AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 2002
REGISTRATION NO. [ - ]
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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AT&T COMCAST CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 4841 27-0000798
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
1500 MARKET STREET
PHILADELPHIA, PENNSYLVANIA 19102
TEL: (215) 665-1700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
ARTHUR R. BLOCK, ESQ.
SENIOR VICE PRESIDENT,
ASSISTANT SECRETARY AND ASSISTANT TREASURER
AT&T COMCAST CORPORATION
1500 MARKET STREET
PHILADELPHIA, PENNSYLVANIA 19102
TEL: (215) 665-1700
FAX: (215) 981-7790
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
DENNIS S. HERSCH, ESQ. MARILYN J. WASSER, ESQ. RICHARD D. KATCHER, ESQ.
WILLIAM L. TAYLOR, ESQ. VICE PRESIDENT -- LAW AND SECRETARY STEVEN A. ROSENBLUM, ESQ.
DAVIS POLK & WARDWELL AT&T CORP. STEPHANIE J. SELIGMAN, ESQ.
450 LEXINGTON AVENUE 295 NORTH MAPLE AVENUE WACHTELL, LIPTON, ROSEN & KATZ
NEW YORK, NEW YORK 10017 BASKING RIDGE, NEW JERSEY 07920 51 WEST 52ND STREET
TEL: (212) 450-4000 TEL: (908) 221-2000 NEW YORK, NEW YORK 10019
FAX: (212) 450-3800 TEL: (212) 403-1000
FAX: (212) 403-2000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: as soon as
practicable after this registration statement is declared effective and all
conditions to the proposed transaction have been satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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CALCULATION OF REGISTRATION FEE
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AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED(1)(2) REGISTERED(3) PER UNIT PRICE(8) FEE(8)(9)
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Class A common stock, par value $0.01
per share............................ 1,371,829,422(2)(4)
Class A Special common stock, par value
$0.01 per share...................... 940,027,625(5) Not applicable $79,701,143,477 $7,332,506
Class B common stock, par value $0.01
per share............................ 9,444,375(6)
Class C common stock, par value $0.01
per share............................ 1,350,000,000(2)(7)
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(1) Includes, for each item, the related preferred stock purchase rights as
described herein.
(2) If the preferred structure proposal described herein is approved, AT&T
Comcast will issue up to 1,371,829,422 shares of Class A common stock, par
value $0.01 per share, and the related preferred stock purchase rights, and
no shares of Class C common stock, par value $0.01 per share. If the
preferred structure proposal described herein is not approved, AT&T Comcast
will issue 21,829,422 shares of Class A common stock, par value $0.01 per
share, and the related preferred stock purchase rights, and up to
1,350,000,000 shares of Class C common stock, par value $0.01 per share, and
the related preferred stock purchase rights.
(3) Based upon an estimate of the maximum number of shares of each class of
capital stock that may be issued in connection with the transactions
described herein.
(4) Comprising the sum of (i) 21,829,422, which was the number of shares of
Comcast Class A common stock outstanding as of January 31, 2002, and (ii)
1,350,000,000, which is the maximum number of shares of AT&T Comcast stock
that may be issued to the holders of AT&T Broadband common stock in
connection with the transactions described herein.
(5) Comprising the sum of (i) 914,375,648, which was the number of shares of
Comcast Class A Special common stock outstanding as of January 31, 2002, and
(ii) 25,651,977, which is the number of options to acquire shares of Comcast
Class A Special common stock that could be exercised prior to September 30,
2002.
(6) Equal to the number of shares of Comcast Class B common stock outstanding as
of January 31, 2002.
(7) Equal to the maximum number of shares of AT&T Comcast stock that may be
issued to the holders of AT&T Broadband common stock in connection with the
transactions described herein.
(8) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(f) under the Securities Act of 1933 and calculated
as follows:
(i) With respect to the AT&T Broadband common stock and the Comcast Class B
common stock, in accordance with Rule 457(f)(2), based on the book value
at September 30, 2001 of the AT&T Broadband common stock, the AT&T
preferred securities referred to herein as the QUIPS and the Comcast
Class B common stock, respectively.
(a) $43,396,000,000, the book value of AT&T Broadband; plus
(b) $4,718,000,000, the book value of the QUIPS, which will be exchanged in
the QUIPS exchange transaction described herein for the number of
shares of AT&T Broadband stock that will be converted into 115,000,000
shares of AT&T Comcast stock in connection with the mergers described
herein; plus
(c) $148,197,826, the book value of the shares of Comcast Class B common
stock outstanding as of January 31, 2002; and
(ii) With respect to the Comcast Class A common stock and Comcast Class A
Special common stock, in accordance with Rule 457(f)(1), based on the
average of the high and low sale prices for shares of Comcast Class A
common stock and Comcast Class A Special common stock on the Nasdaq
Stock Market on February 7, 2002:
(a) Comcast Class A common stock, 21,829,422 shares, multiplied by average
price, $32.93; plus
(b) Comcast Class A Special common stock, 940,027,625 shares (including
25,651,977 outstanding options to acquire shares of Comcast Class A
Special common stock that could be exercised prior to September 30,
2002), multiplied by average price, $32.68.
(9) Determined in accordance with Section 6(b) of the Securities Act of 1933 at
a rate equal to $92.00 per $1,000,000 of the proposed maximum aggregate
offering price.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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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.
COMCAST CORPORATION
1500 MARKET STREET
PHILADELPHIA, PENNSYLVANIA 19102-2148
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NOTICE OF SPECIAL MEETING OF COMCAST SHAREHOLDERS
TO BE HELD ON , 2002
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A special meeting of shareholders of Comcast Corporation will be held on
, , 2002 at a.m. local time at [OUR OFFICES, 1500
MARKET STREET, WEST TOWER, 9TH FLOOR, PHILADELPHIA, PENNSYLVANIA], for the
following purposes:
- to approve and adopt the merger agreement among Comcast Corporation, AT&T
Corp. and the other parties thereto, whereby our company and a newly
formed corporation containing AT&T's broadband business will each merge
with separate wholly owned subsidiaries of a newly formed corporation
called AT&T Comcast Corporation, and the transactions contemplated by the
merger agreement,
- to approve and adopt an amendment to our articles of incorporation to
permit the above-described transaction to be completed on the terms and
conditions described as the "preferred structure" in the accompanying
joint proxy statement/prospectus, and
- to transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
We describe these items of business more fully in the accompanying joint
proxy statement/prospectus.
The close of business on , 2002 has been fixed as the record date
for the meeting. All shareholders of record at that time are entitled to notice
of, and all holders of our Class A common stock and Class B common stock are
entitled to vote at, the meeting and any adjournment or postponement thereof.
Approval and adoption of the merger agreement requires approval by a
majority of all votes cast by holders of our Class A common stock and Class B
common stock, voting together as a single class. Approval and adoption of the
amendment to the articles of incorporation requires approval by a majority of
all votes cast by the holders of our Class A common stock and Class B common
stock, voting together as a single class, and by a majority of all votes cast by
holders of our Class A common stock, voting as a single class. Sural LLC, which
owns shares of our common stock entitled to cast approximately 86.7% of the
votes on matters submitted for the approval of the holders of the Class A common
stock and Class B common stock, voting together as a single class, has entered
into an agreement pursuant to which it is obligated to vote in favor of, or
otherwise indicated that it will vote in favor of, such matters. Consequently,
the approval and adoption of the merger agreement is assured. Also, the approval
and adoption of the amendment to our articles of incorporation by the holders of
our Class A common stock and Class B common stock, voting together as a single
class, is assured, but remains subject to approval by the holders of our Class A
common stock, voting as a single class.
Because holders of our Class A Special common stock are not generally
entitled to vote and no resolution is proposed for the meeting for which a vote
of the Class A Special common stock is required by law, holders of Class A
Special common stock are not entitled to vote at the meeting. The enclosed joint
proxy statement/prospectus is being sent to holders of Class A Special common
stock for informational purposes only.
In the event that the meeting is adjourned for fifteen days or more due to
the absence of a quorum, those shareholders entitled to vote who attend the
adjourned meeting, although otherwise less than a quorum, will constitute a
quorum for the purpose of acting upon any matter set forth in this notice.
All shareholders are cordially invited to attend the meeting. Our board of
directors urges you to vote by telephone or via the Internet, or to date, sign
and return promptly the enclosed proxy, with respect to your shares of Class A
common stock. The proxies are solicited by our board of directors. The return of
the proxy will not affect your right to vote in person if you do attend the
meeting.
STANLEY WANG
Secretary
, 2002
AT&T CORP.
32 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10013-2412
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NOTICE OF ANNUAL MEETING OF AT&T SHAREHOLDERS
TO BE HELD ON , , 2002
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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.
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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.
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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
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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
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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
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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.
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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
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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.
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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
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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.
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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
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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
I-49
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.
I-50
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
II-1
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.
II-2
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.
II-6
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.
II-13
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.
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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
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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;
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- 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
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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;
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- 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.
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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
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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
V-18
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
V-19
- 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.
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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.
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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.
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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