
EXCHANGEABLE NOTES
During 2000, AT&T Broadband Group, through ATTBLLC and MediaOne, issued
debt which is mandatorily redeemable at AT&T's option into shares of Comcast
common stock or its equivalent (the "Comcast Exchangeable Notes") and Microsoft
Corporation ("Microsoft") common stock or its equivalent (the "Microsoft
Exchangeable Notes").
Following is a summary of the Comcast Exchangeable Notes outstanding at
December 31, 2000 by year of maturity which are indexed to 25 million shares of
Comcast common stock:
MATURITY DATE 2003 2004 2005
------------- ------ ------ ------
Face value.............................. $ 371 $ 314 $ 329
Interest rate........................... 6.75% 5.50% 4.63%
Put price............................... $41.50 $41.06 $39.13
Call price.............................. $49.80 $49.27 $46.96
Carrying value at December 31, 2000..... $ 371 $ 314 $ 329
At maturity, the Comcast Exchangeable Notes will be redeemed, at AT&T's
option, into (i) a number of shares of Comcast common stock equal to the
underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash
value. The exchange ratio will be calculated at maturity in the following
manner:
(a) If the fair market value of a share of Comcast common stock is
greater than the call price, the exchange ratio will be 0.8333;
(b) If the fair market value of a share of Comcast common stock is
less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Comcast common stock is
less than the call price but greater than the put price, the exchange ratio
will be a fraction the numerator of which is equal to the put price, and
the denominator of which is equal to the fair market value of one share of
Comcast common stock.
Following is a summary of the Comcast Exchangeable Notes outstanding at
December 31, 2000, which are indexed to 22.3 million shares of Comcast common
stock:
MATURITY DATE 2003 2004 2005
------------- ------ ------ ------
Face value............................................... $ 267 $ 267 $ 267
Interest rate............................................ 6.76% 6.80% 6.84%
Put price................................................ $35.89 $35.89 $35.89
Call price............................................... $50.64 $58.39 $67.97
Carrying value at December 31, 2000...................... $ 267 $ 267 $ 267
L-132
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
At maturity, such Comcast Exchangeable Notes will be redeemed, at AT&T's
option, with (i) a number of shares of Comcast common stock equal to the
underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash
value. The exchange ratio will be calculated at maturity in the following
manner:
(a) If the fair market value of a share of Comcast common stock is
greater than or equal to the call price, the exchange ratio will be a
fraction the numerator of which is equal to the sum of (i) the put price,
plus (ii) the excess of the fair market value of one share of Comcast
common stock over the call price, and the denominator of which is equal to
the fair market value of one share of Comcast common stock;
(b) If the fair market value of a share of Comcast common stock is
less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Comcast common stock is
less than the call price but greater than the put price, the exchange ratio
will be a fraction of which the numerator is equal to the put price, and
the denominator of which is equal to the fair market value of one Comcast
common stock.
Following is a summary of the Microsoft Exchangeable Notes outstanding at
December 31, 2000, which are indexed to 10 million shares of Microsoft common
stock:
MATURITY DATE 2003 2004 2005
------------- ------ ------- -------
Face value............................................. $ 227 $ 226 $ 226
Interest rate.......................................... 6.96% 7.00% 7.04%
Put price.............................................. $67.87 $ 67.87 $ 67.87
Call price............................................. $97.39 $111.64 $128.60
Carrying value at December 31, 2000.................... $ 145 $ 144 $ 144
At maturity, the Microsoft Exchangeable Notes will be redeemed, at AT&T's
option, with (i) a number of shares of Microsoft common stock equal to the
underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash
value. The exchange ratio will be calculated at maturity in the following
manner:
(a) If the fair market value of a share of Microsoft common stock is
greater than the call price, the exchange ratio will be a fraction the
numerator of which is equal to the sum of (i) the put price, plus (ii) the
excess of the fair market value of one share of Microsoft common stock over
the call price, and the denominator of which is equal to the fair market
value of one share of Microsoft common stock;
(b) If the fair market value of a share of Microsoft common stock is
less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Microsoft common stock is
less than or equal to the call price but greater than the put price, the
exchange ratio will be a fraction of which the numerator is equal to the
put price, and the denominator of which is equal to the fair market value
of one Microsoft common stock.
During 1999 and 1998, MediaOne issued debt (the "Vodafone Exchangeable
Notes") which is mandatorily redeemable at AT&T's option into (i) Vodafone Group
plc ("Vodafone") American Depository Receipts ("ADRs") held by AT&T Broadband
Group, through MediaOne, (ii) the cash
L-133
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
equivalent, or (iii) a combination of cash and Vodafone ADRs. The maturity value
of the Vodafone Exchangeable Notes varies based on the fair value of a Vodafone
ADR.
Following is a summary of the Vodafone Exchangeable Notes outstanding at
December 31, 2000, which are indexed to Vodafone ADRs:
MATURITY DATE 2001 2002
------------- ------ ------
Face value.................................................. $1,686 $1,129
Interest rate............................................... 6.25% 7.0%
Put price................................................... $19.65 $43.44
Call price.................................................. $25.10 $51.26
Carrying value at December 31, 2000......................... $2,337 $1,012
The Vodafone Exchangeable Notes that mature in 2001, which are indexed to
29 million Vodafone ADRs, will be exchanged at maturity based upon a redemption
value of $9.00 in cash plus 2 1/2 times the fair market value of a Vodafone ADR
("Maturity Price"), as follows:
(a) If the Maturity Price is greater than or equal to $9.00 plus 2 1/2
times the call price per share, each Vodafone Exchangeable Note is
equivalent to 0.8101 of the Maturity Price;
(b) If the Maturity Price is less than or equal to $9.00 plus 2 1/2
times the put price per share, each Vodafone Exchangeable Note is
equivalent to the Maturity Price; or
(c) If the Maturity Price is less than $71.75 per share but greater
than $58.125 per share, each Vodafone Exchangeable Note is equivalent to
$58.125.
The redemption formula for such Vodafone Exchangeable Notes that mature in
2002, which are indexed to 26 million shares of Vodafone ADRs, is as follows:
(a) If the fair market value of a Vodafone ADR is greater than or
equal to the call price, each Vodafone exchangeable Note is equivalent to
0.8475 of a Vodafone ADR;
(b) If the fair market value of a Vodafone ADR is less than or equal
to the put price, each Vodafone Exchangeable Note is equivalent to one
Vodafone ADR; or
(c) If the fair market value of a Vodafone ADR is less than the call
price but greater than the put price, each Vodafone Exchangeable Note is
equivalent to a fraction of a Vodafone ADR equal to (i) the put price
divided by (ii) the fair market value of one Vodafone ADR.
The exchangeable notes are being accounted for as indexed debt instruments
since the maturity value of the debt is dependent upon the fair market value of
the underlying Comcast, Microsoft and Vodafone securities. The exchangeable
notes contain an embedded option that hedges the market risk of a decline in
value of Comcast, Microsoft and Vodafone securities. The market risk of a
decline in Comcast and Microsoft stock, and Vodafone ADRs, below the respective
put prices has been eliminated. In addition, any market gains we may earn have
been limited to the call prices, with the exception of certain debt indexed to
Comcast stock and the debt indexed to the Vodafone ADRs, which provides for our
participation in a portion of the market gains above the call price.
Since the Comcast, Microsoft and Vodafone securities are cost method
investments being accounted for as "available-for-sale" securities under SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
changes in the maturity value of the exchangeable notes and the underlying
securities are being recorded as unrealized gains or losses, net of tax, within
other comprehensive income as a component of combined attributed net assets.
L-134
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The exchangeable notes indexed to Comcast common stock and Microsoft common
stock are secured by the Comcast and Microsoft investments AT&T Broadband Group
owns, through ATTBLLC and MediaOne. The exchangeable notes indexed to Vodafone
are unsecured obligations, ranking equally in right of payment with all other
unsecured and unsubordinated obligations of AT&T.
OTHER EXCHANGEABLE NOTES
During 2000, AT&T Broadband Group, through MediaOne, also entered into a
series of purchased and written options with a number of financial institutions
to monetize its holdings of 21.9 million shares of Microsoft common stock and
issued floating rate debt, which is attributed to AT&T Broadband Group. The
carrying value of the debt outstanding at December 31, 2000 was $1,369, which
pays interest at the three month London Inter-Bank Offering Rate ("LIBOR") plus
0.4%. The debt matures annually with $458 maturing in 2003 and 2004, and $453
maturing in 2005, and is repayable at AT&T's option in either Microsoft common
stock or cash.
In addition, two subsidiaries of MediaOne, MediaOne SPC IV and MediaOne SPC
VI, entered into a series of purchased and written options on Vodafone ADRs
contributed to them by MediaOne and issued floating rate debt. The carrying
value of the debt outstanding at December 31, 2000 was $1,739, which pays
interest at a three-month LIBOR plus 0.5%. This debt has been attributed to AT&T
Broadband Group and matures in equal quarterly installments beginning in 2003
and ending in 2005. The assets of MediaOne SPC IV, which are primarily 29.1
million Vodafone ADRs, are only available to pay the creditors of MediaOne SPC
IV. Likewise, the assets of MediaOne SPC VI, which are primarily 18.0 million
Vodafone ADRs, are only available to pay the creditors of MediaOne SPC VI.
SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY SUBORDINATED DEBT SECURITIES
Certain subsidiary trusts (the "Trusts") of AT&T Broadband Group, through
ATTBLLC and MediaOne, had preferred securities outstanding at December 31, 2000
and 1999 as follows:
CARRYING AMOUNT
INTEREST MATURITY ----------------
SUBSIDIARY TRUST RATE DATE 2000 1999
---------------- -------- -------- ------ ------
TCI Communications Financing I................. 8.72% 2045 $ 528 $ 528
TCI Communications Financing II................ 10.00% 2045 514 521
TCI Communications Financing III............... 9.65% 2027 357 360
TCI Communications Financing IV................ 9.72% 2036 204 217
MediaOne Financing I........................... 7.96% 2025 30 --
MediaOne Financing II.......................... 8.25% 2036 28 --
MediaOne Finance II............................ 9.50% 2036 214 --
MediaOne Finance III........................... 9.04% 2038 504 --
------ ------
$2,379 $1,626
====== ======
The Trusts were created for the exclusive purpose of issuing the Trust
Preferred Securities and investing the proceeds thereof into Subordinated
Deferrable Interest Notes (the "Subordinated Debt Securities") of TCI and
MediaOne. The Subordinated Debt Securities have interest rates equal to the
interest rate of the corresponding Trust Preferred Securities. The TCI
Communications Financing I and II Trust Preferred Securities are callable at
face value beginning January and May 2001, respectively. The TCI Communications
Financing III Trust Preferred Securities are callable at 104.825% of face value
L-135
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
beginning in March 2007. TCI Communications Financing IV Trust Preferred
Securities are callable at face value beginning in March 2002. Upon redemption
of the Subordinated Debt Securities, the Trust Preferred Securities will be
mandatorily redeemable. All of the MediaOne Subordinated Debt Securities are
redeemable at a redemption price of $25.00 per security, plus accrued and unpaid
interest. Upon redemption of the MediaOne Subordinated Debt Securities, the
MediaOne Trust Preferred Securities are mandatorily redeemable at a price of
$25.00 per share, plus accrued and unpaid distributions. The 7.96% MediaOne
Subordinated Debt Securities became redeemable after September 11, 2000. The
9.50% and 8.25% MediaOne Subordinated Debt Securities are redeemable after
October 29, 2001. The 9.04% MediaOne Subordinated Debt Securities are redeemable
after October 28, 2003. The Trust Preferred Securities are recorded within
long-term debt in the accompanying combined balance sheet. AT&T Broadband, LLC
effectively provides a free and unconditional guarantee of all the TCI Trusts'
obligations under the Trust Preferred Securities. In 2000, AT&T provided a full
and unconditional guarantee on the outstanding securities issued by TCI
Communications Financing I, II and IV. MediaOne has effectively provided a full
and unconditional guarantee of the MediaOne trust obligations under the Trust
Preferred Securities. In 2000, AT&T provided a full and unconditional guarantee
of the MediaOne Trust Preferred Securities. Dividends accrued and paid on the
Trust Preferred Securities aggregated $182 and $114 for the for the year ended
December 31, 2000 and the ten months ended December 31, 1999, respectively, and
are included in interest expense in the accompanying combined financial
statements. AT&T has the right to defer interest payments up to 20 consecutive
quarters; as a consequence, dividend payments on the Trust Preferred Securities
can be deferred by the trusts during any such interest-payment period.
Annual maturities at December 31, 2000, of the $22,590 in total long-term
obligations are as follows:
2001................................ $3,073
2002................................ 1,700
2003................................ 3,071
2004................................ 1,693
2005................................ 3,144
Later years......................... 9,909
8. MINORITY INTEREST
PREFERRED STOCK OF SUBSIDIARIES
Prior to the TCI Merger, TCI Pacific Communications Inc. ("Pacific"), an
attributed entity of AT&T Broadband Group, issued 5% Class A Senior Cumulative
Exchangeable preferred stock, which remains outstanding. At December 31, 2000
and 1999, 6.3 million shares of such stock were authorized and outstanding. Each
share is exchangeable, from and after August 1, 2001, for approximately 6.3
shares of AT&T common stock, subject to certain antidilution adjustments.
Additionally, Pacific may elect to make any dividend, redemption or liquidation
payment in cash, shares of AT&T common stock or a combination of the foregoing.
The Pacific preferred stock is reflected within minority interest in the
accompanying combined balance sheets and aggregated $2.1 billion at December 31,
2000 and 1999.
Prior to the TCI Merger, TCI issued Class B 6% Cumulative Redeemable
Exchangeable Junior preferred stock (the "Class B Preferred Stock"). At December
31, 1999, 1.6 million shares of Class B Preferred Stock were outstanding, net of
shares held by a subsidiary, out of an authorized 1.7 million shares. The Class
B Preferred Stock and accumulated dividends aggregated $152 at December 31,
1999, and were reflected within minority interest in the accompanying combined
balance sheet at December 31, 1999. On February 22, 2000, all outstanding shares
of Class B Preferred Stock were redeemed at $105.88 per share.
L-136
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
CENTAUR FUNDING CORPORATION
Prior to the MediaOne Merger, Centaur Funding Corporation ("Centaur"), a
subsidiary of MediaOne, issued three series of preferred shares, the Auction
Market Preference Shares, Series A ("Series A Shares"), the 9.08% Cumulative
Preference Shares, Series B (the "Series B Shares"), and the Preference Shares,
Series C (the "Series C Shares"). Centaur was created for the principal purpose
of raising capital through the issuance of preferred shares and investing those
proceeds into notes issued by MediaOne SPC II, a subsidiary of MediaOne.
Principal and interest payments from the notes are expected to be Centaur's
principal source of funds to make dividend and redemption payments on the
preferred shares. In addition, the dividend and redemption payments on the
preferred shares will be determined by reference to the dividend and redemption
activity of the preferred stock of AirTouch Communications, Inc. ("ATI shares")
held by MediaOne SPC II. AirTouch Communications, Inc. is a subsidiary of
Vodafone. Payments on the preferred shares are neither guaranteed nor secured by
MediaOne or AT&T. The assets of MediaOne SPC II, which include the ATI shares,
are only available to pay creditors of MediaOne SPC II. Centaur and MediaOne SPC
II are attributed entities of AT&T Broadband Group.
At December 31, 2000, the following Centaur preferred securities, which
have been attributed to AT&T Broadband Group, were outstanding:
SHARES CARRYING
DIVIDEND RATE MATURITY DATE OUTSTANDING AMOUNT
------------- -------------- ----------- --------
Series A Shares........................ Variable None 400 $ 100
Series B Shares........................ 9.08% April 21, 2020 934,500 927
Series C Shares........................ None April 21, 2020 715,500 118
------
$1,145
======
The Series A Shares have a liquidation value of $250 thousand per share and
dividends are payable quarterly when declared by Centaur's Board of Directors
out of funds legally available. The Series B Shares have a liquidation value of
$1 thousand per share and dividends are payable quarterly in arrears when
declared by Centaur's Board of Directors out of funds legally available. In
addition, dividends may be declared and paid only to the extent dividends have
been declared and paid on the ATI shares. The Series C Shares have a liquidation
value of $1 thousand per share at maturity. The value of the Series C Shares
will be accreted to its liquidation value upon maturity. The Series B Shares
rank equally with the Series C Shares as to the redemption payments and upon
liquidation, and the Series B and Series C Shares rank senior to the Series A
Shares and the common stock shares of Centaur as to the redemption payments and
upon liquidation. The Series B Shares rank senior to the Series A Shares and the
common shares with respect to dividend payments. The preferred shares issued by
Centaur are recorded within minority interest in the accompanying combined
balance sheet at December 31, 2000.
Dividends on the preferred shares were $55 for the year ended December 31,
2000 and were included within minority interest income (expense) in the combined
statements of operations.
9. COMPANY-OBLIGATED CONVERTIBLE QUARTERLY INCOME PREFERRED SECURITIES
On June 16, 1999, AT&T Finance Trust I (the "AT&T Trust"), a wholly owned
subsidiary of AT&T completed the private sale of 100 million shares of 5.0%
cumulative quarterly income preferred securities ("Quarterly Preferred
Securities") to Microsoft. Proceeds from the issuance were invested by the AT&T
Trust in junior subordinated debentures ("Debentures") issued by AT&T due 2029,
which represent the sole asset of the AT&T Trust. The Quarterly Preferred
Securities have been attributed to AT&T Broadband Group.
L-137
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Quarterly Preferred Securities pay dividends at an annual rate of 5.0%
of the liquidation preference of $50 per security, and are convertible at any
time prior to maturity into 66.667 million shares of AT&T common stock. The
Quarterly Preferred Securities are subject to mandatory redemption upon
repayment of the Debentures at maturity or their earlier redemption. The
conversion feature can be terminated, under certain conditions, after three
years.
The Debentures will make a quarterly payment in arrears of 62.5 cents per
security on the last day of March, June, September and December of each year.
AT&T has the right to defer such interest payments up to 20 consecutive
quarters. As a consequence, quarterly dividend payments on the Quarterly
Preferred Securities can be deferred by the AT&T Trust during any such
interest-payment period. If AT&T defers any interest payments, AT&T may not,
among other things, pay any dividends on AT&T common stock until all interest in
arrears is paid to the AT&T Trust.
Dividends on the Quarterly Preferred Securities were $250 and $135 for the
year ended December 31, 2000 and the ten months ended December 31, 1999,
respectively, and are reported within minority interest income (expense) in the
accompanying combined statements of operations.
On June 16, 1999, AT&T also issued to Microsoft 40 million warrants, each
to purchase one share of AT&T common stock at a price of $75 per share at the
end of three years. Alternatively, the warrants are exercisable on a cashless
basis. If the warrants are not exercised on the three-year anniversary of the
closing date, the warrants expire.
A discount on the Quarterly Preferred Securities equal to the value of the
warrants of $306 was recognized and is being amortized over the 30-year life of
the Quarterly Preferred Securities as a component of minority interest income
(expense) in the accompanying combined statements of operations.
10. FINANCIAL INSTRUMENTS
In the normal course of business, AT&T Broadband Group uses various
financial instruments, including derivative financial instruments, for purposes
other than trading. AT&T Broadband Group does not use derivative financial
instruments for speculative purposes. Financial instruments used by AT&T
Broadband Group include guarantees of debt, letters of credit, option contracts
and interest rate swap agreements. Option contracts are used to mitigate
exposure to the fluctuations of stock prices of securities that collateralize
certain debt instruments. Interest rate swap agreements are used to mitigate
interest rate exposures. Collateral is generally not required for these types of
instruments.
By their nature, all such instruments involve risk, including the credit
risk of nonperformance by counterparties. The maximum potential loss associated
with such risk may exceed the amount recognized in the balance sheet. However,
at December 31, 2000 and 1999, in management's opinion there was no significant
risk of loss in the event of nonperformance of the counterparties to these
financial instruments. AT&T Broadband Group controls its exposure to credit risk
through credit approvals, credit limits and monitoring procedures. AT&T
Broadband Group does not have any significant exposure to any individual
customer or counterparty, or any major concentration of credit risk related to
any financial instruments.
OPTION CONTRACTS
Prior to the MediaOne Merger two subsidiaries of MediaOne, MediaOne SPC IV
and MediaOne SPC VI, entered into a series of purchased and written options (the
"Vodafone Collars") on Vodafone ADRs contributed to them by MediaOne and issued
floating rate debt. Such subsidiaries of MediaOne have been attributed to AT&T
Broadband Group. The Vodafone Collars have been designated and are effective as
a hedge of the market risk associated with the investment in Vodafone ADRs. The
Vodafone Collars are therefore carried at fair value, with unrealized gains and
losses, net of tax, being recorded
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AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
within other comprehensive income as a component of combined attributed net
assets, together with any change in the fair value of the Vodafone ADRs. The
carrying value of the Vodafone Collars at December 31, 2000, was $453.
At the expiration of the MediaOne SPC IV collar, AT&T Broadband Group will
receive cash if the market value of a Vodafone ADR is less than approximately
$34.00 per share, which effectively eliminates the downside risk if the stock
price falls below $34.00 per share. Conversely, if the value of a Vodafone ADR
is greater than approximately $49.00 per share, AT&T Broadband Group will be
required to pay cash, which effectively offsets the corresponding increase in
the value of a Vodafone ADR. This Vodafone Collar expires quarterly beginning in
2003 and ending in 2005.
At the expiration of the MediaOne SPC VI collar, AT&T Broadband Group will
receive cash if the market value of a Vodafone ADR is less than approximately
$40.00 per share, which effectively eliminates the downside risk if the stock
price falls below $40.00 per share. Conversely, if the market value of a
Vodafone ADR is greater than approximately $58.00 per share, AT&T Broadband
Group will be required to pay cash, which effectively offsets the corresponding
increase in the value of a Vodafone ADR. This Vodafone Collar expires quarterly
beginning in 2003 and ending in 2005.
During 2000, AT&T also entered into a series of purchased and written
options related to a portion of AT&T's holdings in Microsoft stock (the
"Microsoft Collar"), which is indexed to floating rate debt. AT&T's holdings in
Microsoft stock and the Microsoft Collar have been attributed to AT&T Broadband
Group. The Microsoft Collar has been designated and is effective as a hedge of
the market risk associated with AT&T's investment in Microsoft stock. The
Microsoft Collar is carried at fair value, with unrealized gains or losses, net
of tax, being recorded within other comprehensive income as a component of
combined attributed net assets, together with any change in the fair value of
the securities. The carrying value of the Microsoft Collar was $419 at December
31, 2000.
At the expiration of the Microsoft Collar, if the price of a Microsoft
share is equal to or less than the put price of $62.48, AT&T would exercise the
put option and deliver all underlying shares of Microsoft common stock and
receive cash equal in value to (i) the put price, multiplied by (ii) the
underlying share amount. Alternatively, at AT&T's option, AT&T can elect not to
deliver the underlying shares and instead settle the put option by receiving
cash equal in value to the (i) difference between the put price minus the fair
value of one Microsoft share, multiplied by (ii) the underlying share amount. If
the price of a Microsoft share is greater than the call price, which ranges from
$86.26 to $118.36, then the call option would be exercised and AT&T would
deliver all underlying shares and receive cash equal in value to (i) the call
price, multiplied by (ii) the underlying share amount. At AT&T's option, AT&T
can elect not to deliver the underlying shares and instead settle the call
option by delivering cash equal in value to the (i) difference between the call
price minus the fair value of one Microsoft share, multiplied by (ii) the
underlying share amount. Any such amount received from the exercise or
settlement of either put or call option will be used to retire the floating rate
debt. AT&T Broadband Group would retain cash in excess of the call price from a
call option exercise. If the price of a Microsoft share is between the put price
and the call price, the collar will expire without value.
INTEREST RATE SWAP AGREEMENTS
Interest rate swaps are entered into to manage exposure to changes in
interest rates and to lower overall costs of financing. AT&T enters into swap
agreements to manage the fixed/floating mix of the debt portfolio in order to
reduce aggregate risk to interest rate movements. Interest rate swaps also allow
funds to be raised at floating rates and effectively swap them into fixed rates
that are lower than those available if fixed-rate borrowings were made directly.
These agreements involve the exchange of fixed-rate for
L-139
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
floating-rate payments or floating-rate for other floating-rate payments without
the exchange of the underlying principal amount. Floating-rate payments are
based on rates tied to the LIBOR.
The following table indicates the types of swaps in use at December 31,
2000 and 1999, which have been attributed to AT&T Broadband Group, and their
weighted-average interest rates. Average variable rates are those in effect at
the reporting date and may change significantly over the lives of the contracts.
2000 1999
----- ------
Fixed to variable swaps -- notional amount.................. $ 500 $1,550
Average receive rate...................................... 9.68% 7.18%
Average pay rate.......................................... 8.92% 6.77%
Variable to variable swaps -- notional amount............... $ -- $ 495
Average receive rate...................................... -- 6.63%
Average pay rate.......................................... -- 6.53%
The weighted-average remaining terms of the swap contracts were 30 years at
December 31, 2000.
The notional amounts represent agreed-upon amounts on which calculations of
dollars to be exchanged are based. They do not represent amounts exchanged by
the parties and, therefore, are not a measure of AT&T Broadband Group's
exposure. Exposure is limited to the fair value of the contracts with a positive
fair value plus interest receivable, if any, at the reporting date.
GUARANTEES OF DEBT
From time to time, AT&T Broadband, LLC and MediaOne may guarantee the debt
of their subsidiaries and certain unconsolidated joint ventures. AT&T Broadband,
LLC has taken certain steps to support debt compliance with respect to
obligations aggregating $1,461 and $1,720 at December 31, 2000 and 1999,
respectively, of certain cable television partnerships in which AT&T Broadband,
LLC has a non-controlling ownership interest and which have been attributed to
AT&T Broadband Group. All guarantees of AT&T Broadband Group, through ATTBLLC,
totaled $1,486 and $1,760 at December 31, 2000 and 1999, respectively. Although
there can be no assurance, management believes that it will not be required to
meet its obligations under such guarantees.
LETTERS OF CREDIT
Letters of credit are purchased guarantees that ensure performance or
payment to third parties in accordance with specified terms and conditions.
Letters of credit do not create additional risk to AT&T Broadband Group.
Outstanding letters of credit at December 31, 2000 were $263.
EQUITY HEDGES
Equity hedges are used to manage exposure to changes in equity prices
associated with stock appreciation rights of affiliated companies.
L-140
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS INCLUDING DERIVATIVE FINANCIAL
INSTRUMENTS
The following tables show the valuation methods, the carrying amounts and
estimated fair values of material financial instruments.
FINANCIAL INSTRUMENT VALUATION METHOD
-------------------- ----------------
Debt excluding capital leases Market quotes or rates available for debt
with similar terms and maturities
Guarantees of debt There are no quoted market prices for
similar agreements available
Letters of Credit Fees paid to obtain obligations
Option contracts Market quotes obtained from dealers
Interest rate swap agreements Market quotes obtained from dealers
Equity hedges Market quotes
Preferred securities Market quotes*
---------------
* It is not practicable to estimate the fair value of the $4,700 Quarterly
Preferred Securities that aggregated $4,710 and $4,700 at December 31, 2000
and 1999, respectively. There are no current market quotes on this private
placement.
2000 1999
------------------- ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- ------
Debt excluding capital leases................ $22,182 $20,275 $10,314 $9,676
Pacific preferred stock...................... $ 2,121 $ 595 $ 2,121 $1,929
2000 1999
------------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------- -------------- -------------- --------------
ASSET LIAB. ASSET LIAB. ASSET LIAB. ASSET LIAB.
------ ----- ------ ----- ------ ----- ------ -----
Interest rate swap
agreements................ $ -- -- -- -- 22 23 2 19
Equity hedges............... $ -- 87 -- 87 281 -- 281 --
===== ===== ===== ===== ===== ===== ===== =====
11. PENSION, POSTRETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS
As a result of the MediaOne Merger, AT&T sponsors a pension plan covering
substantially all of the former MediaOne employees. Pension benefits are
principally based on pay and service. In addition, AT&T sponsors retiree benefit
plans for certain former MediaOne employees. These plans have been included in
AT&T Broadband Group.
The following table shows the components of the net periodic benefit costs
included in the combined statements of income for the year ended December 31,
2000:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
-------- --------------
Service cost-benefits earned during the period.............. $ 9 $ 1
Interest cost on benefit obligations........................ 8 1
Credit for expected return on plan assets................... (9) --
---- ----
Net periodic benefit cost................................... $ 8 $ 2
==== ====
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AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets for the year ending December 31,
2000, and a statement of the funded status at December 31, 2000:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
-------- --------------
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligation, beginning of year....................... $ -- $ --
Acquisition of MediaOne..................................... 204 38
Service cost................................................ 9 1
Interest cost............................................... 8 1
Plan amendments............................................. (5) --
Actuarial losses (gains).................................... 17 (5)
Benefit payments............................................ (68) --
---- ----
Benefit obligations, end of year............................ $165 $ 35
==== ====
CHANGE IN FAIR VALUE OF PLAN ASSETS:
Fair value of plan assets, beginning of year................ $ -- $ --
Acquisition of MediaOne..................................... 205 5
Actual return on plan assets................................ (12) --
Employer contributions...................................... 23 --
Benefit payments............................................ (68) --
---- ----
Fair value of plan assets, end of year...................... $148 $ 5
==== ====
Unfunded benefit obligation................................. $(17) $(30)
Unrecognized net loss (gain)................................ 38 (5)
Unrecognized prior service cost............................. (5) --
---- ----
Net amount recorded......................................... $ 16 $(35)
==== ====
The following table provides the amounts recorded in AT&T Broadband Group's
combined balance sheet at December 31, 2000:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
-------- --------------
Prepaid pension cost........................................ $ 36 $ --
Benefit related liabilities................................. (21) (35)
Accumulated other comprehensive income...................... 1 --
---- ----
Net amount recorded......................................... $ 16 $(35)
==== ====
The nonqualified pension plan had an unfunded accumulated benefit
obligation of $21 at December 31, 2000.
L-142
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted-average assumptions used in the measurement of the pension and
postretirement benefit obligations at December 31, 2000 are:
Discount rate............................................... 7.5%
Expected return on plan assets.............................. 9.5%
Rate of compensation increase............................... 4.0%
A rate of increase in the per capita cost of covered healthcare benefits
(the healthcare cost trend rate) of 7% was assumed. This rate was assumed to
gradually decline after 2000 to 5% by the year 2011 and then remain level.
Assumed healthcare cost trend rates have a significant effect on the amounts
reported for the healthcare plans. A one percentage point increase or decrease
in the assumed healthcare cost trend rate would increase or decrease the
healthcare component of the accumulated postretirement benefit obligation by $4
and $3, respectively. The impact on the service and interest-cost components of
net periodic postretirement healthcare benefit cost would not have been
material.
AT&T also sponsors savings plans for the majority of its employees. The
plans allow employees to contribute a portion of their pre-tax and/or after-tax
income in accordance with specified guidelines. Employee contributions are
matched up to certain limits. AT&T Broadband Group contributions amounted to $70
and $38 for the year ended December 31, 2000 and the ten months ended December
31, 1999.
12. STOCK-BASED COMPENSATION PLANS
Under AT&T's 1997 Long-term Incentive Program (the "Program"), AT&T grants
stock options, performance shares, restricted stock and other awards on AT&T
common stock. The exercise price of any stock option is equal to the stock price
when the option is granted. Generally, the options vest over three or four years
and are exercisable up to 10 years from the date of grant.
Under the Program, performance share units are awarded to key employees in
the form of either common stock or cash at the end of a three-year period, based
on AT&T's total shareholder return and/or certain financial-performance targets.
Under the AT&T 1996 Employee Stock Purchase Plan (the "Plan"), which was
effective July 1, 1996, AT&T is authorized to sell up to 75 million shares of
AT&T common stock to its eligible employees. Under the terms of the Plan,
employees may have up to 10% of their earnings withheld to purchase AT&T's
common stock. The purchase price of the stock on the date of exercise is 85% of
the average high and low sale prices of shares on the New York Stock Exchange
for that day. Under the Plan, AT&T sold approximately 506 thousand and 102
thousand shares to AT&T Broadband Group employees in 2000 and 1999,
respectively.
AT&T Broadband Group applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for stock-based compensation plans other than for performance-based
and restricted stock awards and stock appreciation rights ("SARs"). Stock based
compensation income (expense) for AT&T Broadband Group was $268 and $(366) for
the year ended December 31, 2000 and the ten months ended December 31, 1999,
respectively. These amounts included income (expense) of $269 and $(382) for the
year ended December 31, 2000 and the ten months ended December 31, 1999,
respectively, related to grants of SARs of affiliated companies held by certain
employees subsequent to the TCI Merger. AT&T entered into an equity hedge in
1999 to offset potential future compensation costs associated with such SARs.
(Expense)
L-143
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
income related to this hedge was $(297) and $247 for the year ended December 31,
2000 and the ten months ended December 31, 1999, respectively.
AT&T Broadband Group has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." If AT&T Broadband Group had
elected to recognize compensation costs based on the fair value at the date of
grant for AT&T awards granted to AT&T Broadband Group employees in 2000 and
1999, consistent with the provisions of SFAS No. 123, AT&T Broadband Group's net
loss would have been adjusted to reflect additional compensation expense
resulting in the following pro forma amounts:
YEAR TEN MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Net loss................................................... $(5,390) $(2,203)
AT&T granted approximately 13.4 million and 1.0 million stock options to
AT&T Broadband Group employees during 2000 and 1999, respectively. At the date
of grant, the weighted average exercise price for AT&T options granted to AT&T
Broadband Group employees during 2000 and 1999 were $34.17 and $56.56,
respectively. The weighted-average fair values at date of grant for AT&T options
granted to AT&T Broadband Group employees during 2000 and 1999 were $10.28 and
$17.45, respectively, and were estimated using the Black-Scholes option-pricing
model. The following weighted-average assumptions were applied for 2000 and
1999, respectively: (i) expected dividend yields of 1.7% and 1.7% (ii) expected
volatility rates of 33.9% and 28.6%, and (iii) risk-free interest rates of 6.24%
and 5.26% and (iv) expected lives of 3.7 years and 5.7 years.
13. INCOME TAXES
AT&T Broadband Group is not a separate taxable entity for federal and state
income tax purposes and its results of operations are included in the
consolidated federal and state income tax returns of AT&T and its affiliates, as
described in note 1.
L-144
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the provision (benefit) for income taxes follow:
YEAR TEN MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
FEDERAL:
Current.................................................. $ (786) $(469)
Deferred................................................. (215) 64
------- -----
(1,001) (405)
STATE AND LOCAL:
Current.................................................. $ (136) $ 22
Deferred................................................. (47) (82)
------- -----
(183) (60)
------- -----
FOREIGN:
Current.................................................. $ 1 $ --
------- -----
1 --
------- -----
Benefit for income taxes................................... $(1,183) $(465)
------- -----
In addition, AT&T Broadband Group also recorded current and deferred income
tax benefits related to minority interest and net equity losses on other equity
investments in the amounts of $100 and $370 for the year ended December 31, 2000
and $54 and $438 for the ten months ended December 31, 1999, respectively.
The following table shows the principal reasons for the difference between
the effective income tax rate and the United States federal statutory income tax
rate:
YEAR TEN MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
U.S. federal statutory income tax rate..................... 35% 35%
Federal income tax benefit at statutory rate............... $3,507 $ 642
Operating losses and charges relating to Excite@Home....... (2,758) --
Investment dispositions, acquisitions and legal entity
restructuring............................................ 374 --
In-process research and development write-off.............. -- (208)
State and local income taxes, net of federal income tax
benefit.................................................. 119 39
Amortization of intangibles................................ (81) (12)
Other...................................................... 22 4
------ ------
Benefit for income taxes................................... $1,183 $ 465
Effective income tax rate.................................. 11.8% 25.3%
L-145
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax liabilities are taxes AT&T Broadband Group expects to
pay in future periods. Similarly, deferred income tax assets are recorded for
expected reductions in taxes payable in future periods. Deferred income taxes
arise because of differences in the book and tax basis of certain assets and
liabilities. Deferred income tax liabilities and assets consist of the
following:
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(AMOUNTS IN MILLIONS)
LONG-TERM DEFERRED INCOME TAX LIABILITIES
Property, plant and equipment............................... $ 1,319 $ 896
Investments................................................. 9,148 6,161
Franchises.................................................. 18,571 11,998
Other....................................................... 2,087 147
------- -------
Total long-term deferred income tax liabilities............. 31,125 19,202
LONG-TERM DEFERRED INCOME TAX ASSETS
Business restructuring...................................... 3
Net operating loss/credit carryforwards..................... 509 465
Employee pensions and other benefits, net................... 520
Reserves and allowances..................................... 65 10
Valuation allowances........................................ (726) (124)
Other....................................................... 2,204 709
------- -------
Total long-term deferred income tax assets.................. $ 2,575 $ 1,060
------- -------
Net long-term deferred income tax liabilities............... $28,550 $18,142
------- -------
Current deferred income tax liabilities:
Investments............................................... 670 --
Other..................................................... 6 12
------- -------
Total current deferred income tax liabilities............... 676 12
------- -------
CURRENT DEFERRED INCOME TAX ASSETS
Employee pensions and other benefits........................ 22 235
Reserves and allowances..................................... 10 10
Valuation allowances........................................ (39) --
Other....................................................... 197 28
------- -------
Total current deferred income tax assets.................... 190 273
------- -------
Net current deferred income tax (liabilities) assets........ (486) 261
------- -------
Total deferred income tax liabilities....................... $29,036 $17,881
======= =======
The valuation allowance for deferred tax assets as of December 31, 2000 and
1999 was $765 and $124, respectively. The realization of AT&T Broadband Group's
deferred tax assets is not dependent upon the consolidated tax group of AT&T. On
a stand alone basis, AT&T Broadband Group has sufficient reversing taxable
temporary differences to warrant recognition of its deferred tax assets without
the need for any additional valuation allowance.
L-146
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2000, AT&T Broadband Group, excluding Excite@Home, had
federal net operating loss carryforwards of $64, expiring through 2013. AT&T
Broadband Group also has federal tax credit carryforwards of $82, expiring
through 2004. In connection with the TCI Merger, certain federal and state net
operating loss carryforwards were subject to a valuation allowance of $59. If,
in the future, the realization of these acquired deferred tax assets becomes
more likely than not, any reduction of the associated valuation allowance will
be allocated to reduce franchise costs and other purchased intangibles.
At December 31, 2000, Excite@Home had net operating loss carryforwards (tax
effected) for federal and state income tax purposes of $281 expiring through
2020 and $9 expiring through 2010, respectively. Utilization of Excite@Home's
net operating loss carryforwards may be subject to a minor annual limitation due
to the ownership change limitations provided by the Internal Revenue Code of
1986, as amended, and similar state provisions. The annual limitation may result
in the expiration of a portion of Excite@Home's net operating loss and tax
credit carryforwards before utilization. The realization of Excite@Home's net
deferred tax asset is dependent upon Excite@Home's future earnings, if any, the
timing and amount of which are uncertain. In addition, Excite@Home is a separate
taxpayer and is not a member of the AT&T consolidated tax group. Accordingly,
Excite@Home provided a valuation allowance in an amount equal to its net
deferred tax assets of $702 as of December 31, 2000. Approximately $142 of
Excite@Home's valuation allowance at December 31, 2000, is attributable to stock
option deductions, the benefit of which will be credited to paid in capital when
realized. Approximately $269 of Excite@Home's valuation allowance at December
31, 2000, is attributable to deferred tax assets that if realized will be
allocated to first reduce goodwill, then other purchased intangibles, and then
income tax expense.
14. COMMITMENTS AND CONTINGENCIES
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") imposed certain rate regulations on the cable television
industry. Under the 1992 Cable Act, all cable systems are subject to rate
regulation, unless they face "effective competition," as defined by the 1992
Cable Act and expanded in the Telecommunications Act of 1996 (the "1996 Act"),
in their local franchise area.
The entities attributed to the AT&T Broadband Group believe that they have
complied in all material respects with the provisions of the 1992 Cable Act and
the 1996 Act, including its rate setting provisions. If, as a result of the
review process, a system cannot substantiate its rates, it could be required to
retroactively reduce its rates to the appropriate benchmark and refund the
excess portion of rates received.
In the normal course of business AT&T Broadband Group is subject to
proceedings, lawsuits and other claims, including proceedings under laws and
regulations related to environmental and other matters. Such matters are subject
to many uncertainties, and outcomes are not predictable with assurance.
Consequently, AT&T Broadband Group is unable to ascertain the ultimate aggregate
amount of monetary liability or financial impact with respect to these matters
at December 31, 2000. These matters could affect the operating results of any
one quarter when resolved in future periods. However, management believes after
final disposition, any monetary liability or financial impact to AT&T Broadband
Group beyond that provided for at year-end would not be material to AT&T
Broadband Group's annual combined financial statements.
AT&T Broadband Group leases land, buildings and equipment through contracts
that expire in various years through 2029. Rental expense under operating leases
was $122 for the year ended December 31, 2000, and $68 for the ten months ended
December 31, 1999. The following table shows the
L-147
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
future minimum lease payments due under noncancelable operating and capital
leases at December 31, 2000:
OPERATING CAPITAL
LEASES LEASES
--------- -------
2001........................................................ $ 133 $ 140
2002........................................................ 130 129
2003........................................................ 123 80
2004........................................................ 116 59
2005........................................................ 117 55
Later years................................................. 462 86
------ -----
Total minimum lease payments................................ $1,081 549
======
Less amount representing interest........................... (141)
-----
Present value of net minimum lease payments................. $ 408
=====
At December 31, 2000, an entity attributed to AT&T Broadband Group has an
agreement with Motorola, Inc. to purchase a minimum of 1.25 million digital
set-top devices at an average price of $248 per unit in 2001.
AT&T Broadband Group is party to an agreement under which it purchases
certain billing services from an unaffiliated third party. Unless terminated by
either party pursuant to terms of the agreement, the agreement expires on
December 31, 2012. The agreement calls for monthly payments. Such payments are
subject to adjustments and conditions pursuant to the terms of the underlying
agreements.
15. RELATED PARTY TRANSACTIONS
As discussed in Note 1, AT&T provides necessary working capital
requirements through intercompany debt and capital contributions to AT&T
Broadband Group. These amounts are reflected in the accompanying combined
balance sheets as short-term debt due to AT&T or a component of combined
attributed net assets. Short-term debt due to AT&T and interest was assumed
based upon the methodology outlined in Note 1. Intercompany debt was $5,830 and
$4,297 at December 31, 2000 and 1999, respectively. Intercompany interest
expense was $323 and $91 for the year ended December 31, 2000 and for the ten
months ended December 31, 1999, respectively.
Pursuant to an agreement with a subsidiary of LMG, entities attributed to
AT&T Broadband Group purchase programming and other services from such LMG
subsidiary. Amounts included in costs of services for programming purchased from
such LMG subsidiary were $239 and $184 for the year ended December 31, 2000 and
for the ten months ended December 31, 1999, respectively. Pursuant to such
agreement, certain entities attributed to AT&T Broadband Group are required to
make minimum payments for such programming and other services through 2022. The
commitments increase annually from $288 in 2001 to $315 in 2003, and will
thereafter increase annually through 2022 with inflation. In the event that
programming costs of such LMG subsidiary increase by more than ten percent of an
amount specified in the contract, AT&T Broadband Group's commitment will be
increased by 66 percent of the increase above the amount specified in the
contract. Other factors such as acquisitions and divestitures also affect the
commitment amounts.
AT&T Consumer Services Group provides AT&T Broadband Group with sales
support and customer care services at cost based prices. For the year ended
December 31, 2000 and the ten months ended
L-148
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1999, such amounts totaled $89 and $121, respectively, and are
included in selling, general and administrative expenses in the accompanying
combined statements of operations.
In addition, AT&T Consumer Services Group and AT&T Business Services Group
provide AT&T Broadband Group with wireline communication and other services. For
the year ended December 31, 2000 and the ten months ended December 31, 1999,
charges for such services totaled $104 and $31, respectively, and are included
in costs of services in the accompanying combined statements of operations.
Included in current liabilities at December 31, 2000 and 1999, was $98 and
$213, respectively, related to amounts due AT&T Consumer Services Group and AT&T
Business Services Group for the above described services.
AT&T allocates general corporate overhead expenses, including finance,
legal, marketing, use of the AT&T brand, planning and strategy and human
resources to AT&T Broadband Group, as well as costs for AT&T employees who
directly support the activities of the AT&T Broadband Group. Charges for such
services amounted to $159 and $120 for the year ended December 31, 2000 and for
the ten months ended December 31, 1999, respectively. These amounts are included
in selling, general and administrative expenses in the accompanying combined
statements of operations and were determined based on the methodology described
in note 1.
On October 2, 2000, AT&T Broadband Group, through MediaOne, completed the
sale of several equity interests in international ventures acquired as a result
of the MediaOne Merger to the AT&T Wireless Group. Such interests were sold for
approximately $1 billion, which was based upon a third party valuation. AT&T
Broadband Group received 120,335,081 of AT&T common shares for sale of such
equity interests. The AT&T common stock received in such transaction has been
included in combined attributed net assets. In connection with such sale, $196
of related deferred tax liabilities were transferred to AT&T Wireless Group. No
gain or loss was recognized on the sale of such equity interests.
16. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." Among
other provisions, it requires entities recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. Gains and losses resulting from changes in the fair
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The effective date of
this standard was delayed via the issuance of SFAS No. 137. The effective date
for SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though
earlier adoption is encouraged and retroactive application is prohibited. For
AT&T Broadband Group, this means the standard must be adopted no later than
January 1, 2001. In June 2000, the FASB issued SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities" as an amendment
to SFAS No. 133. This statement provides clarification with regard to certain
implementation issues under SFAS No. 133 on specific types of hedges.
On January 1, 2001, AT&T Broadband Group adopted SFAS No. 133. AT&T
Broadband Group recorded a cumulative effect of an accounting change, net of
applicable taxes, of approximately $1,209 of income, primarily attributable to
fair value adjustments of debt instruments, including those acquired in
conjunction with the MediaOne Merger, as well as to the warrant portfolio. In
addition, in connection with the adoption of SFAS No. 133, AT&T Broadband Group
reclassified certain investment securities, which support debt that is indexed
to such securities, from "available-for-sale" to "trading." This
reclassification resulted in the recognition of a charge of $1,724, net of
applicable taxes, which was recorded as a
L-149
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
reduction of other income. As available-for-sale securities, changes in fair
value were previously included within other comprehensive income as a component
of combined attributed net assets.
The impact of the adoption of SFAS No. 133, as amended by SFAS No. 138, on
AT&T Broadband Group's future results of operations is dependent upon the fair
values of the derivatives and related financial instruments and could result in
pronounced quarterly fluctuations in other income in future periods.
In December 1999, the SEC issued SAB No. 101, "Revenue Recognition in
Financial Statements." Registrants were required to apply the accounting and
disclosures described in SAB No. 101 no later than the fourth quarter of 2000.
AT&T Broadband Group is currently in compliance with the provisions of SAB No.
101.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities -- a
Replacement of FASB No. 125." This statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. Under these standards, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. This statement is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. AT&T Broadband Group does not expect
that the adoption of SFAS No. 140 will have a material impact on AT&T Broadband
Group's results of operations, financial position or cash flows.
17. SUBSEQUENT EVENTS
Effective January 1, 2001, entities attributed to AT&T Broadband Group sold
to Insight Communications Company LP ("Insight"), for $392, several Illinois
systems serving approximately 98,400 customers. Insight contributed the
customers to Insight Midwest, L.P. in which AT&T Broadband Group, through its
attributed entities, has a 50% interest. The $62 gain is being deferred due to a
keep well agreement with Insight Midwest, L.P. Entities attributed to AT&T
Broadband Group also contributed several Illinois systems serving approximately
247,500 customers to Insight Midwest, L.P. while Insight contributed systems
serving approximately 177,000 customers. The $117 gain is being deferred due to
a keep well agreement with Insight Midwest, L.P.
On January 2, 2001, AT&T through ATTBLLC, completed the sale of
Kearns-Tribune, LLC, to MediaNews Group for $200 in cash. The transaction
resulted in a pretax gain of approximately $107.
On January 8, 2001, a subsidiary of AT&T and Cablevision Systems
Corporation completed agreements for the transfer of cable-systems. AT&T
received cable-systems serving 358,000 customers in Boston and Eastern
Massachusetts. In exchange, Cablevision received cable-systems serving
approximately 130,000 customers in northern New York suburbs, and 44 million
shares of AT&T common stock valued at approximately $871, and approximately $204
in cash. Cablevision recorded a gain as a result of the transaction. Due to the
ownership interest in Cablevision, AT&T Broadband Group recorded its portion of
the gain, of $234 in "net losses from equity investments."
On April 30, 2001, a subsidiary of AT&T received 63.9 million shares of
AT&T stock valued at $1,423 held by Comcast in exchange for an entity owning
cable systems serving approximately 590,000 customers in Delaware, New Mexico,
Maryland, New Jersey, Pennsylvania and Tennessee.
L-150
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In February 2001, a subsidiary of AT&T and Charter signed a definitive
agreement involving several strategic cable system transactions. In accordance
with such agreement, Charter will receive cable systems which are attributed to
AT&T Broadband Group serving approximately 574,000 customers in Missouri,
Illinois, Alabama, Nevada and California. AT&T Broadband Group, through its
attributed entities, will receive $1,790, subject to adjustments, composed of
cable systems serving approximately 62,000 customers in Florida, up to $502 in
Charter common stock, and the balance in cash. Pending certain closing
conditions and regulatory approvals, the transactions are expected to close in
the second and third quarters of 2001.
In February 2001, a subsidiary of AT&T and MediaCom Communications
Corporation ("MediaCom") signed a definitive agreement in which certain cable
systems attributed to AT&T Broadband Group serving approximately 837,000
customers in Georgia, Iowa, Illinois and Missouri will be sold to MediaCom. AT&T
Broadband Group will receive cash of approximately $2,215, subject to
adjustments. Pending certain closing conditions and regulatory approvals, the
transaction is expected to close in the second quarter of 2001.
In April 2001, a subsidiary of AT&T and Adelphia Communications Corporation
("Adelphia") signed a definitive agreement in which certain cable systems
attributed to AT&T Broadband Group serving approximately 128,000 customers in
central Pennsylvania and Ohio will be sold to Adelphia. AT&T Broadband Group
will receive cash of approximately $318, subject to adjustments. Pending certain
closing conditions and regulatory approvals, the transaction is expected to
close in the third quarter of 2001.
In May 2001, AT&T, together with certain subsidiaries attributed to the
AT&T Broadband Group, agreed to sell the 99.75% interest they own in the entity
holding the Baltimore, Maryland cable television system, serving approximately
110,000 customers, to Comcast for approximately $516. Pending certain closing
conditions and certain regulatory conditions, this transaction is expected to
close at the end of the second quarter or beginning of the third quarter of
2001.
On January 11, 2001, Cox and Comcast exercised their rights to sell a
combined total of approximately 60 million shares of Excite@Home Series A common
stock to AT&T as part of the March 2000 agreement to reorganize Excite@Home's
governance. If this transaction were completed as originally contemplated, AT&T
Broadband Group would hold, on a fully diluted basis, approximately 38% of the
economic interest in Excite@Home and approximately 79% of the voting interest.
However, AT&T currently is in discussions to renegotiate the structure or terms
of the exercise of these sale rights, which negotiations may change the number
of shares or the percentage interests in Excite@Home that AT&T Broadband Group
will hold and may result in Comcast and/or Cox retaining all of their
Excite@Home shares.
In the first quarter of 2001, AT&T Broadband Group recorded a charge of $56
for restructuring and exit costs as part of an initiative to reduce costs. The
restructuring and exit plans primarily focus on the maximization of synergies
through head count reductions, including the consolidation of customer-care and
call centers and the reduction in the construction efforts on cable plant
upgrade and rebuild activity. Included in exit costs was $53 of cash termination
benefits associated with the separation of approximately 2,100 employees as part
of involuntary termination plans. Approximately 11 percent of the separations
were management employees and 89 percent were non-management employees. The
charge also included approximately $3 recognized on the disposition of
facilities as a result of the headcount reductions.
In the first quarter of 2001, AT&T signed a non-binding letter of agreement
under which AT&T may provide Excite@Home with $75 to $85 in connection with the
restructuring of the backbone fiber agreement between the companies and with a
joint initiative to maintain and improve current network
L-151
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
performance levels. In addition, AT&T Broadband Group recorded $752 of asset
impairment and restructuring charges related to Excite@Home. The impairment
charges relate to $600 in asset impairment charges taken by Excite@Home and a
related goodwill impairment of $139 taken by AT&T Broadband Group associated
with its acquisition goodwill of Excite@Home. The asset impairment and
restructuring charge included $13 of restructuring charges for headcount
reductions and consolidation of facilities.
L-152
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
FINANCIAL STATEMENTS
AT&T Consumer Services Group is an integrated business of AT&T Corp. (AT&T)
and is not a stand-alone entity. The combined financial statements included
herein reflect the results of the proposed AT&T Consumer Services Group tracking
stock. Separate financial statements are not required to be filed for tracking
stocks. However, we have provided the financial statements as an exhibit to this
document to provide additional disclosures to investors to allow them to assess
the financial performance of AT&T Consumer Services Group. Presenting separate
financial statements for AT&T Consumer Services Group does not indicate that we
have changed title to any assets or responsibility for any liabilities, and does
not purport to affect the rights of any of AT&T's creditors. Holders of AT&T
Consumer Services Group tracking stock do not have claims against the assets of
AT&T Consumer Services Group. Instead, AT&T Consumer Services Group shareholders
own a separate class of AT&T common stock that is intended to reflect the
financial performance and economic value of AT&T's consumer services'
businesses.
L-153
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF INCOME
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- -----------------
2001 2000 2001 2000
------ ------ ------- -------
(DOLLARS IN MILLIONS)
(UNAUDITED)
Revenue.................................................. $3,822 $4,651 $11,614 $14,651
Operating Expenses
Access and other connection.............................. 1,014 1,185 3,112 4,126
Selling, general and administrative...................... 913 979 2,855 3,195
Costs of services and products (excluding depreciation of
$40, $35, $119 and $100 included below)................ 590 661 1,758 1,957
Depreciation and other amortization...................... 49 43 145 123
Net restructuring and other charges...................... -- -- -- 97
Total operating expenses................................. 2,566 2,868 7,870 9,498
Operating income......................................... 1,256 1,783 3,744 5,153
Other income, net........................................ 8 6 22 63
Interest expense......................................... 28 76 134 98
Income before income taxes............................... 1,236 1,713 3,632 5,118
Provision for income taxes............................... 473 655 1,389 1,957
Net income............................................... $ 763 $1,058 $ 2,243 $ 3,161
The notes are an integral part of the combined financial statements.
L-154
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED BALANCE SHEETS
AT AT
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(DOLLARS IN MILLIONS)
(UNAUDITED)
ASSETS
Cash and cash equivalents................................... $ 1 $ --
Accounts receivable, less allowances of $344 and $410....... 2,054 2,681
Deferred income taxes....................................... 261 314
Other current assets........................................ 82 68
Total Current Assets................................... 2,398 3,063
Property, plant and equipment, net of accumulated
depreciation of $536 and $468............................. 125 170
Other assets................................................ 310 310
Total Assets........................................... $2,833 $3,543
LIABILITIES
Accounts payable............................................ $ 840 $1,133
Payroll and benefit-related liabilities..................... 144 149
Debt maturing within one year............................... -- 13
Income taxes payable........................................ 508 --
Other current liabilities................................... 347 475
Total Current Liabilities.............................. 1,839 1,770
Long-term debt due to AT&T.................................. 1,514 4,000
Deferred income taxes....................................... 31 29
Other long-term liabilities and deferred credits............ 275 285
Total Liabilities...................................... 3,659 6,084
Combined attributed net liabilities......................... (826) (2,541)
Total Liabilities and Combined Attributed Net
Liabilities........................................... $2,833 $3,543
The notes are an integral part of the combined financial statements.
L-155
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF CHANGES IN COMBINED
ATTRIBUTED NET (LIABILITIES) ASSETS
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
---------------------
2001 2000
--------- ---------
(DOLLARS IN MILLIONS)
(UNAUDITED)
Combined Attributed Net (Liabilities) Assets
Balance at beginning of year................................ $(2,541) $ 1,070
Net income................................................ 2,243 3,161
Dividends declared to AT&T................................ (272) (1,563)
Contributions to AT&T, net................................ (256) (5,598)
Balance at end of period.................................... $ (826) $(2,930)
The notes are an integral part of the combined financial statements.
L-156
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
---------------------
2001 2000
--------- ---------
(DOLLARS IN MILLIONS)
(UNAUDITED)
OPERATING ACTIVITIES
Net income.................................................. $ 2,243 $ 3,161
Adjustments to reconcile net income to net cash provided by
operating activities:
Net restructuring and other charges....................... -- 58
Depreciation and amortization............................. 145 123
Provision for uncollectible receivables................... 463 448
Decrease (increase) in receivables........................ 164 (102)
(Decrease) increase in accounts payable................... (293) 131
Increase in income taxes payable.......................... 508 --
Net change in other operating assets and liabilities...... (131) (183)
Net cash provided by operating activities................... 3,099 3,636
INVESTING ACTIVITIES
Capital expenditures and other additions.................... (96) (104)
Net cash used in investing activities....................... (96) (104)
FINANCING ACTIVITIES
(Decrease) increase in long-term debt due to AT&T........... (2,486) 3,673
Dividends paid to AT&T...................................... (277) (1,481)
Contributions to AT&T, net.................................. (226) (5,707)
Decrease in short-term borrowings, net...................... (13) (22)
Net cash used in financing activities....................... (3,002) (3,537)
Net increase (decrease) in cash and cash equivalents........ 1 (5)
Cash and cash equivalents at beginning of year.............. -- 6
Cash and cash equivalents at end of period.................. $ 1 $ 1
The notes are an integral part of the combined financial statements.
L-157
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
(UNAUDITED)
(a) BASIS OF PRESENTATION
On October 25, 2000 AT&T announced a restructuring plan designed to fully
separate or issue separately tracked stocks intended to reflect the financial
performance and economic value of each of AT&T's four major operating units. On
December 19, 2001, AT&T reaffirmed its commitment to creating a tracking stock
designed to reflect the financial performance and economic value of AT&T
Consumer Services Group. If the Consumer Services charter amendment is approved
by the AT&T shareholders, AT&T expects to distribute some or all of the tracking
stock to AT&T shareholders in 2002. However, our board of directors reserves the
right to change the timing of the distribution. In addition, our board of
directors reserves the right to not create or distribute shares of AT&T Consumer
Services Group tracking stock, or to distribute less than all of these shares,
even if shareholders approve the Consumer Services charter amendment proposal.
The combined financial statements have been prepared by AT&T Consumer
Services Group pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC) and, in the opinion of management, include all
adjustments necessary for a fair presentation of the combined results of
operations, financial position and cash flows for each period presented. The
combined results for interim periods are not necessarily indicative of results
for the full year. These financial results should be read in conjunction with
AT&T's Form 8-K filed on September 24, 2001, restating AT&T's consolidated
financial results for the year ended December 31, 2000, to reflect AT&T Wireless
Services as a discontinued operation, AT&T's Form 10-K/A for the year ended
December 31, 2000, AT&T's Form 10-Q for the quarter ended September 30, 2001 and
AT&T Consumer Services Group's combined financial statements for the year ended
December 31, 2000 included elsewhere in this document.
AT&T Consumer Services Group provides a variety of communications services
to residential customers including long distance, local toll (intrastate calls
outside the immediate local area) and Internet access. In addition, AT&T
Consumer Services Group provides calling card, operator-handled calling services
and, in certain areas, local phone services.
AT&T Consumer Services Group is an integrated business of AT&T and is not a
separate legal entity. These combined financial statements reflect the results
of operations, financial position, changes in combined attributed net
(liabilities) assets and cash flows of AT&T Consumer Services Group as if it
were a separate entity for all periods presented. The combined financial
statements of AT&T Consumer Services Group were prepared in accordance with
Generally Accepted Accounting Principles. The financial information included
herein may not necessarily reflect the combined results of operations, financial
position, changes in combined attributed net (liabilities) assets and cash flows
of AT&T Consumer Services Group had it been a separate, stand-alone entity
during the periods presented.
The combined financial statements of AT&T Consumer Services Group reflect
the assets, liabilities, revenue and expenses directly attributable to AT&T
Consumer Services Group, as well as allocations deemed reasonable by management,
to present the results of operations, financial position and cash flows of AT&T
Consumer Services Group on a stand-alone basis. The allocation methodologies
have been described within the notes to the combined financial statements where
appropriate. All significant intercompany accounts and transactions within AT&T
Consumer Services Group have been eliminated. Earnings per share disclosure has
not been presented as AT&T Consumer Services Group is a business unit of AT&T
and earnings per share data is not considered meaningful.
The combined financial statements of AT&T Consumer Services Group primarily
include the results of the following legal entities: AT&T Communications of the
Southern States Inc., AT&T
L-158
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Communications of the Southwest, Inc., AT&T Puerto Rico, AT&T Virgin Islands,
AT&T Communications companies in other jurisdictions and certain attributed
assets of AT&T Corp.
Debt has been allocated to AT&T Consumer Services Group based on our future
view of AT&T's debt position after taking into account the significant
deleveraging activities of AT&T Corp. This allocation took into account the
following factors: prospective financing requirements, working capital and
capital expenditure requirements, equity issuance and comparable company
profiles. Increases in historical debt levels are based, in general, on
historical cash flows generated by this entity in relation to total AT&T. Such
cash outflows include acquisitions, dividend payments and capital expenditures,
partially offset by cash flow from operations. For purposes of this allocation,
certain "corporate" activities were deemed to be partially funded by this entity
by contributing proceeds to the parent for these activities. These activities
included the repurchase of common shares by AT&T and cash payments associated
with the TCI merger and the MediaOne acquisition. The interest expense on the
allocated debt was calculated based on a rate intended to be equivalent to the
rate AT&T Consumer Services Group would have received if it were a stand-alone
entity. Due to the expected positive operating cash flow of AT&T Consumer
Services Group, the level of debt of AT&T Consumer Services Group in the future
is expected to be significantly lower than the level at September 30, 2001.
As a result of the above methodology, AT&T Consumer Services Group may
advance funds to AT&T Corp. These advances are accounted for as borrowings
between the entities and bear interest at a market rate that is substantially
equal to the rate at which AT&T would be able to borrow from third parties on
debt with similar maturities.
General corporate overhead related to AT&T's Corporate headquarters and
common support divisions has been allocated to AT&T Consumer Services Group as
it was not deemed practicable to specifically identify such common costs to AT&T
Consumer Services Group. The allocation of corporate overhead is divided into an
allocation of shared services (e.g., payroll and accounts payable) and other
corporate overhead. Costs of shared services are allocated to AT&T Consumer
Services Group based on transaction based prices. Other corporate overhead is
allocated to AT&T Consumer Services Group based on the ratio of AT&T Consumer
Services Group's external costs and expenses adjusted for any functions that
AT&T Consumer Services Group performs on its own. The costs of these services
charged to AT&T Consumer Services Group are not necessarily indicative of the
costs that would have been incurred by AT&T Consumer Services Group had they
performed these functions entirely as a stand alone entity, nor are they
indicative of costs that will be charged or incurred in the future. However,
management believes that such allocations are reasonable.
AT&T Consumer Services Group purchases network related services from AT&T
at cost-based prices, which approximate market prices.
AT&T performs cash management functions on behalf of AT&T Consumer Services
Group. Substantially all of AT&T Consumer Services Group's cash balances are
swept to AT&T on a daily basis, where they are managed and invested by AT&T.
Transfers of cash to and from AT&T are reflected as a component of combined
attributed net assets, after giving effect to the allocation of debt described
above.
Changes in combined attributed net (liabilities) assets primarily represent
net transfers to or from AT&T, after giving effect to the net income or loss of
AT&T Consumer Services Group during the period, and were primarily assumed to be
settled in cash.
Consolidated income tax provision, related tax payments or refunds, and
deferred tax balances of AT&T have been allocated to AT&T Consumer Services
Group based principally on the taxable income and tax credits directly
attributable to AT&T Consumer Services Group, essentially a stand alone
presentation. AT&T Business Services Group and AT&T Consumer Services Group
will, prior to the
L-159
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
issuance of any shares of AT&T Consumer Services Group tracking stock, enter
into a tax sharing agreement which, consistent with the principles described in
the preceding sentence, will provide for tax sharing payments based on the tax
expense or tax benefit of a hypothetical affiliated group consisting of AT&T
Business Services Group and AT&T Consumer Services Group. Based on this
agreement, the consolidated tax liability before credits is allocated between
the groups, based on each group's contribution to consolidated taxable income of
the hypothetical group. Consolidated tax credits of the hypothetical group are
allocated between groups based on each group's contribution to each tax credit.
(b) NET RESTRUCTURING AND OTHER CHARGES
The following table displays the activity and balances of the restructuring
reserve account from January 1, 2001, to September 30, 2001:
EMPLOYEE
SEPARATIONS
-----------
Balance at January 1, 2001.................................. $41
Additions................................................... --
Deductions.................................................. 10
Balance at September 30, 2001............................... $31
Deductions reflect cash payments of $10 related to employee separations.
The cash outlay was primarily funded through cash from operations.
During the first quarter of 2000, AT&T Consumer Services Group recorded $97
of net restructuring and other charges, which included $79 for restructuring and
exit costs associated with AT&T's initiative to reduce costs by the end of 2000.
Also included in restructuring and other charges was an asset impairment
charge of $18 related to the write-down of unrecoverable assets in certain
businesses in which the carrying value was no longer supported by future cash
flows.
(c) SECURITIZATION OF RECEIVABLES
On June 20, 2001, AT&T amended an existing accounts receivable
securitization program for a new 364-day term providing for up to $0.5 billion
of funding. Under the program, AT&T Consumer Services Group accounts receivable
were sold on a discounted, revolving basis, to a special purpose, wholly-owned
subsidiary, which assigns interests in such receivables to unrelated third-party
financing entities. The securitization proceeds of $0.5 billion were recorded as
debt by AT&T. At September 30, 2001, the borrowing was collateralized by $1.0
billion of accounts receivable. In January of 2002, approximately $0.3 billion
of the $0.5 billion proceeds were repaid.
(d) RELATED PARTY TRANSACTIONS
AT&T Consumer Services Group purchases network related services from AT&T
at cost-based prices, which approximate market prices. For the three and nine
months ended September 30, 2001, these amounts totaled $153 and $447,
respectively, and for the three and nine months ended September 30, 2000, these
amounts totaled $217 and $651, respectively, and are reflected within costs of
services and products in the combined statements of income. There are no
inter-entity payables for these services as amounts are deemed to be settled in
cash.
AT&T Consumer Services Group purchases sales and sales support, customer
care, billing, and research and development services from AT&T Business Services
at cost-based prices, which approximate
L-160
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
market prices. For the three and nine months ended September 30, 2001, these
amounts totaled $115 and $352, respectively, and for the three and nine months
ended September 30, 2000, these amounts totaled $121 and $326, respectively, and
are reflected within selling, general and administrative (SG&A) expenses in the
combined statements of income. There are no inter-entity payables for these
services as amounts are deemed to be settled in cash.
AT&T has allocated general corporate overhead expenses related to AT&T's
corporate headquarters and common support division to AT&T Consumer Services
Group. For the three and nine months ended September 30, 2001, these amounts
totaled $62 and $187, respectively, and for the three and nine months ended
September 30, 2000, these amounts totaled $61 and $190, respectively, and are
reflected within SG&A. There are no inter-entity payables for these services as
amounts are deemed to be settled in cash.
AT&T Consumer Services Group purchases receivables from AT&T Wireless
Services and provides customer care and billing services to AT&T Wireless
Services at cost-based prices, through the split-off date, which approximate
market prices. For the period January 1 through July 9, 2001 (the date AT&T
completed the split-off of AT&T Wireless as a separate, independently-traded
company), these customer care and billing services totaled $32, and for the
three and nine months ended September 30, 2000, these amounts totaled $21 and
$66, respectively, and are reflected as a reduction of SG&A expenses in the
combined statements of income. Included within accounts payable at December 31,
2000 was $79.
AT&T Consumer Services Group provides AT&T Broadband Group with sales
support and customer care services at cost-based prices, which approximate
market prices. For the three and nine months ended September 30, 2001, these
amounts totaled $45 and $142, respectively, and for the three and nine months
ended September 30, 2000, these amounts totaled $18 and $48, respectively, and
are reflected as a reduction of SG&A expenses in the combined statements of
income. There were no inter-entity receivables from AT&T Broadband Group at
September 30, 2001; included in accounts receivable at December 31, 2000,
amounts due were $130. AT&T Consumer Services Group provides billing and
collections services on behalf of AT&T Broadband Group. Included within accounts
payable at September 30, 2001 and December 31, 2000 was $1 and $48,
respectively.
AT&T invests excess cash of AT&T Puerto Rico and AT&T Virgin Islands on
their behalf. Notes receivable related to this cash, included within accounts
receivable, were $278 at September 30, 2001 and $262 at December 31, 2000.
(e) STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 133 "ACCOUNTING FOR
DERIVATIVES INSTRUMENTS AND HEDGING ACTIVITIES"
Effective January 1, 2001, AT&T Consumer Services Group adopted Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", and its corresponding amendments under SFAS
No. 138. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. All derivatives, whether designated
in hedging relationships or not, are required to be recorded on the balance
sheet at fair value. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and of the hedged item attributable
to the hedged risk are recognized in earnings. If the derivative is designated
as a cash flow hedge, the effective portions of changes in the fair value of the
derivative are recorded in other comprehensive income within combined attributed
net liabilities and are recognized in the income statement when the hedged item
affects earnings. Changes in fair values of derivative instruments not
designated as hedging instruments and ineffective portions of hedges, if any,
are recognized in earnings in the current period.
L-161
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The adoption of SFAS No. 133 on January 1, 2001 did not have an impact on
AT&T Consumer Services Group's financial statements.
(f) NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," which supercedes Accounting Principles Board
(APB) Opinion No. 16. SFAS No. 141 requires all business combinations initiated
after June 30, 2001 be accounted for under the purchase method. In addition,
SFAS No. 141 establishes criteria for the recognition of intangible assets
separately from goodwill. These requirements are effective for fiscal years
beginning after December 15, 2001, which for AT&T Consumer Services Group means
January 1, 2002. AT&T Consumer Services Group does not expect that the adoption
of SFAS No. 141 will have a material effect on AT&T Consumer Services Group's
results of operations, financial position or cash flows.
Also in July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which supercedes APB Opinion No. 17. Under SFAS No. 142
goodwill and indefinite lived intangible assets will no longer be amortized, but
rather will be tested for impairment upon adoption and at least annually
thereafter. In addition, the amortization period of intangible assets with
finite lives will no longer be limited to 40 years. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001, which for AT&T Consumer
Services Group means the standard will be adopted on January 1, 2002. In
connection with the adoption of this standard, AT&T Consumer Services Group's
unamortized goodwill balance will no longer be amortized, but will continue to
be tested for impairment. AT&T Consumer Services Group does not expect that the
adoption of SFAS No. 142 will have a material effect on AT&T Consumer Services
Group's results of operations, financial position or cash flows.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This standard requires that obligations associated with
the retirement of tangible long-lived assets be recorded as liabilities when
those obligations are incurred, with the amount of the liability initially
measured at fair value. Upon initially recognizing a liability for an asset
retirement obligation, an entity must capitalize the cost by recognizing an
increase in the carrying amount of the related long-lived asset. Over time, this
liability is accreted to its present value, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. SFAS No. 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002, which for AT&T
Consumer Services Group means the standard will be adopted on January 1, 2003.
AT&T Consumer Services Group does not expect that the adoption of this statement
will have a material impact on AT&T Consumer Services Group's results of
operations, financial position or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS No. 144 applies to all long-lived assets, including
discontinued operations, and consequently amends APB 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."
Based on SFAS No. 121, SFAS No. 144 develops one accounting model for long-lived
assets that are to be disposed of by sale, as well as addresses the principal
implementation issues. SFAS No. 144 requires that long-lived assets that are to
be disposed of by sale be measured at the lower of book value or fair value less
cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued
operations to include all components of an entity with operations that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144 is
effective for financial statements issued for fiscal years
L-162
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
beginning after December 15, 2001, which for AT&T Consumer Services Group means
the standard will be adopted on January 1, 2002. AT&T Consumer Services Group
does not expect that the adoption of SFAS No. 144 will have a material impact on
AT&T Consumer Services Group's results of operations, financial position or cash
flows.
(g) SUBSEQUENT EVENTS
On October 16, 2001, AT&T announced a decision to unwind Concert, its
global venture with British Telecommunications plc. Currently, Concert incurs
most of our international settlements and bills AT&T Consumer Services a net
expense composed of international settlement (interconnection) expense and
foreign-billed revenue to settle calls completed outside of the United States.
In conjunction with the unwinding of Concert, AT&T Consumer Services will record
both foreign-billed revenue and interconnection expense for these transactions.
In January 2002, AT&T Corp. entered into a $2.6 billion five-year agreement
with Accenture Ltd. for Accenture to provide management, new technology and
training for AT&T Consumer Services Group. Under the terms of the agreement,
Accenture will be responsible for providing new technology development and
ongoing management direction to improve AT&T Consumer Services Group's customer
care operations, with goals of reducing costs, raising productivity, and
improving sales and customer service. AT&T Consumer Services Group will continue
to develop and implement its overall business and marketing strategies and new
product offerings.
L-163
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareowners of AT&T Corp.:
In our opinion, the accompanying combined balance sheets and the related
combined statements of income and changes in combined attributed net assets and
of cash flows present fairly, in all material respects, the financial position
of AT&T Consumer Services Group at December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of AT&T Consumer Services Group's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
AT&T Consumer Services Group is a fully integrated business unit of AT&T Corp.;
consequently, as indicated in Note 1, these combined financial statements have
been derived from the consolidated financial statements and accounting records
of AT&T Corp. and reflect certain assumptions and allocations. Moreover, as
indicated in Note 1, AT&T Consumer Services Group relies on AT&T Corp. for
administrative, management and other services. The financial position, results
of operations and cash flows of AT&T Consumer Services Group could differ from
those that would have resulted had AT&T Consumer Services Group operated
autonomously or as an entity independent of AT&T Corp. As more fully discussed
in Note 1, the combined financial statements of AT&T Consumer Services Group
should be read in conjunction with the audited consolidated financial statements
of AT&T Corp.
PricewaterhouseCoopers LLP
New York, New York
May 9, 2001
L-164
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(IN MILLIONS)
Revenue..................................................... $18,894 $21,753 $22,763
Operating Expenses
Access and other connection................................. 5,204 6,223 7,453
Selling, general and administrative......................... 4,128 4,688 5,453
Costs of services and products (excluding depreciation of
$137, $168 and $116 included below)....................... 2,557 3,316 3,656
Depreciation and amortization............................... 167 184 116
Net restructuring and other charges......................... 97 7 (19)
Total operating expenses.................................... 12,153 14,418 16,659
Operating income............................................ 6,741 7,335 6,104
Other income, net........................................... 81 208 86
Interest expense............................................ 164 41 27
Income before income taxes.................................. 6,658 7,502 6,163
Provision for income taxes.................................. 2,546 2,869 2,356
Net income.................................................. $ 4,112 $ 4,633 $ 3,807
The notes are an integral part of the combined financial statements.
L-165
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED BALANCE SHEETS
AT DECEMBER 31,
----------------
2000 1999
------ ------
(IN MILLIONS)
ASSETS
Cash and cash equivalents................................... $ -- $ 6
Receivables, less allowances of $410 and $414............... 2,681 3,115
Deferred income taxes....................................... 314 372
Other current assets........................................ 68 81
Total current assets................................... 3,063 3,574
Property, plant and equipment, net of accumulated
depreciation of $468 and $485............................. 170 132
Other assets................................................ 310 366
Total assets........................................... $3,543 $4,072
LIABILITIES
Accounts payable............................................ $1,133 $ 884
Payroll and benefit-related liabilities..................... 149 246
Debt maturing within one year............................... 13 36
Other current liabilities................................... 475 600
Total current liabilities.............................. 1,770 1,766
Long-term debt due to AT&T.................................. 4,000 900
Long-term liabilities and deferred credits.................. 285 295
Deferred income taxes....................................... 29 41
Total liabilities...................................... 6,084 3,002
Combined attributed net (liabilities) assets................ (2,541) 1,070
Total liabilities and combined attributed net assets........ $3,543 $4,072
The notes are an integral part of the combined financial statements.
L-166
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF CHANGES IN COMBINED
ATTRIBUTED NET ASSETS
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(IN MILLIONS)
COMBINED ATTRIBUTED NET (LIABILITIES) ASSETS
Balance at beginning of year.............................. $ 1,070 $ 3,266 $ 821
Net income............................................. 4,112 4,633 3,807
Dividends declared to AT&T............................. (1,657) (1,871) (1,487)
Contributions (to) from AT&T, net...................... (6,066) (4,958) 125
Balance at end of year.................................... $(2,541) $ 1,070 $ 3,266
The notes are an integral part of the combined financial statements.
L-167
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(IN MILLIONS)
OPERATING ACTIVITIES
Net income.................................................. $ 4,112 $ 4,633 $ 3,807
Adjustments to reconcile net income to net cash provided by
operating activities:
Gains on sales of businesses and investments.............. (56) (162) --
Net restructuring and other charges....................... 55 6 (19)
Depreciation and amortization............................. 167 184 116
Provision for uncollectibles.............................. 595 749 886
Increase in accounts receivable........................... (161) (954) (426)
Increase (decrease) in accounts payable................... 249 (55) (10)
Net change in other operating assets and liabilities...... (174) (51) (213)
Net cash provided by operating activities.............. 4,787 4,350 4,141
INVESTING ACTIVITIES
Capital expenditures and other additions.................. (148) (300) (98)
Loan to AT&T.............................................. -- 1,580 (1,580)
Net dispositions of businesses............................ 15 125 --
Other investing activities, net........................... 1 (7) 37
Net cash (used in) provided by investing activities.... (132) 1,398 (1,641)
FINANCING ACTIVITIES
Decrease in long-term debt due to AT&T.................... -- -- (1,122)
Increase in long-term debt due to AT&T.................... 3,100 900 --
Dividends paid to AT&T.................................... (2,031) (1,808) (1,458)
Contributions (to) from AT&T, net......................... (5,707) (4,829) 80
Decrease in short-term borrowings, net.................... (23) (5) --
Net cash used in financing activities.................. (4,661) (5,742) (2,500)
Net increase (decrease) in cash and cash equivalents........ (6) 6 --
Cash and cash equivalents, beginning of year................ 6 -- --
Cash and cash equivalents, end of year...................... -- 6 --
The notes are an integral part of the combined financial statements.
L-168
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
On October 25, 2000 AT&T announced a restructuring plan designed to fully
separate or issue separately tracked stocks intended to reflect the financial
performance and economic value of each of AT&T's four major operating units.
Under this plan AT&T will create a new class of stock to track the financial
performance and economic value of AT&T Consumer Services Group. If the Consumer
Services charter amendment proposal is approved, AT&T expects to distribute some
or all of the tracking stock to AT&T shareholders later this year.
BASIS OF PRESENTATION
AT&T Consumer Services Group provides to residential customers a variety of
any-distance communications services including long distance, local toll
(intrastate calls outside the immediate local area) and Internet access. In
addition, AT&T Consumer Services Group provides calling card, operator-handled
calling services, and in certain areas, local phone services.
AT&T Consumer Services Group is an integrated business of AT&T and is not a
separate legal entity. These combined financial statements reflect the results
of operations, financial position, changes in combined attributed net assets and
cash flows of AT&T Consumer Services Group as if it were a separate entity for
all periods presented. The combined financial statements of AT&T Consumer
Services Group were prepared in accordance with generally accepted accounting
principles. The financial information included herein may not necessarily
reflect the combined results of operations, financial position, changes in
combined attributed net assets and cash flows of AT&T Consumer Services Group
had it been a separate, stand-alone entity during the periods presented. These
financial statements should be read in conjunction with AT&T's Form 10-K/A for
the year ended December 31, 2000.
The combined financial statements of AT&T Consumer Services Group reflect
the assets, liabilities, revenue and expenses directly attributable to AT&T
Consumer Services Group, as well as allocations deemed reasonable by management,
to present the results of operations, financial position and cash flows of AT&T
Consumer Services Group on a stand-alone basis. The allocation methodologies
have been described within the notes to the combined financial statements where
appropriate. All significant intercompany accounts and transactions within AT&T
Consumer Services Group have been eliminated. Earnings per share disclosure has
not been presented as AT&T Consumer Services Group is a business unit of AT&T
and earnings per share data is not considered meaningful.
The combined financial statements of AT&T Consumer Services Group primarily
include the results of the following legal entities: AT&T Communications of the
Southern States Inc., AT&T Communications of the Southwest, Inc., AT&T
Communications companies in other jurisdictions and certain attributed assets of
AT&T Corp.
Debt has been allocated to AT&T Consumer Services Group based on our future
view of AT&T's debt position after taking into account the significant
deleveraging activities of AT&T Corp. This allocation took into account the
following factors: prospective financing requirements, working capital and
capital expenditure requirements and comparable company profiles. Increases in
historical debt levels are based, in general, on historical cash flows generated
by this entity in relation to total AT&T. Such cash outflows include
acquisitions, dividend payments and capital expenditures, partially offset by
cash flow from operations. For purposes of this allocation, certain "corporate"
activities were deemed to be partially funded by this entity by contributing
proceeds to the parent for these activities. These activities included the
repurchase of common shares by AT&T and cash payments associated with the
acquisitions of TCI
L-169
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
merger and MediaOne acquisition. Since AT&T Consumer Services Group will be a
tracking stock of AT&T Communications Services, Inc., the intercompany debt
allocated to them will be payable to AT&T Communications Services, Inc. The
interest expense on the allocated debt was calculated based on a rate intended
to be equivalent to the rate AT&T Consumer Services Group would have received if
it were a stand-alone entity. Due to the expected positive operating cash flow
of AT&T Consumer Services Group, the level of debt of AT&T Consumer Services
Group in the future is expected to be significantly lower than the level at
December 31, 2000.
As a result of the above methodology, AT&T Consumer Services Group advanced
funds to AT&T. These advances are accounted for as short-term borrowings between
the entities and bear interest at a market rate that is substantially equal to
the rate at which AT&T would be able to borrow from third parties on a
short-term basis.
General corporate overhead related to AT&T's corporate headquarters and
common support divisions has been allocated to AT&T Consumer Services Group as
it was not deemed practicable to specifically identify such common costs to AT&T
Consumer Services Group. The allocation of corporate overhead is divided into an
allocation of shared services (e.g., payroll and accounts payable) and other
corporate overhead. Costs of shared services are allocated to AT&T Consumer
Services Group based on transaction based prices costs of specific
service/program provided. Other corporate overhead is allocated to AT&T Consumer
Services Group based on the ratio of AT&T Consumer Services Group's external
costs and expenses adjusted for any functions that AT&T Consumer Services Group
performs on its own. The costs of these services charged to AT&T Consumer
Services Group are not necessarily indicative of the costs that would have been
incurred in AT&T Consumer Services Group had they performed these functions
entirely as a stand alone entity, nor are they indicative of costs that will be
charged or incurred in the future. However, management believes that such
allocations are reasonable.
AT&T performs cash management functions on behalf of AT&T Consumer Services
Group. Substantially all of AT&T Consumer Service's Group's cash balances are
swept to AT&T on a daily basis, where they are managed and invested by AT&T.
Transfers of cash to and from AT&T are reflected as a component of combined
attributed net assets, after giving effect to the allocation of debt described
above.
Changes in combined attributed net assets primarily represented net
transfers to or from AT&T, after giving effect to the net income of AT&T
Consumer Services Group during the period, and were assumed to be settled in
cash.
Consolidated income tax provision, related tax payments or refunds, and
deferred tax balances of AT&T have been allocated to AT&T Consumer Services
Group based principally on the taxable income and tax credits directly
attributable to AT&T Consumer Services Group, essentially a stand alone
presentation. AT&T Business Services Group and AT&T Consumer Services Group
will, prior to the issuance of any shares of AT&T Consumer Services Group
tracking stock, enter into a tax sharing agreement which, consistent with the
principles described in the preceding sentence, will provide for tax sharing
payments based on the taxes or tax benefits of a hypothetical affiliated group
consisting of AT&T Business Services Group and AT&T Consumer Services Group.
Based on this agreement, the consolidated tax liability before credits is
allocated between the groups, based on each group's contribution to consolidated
taxable income of the hypothetical group. Consolidated tax credits of the
hypothetical group are allocated between groups based on each group's
contribution to each tax credit.
L-170
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
AT&T Consumer Services Group recognizes long distance and local services
revenue based upon minutes of traffic processed or contracted fee schedules.
AT&T Consumer Services Group recognizes revenue as services are rendered or as
products are delivered to and are accepted by customers and when services are
provided in accordance with contract terms. Customer activation fees, along with
related costs up to but not exceeding the revenue, are deferred and amortized
over the customer relationship period. AT&T Consumer Services Group records
revenue net of an estimate for unbillable accounts. During 2000, AT&T Consumer
Services Group adopted Securities and Exchange Commission Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements." The adoption
did not have a material impact on AT&T Consumer Services Group's results of
operations or financial condition.
ADVERTISING AND PROMOTIONAL COSTS
AT&T Consumer Services Group expenses costs of advertising and promotions,
including cash incentives used to acquire customers, as incurred. Advertising
and promotional expenses were $930, $1,085 and $1,361 in 2000, 1999 and 1998,
respectively. Of these amounts, $288, $320, and $622 were cash incentives to
acquire customers in 2000, 1999 and 1998, respectively.
CASH EQUIVALENTS
AT&T Consumer Services Group considers all highly liquid investments with
original maturities of generally three months or less to be cash equivalents.
CASH FLOWS
For purposes of the combined statements of cash flows, transactions between
AT&T Consumer Services Group and AT&T, other than dividends, have been accounted
for as having been settled in cash at the time the transaction was recorded by
AT&T Consumer Services Group.
PROPERTY, PLANT AND EQUIPMENT
AT&T Consumer Services Group states property, plant and equipment at cost
and determines depreciation based upon the assets' estimated useful lives using
either the group or unit method. All of AT&T Consumer Services Group's property,
plant and equipment consists of communications and network equipment. The useful
lives of communications and network equipment range from three to 15 years. The
group method is used for the majority of the communications and network
equipment. All other property, plant and equipment, is depreciated on a
straight-line basis. When AT&T Consumer Services Group sells or retires assets
depreciated using the group method, the cost is deducted from property, plant
and equipment and charged to accumulated depreciation, without recognition of a
gain or loss. The unit method is primarily used for large computer systems and
support assets. When AT&T Consumer Services Group sells assets that were
depreciated using the unit method, AT&T Consumer Services Group includes the
related gains or losses in other income.
GOODWILL
Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for as purchases. AT&T
Consumer Services Group amortizes goodwill on a straight-line basis over 10
years.
L-171
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SOFTWARE CAPITALIZATION
Certain direct software development costs are capitalized, including
external direct costs of material and services, and payroll costs for employees
devoting time to the software projects. These costs are included within other
assets and are amortized over a period not to exceed five years beginning when
the asset is substantially ready for use. Costs incurred during the preliminary
project stage, as well as maintenance and training costs, are expensed as
incurred. AT&T Consumer Services Group capitalizes initial operating-system
software costs and amortizes them over the life of the associated hardware. AT&T
Consumer Services Group also capitalizes costs of purchased application
software. These capitalized costs are included in property, plant and equipment
and are amortized over a useful life not to exceed five years.
INCOME TAXES
AT&T Consumer Services Group is not a separate taxable entity for federal
and state income tax purposes and its results of operations are included in the
consolidated federal and state income tax returns of AT&T and its affiliates.
AT&T Consumer Services Group's provision or benefit for income taxes is based
upon its contribution to the overall income tax liability of AT&T and its
affiliates as described in Note 1.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets such as property, plant and equipment, goodwill,
investments and software are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. If
the total of the expected future undiscounted cash flows is less than the
carrying amount of the asset, a loss is recognized for the difference between
the fair value and carrying value of the asset. In addition, in accordance with
Accounting Principles Board (APB) Opinion No. 17, "Intangible Assets," AT&T
Consumer Services Group continues to evaluate the amortization periods to
determine whether events or circumstances warrant revised amortization periods.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenue and expenses during the period reported. Actual results
could differ from those estimates. Estimates are used when accounting for
certain items such as long-term contracts, allowance for doubtful accounts,
depreciation and amortization, employee benefit plans, taxes, restructuring
reserves and contingencies.
CONCENTRATIONS
As of December 31, 2000, AT&T Consumer Services Group does not have any
significant concentration of business transacted with a particular customer,
supplier or lender that could, if suddenly eliminated, severely impact AT&T
Consumer Services Group's operations. AT&T Consumer Services Group also does not
have a concentration of available sources of labor, services, or other rights
that could, if suddenly eliminated, severely impact AT&T Consumer Services
Group's operations. AT&T Consumer Services Group currently obtains a significant
portion of its transport services exclusively from AT&T Business Services Group.
If AT&T Consumer Services Group is unable to procure such transport services it
could affect its ability to meet demand for its products which would have an
adverse affect on the results.
L-172
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
2000 1999 1998
---- ---- ----
INCLUDED IN DEPRECIATION AND AMORTIZATION
Amortization of purchased intangibles..................... $21 $ 9 $ --
Amortization of goodwill.................................. 9 7 --
INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Research and development expenses......................... $59 $101 $174
OTHER INCOME, NET
Interest income........................................... 14 45 84
Gains on sales of businesses and investments.............. 56 162 --
Miscellaneous, net........................................ 11 1 2
Total other income, net................................... $81 $208 $ 86
SUPPLEMENTARY BALANCE SHEET INFORMATION
AT DECEMBER 31,
----------------
2000 1999
----- -----
OTHER ASSETS:
Software development costs, net........................... $155 $192
Goodwill, net............................................. 81 90
Other..................................................... 74 84
---- ----
$310 $366
AT DECEMBER 31,
----------------
2000 1999
----- -----
OTHER CURRENT LIABILITIES:
Marketing Incentives...................................... $255 $322
Deferred Revenue.......................................... 98 124
Other..................................................... 122 154
---- ----
$475 $600
SUPPLEMENTARY CASH FLOW INFORMATION
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
Interest payments........................................ $ 164 $ 41 $ 27
Income tax payments...................................... $2,546 $2,869 $2,356
L-173
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACQUISITIONS AND DISPOSITIONS
In 1999, AT&T Consumer Services Group purchased certain assets of SmarTalk
Teleservices, Inc., a leading seller of prepaid calling cards. The difference
between the purchase price and the fair value of net assets acquired has been
recorded as Goodwill in the accompanying financial statements. AT&T Consumer
Services Group amortizes this asset over 10 years, and recorded amortization
expense in the amount of $9 and $7 for the years ended December 31, 2000, and
1999, respectively.
Also in 1999, AT&T Consumer Services Group sold its Language Line Services
business for a gain of $153, which is reflected in the combined statements of
income.
5. NET RESTRUCTURING AND OTHER CHARGES
During 2000, AT&T Consumer Services Group recorded $97 of net restructuring
and other charges, which included $18 of asset impairment charges and $79 for
restructuring and exit costs.
The charge for restructuring and exit plans was primarily due to headcount
reductions, including the consolidation of customer care and call centers.
Included in exit costs was $79 of cash termination benefits associated with
the involuntary separation of about 1,300 employees. Approximately 65% of the
individuals were management employees and 35% were non-management employees.
The following table displays the activity of the restructuring reserve
account:
EMPLOYEE
SEPARATIONS
-----------
Balance at January 1, 1998.................................. $ 53
Deductions................................................ (48)
Balance at December 31, 1998................................ $ 5
Additions................................................. 7
Deductions................................................ (6)
Balance at December 31, 1999................................ $ 6
Additions................................................. 79
Deductions................................................ (44)
Balance at December 31, 2000................................ $ 41
Deductions reflect cash payments of $29, $6 and $44 for 1998, 1999, and
2000, respectively. These payments included cash termination benefits of $29, $0
and $42, for the years ended December 31, 1998, 1999 and 2000, respectively.
Deductions for 1998 also include noncash utilization of $19, which reflects a
reversal of excess reserves. Nearly 53% of the employees affected by the 1999
and 2000 restructuring charges have left their positions at December 31, 2000.
In 2000, AT&T Consumer Services Group also recorded an asset impairment
charge of $18 related to the write-down of unrecoverable assets in certain
businesses where the carrying value was no longer supported by estimated future
cash flows.
During 1999, AT&T Consumer Services Group recorded $7 of net restructuring
and other charges. This $7 charge for restructuring and exit costs was recorded
in conjunction with AT&T's initiative to reduce costs. The restructuring and
exit plans primarily focused on the maximization of synergies through headcount
reductions, including the consolidation of customer-care and call centers.
L-174
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The exit costs represent cash termination benefits associated with the
separation of approximately 164 employees as part of voluntary termination
plans. All of the terminations were nonmanagement employees.
During 1998, AT&T Consumer Services Group recorded a $19 benefit to net
restructuring and other charges. This benefit represents the reversal of 1995
business restructuring reserves primarily resulting from the overlap of AT&T's
1998 voluntary retirement incentive program (VRIP) on certain 1995 projects.
6. RELATED PARTY TRANSACTIONS
AT&T Consumer Services Group purchases network related services from AT&T
at cost-based prices, which approximate market prices. For the years ended
December 31, 2000, 1999 and 1998, these amounts totaled $846, $1,249 and $1,402,
respectively, and are reflected within costs of services and products in the
combined statements of income. There are no inter-entity payables for these
services as amounts are deemed to be settled in cash.
AT&T Consumer Services Group purchases sales and sales support, customer
care, billing, and research and development services from AT&T Business Services
Group at cost-based prices, which approximate market prices. For the years ended
December 31, 2000, 1999, and 1998, these amounts totaled $445, $704, and $1,014,
respectively, and are reflected within selling, general and administrative
(SG&A) expenses in the combined statements of income.
AT&T has allocated general corporate overhead expenses related to AT&T's
corporate headquarters and common support division to AT&T Consumer Services
Group. For the years ended December 31, 2000, 1999, and 1998, these amounts
totaled $244, $335, and $415, respectively, and are reflected within SG&A.
AT&T Consumer Services Group purchases receivables from AT&T Wireless
Services and provides customer care and billing services to AT&T Wireless
Services at cost-based prices, which approximate market prices. For the years
ended December 31, 2000, 1999 and 1998, these customer care and billing services
totaled $88, $77 and $18, respectively, and are reflected as a reduction of SG&A
expenses in the combined statements of income. Included within accounts payable
at December 31, 2000 and 1999 was $79 and $77, respectively.
AT&T Consumer Services Group provides AT&T Broadband with sales support and
customer care services at cost-based prices, which approximate market prices.
For the years ended December 31, 2000 and 1999, these amounts totaled $89 and
$121, respectively, and are reflected as a reduction of SG&A expenses in the
combined statements of income. The inter-entity receivables from AT&T Broadband
Group were $130 and $120 at December 31, 2000 and 1999, respectively. AT&T
Consumer Services Group provides billing and collections services on behalf of
AT&T Broadband Group. Amounts due to AT&T Broadband Group were $48 at December
31, 2000.
AT&T invests excess cash of AT&T Puerto Rico and AT&T Virgin Islands on
their behalf. Notes receivable related to this cash, included within accounts
receivable, were $262 and $171 at December 31, 2000, 1999, respectively.
7. PENSION, POSTRETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS
The majority of AT&T Consumer Services Group's employees participate in
AT&T's noncontributory defined benefit pension plans and postretirement benefit
plans. Pension benefits for management employees are principally based on
career-average pay. Pension benefits for occupational employees are not directly
related to pay. AT&T's benefit plans for current and certain future retirees
include health care benefits, life insurance coverage and telephone concessions.
L-175
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of allocating a portion of AT&T's net pension and
postretirement periodic benefit cost to AT&T Consumer Services Group's financial
statements, certain estimates were made as of December 31, 2000, 1999 and 1998
of AT&T Consumer Services Group's share of AT&T's pension and postretirement
assets and benefit obligations related to AT&T Consumer Services Group's active
employees. Based on this methodology, AT&T Consumer Services Group's share of
AT&T's net pension and postretirement periodic benefit (credit) cost was $(14)
and $11 in 2000, $(11) and $17 in 1999 and $(4) and $10 in 1998, respectively.
AT&T Consumer Services Group's employees are also eligible to participate
in savings plans sponsored by AT&T. The plans allow employees to contribute a
portion of their pretax and/or after-tax income in accordance with specified
guidelines. AT&T matches a certain percentage of employee contributions, up to
certain limits. AT&T Consumer Services Group's expense related to the AT&T
savings plans was $21 in 2000, $26 in 1999 and $26 in 1998.
8. STOCK-BASED COMPENSATION PLANS
Under AT&T's 1997 Long-term Incentive Program (Program), AT&T grants stock
options, performance shares, restricted stock and other awards on AT&T common
stock.
The exercise price of any stock option is equal to the stock price when the
option is granted. Generally, the options vest over three or four years and are
exercisable up to 10 years from the date of grant.
Under the Program, performance share units are awarded to key employees in
the form of either common stock or cash at the end of a three-year period, based
on AT&T's total shareholder return and/or certain financial-performance targets.
Under the AT&T 1996 Employee Stock Purchase Plan (Plan), which was
effective July 1, 1996, AT&T is authorized to sell up to 75 million shares of
AT&T common stock to its eligible employees. Under the terms of the Plan,
employees may have up to 10% of their earnings withheld to purchase AT&T's
common stock. The purchase price of the stock on the date of exercise is 85% of
the average high and low sale prices of shares on the New York Stock Exchange
for that day. Under the Plan, AT&T sold approximately 389 thousand, 311 thousand
and 251 thousand shares to AT&T Consumer Services Group's employees in 2000,
1999 and 1998, respectively.
AT&T and AT&T Consumer Services Group applied Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its plans. Accordingly, no compensation
expense has been recognized for its stock-based compensation plans other than
for performance-based and restricted stock awards and stock appreciation rights
(SARs). Compensation costs charged against AT&T Consumer Services Group's
results of operations were $3, $4 and $2 in 2000, 1999 and 1998, respectively.
AT&T and AT&T Consumer Services Group have adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." If AT&T
Consumer Services Group had elected to recognize compensation costs based on the
fair value at the date of grant for AT&T awards granted to AT&T Consumer
Services Group's employees in 2000, 1999 and 1998, consistent with the
provisions of
L-176
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS No. 123, AT&T Consumer Services Group's net income would have been adjusted
to reflect additional compensation expense resulting in the following pro forma
amounts:
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
Net income............................................... $4,095 $4,621 $3,801
The pro forma effect on net income for 1998 may not be representative of
the pro forma effect on net income of future years because the SFAS No. 123
method of accounting for pro forma compensation expense has not been applied to
options granted prior to January 1, 1995, as all such options were fully vested
by the end of 1998.
AT&T granted approximately 5.2 million, 2.5 million and 1.7 million stock
options to AT&T Consumer Services Group employees during 2000, 1999 and 1998,
respectively. At the date of grant, the weighted average exercise price for AT&T
options granted to AT&T Consumer Services Group's employees during 2000, 1999
and 1998 were $36.06, $55.96 and $41.72, respectively. The weighted-average fair
values at date of grant for AT&T options granted to AT&T Consumer Services
Group's employees during 2000, 1999 and 1998 were $12.41, $15.53 and $9.88,
respectively, and were estimated using the Black-Scholes option-pricing model.
The following weighted-average assumptions were applied for 2000, 1999 and 1998,
respectively: (i) expected dividend yields of 1.6%, 1.7% and 2.0% (ii) expected
volatility rates of 33.6%, 28.5% and 24.5%, and (iii) risk-free interest rates
of 6.29%, 5.15% and 5.14% and (iv) expected lives of 4.9 years, 4.6 years and
4.3 years.
9. INCOME TAXES
AT&T Consumer Services Group is not a separate legal entity for federal and
state income tax purposes and its results of operations are included in the
consolidated federal and state income tax returns of AT&T and its affiliates.
(See Note 1). AT&T Consumer Services Group's provision for income taxes has been
prepared as if the entity prepares separate tax returns for federal and state
tax purposes.
The following table shows the principal reasons for the difference between
the effective income tax rate and the U.S. federal statutory income tax rate:
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
U.S. federal statutory income tax rate................... 35.00% 35.00% 35.00%
Federal income tax at statutory rate..................... $2,330 $2,626 $2,157
Foreign income taxes..................................... 21 26 16
Taxes on repatriated and accumulated foreign income, net
of tax credits......................................... (21) (26) (16)
State and local income taxes, net of federal income tax
effect................................................. 216 244 200
Research and other credits............................... (1) (2) (3)
Other differences, net................................... 1 1 2
Provision for income taxes............................... $2,546 $2,869 $2,356
Effective income tax rate................................ 38.2% 38.2% 38.2%
L-177
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The U.S. and foreign components of income from continuing operations before
income taxes and the provision for income taxes are presented in this table:
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
INCOME BEFORE INCOME TAXES
United States.......................................... $6,656 $7,497 $6,171
Foreign................................................ 2 5 (8)
Total.................................................. $6,658 $7,502 $6,163
PROVISION FOR INCOME TAXES
CURRENT
Federal................................................ $2,150 $2,402 $2,028
State and local........................................ 327 366 308
Foreign................................................ 21 26 16
DEFERRED
Federal................................................ $ 42 $ 65 $ 4
State and local........................................ 6 10 --
Provision for income taxes............................... $2,546 $2,869 $2,356
Deferred income tax liabilities are taxes AT&T Consumer Services Group
expects to pay in future periods. Similarly, deferred income tax assets are
recorded for expected reductions in taxes payable in future periods. Deferred
income taxes arise because of differences in the book and tax basis of certain
assets and liabilities.
Deferred income tax liabilities and assets consist of the following:
AT DECEMBER 31,
----------------
2000 1999
---- ----
LONG-TERM DEFERRED INCOME TAX LIABILITIES
Property, plant and equipment............................. $ 18 $ 11
Intangibles............................................... 60 81
Other..................................................... 1 2
Total long-term deferred income tax liabilities........... $ 79 $ 94
LONG-TERM DEFERRED INCOME TAX ASSETS
Employee Benefits......................................... $ 41 $ 46
Reserves and allowances................................... 5 7
Other..................................................... 4 --
Total long-term deferred income tax assets................ $ 50 $ 53
Net long-term deferred income tax liabilities............... 29 41
CURRENT DEFERRED INCOME TAX LIABILITIES
Total current deferred income tax liabilities............... $ 9 $ 9
L-178
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
AT DECEMBER 31,
----------------
2000 1999
---- ----
CURRENT DEFERRED INCOME TAX ASSETS
Business restructuring.................................... $ 17 $ 21
Employee benefits......................................... 23 39
Reserve and allowances.................................... 255 300
Advanced Payments......................................... 27 20
Other..................................................... 1 1
Total current deferred income tax assets.................... $323 $381
Net current deferred income tax assets...................... $314 $372
10. COMMITMENTS AND CONTINGENCIES
In the normal course of business AT&T Consumer Services Group is subject to
proceedings, lawsuits and other claims, including proceedings under laws and
regulations related to environmental and other matters. Such matters are subject
to many uncertainties, and outcomes are not predictable with assurance.
Consequently, AT&T Consumer Services Group is unable to ascertain the ultimate
aggregate amount of monetary liability or financial impact with respect to these
matters at December 31, 2000. These matters could affect the operating results
of any one quarter when resolved in future periods. However, AT&T Consumer
Services Group believes that after final disposition, any monetary liability or
financial impact to us beyond that provided for at year-end would not be
material to AT&T Consumer Services Group's annual combined financial statements.
AT&T Consumer Services Group leases equipment through contracts that expire
in various years through 2004. Rental expense under operating leases was $15,
$19 and $11 for the years ended December 31 2000, 1999 and 1998, respectively.
11. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." Among
other provisions, it requires that entities recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. Gains and losses resulting from changes in the fair
value of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The effective date of
this standard was delayed via the issuance of SFAS No. 137. The effective date
for SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though
earlier adoption is encouraged and retroactive application is prohibited. For
AT&T Consumer Services Group this means that the standard must be adopted no
later than January 1, 2001.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" as an amendment to SFAS
No. 133. This statement provides clarification with regard to certain
implementation issues under SFAS No. 133 on specific types of hedges.
On January 1, 2001, AT&T Consumer Services Group adopted SFAS No. 133. This
adoption did not have a material impact on AT&T Consumer Services Group's
combined financial statements.
The impact of the adoption of SFAS No. 133, as amended by SFAS No. 138, on
AT&T Consumer Services Group's future results of operations is dependent upon
the fair values of AT&T Consumer Services Group's derivatives and related
financial instruments and could result in pronounced quarterly fluctuations in
other income in future periods.
L-179
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities -- A
Replacement of FASB No. 125." This statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. Under these standards, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. This statement is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. AT&T Consumer Services Group does
not expect that the adoption of SFAS No. 140 will have a material impact on AT&T
Consumer Services Group's results of operations, financial position or cash
flows.
12. SUBSEQUENT EVENTS
On April 26, 2001, AT&T initiated a 364-day accounts receivable
securitization program providing for up to $500 of funding. Under the program, a
small percentage of accounts receivable related to AT&T Consumer Services Group
will be sold on a discounted, revolving basis, to a special purpose,
wholly-owned subsidiary, which assigns interests in such receivables to
unrelated third-party financing entities.
On March 23, 2001, AT&T Inc. signed an agreement to acquire substantially
all of the assets of NorthPoint Communications Group, Inc. valued at
approximately $135. The acquisition includes all of NorthPoint's co-locations
nationwide, certain network equipment, systems and support software and related
assets, including two leased buildings. The purchase of NorthPoint
Communications Group, Inc. is expected to be attributed to AT&T Communications
Services, Inc.
L-180
REPORT OF INDEPENDENT ACCOUNTANTS
ON ACCOMPANYING CONSOLIDATING CONDENSED INFORMATION
To the Board of Directors and
Shareowners of AT&T Corp.
The report on our audit of the consolidated financial statements, in which
we indicated the extent of our reliance on the report of other auditors, of AT&T
Corp. and its subsidiaries at December 31, 2000 and 1999 and for each of the
three years in the period ended December 31, 2000, appears on page L-35 of this
document. That audit was conducted for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The consolidating condensed
information that appears on pages L-188 through L-195 is presented for purposes
of additional analysis of the consolidated financial statements rather than to
present the financial position, results of operations and cash flows of the
individual companies. Accordingly, we do not express an opinion on the financial
position, results of operations and cash flows of the individual companies.
However, the consolidating condensed information has been subjected to the
auditing procedures applied in the audit of the consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the consolidated financial statements taken as a whole.
PricewaterhouseCoopers LLP
New York, New York
March 16, 2001, except for the
allocation of costs and expenses
between the groups and other related
party transactions, which are
disclosed in the financial statements
of AT&T Consumer Services Group, as to
which the date is May 9, 2001, the
measurement date for discontinued
operations, as to which the date is
May 29, 2001, and the split-off of
Liberty Media Group, as to which the
date is August 10, 2001
L-181
CONSOLIDATING CONDENSED FINANCIAL INFORMATION
In conjunction with the issuance of Liberty Media Group tracking stock, and
the proposed issuance of AT&T Consumer Services Group tracking stock, AT&T has
separated for financial reporting purposes in all periods the AT&T Common Stock
Group, Liberty Media Group and AT&T Consumer Services Group. Below is the
consolidating financial information reflecting the businesses of these
individual groups, including the allocation of expenses between the groups in
accordance with our allocation policies, as well as other related party
transactions such as sales of services between groups and interest income and
expense on intercompany borrowings. AT&T does not have a controlling financial
interest in Liberty Media Group for financial accounting purposes; therefore,
our ownership in Liberty Media Group is reflected as an investment accounted for
under the equity method and is reflected as such in the consolidating financial
statements below. The results of AT&T Broadband Group are reflected within AT&T
Common Stock Group.
AT&T Consumer Services Group purchases long distance and other
network-related services from AT&T at market-based prices and such amounts are
eliminated in consolidation. Debt has been allocated to AT&T Consumer Services
Group based on the future view of AT&T's debt position after taking into account
the significant deleveraging activities of AT&T. This allocation took into
account the following factors: prospective financing requirements, desired
stand-alone credit profile, working capital and capital expenditure requirements
and comparable company profiles. The historical interest expense on the
allocated debt was calculated based on a rate intended to be equivalent to the
rate AT&T Consumer Services Group would have received if it was a stand-alone
entity. General corporate overhead related to AT&T's corporate headquarters and
common support divisions has been allocated to the groups based on the ratio of
each group's external costs and expenses to AT&T's consolidated external costs
and expenses, adjusted for any functions that any group performs on its own. The
consolidated income tax provision, related tax payments or refunds, and deferred
tax balances of AT&T have been allocated to the groups based principally on the
taxable income and tax credits directly attributable to each group.
Pursuant to the Inter-Group agreement, AT&T does not allocate general
overhead expenses to Liberty Media Group and only charges Liberty Media Group
for specific services that Liberty Media Group receives from AT&T pursuant to
service agreements or similar arrangements. Additionally, as Liberty Media Group
operates independent of AT&T, there is no cash or debt allocated to them.
On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a
separate, independently-traded company. All AT&T Wireless tracking stock was
converted into AT&T Wireless common stock on a one-for-one basis and 1,136
million shares of AT&T Wireless common stock, held by AT&T, was distributed to
AT&T common shareowners on a basis of 0.3218 of a share of AT&T Wireless for
each AT&T share outstanding. The results of AT&T Wireless have been included as
discontinued operations for all periods presented. The split-off of AT&T
Wireless resulted in a non-cash gain of approximately $13.5 billion.
On August 10, 2001, AT&T completed the split-off of Liberty Media
Corporation as an independent, publicly-traded company. AT&T redeemed each
outstanding share of Class A and Class B Liberty Media Group (LMG) tracking
stock for one share of Liberty Media Corporation's Series A and Series B common
stock, respectively. The split-off was recorded as a book value transaction,
therefore, no gain or loss was recorded.
L-182
AT&T
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
AT&T AT&T
COMMON CONSUMER LIBERTY ELIMINATIONS/
STOCK SERVICES MEDIA RECLASSI- CONSOLIDATED
GROUP(1) GROUP GROUP FICATIONS(2) AT&T CORP.
-------- -------- ------- ------------- ------------
(DOLLARS IN MILLIONS)
External revenue....................... $28,350 $11,614 $ -- $ -- $39,964
Inter-group revenue.................... 214 (214)
Total revenue.......................... 28,564 11,614 (214) 39,964
Operating Expenses
Costs of services and products......... 9,147 1,311 10,458
Access and other connection............ 6,177 3,112 9,289
Selling, general and administrative.... 5,686 2,458 8,144
Depreciation and other amortization.... 4,997 145 (26) 5,116
Amortization of goodwill, franchise
costs and other purchased
intangibles.......................... 1,894 26 1,920
Net restructuring and other charges.... 1,494 1,494
Inter-group expenses................... (630) 844 (214)
Total operating expenses............... 28,765 7,870 (214) 36,421
Operating (loss) income................ (201) 3,744 3,543
Other income........................... (7,217) 22 (7,195)
Inter-group interest income............ 132 (132)
Interest expense....................... 2,424 2 2,426
Inter-group interest expense........... 132 (132)
(Loss) income before income taxes,
minority interest and earnings
(losses) from equity investments..... (9,710) 3,632 (6,078)
(Benefit) provision for income taxes... (4,135) 1,389 (2,746)
Minority interest income............... 1,015 1,015
Equity losses from Liberty Media
Group................................ (2,711) (2,711)
Net losses from other equity
investments.......................... 423 423
(Loss) income from continuing
operations........................... (4,983) 2,243 (2,711) (5,451)
Income from discontinued operations
(net of income taxes)................ 150 150
Gain on disposition of discontinued
operations........................... 13,503 13,503
Income before cumulative effect of
accounting change.................... 8,670 2,243 (2,711) 8,202
Cumulative effect of accounting change
(net of income taxes)................ 359 545 904
Net income............................. 9,029 2,243 (2,166) 9,106
Dividend requirements on preferred
stock................................ 652 652
Premium on wireless tracking stock
exchange............................. 80 80
Net income available to common
shareowners.......................... $ 8,297 $ 2,243 $(2,166) $ -- $ 8,374
---------------
(1) The results of AT&T Broadband Group are reflected within AT&T Common Stock
Group.
(2) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
L-183
AT&T
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
AT&T AT&T
COMMON CONSUMER LIBERTY ELIMINATIONS/
STOCK SERVICES MEDIA RECLASSIFI- CONSOLIDATED
GROUP(1) GROUP GROUP CATIONS(2) AT&T CORP.
-------- -------- ------- ------------- ------------
(DOLLARS IN MILLIONS)
External revenue........................ $26,972 $14,651 $ -- $ -- $41,623
Inter-group revenue..................... 223 (223)
Total revenue........................... 27,195 14,651 (223) 41,623
Operating Expenses
Access and other connection............. 6,054 4,126 10,180
Costs of services and products.......... 7,943 1,306 9,249
Selling, general and administrative..... 4,639 2,727 7,366
Depreciation and other amortization..... 4,104 123 (23) 4,204
Amortization of goodwill, franchise
costs and other purchased
intangibles........................... 1,410 23 1,433
Net restructuring and other charges..... 700 97 797
Inter-group expenses.................... (896) 1,119 (223)
Total operating expenses................ 23,954 9,498 (223) 33,229
Operating income........................ 3,241 5,153 8,394
Other income............................ 1,295 63 1,358
Inter-group interest income............. 98 (98)
Interest expense........................ 2,000 2,000
Inter-group interest expense............ 98 (98)
Income before income taxes, minority
interest and earnings (losses) from
equity investments.................... 2,634 5,118 7,752
Provision for income taxes.............. 575 1,957 2,532
Minority interest income................ 11 11
Equity earnings from Liberty Media
Group................................. 2,965 2,965
Net losses from other equity
investments........................... 615 615
Income from continuing operations....... 1,455 3,161 2,965 7,581
Income from discontinued operations (net
of income taxes)...................... 208 208
Net income.............................. $ 1,663 $ 3,161 $2,965 $ -- $ 7,789
---------------
(1) The results of AT&T Broadband Group are reflected within AT&T Common Stock
Group.
(2) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
L-184
AT&T
CONSOLIDATING CONDENSED BALANCE SHEET
AT SEPTEMBER 30, 2001
(UNAUDITED)
AT&T AT&T
COMMON CONSUMER ELIMINATIONS/
STOCK SERVICES RECLASSI- CONSOLIDATED
GROUP(1) GROUP FICATIONS(2) AT&T CORP.
-------- -------- ------------- ------------
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents....................... $ 4,197 $ 1 $ -- $ 4,198
Receivables..................................... 8,249 2,054 (280) 10,023
Deferred income taxes........................... 1,362 261 1,623
Other current assets............................ 532 82 614
Total current assets....................... 14,340 2,398 (280) 16,458
Property, plant & equipment, net................ 40,623 125 40,748
Franchise costs, net............................ 43,287 43,287
Goodwill, net................................... 24,702 72 24,774
Other investments & related advances............ 24,256 12 24,268
Other assets.................................... 10,288 310 (84) 10,514
Long-term assets due from related party......... 1,514 (1,514)
Total Assets............................... 159,010 2,833 (1,794) 160,049
LIABILITIES
Debt maturing within one year................... 18,449 18,449
Other current liabilities....................... 11,869 1,839 (280) 13,428
Total current liabilities.................. 30,318 1,839 (280) 31,877
Long-term debt.................................. 30,007 30,007
Long-term debt due to related party............. 1,514 (1,514)
Deferred income taxes........................... 27,144 31 27,175
Other long-term liabilities & deferred
credits....................................... 10,177 275 10,452
Total Liabilities.......................... 97,646 3,659 (1,794) 99,511
Minority Interest............................... 3,622 3,622
Company-Obligated Convertible Quarterly Income
Preferred Securities of a Subsidiary Trust
Holding Solely Subordinated Debt Securities of
AT&T.......................................... 4,718 4,718
SHAREOWNERS' EQUITY
AT&T Common Stock............................... 3,536 3,536
Other shareowners' equity....................... 53,024 (826) (3,536) 48,662
Total shareowners' equity.................. 53,024 (826) 52,198
Total Liabilities and Shareowners'
Equity................................... $159,010 $2,833 $(1,794) $160,049
---------------
(1) The results of AT&T Broadband Group are reflected within AT&T Common Stock
Group.
(2) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
L-185
AT&T
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
AT&T AT&T
COMMON CONSUMER LIBERTY ELIMINATIONS/
STOCK SERVICES MEDIA RECLASSI- CONSOLIDATED
GROUP(1) GROUP GROUP FICATIONS(2) AT&T CORP.
-------- -------- ------- ------------- ------------
(DOLLARS IN MILLIONS)
Net cash provided by operating
activities of continuing
operations........................... $ 3,642 $ 3,099 $ -- $ -- $ 6,741
INVESTING ACTIVITIES
Capital expenditures and other
additions............................ (6,292) (96) (6,388)
Decrease (increase) in other
receivables.......................... 2,381 (2,486) (105)
Equity investment distributions and
sales................................ 1,845 1,845
Net acquisitions of businesses,
including cash acquired.............. 4,827 4,827
Other.................................. (214) (214)
Net cash provided by (used in)
investing activities of continuing
operations........................... 2,547 (96) (2,486) (35)
FINANCING ACTIVITIES
Retirement of long-term debt........... (1,618) (1,618)
Repayment of borrowings from AT&T
Wireless............................. (5,803) (5,803)
Issuance of convertible preferred
securities and warrants.............. 9,811 9,811
Decrease in short-term borrowings,
net.................................. (9,567) (13) (9,580)
Other.................................. 261 (2,989) 2,486 (242)
Net cash used in financing activities
of continuing operations............. (6,916) (3,002) 2,486 (7,432)
Net cash provided by discontinued
operations........................... 4,860 4,860
Net increase in cash and cash
equivalents.......................... 4,133 1 4,134
Cash and cash equivalents at beginning
of year.............................. 64 64
Cash and cash equivalents at end of
period............................... $ 4,197 $ 1 $ -- $ -- $ 4,198
---------------
(1) The results of AT&T Broadband Group are reflected within AT&T Common Stock
Group.
(2) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
L-186
AT&T
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
AT&T AT&T
COMMON CONSUMER LIBERTY ELIMINATIONS/
STOCK SERVICES MEDIA RECLASSI- CONSOLIDATED
GROUP(1) GROUP GROUP FICATIONS(2) AT&T CORP.
-------- -------- ------- ------------- ------------
(DOLLARS IN MILLIONS)
Net cash provided by operating
activities of continuing
operations.......................... $ 4,478 $ 3,636 $ -- $ -- $ 8,114
INVESTING ACTIVITIES
Capital expenditures and other
additions........................... (7,102) (104) (7,206)
Increase in other receivables......... (4,654) 3,673 (981)
Equity investment distributions and
sales............................... 785 785
Equity investment contributions and
purchases........................... (2,364) (2,364)
Net acquisitions of businesses,
including cash acquired............. (16,614) (16,614)
Other................................. (56) (56)
Net cash used in investing activities
of continuing operations............ (30,005) (104) 3,673 (26,436)
FINANCING ACTIVITIES
Proceeds from long-term debt
issuance............................ 739 739
Retirement of long-term debt.......... (1,954) (1,954)
Issuance of AT&T Wireless Group common
shares.............................. 10,291 10,291
Dividends paid........................ (740) (1,481) (2,221)
Increase (decrease) in short-term
borrowings, net..................... 17,385 (22) 17,363
Other................................. 4,790 (2,034) (3,673) (917)
Net cash provided by (used in)
financing activities of continuing
operations.......................... 30,511 (3,537) (3,673) 23,301
Net cash used in discontinued
operations.......................... (5,686) (5,686)
Net decrease in cash and cash
equivalents......................... (702) (5) (707)
Cash and cash equivalents at beginning
of year............................. 1,012 6 1,018
Cash and cash equivalents at end of
period.............................. $ 310 $ 1 $ -- $ -- $ 311
---------------
(1) The results of AT&T Broadband Group are reflected within AT&T Common Stock
Group.
(2) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
L-187
AT&T
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2000
AT&T AT&T
COMMON CONSUMER LIBERTY ELIMINATIONS/
STOCK SERVICES MEDIA RECLASSI- CONSOLIDATED
GROUP(1) GROUP GROUP FICATIONS(2) AT&T CORP.
-------- -------- ------- ------------- ------------
(DOLLARS IN MILLIONS)
External revenue........................ $36,639 $18,894 $ -- $ -- $55,533
Inter-group revenue..................... 298 (298)
Total revenue........................... 36,937 18,894 (298) 55,533
Operating Expenses
Access and other connection............. 7,936 5,204 13,140
Costs of services and products.......... 11,084 1,711 12,795
Selling, general and administrative..... 6,204 3,548 9,752
Depreciation and other amortization..... 5,788 167 (31) 5,924
Amortization of goodwill, franchise
costs and other purchased
intangibles........................... 2,634 31 2,665
Net restructuring and other charges..... 6,932 97 7,029
Inter-group expenses.................... (1,128) 1,426 (298)
Total operating expenses................ 39,450 12,153 (298) 51,305
Operating (loss) income................. (2,513) 6,741 4,228
Other income............................ 1,069 81 1,150
Inter-group interest income............. 164 (164)
Interest expense........................ 2,964 2,964
Inter-group interest expense............ 164 (164)
(Loss) income before income taxes,
minority interest and earnings
(losses) from equity investments...... (4,244) 6,658 2,414
Provision for income taxes.............. 738 2,546 3,284
Minority interest income................ 4,103 4,103
Equity earnings from Liberty Media
Group................................. 1,488 1,488
Net losses from other equity
investments........................... 588 588
(Loss) income from continuing
operations............................ (1,467) 4,112 1,488 4,133
Income from discontinued operations (net
of income taxes)...................... 536 536
Net (loss) income....................... $ (931) $ 4,112 $1,488 $ -- $ 4,669
---------------
(1) The results of AT&T Broadband Group are reflected within AT&T Common Stock
Group.
(2) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
L-188
AT&T
CONSOLIDATING CONDENSED BALANCE SHEET
AT DECEMBER 31, 2000
AT&T AT&T
COMMON CONSUMER LIBERTY ELIMINATIONS/
STOCK SERVICES MEDIA RECLASSI- CONSOLIDATED
GROUP(1) GROUP GROUP FICATIONS (2) AT&T CORP.
-------- -------- ------- ------------- ------------
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents...................... $ 64 $ -- $ -- $ -- $ 64
Receivables.................................... 8,894 2,681 (522) 11,053
Investments.................................... 2,102 2,102
Deferred income taxes.......................... 406 314 720
Other current assets........................... 713 68 781
Total current assets...................... 12,179 3,063 (522) 14,720
Property, plant & equipment, net............... 41,099 170 41,269
Franchise costs, net........................... 48,218 48,218
Goodwill, net.................................. 26,701 81 26,782
Investment in Liberty Media Group and related
receivables, net............................. 34,290 34,290
Other investments & related advances........... 30,871 4 30,875
Other assets................................... 10,757 310 (85) 10,982
Net assets of discontinued operations.......... 27,224 27,224
Long-term assets due from related party........ 4,000 (4,000)
Total Assets.............................. 201,049 3,543 34,290 (4,522) 234,360
LIABILITIES
Debt maturing within one year.................. 31,825 13 31,838
Liability under put options.................... 2,564 2,564
Other current liabilities...................... 12,338 1,757 (522) 13,573
Total current liabilities................. 46,727 1,770 (522) 47,975
Long-term debt................................. 33,089 33,089
Long-term debt due to related party............ 4,000 (4,000)
Deferred income taxes.......................... 32,025 29 32,054
Other long-term liabilities & deferred
credits...................................... 8,208 285 8,493
Total Liabilities......................... 120,049 6,084 (4,522) 121,611
Minority Interest.............................. 4,841 4,841
Company-Obligated Convertible Quarterly Income
Preferred Securities of a Subsidiary Trust
Holding Solely Subordinated Debt Securities
of AT&T...................................... 4,710 4,710
SHAREOWNERS' EQUITY
AT&T Common Stock.............................. 3,760 3,760
AT&T Wireless Group Common Stock............... 362 362
Liberty Media Group Class A Common Stock....... 2,364 2,364
Liberty Media Group Class B Common Stock....... 206 206
Other shareowners' equity...................... 71,449 (2,541) 34,290 (6,692) 96,506
Total shareowners' equity................. 71,449 (2,541) 34,290 103,198
Total Liabilities and Shareowners'
Equity.................................. $201,049 $ 3,543 $34,290 $(4,522) $234,360
---------------
(1) The results of AT&T Broadband Group are reflected within AT&T Common Stock
Group.
(2) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
L-189
AT&T
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
AT&T AT&T
COMMON CONSUMER LIBERTY ELIMINATIONS/
STOCK SERVICES MEDIA RECLASSI- CONSOLIDATED
GROUP(1) GROUP GROUP FICATIONS(2) AT&T CORP.
-------- -------- ------- ------------- ------------
(DOLLARS IN MILLIONS)
Net cash provided by operating
activities of continuing
operations........................... $ 6,878 $ 4,787 $ -- $ -- $ 11,665
INVESTING ACTIVITIES
Capital expenditures and other
additions............................ (10,763) (148) (10,911)
(Increase) decrease in other
receivables.......................... (4,152) 3,100 (1,052)
Equity investment distributions and
sales................................ 992 992
Equity investment contributions and
purchases............................ (2,394) (2,394)
Net acquisitions of businesses,
including cash acquired.............. (16,672) 15 (16,657)
Other.................................. (24) 1 (23)
Net cash used in investing activities
of continuing operations............. (33,013) (132) 3,100 (30,045)
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances............................ 4,601 4,601
Retirement of long-term debt........... (2,118) (2,118)
Issuance of AT&T Wireless Group common
shares............................... 10,314 10,314
Dividends paid......................... (1,016) (2,031) (3,047)
Increase (decrease) in short-term
borrowings, net...................... 16,996 (23) 16,973
Other.................................. 4,716 (2,607) (3,100) (991)
Net cash provided by (used in)
financing activities of continuing
operations........................... 33,493 (4,661) (3,100) 25,732
Net cash used in discontinued
operations........................... (8,306) (8,306)
Net decrease in cash and cash
equivalents.......................... (948) (6) (954)
Cash and cash equivalents at beginning
of year.............................. 1,012 6 1,018
Cash and cash equivalents at end of
year................................. $ 64 $ -- $ -- $ -- $ 64
---------------
(1) The results of AT&T Broadband Group are reflected within AT&T Common Stock
Group.
(2) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
L-190
AT&T
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1999
AT&T AT&T
COMMON CONSUMER LIBERTY ELIMINATIONS/
STOCK SERVICES MEDIA RECLASSI- CONSOLIDATED
GROUP(1) GROUP GROUP FICATIONS(2) AT&T CORP.
-------- -------- ------- ------------- ------------
(DOLLARS IN MILLIONS)
External revenue....................... $33,220 $21,753 $ -- $ -- $54,973
Inter-group revenue.................... 328 (328)
Total revenue.......................... 33,548 21,753 (328) 54,973
Operating Expenses
Access and other connection............ 8,216 6,223 14,439
Costs of services and products......... 8,946 2,067 11,013
Selling, general and administrative.... 7,099 3,795 10,894
Depreciation and other amortization.... 4,969 184 (16) 5,137
Amortization of goodwill, franchise
costs and other purchased
intangibles.......................... 1,041 16 1,057
Net restructuring and other charges.... 968 7 975
Inter-group expenses................... (1,814) 2,142 (328)
Total operating expenses............... 29,425 14,418 (328) 43,515
Operating income....................... 4,123 7,335 11,458
Other income........................... 652 174 826
Inter-group interest income............ 38 34 (72)
Interest expense....................... 1,500 3 1,503
Inter-group interest expense........... 34 38 (72)
Income before income taxes, minority
interest and earnings (losses) from
equity investments................... 3,279 7,502 10,781
Provision for income taxes............. 1,147 2,869 4,016
Minority interest expense.............. 126 126
Equity losses from Liberty Media
Group................................ (2,022) (2,022)
Net losses from other equity
investments.......................... 756 756
Income (loss) from continuing
operations........................... 1,250 4,633 (2,022) 3,861
Loss from discontinued operations (net
of income taxes)..................... (433) (433)
Net income (loss)...................... $ 817 $ 4,633 $(2,022) $ -- $ 3,428
---------------
(1) The results of AT&T Broadband Group are reflected within AT&T Common Stock
Group.
(2) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
L-191
AT&T
CONSOLIDATING CONDENSED BALANCE SHEET
AT DECEMBER 31, 1999
AT&T AT&T
COMMON CONSUMER LIBERTY ELIMINATIONS
STOCK SERVICES MEDIA RECLASSI- CONSOLIDATED
GROUP(1) GROUP GROUP FICATIONS(2) AT&T CORP.
-------- -------- ------- ------------ ------------
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents.......... $ 1,012 $ 6 $ -- $ -- $ 1,018
Receivables........................ 6,495 3,115 (368) 9,242
Deferred income taxes.............. 788 372 1,160
Other current assets............... 843 81 924
Total current assets.......... 9,138 3,574 (368) 12,344
Property, plant & equipment, net... 33,234 132 33,366
Franchise costs, net............... 32,693 32,693
Goodwill, net...................... 5,221 89 5,310
Investment in Liberty Media Group
and related receivables, net..... 38,460 38,460
Other investments & related
advances......................... 14,856 14,856
Other assets....................... 8,788 366 (89) 9,065
Net assets of discontinued
operations....................... 17,363 17,363
Long-term assets due from related
party............................ 900 (900)
Total Assets.................. 122,193 4,072 38,460 (1,268) 163,457
LIABILITIES
Debt maturing within one year...... 12,444 36 12,480
Other current liabilities.......... 12,176 1,730 (368) 13,538
Total current liabilities..... 24,620 1,766 (368) 26,018
Long-term debt..................... 23,214 23,214
Long-term debt due to related
party............................ 900 (900)
Deferred income taxes.............. 20,466 41 20,507
Other long-term liabilities &
deferred credits................. 7,424 295 7,719
Total Liabilities............. 75,724 3,002 (1,268) 77,458
Minority interest.................. 2,372 2,372
Company-obligated convertible
quarterly income preferred
securities of a subsidiary trust
holding solely subordinated debt
securities of AT&T............... 4,700 4,700
SHAREOWNERS' EQUITY
AT&T common stock.................. 3,196 3,196
AT&T Wireless group common stock
Liberty Media Group Class A Common
Stock.............................. 2,314 2,314
Liberty Media Group Class B Common
Stock............................ 217 217
Other shareowners' equity.......... 39,397 1,070 38,460 (5,727) 73,200
Total shareowners' equity..... 39,397 1,070 38,460 78,927
Total Liabilities and
Shareowners' Equity......... $122,193 $4,072 $38,460 $(1,268) $163,457
---------------
(1) The results of AT&T Broadband Group are reflected within AT&T Common Stock
Group.
(2) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
L-192
AT&T
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
AT&T AT&T
COMMON CONSUMER LIBERTY ELIMINATIONS/
STOCK SERVICES MEDIA RECLASSI- CONSOLIDATED
GROUP(1) GROUP GROUP FICATIONS(2) AT&T CORP.
-------- -------- ------- ------------- ------------
(DOLLARS IN MILLIONS)
Net cash provided by operating activities of
continuing operations...................... $ 6,159 $ 4,350 $ -- $ -- $ 10,509
INVESTING ACTIVITIES
Capital expenditures and other additions..... (11,290) (300) (11,590)
(Increase) decrease in other receivables..... (1,054) 1,580 (509) 17
Equity investment distributions and sales.... 1,574 1,574
Equity investment contributions and
purchases.................................. (7,837) (7,837)
Net acquisitions of businesses, including
cash acquired.............................. (6,094) 125 (5,969)
Other........................................ (72) (7) (79)
Net cash (used in) provided by investing
activities of continuing operations........ (24,773) 1,398 (509) (23,884)
FINANCING ACTIVITIES
Proceeds from long-term debt issuances....... 8,396 8,396
Retirement of long-term debt................. (2,255) (2,255)
Issuance of convertible securities........... 4,638 4,638
Net acquisition of treasury shares........... (4,624) (4,624)
Dividends paid............................... (904) (1,808) (2,712)
Increase (decrease) in short-term borrowings,
net........................................ 8,769 (5) 1,409 10,173
Other........................................ 5,067 (3,929) (900) 238
Net cash provided by (used in) financing
activities of continuing operations........ 19,087 (5,742) 509 13,854
Net cash used in discontinued operations..... (2,594) (2,594)
Net (decrease) increase in cash and cash
equivalents................................ (2,121) 6 (2,115)
Cash and cash equivalents at beginning of
year....................................... 3,133 3,133
Cash and cash equivalents at end of year..... $ 1,012 $ 6 $ -- $ -- $ 1,018
---------------
(1) The results of AT&T Broadband Group are reflected within AT&T Common Stock
Group.
(2) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
L-193
AT&T
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1998
AT&T AT&T
COMMON CONSUMER ELIMINATIONS/
STOCK SERVICES RECLASSI- CONSOLIDATED
GROUP GROUP FICATIONS(1) AT&T CORP.
-------- -------- ------------- ------------
(DOLLARS IN MILLIONS)
External revenue............................... $ 25,054 $ 22,763 $ -- $ 47,817
Inter-group revenue............................ 280 (280)
Total revenue.................................. 25,334 22,763 (280) 47,817
Operating Expenses
Access and other connection.................... 7,663 7,453 15,116
Costs of services and products................. 6,031 2,254 8,285
Selling, general and administrative............ 6,666 4,027 10,693
Depreciation and other amortization............ 3,417 116 3,533
Amortization of goodwill, franchise costs and
other purchased intangibles.................. 44 44
Net restructuring and other charges............ 2,533 (19) 2,514
Inter-group expenses........................... (2,548) 2,828 (280)
Total operating expenses....................... 23,806 16,659 (280) 40,185
Operating income............................... 1,528 6,104 7,632
Other income................................... 793 19 812
Inter-group interest income.................... 24 67 (91)
Interest expense............................... 290 3 293
Inter-group interest expense................... 67 24 (91)
Income before income taxes, minority interest
and earnings (losses) from equity
investments.................................. 1,988 6,163 8,151
Provision for income taxes..................... 633 2,356 2,989
Minority interest expense...................... 1 1
Net losses from other equity investments....... 109 109
Income from continuing operations (net of
income taxes)................................ 1,245 3,807 5,052
Income from discontinued operations............ 193 193
Gain on sale of discontinued operations........ 1,290 1,290
Income before extraordinary loss............... 2,728 3,807 6,535
Extraordinary loss (net of income taxes)....... 137 137
Net income..................................... $ 2,591 $ 3,807 $ -- $ 6,398
---------------
(1) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
L-194
AT&T
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
AT&T AT&T
COMMON CONSUMER ELIMINATIONS/
STOCK SERVICES RECLASSI- CONSOLIDATED
GROUP GROUP FICATIONS(1) AT&T CORP.
------- -------- ------------- ------------
(DOLLARS IN MILLIONS)
Net cash provided by operating activities of
continuing operations.......................... $ 5,803 $ 4,141 $ -- $ 9,944
INVESTING ACTIVITIES
Capital expenditures and other additions......... (6,620) (98) (6,718)
Decrease (increase) in other receivables......... 7,523 (1,580) 460 6,403
Net sales of marketable securities............... 307 307
Net acquisitions of businesses, including cash
acquired....................................... 4,183 4,183
Other............................................ (77) 37 (40)
Net cash provided by (used in) investing
activities of continuing operations............ 5,316 (1,641) 460 4,135
FINANCING ACTIVITIES
Retirement of long-term debt..................... (2,594) (2,594)
Net acquisition of treasury shares............... (3,321) (3,321)
Dividends paid................................... (729) (1,458) (2,187)
Decrease in short-term borrowings, net........... (1,511) (1,580) (3,091)
Other............................................ 64 (1,042) 1,120 142
Net cash used in financing activities of
continuing operations.......................... (8,091) (2,500) (460) (11,051)
Net cash used in discontinued operations......... (207) (207)
Net increase in cash and cash equivalents........ 2,821 2,821
Cash and cash equivalents at beginning of year... 312 312
Cash and cash equivalents at end of year......... $ 3,133 $ -- $ -- $ 3,133
---------------
(1) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
L-195
AT&T
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma combined condensed financial statements set forth
below for AT&T give effect to
- the Liberty Media Group distribution
- the AT&T Broadband Group distribution
(collectively, the AT&T restructuring events), as if such events had been
completed on January 1, 1999 for income statement purposes, and at September 30,
2001 for balance sheet purposes, subject to the assumptions and adjustments in
the accompanying notes to the pro forma financial statements. Upon the
distribution of AT&T Broadband Group, AT&T will report AT&T Broadband Group as a
Discontinued Operation, in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." For accounting purposes, the
spin-off (the distribution) of AT&T Broadband Group is considered a non pro-rata
distribution and is expected to be recorded at fair value resulting in the
recognition of a gain or loss on the remaining AT&T entity upon the distribution
date. The split-off of Liberty Media Group which was completed on August 10,
2001, was a pro-rata distribution and was therefore recorded at historical cost.
See the Notes to the Unaudited Pro Forma Combined Condensed Financial Statements
for additional disclosure of potential material nonrecurring charges and credits
directly attributable to the events as noted above which are not reflected in
the pro forma financial statements.
The pro forma adjustments included herein are based on available
information and certain assumptions that management believes are reasonable and
are described in the accompanying notes to the pro forma financial statements.
The Unaudited Pro Forma Combined Condensed Financial Statements do not
necessarily represent what AT&T's financial position or results of operations
would have been had the AT&T Broadband distribution or the Liberty Media Group
distribution occurred on such dates or to project AT&T's financial position or
results of operations at or for any future date or period. In the opinion of
management, all adjustments necessary to present fairly the unaudited pro forma
financial information have been made. The Unaudited Pro Forma Combined Condensed
Financial Statements should be read in conjunction with the historical financial
statements of AT&T, Liberty Media Group and AT&T Broadband Group, incorporated
by reference or included herein.
After obtaining shareholder approval, AT&T currently intends to dividend
AT&T Consumer Services Group tracking stock to current AT&T shareholders
representing some or all of the financial performance and economic value of AT&T
Consumer Services Group. Due to the accumulated deficit that exists at AT&T
Corp., the dividend will be reflected as a reduction of additional paid in
capital for the fair value of AT&T Consumer Services with a corresponding
increase in par value of AT&T Consumer Services Group tracking stock and
additional paid in capital. The issuance of the AT&T Consumer Services Group
tracking stock has no impact on the pro forma balance sheet or pro forma income
statements other than to result in the attribution of net income to AT&T
Consumer Services Group and therefore to reduce income and earnings attributable
to AT&T Common Stock Group. For purposes of these pro forma financial statements
we have assumed distribution of all of the AT&T Consumer Services Group tracking
stock.
L-196
AT&T
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AT SEPTEMBER 30, 2001
AT&T
BROADBAND
HISTORICAL GROUP OTHER PRO FORMA
AT&T(A) DISTRIBUTION(E) ADJUSTMENTS(G) AT&T
---------- --------------- -------------- ---------
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents.......................... $ 4,198 $ (253) $ -- $ 3,945
5,390(f)
(5,390)(f)
Receivables-net.................................... 10,023 (604) (209) 9,210
Deferred income taxes.............................. 1,623 (117) 1,506
Other current assets............................... 614 (570) 336 380
5,390(f)
(5,390)(f)
Property, plant and equipment-net.................. 40,748 (14,292) -- 26,456
Franchise costs-net................................ 43,287 (43,287) -- --
Goodwill-net....................................... 24,774 (19,393) -- 5,381
Other investments and related advances............. 24,268 (22,492) -- 1,776
Prepaid pension costs.............................. 3,281 -- (12) 3,269
Other assets....................................... 7,233 (3,370) 45 3,908
(4,450)(c)
4,450
-------- --------- ----- -------
Total Assets................................... 160,049 (104,261) 43 55,831
======== ========= ===== =======
LIABILITIES
Accounts payable................................... 4,848 (700) 10 4,158
Payroll and benefit-related liabilities............ 1,592 (438) -- 1,154
Debt maturing within one year...................... 18,449 (5,962) 100 12,587
5,390(f)
(5,390)(f)
Other current liabilities.......................... 6,988 (1,783) 16 5,221
Long-term debt..................................... 30,007 (17,312) (100) 12,595
Long-term benefit-related liabilities.............. 3,506 (103) 3,403
Deferred income taxes.............................. 27,175 (25,659) 158 1,606
(68)(d)
Other long-term liabilities and deferred credits... 6,946 (974) 136 6,287
179(d)
-------- --------- ----- -------
Total Liabilities.............................. 99,511 (52,717) 217 47,011
Minority interest.................................. 3,622 (3,319) -- 303
Company-obligated convertible quarterly income
preferred securities of subsidiary trust holding
solely subordinated debt securities of AT&T...... 4,718 (4,718) -- --
SHAREOWNERS' EQUITY
Common Stock:
AT&T common stock, $1 par value, authorized
6,000,000,000 shares; issued and outstanding
3,535,801,018 shares............................. 3,536 52(d) -- 3,588
Additional paid-in capital......................... 51,851 (44,260) (187) 11,623
4,450
(2,118)(d)
(179)(d)
2,066(d)
Retained earnings.................................. (2,093) (4,450)(c) 13 (6,462)
68(d)
Accumulated other comprehensive income............. (1,096) 864 (232)
-------- --------- ----- -------
Total shareowners' equity...................... 52,198 (43,507) (174) 8,517
Total Liabilities & Shareowners' Equity........ $160,049 $(104,261) $ 43 $55,831
======== ========= ===== =======
See Notes To AT&T Unaudited Pro Forma Combined Condensed Financial Statements
L-197
AT&T
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
LIBERTY MEDIA AT&T BROADBAND
HISTORICAL GROUP GROUP OTHER PRO FORMA
AT&T(A) DISTRIBUTION(B) DISTRIBUTION(E) ADJUSTMENTS(G) AT&T
---------- --------------- --------------- -------------- ---------
(DOLLARS IN MILLIONS)
Revenue........................... $39,964 $ -- $ (7,756) $183 $32,391
OPERATING EXPENSES
Costs of services and products.... 10,458 -- (4,245) 217 6,430
Access and other connection....... 9,289 -- -- (34) 9,255
Selling, general and
administrative.................. 8,144 -- (1,951) -- 6,193
Depreciation and amortization..... 7,036 -- (3,633) -- 3,403
Net restructuring and other
charges......................... 1,494 -- (1,494) -- --
------- ------ --------- ---- -------
Total operating expenses.......... 36,421 -- (11,323) 183 25,281
Operating income (loss)........... 3,543 -- 3,567 -- 7,110
Other (expense) income............ (7,195) -- 2,156 -- (5,039)
Interest expense.................. 2,426 -- (1,347) -- 1,079
(Loss) income from continuing
operations before income taxes
and earnings (losses) from
equity investments.............. (6,078) -- 7,070 -- 992
(Benefit) provision for income
taxes........................... (2,746) -- 3,214 (81) 387
Minority interest income
(expense)....................... 1,015 -- (905) -- 110
Equity losses from Liberty Media
Group........................... (2,711) 2,711 -- -- --
Net (losses) earnings from other
equity investments.............. (423) -- 37 -- (386)
(Loss) income from continuing
operations...................... (5,451) 2,711 2,988 81 329
Dividend requirements of preferred
stock........................... 652 -- -- -- 652
Premium on Wireless tracking stock
exchange........................ 80 -- -- -- 80
------- ------ --------- ---- -------
Net (loss) income from continuing
operations attributable to
common shareowners.............. $(6,183) $2,711 $ 2,988 $ 81 $ (403)
======= ====== ========= ==== =======
AT&T COMMON STOCK GROUP:
Loss from continuing operations... $(3,472) $(2,646)(h)
Weighted average shares
outstanding (basic & diluted)... 3,677 3,717
Basic loss per share.............. (0.94) (0.71)(i)
LIBERTY MEDIA GROUP:
Basic and diluted loss per
share........................... $ (1.05)
See Notes To AT&T Unaudited Pro Forma Combined Condensed Financial Statements
L-198
AT&T
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2000
AT&T
LIBERTY MEDIA BROADBAND
HISTORICAL GROUP GROUP OTHER PRO FORMA
AT&T(A) DISTRIBUTION(B) DISTRIBUTION(E) ADJUSTMENTS(G) AT&T
---------- --------------- --------------- -------------- ---------
(DOLLARS IN MILLIONS)
Revenue......................... $55,533 $ -- $ (8,445) $116 $47,204
OPERATING EXPENSES
Costs of services and
products...................... 12,795 (4,600) 117 8,312
Access and other connection..... 13,140 -- -- (1) 13,139
Selling, general and
administrative................ 9,752 -- (2,180) 7,572
Depreciation and amortization... 8,589 -- (4,051) -- 4,538
Net restructuring and other
charges....................... 7,029 -- (6,270) -- 759
------- ------- -------- ---- -------
Total operating expenses........ 51,305 -- (17,101) 116 34,320
Operating income (loss)......... 4,228 -- 8,656 -- 12,884
Other income (expense).......... 1,150 -- 39 -- 1,189
Interest expense................ 2,964 -- (1,323) -- 1,641
Income from continuing
operations before income taxes
and earnings (losses) from
equity investments............ 2,414 -- 10,018 -- 12,432
Provision (benefit) for income
taxes......................... 3,284 -- 1,183 -- 4,467
Minority interest income
(expense)..................... 4,103 -- (4,062) -- 41
Equity earnings from Liberty
Media Group................... 1,488 (1,488) --
Net (losses) earnings from other
equity investments............ (588) -- 597 -- 9
------- ------- -------- ---- -------
Net income (loss) from
continuing operations
attributable to common
shareowners................... $ 4,133 $(1,488) $ 5,370 $ -- $ 8,015
======= ======= ======== ==== =======
AT&T COMMON STOCK GROUP:
Earnings from continuing
operations.................... $ 2,645 $ 3,903(h)
Weighted average shares
outstanding -- basic.......... 3,486 3,526
Basic earnings per share........ 0.76 1.11
Earnings from continuing
operations.................... 2,677 3,903(h)
Weighted average shares
outstanding -- diluted........ 3,545 3,545
Diluted earnings per share...... 0.75 1.10(i)
LIBERTY MEDIA GROUP:
Basic and diluted earnings per
share......................... $ 0.58
See Notes To AT&T Unaudited Pro Forma Combined Condensed Financial Statements
L-199
AT&T
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1999
LIBERTY MEDIA AT&T BROADBAND
HISTORICAL GROUP GROUP OTHER PRO FORMA
AT&T(A) DISTRIBUTION(B) DISTRIBUTION(E) ADJUSTMENTS(G) AT&T
---------- --------------- --------------- -------------- ---------
(DOLLARS IN MILLIONS)
Revenue........................... $54,973 $ -- $(5,080) $32 $49,925
OPERATING EXPENSES
Costs of services and products.... 11,013 -- (2,686) 32 8,359
Access and other connection....... 14,439 -- -- -- 14,439
Selling, general and
administrative.................. 10,894 -- (1,253) -- 9,641
Depreciation and amortization..... 6,194 -- (1,674) -- 4,520
Net restructuring and other
charges......................... 975 -- (644) -- 331
------- ------ ------- --- -------
Total operating expenses.......... 43,515 -- (6,257) 32 37,290
Operating income (loss)........... 11,458 -- 1,177 -- 12,635
Other income (expense)............ 826 -- (50) -- 776
Interest expense.................. 1,503 -- (705) -- 798
Income from continuing operations
before income taxes and earnings
(losses) from equity
investments..................... 10,781 -- 1,832 -- 12,613
Provision (benefit) for income
taxes........................... 4,016 -- 465 -- 4,481
Minority interest income
(expense)....................... (126) -- 126 -- --
Equity (losses) earnings from
Liberty Media Group............. (2,022) 2,022 -- -- --
Net (losses) earnings from other
equity investments.............. (756) -- 707 -- (49)
------- ------ ------- --- -------
Net income from continuing
operations attributable to
common shareowners.............. $ 3,861 $2,022 $ 2,200 $-- $ 8,083
======= ====== ======= === =======
AT&T COMMON STOCK GROUP:
Earnings from continuing
operations...................... $ 5,883 $ 3,450(h)
Weighted average shares
outstanding -- basic............ 3,082 3,115
Basic earnings per share.......... 1.91 1.11
Earnings from continuing
operations...................... 5,909 3,450(h)
Weighted average shares
outstanding -- diluted.......... 3,152 3,152
Diluted earnings per share........ 1.87 1.09(i)
LIBERTY MEDIA GROUP:
Basic and diluted loss per
share........................... $ (0.80)
See Notes To AT&T Unaudited Pro Forma Combined Condensed Financial Statements
L-200
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
(a) These columns reflect the historical results of operations and
financial position of AT&T Corp.
(b) These adjustments deduct the historical results of operations of
Liberty Media Group to reflect the split-off of Liberty Media Group from AT&T.
(c) This entry reflects the fair value adjustment for accounting purposes
which will be recorded upon the distribution of AT&T Broadband Group. Since AT&T
intends to create and distribute the AT&T Consumer Services Group tracking stock
prior to the distribution of AT&T Broadband Group, and since shareowners of the
AT&T Consumer Services Group tracking stock will not receive shares of AT&T
Broadband Group, the distribution of AT&T Broadband Group will be a non pro-rata
transaction. For this reason, the distribution will be accounted for at fair
value and will result in a nonrecurring loss or gain upon distribution equal to
the deficiency or excess of the fair value of AT&T Broadband Group over AT&T's
carrying value of the net assets of AT&T Broadband Group to be distributed. The
actual loss or gain will be determined upon distribution based on the stock
price of the Comcast shares received pursuant to the merger agreement. Based on
the share price of Comcast Corp. on February 7, 2002, the distribution results
in a loss. Due to the fact that the loss is a one-time event, its effects have
not been included as a pro forma adjustment to the income statement; however it
has been included as a pro forma adjustment to retained earnings on the pro
forma balance sheet. The estimated loss is calculated as follows (dollars in
millions):
Fair value of Comcast Corp. shares to be received in the
transaction (1,235,000,000 shares at a closing stock price
of 33.34 per share on February 7, 2002)................... $41,175
Carrying value of AT&T Broadband Group net assets to be
distributed............................................... 45,625
-------
Loss on distribution........................................ $(4,450)
=======
If shareholder or other approval is not obtained for the formation of the AT&T
Consumer Services Group tracking stock or if the tracking stock is not
distributed prior to the distribution of AT&T Broadband Group, the distribution
of AT&T Broadband Group will be a pro-rata transaction recorded at historical
cost. As the loss on the distribution calculated above is not reflected as a pro
forma adjustment to the income statements, this change will not have any impact
on the pro forma income statements as presented.
(d) These entries represent adjustments to AT&T Broadband Group combined
attributed net assets pursuant to the Merger Agreement. The Merger Agreement
calls for the redemption by AT&T of $2,118 million in TCI Pacific Preferred
Stock for AT&T Common Stock. AT&T expects to issue approximately 52 million
shares of common stock (par value $1 per share) for the redemption. In addition,
the Merger agreement stipulates that AT&T will retain certain liabilities
currently reflected in the AT&T Broadband Group financial statements.
Accordingly, these liabilities were transferred to AT&T along with the related
deferred income taxes.
(e) These adjustments deduct the historical results of operations and the
historical financial position of AT&T Broadband Group to reflect the spin-off of
AT&T Broadband from AT&T. The distribution is a fair value transaction and as
such the fair value of the net assets of AT&T Broadband Group have been recorded
as a reduction to additional paid in capital, given the deficit that exists in
retained earnings.
(f) These adjustments reflect the repayment of the intercompany loan
balance from AT&T Broadband Group. The repayment of intercompany indebtedness is
contained in the Separation and Distribution Agreement between AT&T and AT&T
Broadband Corp.
(g) Reflects certain Inter-Group transactions appropriately reflected in
the separate financial statements of AT&T after excluding the AT&T Broadband
Group on a pro forma basis that were eliminated in the AT&T consolidated
financial statements and were therefore not reflected in AT&T's historical
results and financial position. These transactions include adjustments to
properly reflect the standalone tax rates of AT&T subsequent to the distribution
of the AT&T Broadband Group. These
L-201
entries also reflect the reclassification of certain items appropriately
reflected on the separate financial statements of AT&T Broadband.
(h) Income attributable to the AT&T Common Stock Group shareholders has
been reduced by $2,243, $4,112 and $4,633 for the nine months ended September
30, 2001 and the years ended December 31, 2000 and 1999, respectively, to
reflect the income attributable to the AT&T Consumer Services Group tracking
stock shareholders.
(i) Pursuant to the merger agreement, prior to the AT&T Broadband
spin-off, shares of AT&T common stock held by Comcast (currently 83.5 million
shares) will be exchanged on a one-for-one basis into a newly created series of
AT&T exchangeable preferred stock. The AT&T exchangeable preferred stock will be
mandatorily exchangeable after the closing of the Comcast merger into shares of
AT&T common stock utilizing a conversion formula. The conversion formula will
provide Comcast with an interest in AT&T that is equal in value to the interest
Comcast held in AT&T prior to the Comcast merger, subject to a maximum share
issuance of 10% of the outstanding shares of AT&T common stock. The conversion
formula is computed as the combination of average post closing AT&T Comcast
Class A common stock and AT&T common stock trading values divided by average
AT&T common stock trading values utilizing ten randomly selected trading days
after the closing of the Comcast merger. At September 30, 2001, the maximum
additional shares that Comcast could receive would be approximately 270 million
shares, resulting in (loss) earnings per diluted share of $(0.66), $1.02 and
$1.01 for the nine months ended September 30, 2001 and the years ended December
31, 2000 and 1999, respectively.
L-202
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
AT&T Comcast Corporation
Philadelphia, Pennsylvania
We have audited the accompanying balance sheet of AT&T Comcast Corporation as of
December 7, 2001. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the balance sheet
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such balance sheet presents fairly, in all material respects,
the financial position of AT&T Comcast Corporation as of December 7, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
February 7, 2002
L-203
AT&T COMCAST CORPORATION
BALANCE SHEET
DECEMBER 7, 2001
Assets...................................................... $--
Stockholders' Equity
Stock subscription receivable............................. ($2)
Common stock, $.01 par value, authorized 100 shares; 2
shares issued and outstanding.......................... $--
Additional capital........................................ $ 2
---
$--
===
See notes to balance sheet.
L-204
AT&T COMCAST CORPORATION
NOTES TO BALANCE SHEET
DECEMBER 7, 2001
1. ORGANIZATION
On December 7, 2001, CAB Holdings Corp. was incorporated under the laws of
the State of Pennsylvania and was authorized to issue 100 shares of $.01 par
value common stock. At that date of incorporation, CAB Holdings Corp.'s name was
changed to AT&T Comcast Corporation ("the Company") and the Company issued one
share of its $.01 par value common stock to each of Comcast Corporation
("Comcast") and AT&T Corp. ("AT&T") for $1 per share. The Company was organized
to conduct, subsequent to the combination of Comcast and AT&T's Broadband
division ("AT&T Broadband"), the businesses currently conducted by Comcast and
AT&T Broadband. Upon completion of the combination of Comcast and AT&T Broadband
(see Note 2), Comcast and an entity which will then own AT&T Broadband will be
wholly-owned subsidiaries of the Company.
2. SUBSEQUENT EVENT
On December 19, 2001, Comcast and AT&T entered into an Agreement and Plan
of Merger that will result in the combination of Comcast and AT&T Broadband.
AT&T will spin off AT&T Broadband to its stockholders immediately prior to the
combination. The combined company will also hold AT&T's approximate 25.5%
interest in Time Warner Entertainment. The transaction is subject to customary
closing conditions and shareholder and regulatory approvals and is expected to
close by the end of 2002.
L-205
ANNEX M
FORM OF
CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION
UNDER SECTION 805 OF THE NEW YORK STATE
BUSINESS CORPORATION LAW
We, the undersigned, being a Vice President and an Assistant Secretary
respectively, of AT&T Corp., do hereby certify as follows:
FIRST: The name of the corporation is AT&T Corp.
SECOND: The Certificate of Incorporation of the corporation was filed
by the Department of State on March 3, 1885.
THIRD: (a) The Certificate of Incorporation of the corporation is
hereby amended to create one new class of common stock, AT&T Consumer
Services Group common stock, having the number, designation, relative
rights, preferences, and limitations as set forth herein.
(b) The Certificate of Incorporation of the corporation is hereby
amended to remove all references to the Wireless Group tracking stock, to
each class of Liberty Media Group tracking stock and to the AT&T Wireless
Group preferred tracking stock.
(c) To effect the foregoing, and certain related technical changes,
ARTICLE THIRD is hereby amended as set forth in Exhibit A hereto.
FOURTH: The manner in which the foregoing amendment of said
Certificate of Incorporation of the corporation was authorized was by the
vote of the holders of a majority of all outstanding shares of the
corporation entitled to vote thereon at a meeting of shareholders,
subsequent to the unanimous vote of our board of directors.
IN WITNESS WHEREOF, we have subscribed this document on , 2002
and do hereby affirm, under the penalties of perjury, that the statements
contained herein have been examined by us and are true and correct.
By
------------------------------------
Name: Marilyn J. Wasser
Title: Vice President -- Law and
Secretary
By
------------------------------------
Name: Robert S. Feit
Title: Assistant Secretary
M-1
ARTICLE THIRD
CAPITAL STOCK
PART A of ARTICLE THIRD is hereby amended to read in its entirety as
follows:
The aggregate number of shares which the corporation is authorized to
issue is ( ) shares, consisting of one hundred million
(100,000,000) preferred shares having a par value of $1.00 per share
("Preferred Stock") and ( ) common shares, of which six billion
(6,000,000,000) common shares shall be Common Stock having a par value of
$1.00 per share ("Common Stock") and ( ) common shares shall be
Consumer Services Group Common Stock having a par value of $ per
share ("Consumer Services Group Common Stock").
PART B of ARTICLE THIRD is hereby amended to read in its entirety as set
forth below, and PART C of ARTICLE THIRD is hereby deleted in its entirety. PART
D of ARTICLE THIRD shall remain unchanged, except that it shall be redesignated
as PART C of ARTICLE THIRD.
PART B -- COMMON STOCK AND CONSUMER SERVICES GROUP COMMON STOCK
1. VOTING RIGHTS.
(a) Subject to paragraph 1(c) of this Part B of this Article Third, holders
of Common Stock shall be entitled to one vote for each share of such stock held
and holders of Consumer Services Group Common Stock shall be entitled to
of a vote per share of such stock held, on all matters presented to
such shareholders.
(b) Except as may otherwise be required by the laws of the State of New
York or, with respect to additional or special voting rights (which may include,
without limitation, rights of any such holders of any such class or series to
elect one or more directors voting separately as a class) of any class or series
of Preferred Stock or any other class of common shares, except as may be
required by this Certificate of Incorporation of the corporation, as the same
may be amended from time to time (this "Certificate") (including the terms of
any class or series of Preferred Stock and any resolution or resolutions
providing for the establishment of such class or series pursuant to authority
vested in the Board of Directors by this Certificate and the terms of any other
class of common shares), the holders of shares of Common Stock, the holders of
shares of Consumer Services Group Common Stock, the holders of shares of each
other class of common shares, if any, entitled to vote thereon, and the holders
of shares of each class or series of Preferred Stock, if any, entitled to vote
thereon, shall vote as one class with respect to all matters to be voted on by
shareholders of the corporation, and no separate vote or consent of the holders
of shares of Common Stock, the holders of shares of Consumer Services Group
Common Stock, or the holders of shares of any such class of common shares or any
such class or series of Preferred Stock shall be required for the approval of
any such matter.
(c) If the corporation shall in any manner subdivide (by stock split or
otherwise) or combine (by reverse stock split or otherwise) the outstanding
shares of Common Stock, Consumer Services Group Common Stock or any other class
of common stock, or pay a stock dividend in shares of any class to holders of
that class or shall otherwise effect a share distribution (as defined in
paragraph 3 of this Part B of this Article Third) of Common Stock, Consumer
Services Group Common Stock or any other class of common stock, the per share
voting rights of Common Stock specified in paragraph 1(a) of this Part B of this
Article Third, the per share voting rights of Consumer Services Group Common
Stock specified in paragraph 1(a) of this Part B of this Article Third and the
per share voting rights of any other class of common stock shall be
appropriately adjusted so as to avoid any dilution in the aggregate voting
rights of any one class relative to the other classes.
M-2
2. DIVIDENDS.
(a) Dividends on Common Stock. Dividends on Common Stock may be declared
and paid only to the extent of (i) the assets of the corporation legally
available therefor minus (ii) the Consumer Services Group Available Dividend
Amount. (Such amount available for the payment of dividends on Common Stock is
referred to in this Part B of this Article Third as the "Common Stock Available
Dividend Amount.")
(b) Dividends on Consumer Services Group Common Stock. Dividends on
Consumer Services Group Common Stock may be declared and paid only out of the
lesser of (i) the assets of the corporation legally available therefor and (ii)
the Consumer Services Group Available Dividend Amount. Concurrently with the
payment of any dividend on shares of Consumer Services Group Common Stock, at
the election of the Board of Directors, either (x) the Common Stock Group shall
receive from the Consumer Services Group an aggregate payment of the same kind
of cash and/or property that is the subject of such dividend, which payment
shall be equal to the excess, if any, of (i) the quotient obtained by dividing
(A) the aggregate amount of such dividend, as determined by the Board of
Directors, by (B) the Consumer Services Group Allocation Fraction, over (ii) the
aggregate amount of such dividend, as so determined, or (y) the Consumer
Services Group Allocation Fraction will be adjusted as described in paragraph 8
of this Part B of this Article Third. The payment to be made to the Common Stock
Group pursuant to the preceding sentence may, at the discretion of the Board of
Directors, be reflected by an allocation or by a direct transfer of cash or
other property.
(c) Discrimination Between or Among Classes of Common Shares. The Board of
Directors, subject to the provisions of paragraphs 2(a) and 2(b) of this Part B
of this Article Third, shall have the sole authority and discretion to declare
and pay dividends (or to refrain from declaring or paying the same) exclusively
to the holders of Common Stock, exclusively to the holders of Consumer Services
Group Common Stock, exclusively to the holders of any other class of common
shares or to the holders of any two or more of such classes in equal or unequal
amounts, notwithstanding the relationship between the Common Stock Available
Dividend Amount, the Consumer Services Group Available Dividend Amount, the
respective amounts of prior dividends declared on, or the liquidation rights of,
Common Stock, Consumer Services Group Common Stock or any other factor.
3. SHARE DISTRIBUTIONS.
The corporation may declare and pay a distribution consisting of shares of
Common Stock, Consumer Services Group Common Stock or any other securities of
the corporation, any Subsidiary of the corporation or any other Person
(hereinafter sometimes called a "share distribution") to holders of Common Stock
or Consumer Services Group Common Stock in accordance with this paragraph 3 of
this Part B of this Article Third.
(a) Distributions on Common Stock or Consumer Services Group Common
Stock. The corporation may declare and pay a share distribution to holders of
Common Stock, Consumer Services Group Common Stock or any other class of common
shares consisting of any securities of the corporation, any Subsidiary of the
corporation, or any other Person, including, without limitation, a share
distribution consisting of shares of any class or series of Preferred Stock or
shares of Common Stock, Consumer Services Group Common Stock or any other class
of common shares (or Convertible Securities convertible into or exercisable or
exchangeable for shares of any class or series of Preferred Stock or shares of
Common Stock, Consumer Services Group Common Stock or any other class of common
shares).
Concurrently with the making of any share distribution with respect to
Consumer Services Group Common Stock, at the election of the Board of Directors,
either (x) the Common Stock Group shall receive from the Consumer Services Group
an aggregate payment of the same kind of property that is the subject of such
distribution, which payment shall be equal to the excess, if any, of (i) the
quotient obtained by dividing (A) the aggregate amount of such distribution, as
determined by the Board of
M-3
Directors, by (B) the Consumer Services Group Allocation Fraction, over (ii) the
aggregate amount of such dividend, as so determined, or (y) the Consumer
Services Group Allocation Fraction shall be adjusted as described in paragraph 8
of this Part B of this Article Third. Any payment to be made to the Common Stock
Group pursuant to the preceding sentence may, at the discretion of the Board of
Directors, be reflected by an allocation or by a direct transfer of cash or
other property.
(b) Discrimination Between or Among Classes of Common Shares. The Board of
Directors, subject to the foregoing provisions of this paragraph 3 of this Part
B of this Article Third, shall have the sole authority and discretion to declare
and pay (or to refrain from declaring or paying) share distributions exclusively
to holders of Common Stock, exclusively to holders of Consumer Services Group
Common Stock, exclusively to the holders of any other class of common shares or
to holders of any two or more of such classes in equal or unequal amounts,
notwithstanding the relationship between the Common Stock Available Dividend
Amount, the Consumer Services Group Available Dividend Amount, the respective
amounts of prior share distributions declared on, or the liquidation rights of,
Common Stock, Consumer Services Group Common Stock or any other factor.
4. EXCHANGE OF CONSUMER SERVICES GROUP COMMON STOCK.
(a) Exchange at Option of Board of Directors. (I) At any time, the Board
of Directors may exchange all outstanding shares of Consumer Services Group
Common Stock for shares of a new class of common stock or preferred stock of
another Person or entity ("Rollover Shares") that owns, holds or is subject to,
directly or indirectly, all or substantially all of the assets and liabilities
of the Consumer Services Group as of immediately prior to the date fixed for the
redemption, provided that (A) this new class of common stock or preferred stock
has substantially the same terms (except as may arise as a result of different
law governing the other Person or as a result of provisions of the other
Person's governing documents of general applicability to all classes of common
stock) as those governing Consumer Services Group Common Stock as provided for
in this Part B of this Article Third, including with regard to the definition of
"Consumer Services Group," (B) the number of shares of this new class of common
stock or preferred stock issued per share of Consumer Services Group Common
Stock is intended to represent the same proportionate interest in the Consumer
Services Group as a share of Consumer Services Group Common Stock and (C) the
per share voting rights of this new class of common stock or preferred stock
shall be based on the ratio of the initial trading prices of this new class of
common stock or preferred stock to the trading prices of the common stock of
such other entity over a fixed number of Trading Days (not to exceed 25), such
number of Trading Days to be determined by the Board of Directors prior to or at
the time of such redemption. If the Board of Directors determines to exercise
its option pursuant to this clause (I), such transaction shall be referred to as
a "Rollover Transaction."
(II) At any time the Board of Directors, in its sole discretion, may, at
any time, effect a recapitalization of the corporation (a "Board Required
Exchange") by declaring that all of the outstanding shares of Consumer Services
Group Common Stock shall be exchanged for fully paid and nonassessable shares of
Common Stock in accordance with the Exchange Rate. In addition, at any time, as
long as all of the assets and liabilities included in the Consumer Services
Group are held, directly or indirectly, by one or more Qualifying Subsidiaries
of the corporation that hold no other material assets or liabilities (the
"Consumer Services Group Subsidiaries"), the Board of Directors may, subject to
the availability of assets of the corporation legally available therefor, effect
a Board Required Exchange by exchanging, on a pro rata basis, all of the
outstanding shares of Consumer Services Group Common Stock in exchange for an
aggregate number of outstanding fully paid and nonassessable shares of common
stock of such Consumer Services Group Subsidiary or Subsidiaries at the
applicable Exchange Rate, provided that no such exchange may occur unless the
exchange is tax free to the holders of Consumer Services Group Common Stock
(except with respect to any cash received by such holders in lieu of fractional
shares).
(III) For purposes of this paragraph 4 of this Part B of this Article
Third, the term "Exchange Shares" shall mean the shares of Common Stock or
shares of the one or more Consumer Services Group Subsidiaries, as the case may
be, into which shares of Consumer Services Group Common Stock may be
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exchanged pursuant to paragraph (II) above. With regard to any redemption or
exchange pursuant to paragraph (I) or (II) above, the Board of Directors may, in
its sole discretion, condition the redemption or exchange on the occurrence or
failure to occur of certain events, and the Board of Directors may, in its sole
discretion, waive any of these conditions.
(b) Exchange in Connection with Certain Significant Transactions. In the
event of a Disposition (other than a Rollover Transaction, a Consumer Services
Group Related Business Transaction or a transaction as a result of which the
corporation or its successor continues to hold directly or indirectly all or
substantially all the properties and assests (as defined below) of the Consumer
Services Group) by the corporation in a transaction or series of related
transactions of all or substantially all of the properties and assets of the
Consumer Services Group to any Person(s) or group(s) of which the corporation is
not a majority owner (whether by merger, consolidation, sale of assets or stock,
liquidation, dissolution, winding up or otherwise) (a "Significant
Transaction"), effective upon the consummation of such sale, transfer,
assignment or other disposition and automatically without any action on the part
of the corporation or the Board of Directors or on the part of the holders of
shares of Consumer Services Group Common Stock, the corporation shall be
recapitalized (a "Significant Transaction Exchange") by exchanging all
outstanding shares of Consumer Services Group Common Stock for, at the sole
discretion of the Board of Directors, either (i) fully paid and nonassessable
shares of Common Stock at the Exchange Rate or (ii) other consideration, as
described in paragraph 4(c) of this Part B of this Article Third.
Notwithstanding the preceding sentence, the corporation shall be under no
obligation to effect a Significant Transaction Exchange that it might otherwise
be required to effect pursuant to such sentence (and the Exchange Rate shall not
apply) if (i) the underlying Significant Transaction is conditioned upon the
affirmative vote of a majority of the holders of Consumer Services Group Common
Stock, voting as a separate class, (ii) in connection with a spin-off or similar
distribution of the corporation's entire interest in the Consumer Services Group
to the holders of Consumer Services Group Common Stock, including any such
distribution that is made in connection with a Board Required Exchange, (iii) in
connection with the liquidation, dissolution or winding up of the corporation,
whether voluntary or involuntary, or (iv) in connection with the underlying
Significant Transaction, the Board of Directors determine to exercise its option
pursuant to paragraph 4(a)(I) of this Part B of this Article Third.
(c) Alternate Consideration in Connection with Significant Transaction
Exchange. In connection with any Significant Transaction Exchange, the
corporation may, at the sole discretion of the Board of Directors, (i) in lieu
of issuing shares of Common Stock in exchange for shares of Consumer Services
Group Common Stock, either (x) subject to the limitations described in paragraph
2(b) of this Part B of this Article Third and to the other provisions described
in this paragraph 4(c) of this Part B of this Article Third, declare and pay a
dividend in cash and/or in securities or other property (determined as provided
below) to holders of the outstanding shares of Consumer Services Group Common
Stock equally on a share for share basis in an aggregate amount equal to the
Consumer Services Group Net Proceeds of such Significant Transaction; or (y)
provided that there are assets of the corporation legally available therefor and
to the extent the Consumer Services Group Available Dividend Amount would have
been sufficient to pay a dividend in lieu thereof as described in clause (x) of
this paragraph 4(c) of this Part B of this Article Third, then (A) if such
Significant Transaction involves the Disposition of all (not merely
substantially all) of the properties and assets of the Consumer Services Group,
redeem all outstanding shares of Consumer Services Group Common Stock in
exchange for cash and/or securities or other property (determined as provided
below) in an aggregate amount equal to the Consumer Services Group Net Proceeds;
(B) if such Significant Transaction involves the Disposition of substantially
all (but not all) of the properties and assets of the Consumer Services Group,
apply an aggregate amount of cash and/or securities or other property
(determined as provided below) equal to the Consumer Services Group Net Proceeds
to the redemption of outstanding shares of Consumer Services Group Common Stock,
the number of shares to be redeemed to equal the lesser of (1) the whole number
nearest the number determined by dividing the aggregate amount so allocated to
the redemption of Consumer Services Group Common Stock by the average Market
Value of one share of Consumer Services Group Common Stock during the 10
Trading-Day period beginning on the 15th Trading Day following the consummation
of such
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Disposition, and (2) the number of shares of Consumer Services Group Common
Stock outstanding; and (ii) in lieu of issuing solely shares of Common Stock in
exchange for shares of Consumer Services Group Common Stock, subject to the
limitations described in paragraph 2(b) of this Part B of this Article Third and
to the other provisions described in paragraph 4(c) of this Part B of this
Article Third, combine the issuance of shares of Common Stock in exchange for
shares of Consumer Services Group Common Stock with the payment of a dividend on
or the redemption of shares of Consumer Services Group Common Stock for cash
and/or other securities or other property as described below.
In the event that the Board of Directors elects the option described in
(ii) of the preceding paragraph, the outstanding shares of Consumer Services
Group Common Stock exchanged for fully paid and nonassessable shares of Common
Stock shall be exchanged at the Exchange Rate and a dividend shall be paid on
all the remaining shares of Consumer Services Group Common Stock equally on a
share for share basis, or some or all of the remaining outstanding shares of
Consumer Services Group Common Stock shall be exchanged for cash and/or other
securities or other property, as follows. The aggregate amount of such dividend,
in the case of a dividend, or the portion of the Consumer Services Group Net
Proceeds to be applied to such an exchange, in the case of an exchange, shall
equal (A) an amount equal to the total Consumer Services Group Net Proceeds
multiplied by (B) one minus a fraction, the numerator of which shall be the
number of shares of Consumer Services Group Common Stock exchanged for shares of
Common Stock and the denominator of which shall be the total number of
outstanding shares of Consumer Services Group Common Stock. In the event of an
exchange, if the Significant Transaction involves the Disposition of all (not
merely substantially all) of the properties and assets of the Consumer Services
Group, then all remaining outstanding shares of Consumer Services Group Common
Stock will be redeemed in exchange for cash and/or securities or other property
in an aggregate amount equal to the portion of the Consumer Services Group Net
Proceeds to be applied to the exchange. If the Significant Transaction involves
the Disposition of substantially all (but not all) of the properties and assets
of the Consumer Services Group, then the portion of the Consumer Services Group
Net Proceeds to be applied to the exchange will be used to redeem a number of
shares equal to the lesser of (1) the whole number nearest the number determined
by dividing the aggregate amount so allocated to the redemption of Consumer
Services Group Common Stock by the average Market Value of one share of Consumer
Services Group Common Stock during the 10-Trading Day period beginning on the
15th Trading Day following consummation of the Disposition, and (2) the number
of shares of Consumer Services Group Common Stock outstanding.
For purposes of this paragraph 4 of this Part B of this Article Third, in
the case of a Significant Transaction involving a Disposition of properties and
assets in a series of related transactions, such Disposition shall not be deemed
to have been consummated until the consummation of the last of such
transactions. Any exchange described in this paragraph 4 of this Part B of this
Article Third shall be effected in accordance with the applicable provisions set
forth in paragraph 5 of this Part B of this Article Third. In the event that, at
the time of any Significant Transaction, there are outstanding any Convertible
Securities convertible into or exercisable for shares of Consumer Services Group
Common Stock that would give the holders rights to receive any dividend or
exchange consideration related to the Significant Transaction upon exercise,
conversion or otherwise, or would adjust as a result of such dividend or
exchange to give the holder equivalent economic rights, then the shares of
Consumer Services Group Common Stock underlying such Convertible Securities will
be taken into account for purposes of determining the terms of any dividend
payment or exchange effected in lieu of a Significant Transaction Exchange.
(d) Payment to Common Stock Group. Concurrently with the payment of any
dividend referred to in paragraph 4(c) of this Part B of this Article Third, at
the election of the Board of Directors, either (A) the Common Stock Group shall
receive from the Consumer Services Group an aggregate payment of the same kind
of property that is the subject of such dividend, which payment shall be equal
to the excess of (i) the quotient obtained by dividing (x) the aggregate amount
of such dividend, as determined by the Board of Directors, by (y) the Consumer
Services Group Allocation Fraction, over (ii) the aggregate amount of such
dividend, as so determined, or (B) the Consumer Services Group Allocation
Fraction will
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be adjusted as described in paragraph 8 of this Part B of this Article Third.
Any payment to be made to the Common Stock Group pursuant to the preceding
sentence may, at the discretion of the Board of Directors, be reflected by an
allocation or by a direct transfer of cash or other property.
(e) Exchange Rate. For purposes of this paragraph 4 of this Part B of this
Article Third, the term "Exchange Rate" shall mean the number of Exchange Shares
for which each share of Consumer Services Group Common Stock shall be
exchangeable pursuant to a Board Required Exchange or a Significant Transaction
Exchange, determined as follows. If the shares of Consumer Services Group Common
Stock are to be exchanged for shares of Common Stock, each share of Consumer
Services Group Common Stock shall be exchangeable for such number of shares of
Common Stock (calculated to the nearest 1/10,000), subject to paragraph 5 below,
equal to % of the ratio of the Average Market Price Per Share of such
Consumer Services Group Common Stock to the Average Market Price Per Share of
Common Stock. For purposes of computing the Exchange Rate, the "Average Market
Price Per Share" of Common Stock or Consumer Services Group Common Stock, as the
case may be, shall mean in the case of a Significant Transaction Exchange, the
average of the daily Market Value per share for such Common Stock or Consumer
Services Group Common Stock for the 10 consecutive Trading Days beginning on the
15th Trading Day prior to consummation of the Significant Transaction. If the
shares of Consumer Services Group Common Stock are to be exchanged for shares of
one or more Consumer Services Group Subsidiaries, such shares of Consumer
Services Group Common Stock shall be exchanged, on a pro rata basis, for an
aggregate number of outstanding fully paid and nonassessable shares of common
stock of each such Consumer Services Group Subsidiary equal to the number of
outstanding shares of common stock of such Subsidiary held by the corporation
multiplied by the Consumer Services Group Allocation Fraction and, if the Board
of Directors so determines, the remaining shares of such Subsidiary shall be
distributed on a pro rata basis to the holders of shares of Common Stock (or
shares of Common Stock shall be exchanged for such remaining shares of such
Subsidiary); provided that no such distribution (or mandatory exchange) may
occur unless the distribution (or mandatory exchange) is tax free to the holders
of Common Stock (except with respect to any cash received by such holders in
lieu of fractional shares). If at the time of such an exchange for shares of one
or more Consumer Services Group Subsidiaries, there are outstanding any
Convertible Securities convertible into or exercisable for shares of Consumer
Services Group Common Stock that would become exercisable or convertible for
shares of one or more Consumer Services Group Subsidiaries as a result of such
exchange, and the obligation to issue such shares under such options, warrants,
convertible securities or similar rights is not assumed or otherwise provided
for by one or more Consumer Services Group Subsidiaries, then the shares of
Consumer Services Group Common Stock underlying such Convertible Securities will
be taken into account for purposes of determining the Exchange Rate for such
exchange.
For purposes of this paragraph 4 of this Part B of this Article Third,
"substantially all of the properties and assets" of the Consumer Services Group
as of any date shall mean a portion of such properties and assets that
represents at least 80% of the Fair Value of the properties and assets
attributed to the Consumer Services Group as of such date.
5. CERTAIN PROCEDURES RELATING TO EXCHANGES
(a) The Board of Directors may, in its sole discretion, elect to issue
fractional Rollover Shares or Exchange Shares or to make a cash payment in lieu
of fractional shares, as described below. If the Board of Directors elects not
to issue fractional Rollover Shares or Exchange Shares, then no such fractional
shares shall be issued in connection with the exchange or redemption of shares
of Consumer Services Group Common Stock into Rollover Shares or Exchange Shares,
as the case may be, and, in lieu thereof, each holder of Consumer Services Group
Common Stock who would otherwise be entitled to a fractional interest of a
Rollover Share or an Exchange Share shall, upon surrender of such holder's
certificate or certificates representing shares of Consumer Services Group
Common Stock, receive a cash payment (without interest) (the "Fractional
Payment") equal to (i) in the case of an exchange for shares of Common Stock,
the product resulting from multiplying (A) the fraction of a share of Common
Stock to
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which such holder would otherwise have been entitled by (B) the Average Market
Price Per Share of Common Stock on the Exchange Date, or (ii) in the case of an
exchange or redemption for Rollover Shares or shares of one or more Consumer
Services Group Subsidiaries, such value as is determined by the Board of
Directors.
(b) No adjustments in respect of dividends shall be made upon the exchange
of any shares of Consumer Services Group Common Stock; provided, however, that,
if the Exchange Date with respect to Consumer Services Group Common Stock shall
be subsequent to the record date for the payment of a dividend or other
distribution thereon or with respect thereto but prior to the payment or
distribution thereof, the registered holders of such shares at the close of
business on such record date shall be entitled to receive the dividend or other
distribution payable on such shares on the date set for payment of such dividend
or other distribution, notwithstanding the exchange of such shares or the
corporation's default in payment of the dividend or distribution due on such
date.
(c) At such time or times as the corporation exercises its right to cause
an exchange pursuant to paragraph 4(a)(I) or 4(a)(II) of this Part B of this
Article Third or to cause a Board Required Exchange, and at the time of any
Significant Transaction Exchange, the corporation shall give notice of such
exchange to the holders of Consumer Services Group Common Stock whose shares are
to be exchanged, by mailing by first-class mail a notice of such exchange (an
"Exchange Notice"), in the case of an exchange at the discretion of the Board of
Directors, not less than 15 nor more than 90 days prior to the date fixed for
such exchange (which date may be a specified date or a date determined by
reference to the occurrence of specified events) (the "Exchange Date"), and, in
the case of any other required exchange, as soon as practicable before or after
the Exchange Date, in either case, to their last addresses as they appear upon
the corporation's books. Each such Exchange Notice shall specify 1) the Exchange
Date, 2) the Exchange Rate applicable to, or a description of the consideration
to be received in, such exchange, and 3) any conditions to the occurrence of
such exchange as set forth by the Board of Directors (which conditions may be
waived by the Board of Directors in its sole discretion), and shall state that
issuance of certificates representing the applicable type of Rollover Shares or
Exchange Shares to be received upon exchange of shares of Consumer Services
Group Common Stock shall be upon surrender of certificates representing such
shares of Consumer Services Group Common Stock. Without limiting the
alternatives available to the corporation, in the case of any Rollover
Transaction, the redemption of the Consumer Services Group Common Stock
contemplated hereby may be effected pursuant to the terms of any merger,
business combination or similar transaction and/or the Board of Directors may
elect to make the date of consummation of such transaction the Exchange Date.
(d) Before any holder of shares of Consumer Services Group Common Stock
shall be entitled to receive certificates representing such Rollover Shares or
Exchange Shares, such holder must surrender, at such office as the corporation
shall specify, certificates for such shares of Consumer Services Group Common
Stock duly endorsed to the corporation or in blank or accompanied by proper
instruments of transfer to the Corporation or in blank, unless the corporation
shall waive such requirement. The corporation shall, as soon as practicable
after such surrender of certificates representing such shares of Consumer
Services Group Common Stock, issue and deliver, at the office of the transfer
agent representing Rollover Shares or Exchange Shares, to the holder for whose
account such shares of Consumer Services Group Common Stock were so surrendered,
or to such holder's nominee or nominees, certificates representing the number of
Rollover Shares or Exchange Shares to which such holder shall be entitled,
together with the Fractional Payment, if any.
(e) From and after any Exchange Date, all rights of a holder of shares of
Consumer Services Group Common Stock shall cease except for the right, upon
surrender of the certificates representing such shares of Consumer Services
Group Common Stock, to receive certificates representing Rollover Shares or
Exchange Shares together with a Fractional Payment, if any, as described in
paragraphs 5(a) and 5(d) of this Part B of this Article Third and rights to
dividends as described in paragraph 5(b) of this Part B of this Article Third.
No holder of a certificate that immediately prior to the applicable Exchange
Date represented shares of Consumer Services Group Common Stock shall be
entitled to receive any dividend
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or other distribution with respect to Rollover Shares or Exchange Shares, as the
case may be, until surrender of such holder's certificate for a certificate or
certificates representing Rollover Shares or Exchange Shares, as the case may
be. Upon surrender, the holder shall receive the amount of any dividends or
other distributions (without interest) that were payable with respect to a
record date after the Exchange Date, but that were not paid by reason of the
foregoing with respect to the number of Rollover Shares or Exchange Shares, as
the case may be, represented by the certificate or certificates issued upon such
surrender. From and after an Exchange Date applicable to Consumer Services Group
Common Stock, the corporation shall, however, be entitled to treat certificates
for Consumer Services Group Common Stock that have not yet been surrendered for
exchange as evidencing the ownership of the number of Rollover Shares or
Exchange Shares for which the shares of Consumer Services Group Common Stock
represented by such certificates have been exchanged, notwithstanding the
failure to surrender such certificates.
(f) If any certificate for Rollover Shares or Exchange Shares, as the case
may be, is to be issued in a name other than that in which the certificate
representing shares of Consumer Services Group Common Stock surrendered in
exchange therefor is registered, it shall be a condition of such issuance that
the person requesting the issuance pays any transfer or other taxes required by
reason of the issuance of certificates for such Rollover Shares or Exchange
Shares, as the case may be, in a name other than that of the record holder of
the certificate surrendered, or establishes, to the satisfaction of the
corporation or its agent, that such tax has been paid or is not applicable.
Under no circumstances shall the corporation be liable to a holder of shares of
Consumer Services Group Common Stock for any Rollover Shares or Exchange Shares
or dividends or distributions thereon delivered to a public official pursuant to
any applicable abandoned property, escheat or similar law.
(g) At the time an Exchange Notice is delivered with respect to any shares
of Consumer Services Group Common Stock, or at the time of the Exchange Date, if
earlier, the corporation shall have reserved and kept available, solely for the
purpose of issuance upon exchange of the outstanding shares of Consumer Services
Group Common Stock, such number of Exchange Shares as shall be issuable upon the
exchange of the number of shares of Consumer Services Group Common Stock
specified or to be specified in the applicable Exchange Notice, provided that
the corporation shall not under any circumstances be precluded from satisfying
its obligation in respect of the exchange of the outstanding shares of Consumer
Services Group Common Stock by delivery of purchased Exchange Shares that are
held in the treasury of the corporation.
6. LIQUIDATION
In the event of a liquidation, dissolution or winding up of the
corporation, whether voluntary or involuntary, after payment or provision for
payment of the debts and other liabilities of the corporation and subject to the
prior payment in full of the preferential amounts to which any class or series
of Preferred Stock is entitled, (a) the holders of the shares of Common Stock
shall share in the aggregate, on a share for share basis, in a percentage of the
funds of the corporation remaining for distribution to its common shareholders
equal to 100% multiplied by the average daily ratio (expressed as a decimal) of
X/Z for the 20-Trading Day period ending on the Trading Day prior to the date of
the public announcement of such liquidation, dissolution or winding up, (b) the
holders of the shares of Consumer Services Group Common Stock shall share in the
aggregate in a percentage of the funds of the corporation remaining for
distribution to its common shareholders equal to 100% multiplied by the average
daily ratio (expressed as a decimal) of C/Z for such 20-Trading Day period, and
(c) if applicable, the holders of the shares of any other class of common shares
of the corporation (other than Common Stock and Consumer Services Group Common
Stock), on the basis that may be set forth in this Certificate with respect to
any such shares, shall share in the aggregate in a percentage of the funds of
the corporation remaining for distribution to its common shareholders equal to
100% multiplied by the average daily ratio (expressed as a decimal) of Y/Z for
such 20-Trading Day period, where X is the aggregate Market Capitalization of
the Common Stock, C is the aggregate Market Capitalization of Consumer Services
Group Common Stock,
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Y is the aggregate Market Capitalization, if applicable, of any other class of
common shares (other than Common Stock and Consumer Services Group Common
Stock), and Z is the aggregate Market Capitalization of (i) the Common Stock,
(ii) the Consumer Services Group Common Stock, and (iii) any other class of
common shares of the corporation (other than Common Stock and Consumer Services
Group Common Stock). Neither the consolidation or merger of the corporation with
or into any other corporation or corporations nor the sale, transfer or lease of
all or substantially all of the assets of the corporation shall itself be deemed
to be a liquidation, dissolution or winding up of the corporation within the
meaning of this paragraph 6 of this Part B of this Article Third.
Notwithstanding the foregoing, any transaction or series of related transactions
that results in all of the assets and liabilities included in the Consumer
Services Group being held by one or more Consumer Services Group Subsidiaries,
and the distribution of some or all of the shares of such Consumer Services
Group Subsidiaries (and no other material assets or liabilities) to the holders
of the outstanding Consumer Services Group Common Stock shall not constitute a
voluntary or involuntary liquidation, dissolution or winding up of the
corporation for purposes of this paragraph 6 of this Part E of this Article
Third, but shall be subject to paragraph 4 of this Part B of this Article Third.
7. DETERMINATIONS BY THE BOARD OF DIRECTORS
Any determinations made by the Board of Directors under any provision of
this Part B of this Article Third shall be final and binding on all shareholders
of the corporation, except as may otherwise be required by law. The corporation
shall prepare a statement of any determination by the Board of Directors,
respecting the fair market value of any properties, assets or securities, and
shall file such statement with the Secretary of the corporation. Without
limiting the generality of the foregoing, each holder of shares of Common Stock
and/or shares of Consumer Services Group Common Stock, by acquiring or holding
either such security, shall be deemed to acknowledge and agree to the maximum
extent permitted by law, that (a) the terms of the Consumer Services Group
Common Stock grant to the Board of Directors discretion to select among
different exchange, redemption or other options, more than one of which may be
available at a particular time or in connection with a particular transaction,
including without limitation a Rollover Transaction, a Board Required Exchange
(whether for Common Stock or stock of the specified other entities) or a
Significant Transaction Exchange (whether for Common Stock or other
consideration), (b) that the selection of an alternative, if any, shall be a
matter solely within the discretion of the Board of Directors and that the Board
of Directors has no duty to select the alternative that will result in the best
economic treatment for holders of either the Consumer Services Group Common
Stock or the Common Stock, and (c) that no holder of any shares of Consumer
Services Group Common Stock or Common Stock will have any claim based on which
alternative the Board of Directors may elect, even if the holders of the classes
of stock are not treated equally.
8. ADJUSTMENT OF THE CONSUMER SERVICES GROUP ALLOCATION FRACTION
(a) The denominator of the Consumer Services Group Allocation Fraction
shall be adjusted from time to time as deemed appropriate by the Board of
Directors (i) to reflect subdivisions (by stock split or otherwise) and
combinations (by reverse stock split or otherwise) of Consumer Services Group
Common Stock and stock dividends payable in shares of Consumer Services Group
Common Stock, (ii) to reflect the fair market value of contributions or
allocations by the corporation of cash or property or other assets or
liabilities from the Common Stock Group to the Consumer Services Group (or vice
versa), or of cash or property or other assets or liabilities of the Common
Stock Group to, or for the benefit of, employees of the Consumer Services Group
in connection with employee benefit plans or arrangements of the corporation or
any of its subsidiaries (or vice versa), (iii) to reflect the number of shares
of capital stock of the corporation contributed to, or for the benefit of,
employees of the Consumer Services Group in connection with benefit plans or
arrangements of the corporation or any of its Subsidiaries, (iv) to reflect
repurchases by the corporation of shares of Consumer Services Group Common Stock
for the account of the Consumer Services Group, (v) to reflect issuances of
Consumer Services Group Common Stock for the account of the Consumer Services
Group, (vi) to reflect dividends or other distributions to holders of
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the Consumer Services Group Common Stock to the extent no payment is made to the
Common Stock Group, and (vii) under such other circumstances as the Board of
Directors determines appropriate to reflect the economic substance of any other
event or circumstance, provided that, in each case, the adjustment shall be made
in a manner that is fair and equitable to holders of Common Stock and Consumer
Services Group Common Stock. Any adjustment made by the Board of Directors
pursuant to the preceding sentence shall, subject to the foregoing, be at the
sole discretion of the Board of Directors, and all such determinations shall be
final and binding on all shareholders of the corporation. For purposes of this
paragraph 8 of this Part B of this Article Third, the consideration paid by the
Common Stock Group to acquire any assets or other property or contributed or
allocated to the Consumer Services Group shall be presumed to be the "fair
market value" as of its acquisition.
(b) Without duplication of any adjustment pursuant to paragraph 8(a) of
this Part B of this Article Third, in the event that the corporation shall issue
shares of Consumer Services Group Common Stock for the account of the Consumer
Services Group, then the denominator of the Consumer Services Group Allocation
Fraction shall be increased by the number of shares of Consumer Services Group
Common Stock so issued.
(c) Without duplication of any adjustment pursuant to paragraph 8(a) of
this Part B of this Article Third, if, in connection with any share issuance
described in paragraph 8(b) of this Part B of this Article Third, or otherwise,
the corporation contributes or allocates cash or other property or assets from
the Common Stock Group to the Consumer Services Group, the denominator of the
Consumer Services Group Allocation Fraction shall be increased (or further
increased) by an amount obtained by dividing (i) the fair market value of such
cash, property or assets (as determined by the Board of Directors) by (ii) the
net per share offering price of the Consumer Services Group Common Stock.
9. CERTAIN DEFINITIONS.
Unless the context otherwise requires, the terms defined in this paragraph
9 of this Part E of this Article Third shall have, for all purposes of this Part
B of this Article Third, the meanings herein specified:
"Common Stock Group" shall mean, as of any date, the interest of the
corporation in all of the businesses in which the corporation is or has
been engaged, directly or indirectly (either itself or through direct or
indirect subsidiaries, affiliates, joint ventures or other investments or
any of their predecessors or successors), and the respective assets and
liabilities of the corporation therein, other than the Consumer Services
Group Allocated Portion of the Consumer Services Group.
"Consumer Services Group" shall mean, as of any date that any shares
of Consumer Services Group Common Stock have been issued and continue to be
outstanding, without duplication, the direct or indirect interest of the
corporation (either itself or through direct or indirect subsidiaries,
affiliates, joint ventures or other investments, or any of their
predecessors or successors) (a) in all of the businesses, assets and
liabilities reflected in the financial statements of the Consumer Services
Group dated , publicly filed by the corporation, including
any successor to the Consumer Services Group by merger, consolidation or
sale of all or substantially all of its assets (whether or not in
connection with a Consumer Services Group Related Business Transaction),
(b) the other assets and liabilities (contingent or otherwise) of the
corporation and its Subsidiaries primarily related to the businesses,
assets and liabilities described in clause (a) and all net income and net
losses arising in respect thereof after such date, (c) all assets,
liabilities and businesses acquired by the Consumer Services Group or
acquired by the corporation or any of its Subsidiaries for the account of,
or contributed, allocated or otherwise transferred to, the Consumer
Services Group (including the net proceeds of any new issuance for the
account of the Consumer Services Group of any new shares of Consumer
Services Group Common Stock or Convertible Securities), in each case, after
the date of such financial statements and as determined by the Board of
Directors in accordance with the provisions of paragraphs 7 and 8 of this
Part B of this Article Third, and (d) the proceeds of
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any Disposition of any of the foregoing; provided, however, that the
Consumer Services Group shall not include (a) any assets, liabilities or
businesses disposed of after the date of such financial statements or (b)
any assets, liabilities or businesses allocated to the Common Stock Group
or otherwise distributed or otherwise transferred from the Consumer
Services Group, whether to the Common Stock Group, to holders of shares of
Consumer Services Group Common Stock or otherwise, in each case after the
date of such financial statements and as determined by the Board of
Directors in accordance with the provisions of paragraphs 7 and 8 of this
Part B of this Article Third.
"Consumer Services Group Allocated Portion" shall mean, with respect
to the Consumer Services Group as a whole, or any dividend, distribution,
payment, consideration or other amount or allocation requiring
apportionment between the holders of Consumer Services Group Common Stock
(other than the corporation and its Subsidiaries), on the one hand, and the
Common Stock Group, on the other hand, the following: (a) in the case of
the Consumer Services Group as a whole, the proportion of such Group
represented by the Consumer Services Group Allocation Fraction, and (b) in
the case of any other amount or allocation, the product of (i) such amount
or allocation and (ii) the Consumer Services Group Allocation Fraction.
"Consumer Services Group Allocation Fraction" shall mean, as of any
date of determination, a fraction, the numerator of which shall be the
number of shares of Consumer Services Group Common Stock outstanding on
such date and the denominator of which shall be a number initially
determined by the Board of Directors, in its sole discretion, prior to the
date of the initial issuance of any shares of Consumer Services Group
Common Stock, subject to adjustment from time to time as described in
paragraph 8 of this Part B of this Article Third, provided that such
fraction shall in no event be greater than one. If the holders of any
securities of the corporation or any other Person that are convertible into
or exercisable or exchangeable for shares of Consumer Services Group Common
Stock are entitled to participate in any dividend or other distribution
with respect to the Consumer Services Group Common Stock, such shares so
issuable upon such conversion, exercise or exchange shall be taken into
account in calculating the Consumer Services Group Allocation Fraction and
any amount payable to the Common Stock Group in such manner as the Board of
Directors determines to be appropriate.
"Consumer Services Group Available Dividend Amount" shall mean, as of
any date, the Consumer Services Group Allocated Portion of the excess of
(a) the amount by which the total assets of the Consumer Services Group
exceed the total liabilities of the Consumer Services Group as of such date
over (b) the sum of (i) the par value of all issued shares of Consumer
Services Group Common Stock and each class or series of Preferred Stock
attributed to the Consumer Services Group, (ii) the amount of the
consideration received for any shares of Preferred Stock attributed to the
Consumer Services Group without par value that have been issued, except
such part of the consideration therefor as may have been allocated to
surplus in a manner permitted by law, and (iii) any amount not included in
subclauses (i) and (ii) above that the corporation (by appropriate action
of the Board of Directors) has transferred to stated capital specifically
in respect of Consumer Services Group Common Stock, minus (c) all
reductions from such sums set forth in clauses (i), (ii) and (iii) above as
have been effected in a manner permitted by law; provided, however, that,
in the event that the law governing the corporation changes from that
governing the corporation on the date the adoption of the Amendment to this
Certificate pursuant to which the Consumer Services Group Common Stock was
authorized (whether because of amendment of the applicable law or because
of a change in the jurisdiction of incorporation of the corporation through
merger or otherwise), the Consumer Services Group Available Dividend Amount
shall mean the amount of dividends, as determined by the Board of
Directors, that could be paid by a corporation (governed under such
applicable law) having the assets and liabilities of the Consumer Services
Group, an amount of outstanding common stock (and having an aggregate par
value) equal to the amount (and aggregate par value) of the outstanding
Consumer Services Group Common Stock and of each class or series of
Preferred Stock attributed to the Consumer Services Group and having an
amount of earnings or loss
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or other relevant corporate attributes as reasonably determined by the
Board of Directors in light of all factors deemed relevant by the Board of
Directors.
"Consumer Services Group Net Proceeds" shall mean, as of any date,
with respect to any Disposition of any of the properties and assets of the
Consumer Services Group, an amount, if any, equal to the Consumer Services
Group Allocated Portion of the gross proceeds of such Disposition after any
payment of, or reasonable provision for, (a) any taxes payable by the
corporation or any other member of the Common Stock Group in respect of
such Disposition or in respect of any mandatory dividend or redemption
resulting from such Disposition (or that would have been payable but for
the utilization of tax benefits attributable to the Common Stock Group),
(b) any transaction costs borne by the Common Stock Group in connection
with such Disposition, including, without limitation, any legal, investment
banking and accounting fees and expenses borne by the Common Stock Group in
connection with such Disposition, (c) any liabilities and other obligations
(contingent or otherwise) of the Consumer Services Group borne by the
Common Stock Group in connection with such Disposition, including, without
limitation, any indemnity or guarantee obligations incurred by the Common
Stock Group in connection with the Disposition or any liabilities assumed
by the Common Stock Group for future purchase price adjustments, and (d)
any preferential amounts, accumulated and unpaid dividends and other
obligations in respect of Preferred Stock attributed to the Consumer
Services Group. To the extent the proceeds of any Disposition include any
securities or other property other than cash, the Board of Directors shall
determine the value of such securities or property; provided that the value
of any marketable securities included in such proceeds shall be the average
of the daily Market Value of such securities for the 10 consecutive Trading
Days beginning on the 15th Trading Day following consummation of the
Disposition.
"Consumer Services Group Related Business Transaction" shall mean any
Disposition of all or substantially all the properties and assets
attributed to the Consumer Services Group in a transaction or series of
related transactions that results in the corporation or one or more of its
Subsidiaries receiving in consideration of such properties and assets
primarily equity securities (including, without limitation, capital stock,
debt securities convertible into or exchangeable for equity securities or
interests in a general or limited partnership or limited liability company,
without regard to the voting power or other management or governance rights
associated therewith) of any entity that (a) acquires such properties or
assets or succeeds (by merger, formation of a joint venture or otherwise)
to the business conducted with such properties or assets or controls such
acquiror or successor, and (b) which the Board of Directors determines is
primarily engaged or proposes to engage primarily in one or more businesses
similar or complementary to the businesses conducted by the Consumer
Services Group prior to such Disposition.
"Convertible Securities" shall mean any securities of the corporation
or any Subsidiary of the corporation that are convertible into,
exchangeable for or evidence the right to purchase any shares of Common
Stock, Consumer Services Group Common Stock, whether upon conversion,
exercise or exchange, or pursuant to anti-dilution provisions of such
securities or otherwise.
"Disposition" shall mean the sale, transfer, assignment or other
disposition (whether by merger, consolidation, sale or contribution of
assets or stock, or otherwise) by the corporation (or its successors) or
any of its Subsidiaries or properties or assets. Disposition shall not
include a merger, consolidation, exchange of shares or other business
combination transaction involving the corporation in which the corporation
(or its successors) continues, immediately following such transaction, to
hold the same, direct and indirect, interest in the business, assets and
liabilities comprising the Consumer Services Group that it held immediately
prior to such transaction (other than as a result of any action by any
Person included in the Consumer Services Group).
"Fair Value" shall mean, in the case of equity securities or debt
securities of a class that has previously been publicly traded for a period
of at least three months, the Market Value thereof (if such Market Value,
as so defined, can be determined) or, in the case of an equity security or
debt
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security that has not been publicly traded for at least such period, means
the fair value per share of stock or per other unit of such other security,
on a fully distributed basis, as determined by an independent investment
banking firm experienced in the valuation of securities selected in good
faith by the Board of Directors; provided, however, that, in the case of
property other than securities, the "Fair Value" thereof shall be
determined in good faith by the Board of Directors based upon such
appraisals or valuation reports of such independent experts as the Board of
Directors shall in good faith determine to be appropriate in accordance
with good business practice. Any such determination of Fair Value shall be
described in a statement filed with the records of the actions of the Board
of Directors.
"Group" shall mean the Common Stock Group or the Consumer Services
Group.
"Market Capitalization" of any class or series of capital stock of the
corporation on any Trading Day shall mean the product of (a) the Market
Value of one share of such class or series on such Trading Day and (b) the
number of shares of such class or series outstanding on such Trading Day.
"Market Value" of any class or series of capital stock of the
corporation on any day shall mean the average of the high and low reported
sales prices regular way of a share of such class or series on such day (if
such day is a Trading Day, and, if such day is not a Trading Day, on the
Trading Day immediately preceding such day), or, in case no such reported
sale takes place on such Trading Day, the average of the reported closing
bid and asked prices regular way of a share of such class or series on such
Trading Day, in either case, on the New York Stock Exchange or, if the
shares of such class or series are not quoted on the New York Stock
Exchange on such Trading Day, on the Nasdaq National Market, or, if the
shares of such class or series are not quoted on the Nasdaq National Market
on such Trading Day, the average of the closing bid and asked prices of a
share of such class or series in the over-the-counter market on such
Trading Day as furnished by any New York Stock Exchange member firm
selected from time to time by the corporation, or, if such closing bid and
asked prices are not made available by any such New York Stock Exchange
member firm on such Trading Day (including, without limitation, because
such securities are not publicly held), the market value of a share of such
class or series as determined by the Board of Directors; provided that, for
purposes of determining the ratios set forth in paragraph 6 of this Part B
of this Article Third, (a) the "Market Value" of any share of Common Stock
or Consumer Services Group Common Stock on any day prior to the "ex" date
or any similar date for any dividend or distribution paid or to be paid
with respect to Common Stock or Consumer Services Group Common Stock, as
applicable, shall be reduced by the fair market value of the per share
amount of such dividend or distribution as determined by the Board of
Directors, and (b) the "Market Value" of any share of Common Stock or any
share of Consumer Services Group Common Stock on any day prior to (i) the
effective date of any subdivision (by stock split or otherwise) or
combination (by reverse stock split or otherwise) of outstanding shares of
Common Stock or Consumer Services Group Common Stock, as applicable, or
(ii) the "ex" date or any similar date for any dividend or distribution
with respect to the Common Stock or Consumer Services Group Common Stock in
shares of Common Stock or Consumer Services Group Common Stock, as
applicable, shall be appropriately adjusted to reflect such subdivision,
combination, dividend or distribution.
"Person" shall mean any individual, corporation, partnership, limited
liability company, joint venture, association, joint stock company, trust,
unincorporated organization, government or agency or political subdivision
thereof, or other entity, whether acting in an individual, fiduciary or
other capacity.
"Qualifying Subsidiary" of a Person shall mean a Subsidiary of such
Person in which such Person's ownership and voting interest is sufficient
to satisfy the ownership and voting requirements of the Internal Revenue
Code of 1986, as amended, and the regulations thereunder, for a
distribution of such Person's interest in such Subsidiary to the holders of
Consumer Services Group Common Stock and, in the event that the Consumer
Services Group Allocation Fraction is less than one, the holders
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of Common Stock (or any such securities into which the Consumer Services
Group Common Stock or the Common Stock may have been converted,
reclassified or changed or for which they may have been exchanged), as the
case may be, to be tax free to such holders.
"Subsidiary" shall mean, with respect to any Person, any corporation,
limited liability company or partnership 50% or more of whose outstanding
voting securities or membership or partnership interests, as the case may
be, are, directly or indirectly, owned by such Person.
"Trading Day" shall mean each weekday other than any day on which any
relevant class or series of capital stock of the corporation is not
available for trading on the New York Stock Exchange or the Nasdaq National
Market or in the over-the-counter market.
10. CERTAIN TRANSACTIONS INVOLVING THE CORPORATION AS A WHOLE.
Notwithstanding anything to the contrary, in the event of a Disposition of
all or substantially all of the properties and assets of the corporation to an
entity not directly controlled by the corporation or shareholders of the
corporation, the provisions of paragraph 4(b) of this Part B of this Article
Third shall not apply if, as part of such Disposition, each share of Consumer
Services Group Common Stock is entitled to receive the same consideration (both
in type and amount) as such share of Consumer Services Group Common Stock would
have received had it been exchanged for Common Stock.
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ANNEX N
FORM OF BY-LAW AMENDMENT
[NOTE: THE AT&T GROUPS CAPITAL STOCK COMMITTEE BY-LAW WILL REPLACE THE LAST TWO
PARAGRAPHS OF THE BY-LAW PROVISION ESTABLISHING STANDING COMMITTEES SUCH AS THE
AUDIT COMMITTEE AND THE COMPENSATION COMMITTEE. THESE PARAGRAPHS CURRENTLY
RELATE TO THE LIBERTY MEDIA GROUP CAPITAL STOCK COMMITTEE AND THE AT&T WIRELESS
GROUP CAPITAL STOCK COMMITTEE.]
AT&T Groups Capital Stock Committee. The Board of Directors shall form an
AT&T Groups Capital Stock Committee, the members of which shall be selected by
the Board of Directors of the company. The Board of Directors of the company
shall delegate to the AT&T Groups Capital Stock Committee the authority to, and
the AT&T Groups Capital Stock Committee will have the authority to, (i)
interpret, make determinations under, and oversee the implementation of the
policies set forth in the Policy Statement Regarding AT&T Groups Tracking Stock
Matters; (ii) review the policies, programs and practices of the company
relating to (a) the business and financial relationships between the company or
any of its units and AT&T Consumer Services Group, and (b) any matters arising
in connection therewith, all to the extent the AT&T Groups Capital Stock
Committee may deem appropriate; and (iii) recommend such changes in such
policies, programs and practices as the AT&T Groups Capital Stock Committee may
deem appropriate. In performing this function, the AT&T Groups Capital Stock
Committee's role shall not be to make decisions concerning matters referred to
its attention, but, rather, to oversee the process by which decisions concerning
such matters are made. The AT&T Groups Capital Stock Committee shall have and
may exercise such other powers, authority and responsibilities as may be
determined from time to time by the Board of Directors of the company.
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ANNEX O
AT&T CORP.
BOARD OF DIRECTORS
POLICY STATEMENT REGARDING
AT&T GROUPS TRACKING STOCK MATTERS
1. GENERAL POLICY.
It is the policy of the Board of Directors (the "Board") of AT&T Corp.
("AT&T") that:
(a) all material matters as to which the holders of the Common Stock
and the holders and/or Consumer Services Group Common Stock may have
potentially divergent interests shall be resolved in a manner that the
Board (or the Groups Capital Stock Committee) determines to be in the best
interests of AT&T and all of its common shareholders as a whole, after
giving fair consideration to the potentially divergent interests and all
other relevant interests of the holders of the separate classes of common
stock of AT&T; and
(b) a process of fair dealing will govern the relationship between the
Common Stock Group and the Consumer Services Group and the means by which
the terms of any material transaction between them will be determined.
2. RELATIONSHIP BETWEEN THE GROUPS.
AT&T will seek to manage the AT&T Groups in a manner that maximizes the
operational performance and value of all Groups taken as a whole even though in
certain circumstances actions could disproportionately impact an individual
Group; provided, however, that such disproportionate actions will not, in the
aggregate, have an adverse material impact on the results of operations or
financial position of either Group.
(a) General. Subject to special arrangements or existing commercial
arrangements in effect at the time this policy statement is adopted (and
renewals or extensions thereof), except as otherwise provided in this policy
statement, all material commercial transactions between the Common Stock Group
and the Consumer Services Group will be on commercially reasonable terms taken
as a whole and will be subject to the review and approval of the Groups Capital
Stock Committee.
(b) Inter-group Borrowing. The Groups may make loans to each other on
terms and conditions substantially equivalent to the interest rates and terms
and conditions that the groups would be able to obtain from third parties
without the benefit of support or guarantee by AT&T.
(c) Allocation of Corporate Overhead and Support Services. With respect to
shared corporate services that arise as a result of being part of a combined
entity (e.g., securities filing and financial reporting services), costs
relating to such services will be directly attributed to the Group utilizing
such services, and to the extent such costs are not directly attributable,
allocated between the Groups on a fair and reasonable basis as determined by the
Board. With respect to other support services, the Groups will seek to achieve
enterprise efficiencies to reduce the aggregate costs incurred by the Groups on
a combined basis.
(d) No Inter-Group Interest in Common Stock Group. The Consumer Services
Group shall not acquire an Inter-Group Interest in the Common Stock Group.
3. CORPORATE OPPORTUNITIES.
The Board will allocate any business opportunities and operations, any
acquired assets and businesses and any assumed liabilities between the Groups,
in whole or in part, as it considers to be in the best interests of AT&T and its
shareholders as a whole and as contemplated by the provisions of these policies.
To the extent a business opportunity or operation, an acquired asset or
business, or an assumed liability
O-1
would be suitable to be undertaken by or allocated to more than one Group, it
will be allocated by the Board in its business judgment or in accordance with
procedures adopted by the Board from time to time to ensure that decisions will
be made in the best interests of AT&T and its shareholders as a whole. Any such
allocation may involve the consideration of a number of factors that the Board
determines to be relevant, including, without limitation, whether the business
opportunity or operation, the acquired asset or business, or the assumed
liability is principally within the existing scope of a Group's business and
whether a Group is better positioned to undertake or have allocated to it such
business opportunity or operation, acquired assets or business or assumed
liability.
4. DIVIDEND POLICY.
Subject to the limitations set forth in the Charter, including any
preferential rights of any series of preferred stock of AT&T, and to the
limitations of applicable law, holders of shares of Common Stock and/or Consumer
Services Group Common Stock will be entitled to receive dividends on such stock
when, as and if authorized and declared by the Board. The payment of dividends
on the Common Stock will be a business decision to be made by the Board from
time to time based upon the results of operations, financial condition, capital
requirements and future prospects of AT&T and such other factors as the Board
considers relevant. Payment of dividends on the Common Stock may be restricted
by loan agreements, indentures and other transactions entered into by AT&T from
time to time.
With respect to the Consumer Services Group Common Stock, it is currently
expected that one-third of the current regular dividend payable on the Common
Stock will be allocated to the Common Stock and that two-thirds of that dividend
will be allocated to the Consumer Services Group Common Stock. The declaration
of dividends by AT&T and the amount thereof will, however, be in the discretion
of the Board and will depend upon each of our groups' financial performance, the
dividend policies and capital structures of comparable companies and each
group's ongoing capital needs. If and when the Board does determine to pay any
dividends on shares of Consumer Services Group Common Stock, any such
determination will also be subject to factors similar to those described above
with respect to the payment of dividends on the Common Stock.
5. AT&T GROUPS CAPITAL STOCK COMMITTEE.
AT&T's by-laws will provide for a standing committee of the Board to be
known as the AT&T Groups Capital Stock Committee. The Groups Capital Stock
Committee will have and exercise such powers, authority and responsibilities as
the Board may delegate to such Committee, which will initially include authority
to (a) interpret, make determinations under, and oversee the implementation of
these policies, other than as they relate to dividends, with respect to which
all determinations will be made solely by the Board, (b) adopt additional
general policies governing the relationship between the Groups, and (c) engage
the services of accountants, investment bankers, appraisers, attorneys and other
service providers to assist it in discharging its duties. In making
determinations in connection with these policies, the members of the Board and
the AT&T Groups Capital Stock Committee will act in a fiduciary capacity and
pursuant to legal guidance concerning their respective obligations under
applicable law. The delegation of responsibilities to the AT&T Groups Capital
Stock Committee will be subject to such changes as may be determined by the
Board.
6. DEFINITIONS.
Capitalized terms not defined in this policy statement shall have the
meanings set forth in the Charter. References throughout this policy statement
to "ARTICLES," set in all capital letters, are references to ARTICLES in the
Charter.
6.1 Charter.
"Charter" means the Restated Certificate of Incorporation of AT&T, as
amended from time to time.
O-2
6.2 Common Stock.
"Common Stock" means the Common Stock as defined in Part A of ARTICLE
THIRD of the Charter.
6.3 Common Stock Group.
"Common Stock Group" means the Common Stock Group as defined in Part B
of ARTICLE THIRD of the Charter.
6.4 Consumer Services Group.
"Consumer Services Group" means the Consumer Services Group as defined
in Part B of ARTICLE THIRD of the Charter.
6.5 Consumer Services Group Common Stock.
"Consumer Services Group Common Stock" means the Consumer Services
Group Common Stock as defined in Part A of ARTICLE THIRD of the Charter.
7. AMENDMENT AND MODIFICATION OF THESE POLICIES.
These policies and any resolution implementing the provisions hereof may at
any time and from time to time be amended, modified or rescinded by the Board,
and the Board may adopt additional or other policies or make exceptions with
respect to the application of these policies in connection with particular facts
and circumstances, all as the Board may determine, consistent with its fiduciary
duties to AT&T and all of its shareholders.
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