AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 4, 2002
REGISTRATION NO. 333-97953
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
AT&T CORP.
AND THE ADDITIONAL REGISTRANTS LISTED ON THE FOLLOWING PAGES
NEW YORK 4811 13-4924710
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
900 ROUTES 202/206 NORTH
BEDMINSTER, NJ 07921
(908) 221-2000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
ROBERT S. FEIT
VICE PRESIDENT -- LAW AND SECRETARY
AT&T CORP.
900 ROUTES 202/206 NORTH
BEDMINSTER, NJ 07921
(908) 221-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
ARTHUR R. BLOCK, ESQ. BRUCE K. DALLAS, ESQ. STEVEN A. ROSENBLUM, ESQ. JOHN B. TEHAN, ESQ.
SENIOR VICE PRESIDENT DAVIS POLK & WARDWELL STEPHANIE J. SELIGMAN, ESQ. RISE B. NORMAN, ESQ.
AT&T COMCAST CORPORATION 1600 EL CAMINO REAL WACHTELL, LIPTON, ROSEN & KATZ SIMPSON THACHER & BARTLETT
1500 MARKET STREET MENLO PARK, CALIFORNIA 94025 51 WEST 52ND STREET 425 LEXINGTON AVENUE
PHILADELPHIA, PENNSYLVANIA 19102 TEL: (650) 752-2000 NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10017
TEL: (215) 665-1700 FAX: (650) 752-2111 TEL: (212) 403-1000 TEL: (212) 455-2000
FAX: (215) 981-7790 FAX: (212) 403-2000 FAX: (212) 455-2502
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
promptly as possible upon effectiveness of this Registration Statement.
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. [ ] ----------
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED(1) AGGREGATE OFFERING PRICE(2) REGISTRATION FEE(2)
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7.00% Broadband Exchange Notes Due May 15, 2005(3)...
-----------------------------------------------------
7.50% Broadband Exchange Notes Due June 1, 2006(3)...
-----------------------------------------------------
7.75% Broadband Exchange Notes Due March 1,
2007(3).............................................
-----------------------------------------------------
6.00% Broadband Exchange Notes Due March 15, $3,461,586,125 $79,963
2009(3).............................................
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8.125% Broadband Exchange Notes Due January 15,
2022(3).............................................
-----------------------------------------------------
8.125% Broadband Exchange Notes Due July 15,
2024(3).............................................
-----------------------------------------------------
8.35% Broadband Exchange Notes Due January 15,
2025(3).............................................
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8.625% Broadband Exchange Notes Due December 1,
2031(3).............................................
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New Broadband Notes issued upon exchange of the -- --
foregoing(4)........................................
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Guarantees of the New Broadband Notes(4)............. -- --
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New Notes Due 2004 (Series 1)(5).....................
-----------------------------------------------------
New Notes 2004 (Series 2)(5).........................
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New Medium-Term Notes, Series A Due May 15,
2025(5).............................................
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New Medium-Term Notes, Series A Due May 15, $4,399,431,530 N/A
2025(5).............................................
-----------------------------------------------------
New Notes Due 2013(5)................................
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FRN Medium-Term Notes, Series A Due 2054(5)..........
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TOTAL............................................. $7,861,017,655 $79,963
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(1) This registration statement relates to an exchange offer for certain
outstanding securities of AT&T Corp. ("AT&T"). The securities registered
hereby to be initially issued in the exchange offer will have identical
terms, including as to maturity and interest rate, as the securities
tendered in the exchange offer, except that (a) those securities issued in
the exchange offer and identified in note (3) will be co-obligations of AT&T
and AT&T Broadband Corp. ("Broadband") and mandatorily exchanged upon
completion of the AT&T Comcast transaction (as described herein) for New
Broadband Notes with the terms, including as to interest rate and maturity,
as described herein, and (b) those securities issued in the exchange offer
and identified in note (5) will provide for a change in interest rate and/or
maturity date, as described herein, upon completion of the AT&T Comcast
transaction.
(2) The fee paid herewith (to be deducted from AT&T Corp.'s account) was
calculated pursuant to Rule 457(f) based on the average of the high and low
prices reported on the New York Stock Exchange as of September 30, 2002 of
$869,162,625 of additional securities to be cancelled in the exchange as a
result of an increase in the previously estimated percentage to 65% from the
50% proration percentage previously estimated. The registration fee
previously paid was calculated pursuant to Rule 457(f) based on the average
of the high and low prices reported on the New York Stock Exchange as of
August 6, 2002 of the securities to be cancelled in the exchange (after
giving effect to proration) which are listed on the New York Stock Exchange
and the average of the bid and asked price for the other securities to be
cancelled in the exchange, and was estimated solely for the purpose of
calculating the amount of the registration fee. In addition, this
registration statement includes such presently indeterminable principal
amount of New Broadband Notes (consisting of Notes Due 2013 and Notes Due
2022) as may be issuable upon mandatory exchange of the securities
identified in note (3) upon completion of the AT&T Comcast transaction.
(3) These securities will be co-obligations of AT&T and Broadband, mandatorily
exchangeable upon completion of the AT&T Comcast transaction for the New
Broadband Notes, which will be obligations only of Broadband and which will
be fully and unconditionally guaranteed by Comcast Cable Communications,
Inc., AT&T Comcast Corporation, MediaOne Group, Inc. and AT&T Broadband,
LLC.
(4) No registration fee is payable in connection with the New Broadband Notes
pursuant to Rule 457(i) or in connection with the Guarantees pursuant to
Rule 457(n).
(5) These securities will be obligations only of AT&T.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
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 OF 1933, AS AMENDED, 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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ADDITIONAL REGISTRANTS
AT&T BROADBAND CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 4841 04-3592397
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
188 INVERNESS DRIVE WEST
ENGLEWOOD, COLORADO 80112
(303) 858-3000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
ROBERT S. FEIT
VICE PRESIDENT AND ASSISTANT SECRETARY
C/O AT&T CORP.
900 ROUTES 202/206 NORTH
BEDMINSTER, NEW JERSEY 07921
(908) 221-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
MEDIAONE GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 4841 84-0926774
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
188 INVERNESS DRIVE WEST
ENGLEWOOD, COLORADO 80112
(303) 858-3000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
ROBERT S. FEIT
AT&T CORP.
900 ROUTES 202/206 NORTH
BEDMINSTER, NJ 07921
(908) 221-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
AT&T BROADBAND, LLC
(Exact name of registrant as specified in its charter)
DELAWARE 4841 84-1260157
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
188 INVERNESS DRIVE WEST
ENGLEWOOD, COLORADO 80112
(303) 858-3000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
ROBERT S. FEIT
AT&T CORP.
900 ROUTES 202/206 NORTH
BEDMINSTER, NJ 07921
(908) 221-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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 Identification No.)
incorporation or organization) Classification Code Number)
1500 MARKET STREET
PHILADELPHIA, PENNSYLVANIA 19102-2148
(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
AT&T COMCAST CORPORATION
1500 MARKET STREET
PHILADELPHIA, PENNSYLVANIA 19102-2148
(215) 665-1700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COMCAST CABLE COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 4841 23-2175755
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
1500 MARKET STREET
PHILADELPHIA, PENNSYLVANIA 19102-2148
(215) 665-1700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
STANLEY L. WANG
EXECUTIVE VICE PRESIDENT
1500 MARKET STREET
PHILADELPHIA, PENNSYLVANIA 19102-2148
(215) 665-1700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS DATED OCTOBER 4, 2002
AT&T CORP.
OFFER TO EXCHANGE
We are making this exchange offer in connection with the planned combination
of Comcast Corporation and our broadband business. The offer involves two kinds
of exchanges. The following table identifies which of our notes are eligible for
which kind of exchange and sets forth other important economic terms of the
exchange offer:
PRORATION EXCHANGE CREDIT
CUSIP NO. PERCENTAGE SPREAD SPREAD
--------- ---------- -------- ------
BROADBAND ELIGIBLE NOTES NEW BROADBAND NOTES
7.00% Notes Due May 15, 2005............ 001957AS8 65% 2.85%
7.50% Notes Due 2006.................... 001957AP4 65% 3.40%
7.75% Notes Due March 1, 2007........... 001957AR0 65% 3.40% Notes Due March 15, 2013.................. 4.35%
6.00% Notes Due 2009.................... 001957AV1 65% 2.65%
8.125% Debentures Due January 15,
2022.................................. 001957AJ8 65% 3.15%
8.125% Debentures Due July 15, 2024..... 001957AK5 65% 3.20%
8.35% Debentures Due 2025............... 001957AQ2 65% 3.35% Notes Due November 15, 2022............... 4.40%
8.625% Debentures Due December 1,
2031.................................. 001957AL3 65% 3.35%
CUSIP NO.
---------
AT&T ELIGIBLE NOTES NEW AT&T NOTES
5.625% Notes Due 2004................................ 001957AU3......... 6.375% Notes Due March 15, 2004
6.75% Notes Due 2004................................. 001957AM1......... 7.50% Notes Due April 1, 2004
7.75% Medium-Term Notes, Series A Due May 15, 2025... 00206QAP9......... 8.35% Medium-Term Notes, Series A Due May 15, 2025
8.00% Medium-Term Notes, Series A Due May 15, 2025... 00206QAN4......... 8.60% Medium-Term Notes, Series A Due May 15, 2025
6.50% Notes Due 2029................................. 001957AW9......... 6.50% Notes Due March 15, 2013
FRN Medium-Term Notes, Series A Due 2054 FRN Medium-Term Notes, Series A Due 2054
............. 00206QAE4.........
(spread over commercial paper: -.15%) (spread over commercial paper: +.45%)
In the first kind of exchange, we are offering to exchange Broadband
Eligible Notes for notes that, upon completion of the AT&T Comcast transaction,
will become New Broadband Notes. The New Broadband Notes will be obligations of
AT&T Broadband Corp. and will be fully and unconditionally guaranteed by AT&T
Comcast Corporation and the other cable guarantors described in this prospectus.
We will announce the exchange ratios and interest rates for the New Broadband
Notes by press release two business days prior to the expiration of the exchange
offer. The exchange ratios and interest rates will be based upon spreads over
the relevant reference U.S. Treasury rates as described in this prospectus.
In the second kind of exchange, we are offering to exchange AT&T Eligible
Notes for New AT&T Notes. The New AT&T Notes will remain solely our obligations
and, upon completion of the AT&T Comcast transaction, will have the revised
terms described in this prospectus, including the revised maturity date and/or
interest rates set forth in the table above.
To participate in either kind of exchange, you must consent to an amendment
to the terms of your original notes to the extent your notes are accepted for
exchange. This amendment will provide, among other things, that in the AT&T
Comcast transaction, neither AT&T Comcast Corporation nor any of its affiliates
needs to assume our obligations on the original notes. The amendment will amend
any series of notes so long as more than 50% by principal amount of that series
consents. THE TERMS OF AND THE LIQUIDITY OF THE TRADING MARKET FOR YOUR ORIGINAL
NOTES MAY BE AFFECTED BY THE EXCHANGE OFFER EVEN IF YOU DO NOT PARTICIPATE.
We will not accept any notes of a series unless more than 50% of the
principal amount of that series of notes has been validly tendered and not
withdrawn by the applicable expiration date. If more than the proration
percentage of any series of Broadband Eligible Notes is tendered and not
withdrawn by the applicable expiration date, notes of that series will be
accepted for exchange on a prorated basis. The exchange offer for AT&T Eligible
Notes is for all notes and is not subject to proration. The exchange offer is
subject to significant conditions that are described in this prospectus.
THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON
NOVEMBER 1, 2002 UNLESS EXTENDED AS TO ANY SERIES OF ELIGIBLE NOTES IN OUR
DISCRETION. YOU MAY WITHDRAW ANY NOTES TENDERED UNTIL THE EXPIRATION OF THE
EXCHANGE OFFER FOR THAT SERIES OF NOTES. THE EXCHANGE OFFER IS DESCRIBED IN
DETAIL IN THIS PROSPECTUS AND WE URGE YOU TO READ IT CAREFULLY, INCLUDING THE
RISK FACTORS STARTING ON PAGE 45. NEITHER THE BOARD OF DIRECTORS OF AT&T NOR ANY
OTHER PERSON IS MAKING ANY RECOMMENDATION AS TO WHETHER YOU SHOULD TENDER
ELIGIBLE NOTES IN THE EXCHANGE OFFER.
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 EXCHANGE OFFER OR DETERMINED IF THIS PROSPECTUS IS ACCURATE
OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Dealer Managers for the exchange offer are, in alphabetical order, as
follows:
CREDIT SUISSE FIRST BOSTON DEUTSCHE BANK SECURITIES GOLDMAN, SACHS & CO.
JPMORGAN MERRILL LYNCH & CO. MORGAN STANLEY
This prospectus is dated , 2002, and is first being mailed to
noteholders on or about , 2002.
This illustration consists of two diagrams. The first diagram is a simplified
diagram of the proposed AT&T Comcast transaction. The right side of the diagram
shows that AT&T will spin off its broadband business, referred to as "AT&T
Broadband Group," to a newly formed company, AT&T Broadband Corp., referred to
as "Broadband," and that Broadband Acquisition Corp., a wholly owned subsidiary
of AT&T Comcast Corporation, referred to as "AT&T Comcast," will merge with and
into Broadband, with Broadband continuing as the surviving corporation and a
wholly owned subsidiary of AT&T Comcast. The left side of the diagram shows that
Comcast Acquisition Corp., a wholly owned subsidiary of AT&T Comcast, will merge
with and into Comcast Corporation, with Comcast Corporation continuing as the
surviving corporation and a wholly owned subsidiary of AT&T Comcast.
The second diagram is a simplified diagram of the corporate structure of AT&T
Comcast, and the primary obligors and guarantors of the New Broadband Notes,
assuming the AT&T Comcast transaction is completed. The diagram shows AT&T
Comcast, which will guarantee the New Broadband Notes, and two of its
subsidiaries, Broadband, which will be the issuer of the New Broadband Notes,
and Comcast Corporation. The diagram shows two subsidiaries of Broadband,
MediaOne Group, Inc., referred to as "MediaOne," and AT&T Broadband, LLC,
formerly known as Tele-Communications, Inc. and referred to as "TCI," each of
which will guarantee the New Broadband Notes, as well as an additional Broadband
subsidiary named AT&T Broadband Overseas, and that MediaOne and TCI will have
various operating subsidiaries. The diagram also shows Comcast Cable
Communications, Inc., referred to as "Comcast Cable," which will guarantee the
New Broadband Notes, and that Comcast Cable will have various operating
subsidiaries. The diagram shows that Comcast Corporation will also have various
non-cable subsidiaries.
TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE EXCHANGE
OFFER................................. 1
SUMMARY................................. 5
The AT&T Comcast Transaction.......... 5
The Exchange Offer.................... 5
The Companies......................... 10
Description of the Broadband Exchange
Notes.............................. 12
Description of the New Broadband Notes
and the Cable Guarantees........... 12
Description of the New AT&T Notes..... 14
United States Federal Income Tax
Consequences....................... 15
The Dealer Managers................... 16
The Information Agent................. 16
The Exchange Agent.................... 16
The Luxembourg Exchange Agent......... 16
Retail Solicitation Fee............... 17
Recent Developments................... 17
SELECTED FINANCIAL DATA OF AT&T......... 18
SUMMARY PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION OF AT&T......... 21
SELECTED FINANCIAL DATA OF AT&T
BROADBAND GROUP....................... 22
SELECTED FINANCIAL DATA OF BROADBAND.... 23
UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS OF AT&T COMCAST
CORPORATION........................... 24
SELECTED FINANCIAL DATA OF COMCAST...... 34
SELECTED FINANCIAL DATA OF COMCAST
CABLE................................. 37
RATIOS OF EARNINGS TO FIXED CHARGES..... 39
PRO FORMA RATIO OF EARNINGS TO FIXED
CHARGES............................... 40
MARKETS AND MARKET PRICES............... 40
RISK FACTORS............................ 45
Risks Relating to the Exchange
Offer.............................. 45
Risks Relating to the AT&T Comcast
Transaction........................ 47
Risks For AT&T Relating to the AT&T
Comcast Transaction................ 51
Risks Relating to the Business of AT&T
Comcast............................ 52
Risks Relating to AT&T's Credit
Rating............................. 58
Risks Relating to the Businesses of
AT&T Consumer Services Group and
AT&T Business Services Group....... 59
DESCRIPTION OF THE EXCHANGE OFFER....... 67
Purpose of the Exchange Offer......... 67
Terms of the Exchange Offer; Period
for Tendering...................... 67
Important Reservation of Rights
Regarding the Exchange Offer....... 69
Exchange Ratio for the New Broadband
Notes.............................. 69
Interest Rate for the New Broadband
Notes.............................. 72
Other Terms of the Broadband Exchange
Notes, New Broadband Notes and the
New AT&T Notes..................... 72
Conditions to the Exchange Offer...... 73
Proration............................. 75
Fractional Notes...................... 75
Required Consent...................... 76
Procedures for Tendering.............. 76
Book-Entry Transfer................... 77
Guaranteed Delivery Procedures........ 78
Acceptance of Eligible Notes and
Delivery of New Notes.............. 78
Withdrawal Rights..................... 79
The Dealer Managers................... 80
Retail Solicitation Fee............... 81
Information Agent..................... 82
Exchange Agent........................ 82
Luxembourg Exchange Agent............. 82
Fees and Expenses..................... 83
Transfer Taxes........................ 83
Material United States Federal Income
Tax Consequences of the Exchange
Offer.............................. 83
Consequences of Failures to Properly
Tender Broadband Eligible Notes and
AT&T Eligible Notes in the Exchange
Offer.............................. 91
Use of Proceeds....................... 91
DESCRIPTION OF THE NOTE AMENDMENT....... 92
The Note Amendment.................... 92
Terms of the Note Amendment........... 92
Conditions to the Note Amendment...... 93
i
Requisite Consents; Outstanding
Notes.............................. 93
No Consent Fee........................ 93
Expiration Date; Extension of the
Exchange Offer; Amendment;
Termination........................ 94
Consequences to Non-Consenting
Holders; Dissenters' Rights........ 94
Consent Procedures.................... 94
Revocation of Consents................ 94
DESCRIPTION OF THE BROADBAND EXCHANGE
NOTES................................. 95
Basic Terms of the Broadband Exchange
Notes.............................. 95
Mandatory Exchange Upon Completion of
the AT&T Comcast Transaction....... 96
Interest Payments..................... 97
Additional Terms Pertaining Only to
the 6.00% Broadband Exchange Notes
Due March 15, 2009................. 97
Optional Redemption................... 99
No Mandatory Redemption or Sinking
Fund............................... 102
Additional Debt....................... 102
Certain Covenants..................... 102
Modification of the AT&T Indenture.... 103
Events of Default..................... 103
Discharge and Defeasance.............. 104
No Personal Liability of Stockholders,
Officers, Directors or Employees... 104
Concerning the Trustee................ 105
Governing Law......................... 105
Book-Entry System..................... 105
Certificated Notes.................... 105
Same-Day Payment...................... 105
Certain Definitions................... 106
DESCRIPTION OF THE NEW BROADBAND NOTES
AND THE CABLE GUARANTEES.............. 108
Basic Terms of the New Broadband
Notes.............................. 108
Interest Payments..................... 108
Cable Guarantees...................... 108
No Optional Redemption................ 109
No Mandatory Redemption or Sinking
Fund............................... 109
Additional Debt....................... 109
Certain Covenants..................... 109
Modification and Waiver............... 113
Events of Default..................... 114
Discharge and Defeasance.............. 116
No Personal Liability of
Incorporators, Stockholders,
Officers, Directors or Employees... 118
Concerning the Trustee................ 118
Governing Law......................... 118
Book-Entry System..................... 118
Certificated Notes.................... 120
Same-Day Payment...................... 120
COMPARISON OF THE NEW BROADBAND NOTES
AND THE BROADBAND EXCHANGE NOTES...... 121
Comparison of Basic Terms............. 121
Elimination of Payment of Additional
Amounts; Redemption Upon a Tax
Event.............................. 122
Optional Redemption................... 122
Covenants............................. 122
Modification and Waiver............... 123
Events of Default..................... 124
DESCRIPTION OF THE NEW AT&T NOTES....... 126
Basic Terms of the New AT&T Notes..... 126
Interest Payments..................... 127
Additional Terms Pertaining Only to
the New AT&T Notes Due 2004 (Series
1) and New AT&T Notes Due 2013..... 130
Optional Redemption................... 132
Optional Repayment Terms Pertaining
Only to the New FRN Medium-Term
Notes, Series A Due 2054........... 135
No Mandatory Redemption or Sinking
Fund............................... 136
Notices............................... 136
Luxembourg Listing.................... 136
DESCRIPTION OF AT&T COMCAST
TRANSACTION........................... 137
Structure of the Transaction.......... 137
Timing of Closing..................... 137
The Merger Agreement.................. 137
Covenants........................ 137
Post-Transaction Governance
Arrangements.................. 139
Employee Benefits Matters........ 140
Covenant Regarding Comcast's AT&T
Stock......................... 140
Representations and Warranties... 141
Conditions to the Completion of
the Mergers................... 141
Termination of the Merger
Agreement..................... 142
ii
Expenses......................... 143
Amendments and Waivers........... 143
The Separation and Distribution
Agreement.......................... 144
The Separation................... 144
Timing of the Separation and the
Broadband Spin-Off............ 145
Repayment of Intracompany Debt... 145
Post-Spin-Off Transactions....... 145
Conditions to the Completion of
the Broadband Spin-Off........ 145
Mutual Release;
Indemnification............... 146
Termination...................... 147
Amendments and Waivers........... 147
The Exchange Agreement and Instrument
of Admission....................... 147
QUIPS Exchange................... 148
Covenants........................ 148
Conditions to the Completion of
the Microsoft Transaction..... 149
Interactive Technology
Agreement..................... 150
The Tax Sharing Agreement............. 150
The Ancillary Agreements.............. 151
Material Federal Income Tax
Consequences of the AT&T Comcast
Transaction........................ 152
OTHER INDEBTEDNESS AND THE
CROSS-GUARANTEES...................... 153
Description of New Credit
Facilities......................... 153
Other Indebtedness and the Proposed
Cross-Guarantees................... 154
LEGAL MATTERS........................... 156
EXPERTS................................. 156
INFORMATION REGARDING FORWARD-LOOKING
STATEMENTS............................ 157
WHERE YOU CAN FIND MORE INFORMATION..... 158
IMPORTANT INFORMATION FOR NON-U.S.
HOLDERS............................... 160
INDEX TO FINANCIAL STATEMENTS........... F-1
---------------------
You should rely only on information contained in this prospectus. No one is
authorized to provide you with information that is different from that contained
in this prospectus. We do not intend the contents of any websites referred to in
this prospectus to be part of this prospectus.
We are offering to sell, and are seeking offers to buy, the Broadband
Exchange Notes, the New Broadband Notes and the New AT&T Notes only in
jurisdictions where offers and sales are permitted. The information contained in
this prospectus is accurate only as of its date regardless of the time of
delivery of this prospectus or of any sale of the new notes.
The registrants accept responsibility for the information contained in this
prospectus. To the best of our knowledge, the information the registrants give
in this prospectus is in accordance with the facts and contains no omissions
likely to affect the import of the Luxembourg Stock Exchange listing
particulars.
We refer to AT&T Corp. in this prospectus as "AT&T" or "we," "us," "our" or
comparable terms. We refer to Comcast Corporation as "Comcast," Comcast Cable
Communications, Inc. as "Comcast Cable," AT&T Comcast Corporation as "AT&T
Comcast," AT&T Broadband Corp. as "Broadband," MediaOne Group, Inc. as
"MediaOne," AT&T Broadband, LLC (formerly known as Tele-Communications, Inc.) as
"TCI," and the AT&T broadband business as "AT&T Broadband Group."
iii
QUESTIONS AND ANSWERS ABOUT THE EXCHANGE OFFER
The following questions and answers respond to some of the most basic
questions that holders of the notes eligible for the exchange offer may have but
likely will not contain all of the information that is important to you. To
better understand the exchange offer, you should read the summary following the
questions and answers, as well as the rest of this prospectus.
WHAT IS THE AT&T COMCAST TRANSACTION?
Comcast and AT&T are planning to combine Comcast with the AT&T broadband
business. 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 AT&T Comcast transaction will occur in several steps. First, AT&T will
transfer the assets and liabilities of its broadband business to Broadband, a
company newly formed for the purpose of effectuating the AT&T Comcast
transaction. Second, AT&T will spin off Broadband to its shareholders. Third,
Comcast and Broadband will each merge with a different, wholly owned subsidiary
of AT&T Comcast. The merger agreement entered into in connection with the AT&T
Comcast transaction provides for all of the steps described above to occur on
the closing date for the mergers. The AT&T Comcast transaction remains subject
to regulatory and other approvals and other conditions, including the receipt of
specified note consents as described in this prospectus, and is expected to
close by the end of 2002.
None of AT&T, Broadband or any other party will receive any proceeds from
the issuance of the new notes in the exchange offer. The amount that Broadband
would otherwise be required to pay to AT&T upon completion of the AT&T Comcast
transaction to satisfy intercompany indebtedness then outstanding will be
reduced based upon the aggregate principal amount of New Broadband Notes issued
in the mandatory exchange in an amount to be mutually agreed upon.
For purposes of this prospectus, the AT&T Comcast transaction is defined as
the transactions contemplated by the AT&T Comcast merger agreement and the
related separation and distribution agreement, in each case as amended,
supplemented or otherwise modified from time to time, including after the date
of this prospectus.
WHAT IS THE EXCHANGE OFFER?
If you hold Broadband Eligible Notes set forth on the cover of this
prospectus, you are being asked to exchange those notes for Broadband Exchange
Notes that will initially be obligations of AT&T and Broadband. Upon completion
of the AT&T Comcast transaction, the Broadband Exchange Notes will be
mandatorily exchanged at the relevant exchange ratio for New Broadband Notes
that are primary obligations only of Broadband fully and unconditionally
guaranteed by Comcast Cable, AT&T Comcast, MediaOne and TCI, whose guarantees we
refer to as the cable guarantees. AT&T will not be an obligor on the New
Broadband Notes. If the AT&T Comcast transaction is terminated, Broadband will
be released as an obligor on the Broadband Exchange Notes, which will cease to
be exchangeable for New Broadband Notes.
If you hold AT&T Eligible Notes set forth on the cover of this prospectus,
you are being asked to exchange those notes for New AT&T Notes that will be
obligations solely of AT&T.
Holders of Broadband Eligible Notes and AT&T Eligible Notes accepted in
exchange must consent to the note amendment described below.
WHEN WILL I RECEIVE ACCRUED INTEREST ON THE BROADBAND ELIGIBLE NOTES, THE
BROADBAND EXCHANGE NOTES, THE NEW BROADBAND NOTES, THE AT&T ELIGIBLE NOTES OR
THE NEW AT&T NOTES?
You should refer to the specific terms of the notes described in this
prospectus to determine who will be eligible to receive accrued and unpaid
interest and when accrued and unpaid interest will be paid. Interest on each of
the new notes will accrue from the date of original issuance of that series of
notes, which will be on the date the exchange offer is completed with respect to
the Broadband Exchange Notes and the New AT&T Notes and which will be on the
date of mandatory
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exchange with respect to the New Broadband Notes. However:
- interest accrued and unpaid on any Broadband Eligible Notes accepted in an
exchange offer (a) will be paid along with the first payment of interest on
the relevant series of Broadband Exchange Notes or (b) if the mandatory
exchange of the Broadband Exchange Notes occurs prior to that first payment of
interest, will be paid at the time of mandatory exchange;
- interest accrued and unpaid on the Broadband Exchange Notes will be paid at
the time of mandatory exchange;
- interest accrued and unpaid on any AT&T Eligible Notes accepted in an exchange
offer will be paid along with the first payment of interest on the relevant
series of New AT&T Notes; and
- interest accrued and unpaid on any Broadband Eligible Notes or AT&T Eligible
Notes not accepted in an exchange offer will be paid on the same interest
payment dates as previously scheduled for the respective series.
WILL YOU ACCEPT ALL NOTES TENDERED? WILL THERE BE PRORATION?
We will not accept any eligible notes of a series unless more than 50% of
that series of notes has been validly tendered and not withdrawn by the
expiration of the exchange offer for that series. For these purposes, all of the
Series A Medium-Term Notes outstanding will be treated as part of a single
series.
We will not necessarily accept all Broadband Eligible Notes tendered. If
more than the relevant proration percentage of the principal amount of a series
of Broadband Eligible Notes, as set forth on the cover of this prospectus, is
tendered, we will accept Broadband Eligible Notes of that series for exchange on
a prorated basis.
The exchange offer for each series of AT&T Eligible Notes is for all notes
of that series and is not subject to proration.
WHAT IS THE NOTE AMENDMENT?
Holders of Broadband Eligible Notes and AT&T Eligible Notes must consent to
an amendment of the terms of those notes to the extent their notes are accepted
for exchange. The note amendment would clarify that in connection with the AT&T
Comcast transaction, the successor formed by the consolidation or merger, or to
which AT&T shall have transferred its property, need not assume the obligations
of AT&T under the notes of that series and that the successor shall not succeed
to and be substituted for AT&T under the notes of that series.
WILL I BE PAID FOR CONSENTING TO THE NOTE AMENDMENT?
Holders of Broadband Eligible Notes or AT&T Eligible Notes, to the extent
their notes are accepted for exchange, must consent to the note amendment and
will not receive any consent payment. Notes of any series not accepted for
exchange will not receive any payment but will be bound by the note amendment,
provided that more than 50% of the notes of that series have been accepted for
exchange. For these purposes, all of the Series A Medium-Term Notes outstanding
will be treated as part of a single series.
WHAT IS REQUIRED FOR THE NOTE AMENDMENT TO BE EFFECTIVE? WILL I HAVE ANY
DISSENTERS' RIGHTS IN CONNECTION WITH THE NOTE AMENDMENT?
The note amendment will be effective as to each series of notes if more
than 50% by principal amount of the notes of that series are accepted for
exchange. For these purposes, all of the Series A Medium-Term Notes outstanding
will be treated as part of a single series. You will not be entitled to any
dissenters' rights if the note amendment becomes effective without your consent.
DO I NEED TO SEPARATELY CONSENT TO THE NOTE AMENDMENT IN ORDER TO BE ELIGIBLE
FOR THE EXCHANGE OFFER?
Yes. However, completing the letter of transmittal for the exchange offer
will constitute your consent to the note amendment to the extent we accept your
Broadband Eligible Notes or AT&T Eligible Notes for exchange. If the requisite
consents are received, the note amendment will be binding on the relevant series
of Broadband Eligible Notes or AT&T Eligible Notes that remain outstanding.
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WHAT HAPPENS IF I DO NOT EXCHANGE MY NOTES OR MY NOTES ARE NOT ELIGIBLE FOR OR
ACCEPTED IN THE EXCHANGE OFFER?
If you do not exchange your notes, they will remain obligations of AT&T
and, in the case of the Broadband Eligible Notes, will not be obligations of
Broadband and will not be entitled to the cable guarantees of AT&T Comcast,
Comcast Cable, MediaOne and TCI. The terms of your notes will be subject to the
note amendment as a result of the exchange offer whether or not you exchange
your notes so long as more than 50% of the notes of that series have been
accepted for exchange.
WHY ARE YOU MAKING THE EXCHANGE OFFER AND WHAT IS THE PURPOSE OF THE NOTE
AMENDMENT?
The note amendment will satisfy the condition to the AT&T Comcast
transaction that AT&T obtain the consent of, or defease, purchase, retire or
acquire, its debt in respect of series representing at least 90% in aggregate
principal amount outstanding on December 19, 2001, which was approximately $12.7
billion, of debt securities issued under the indenture pursuant to which the
Broadband Eligible Notes and the AT&T Eligible Notes were issued. We refer to
this indenture, which is dated as of September 7, 1990, between AT&T and The
Bank of New York, as trustee, as amended by the First Supplemental Indenture,
dated as of October 30, 1992, as amended, between AT&T and the trustee, as the
AT&T Indenture. As of the date of this prospectus, approximately $11.8 billion
of these debt securities, including the Broadband Eligible Notes and the AT&T
Eligible Notes, remained outstanding. We sometimes refer to the Broadband
Eligible Notes and the AT&T Eligible Notes as the AT&T Notes. AT&T and Comcast
could mutually agree to waive this condition with respect to all or any portion
of the AT&T Notes for which consents are not obtained.
If the AT&T Comcast transaction were to occur and if holders of the AT&T
Notes were to assert successfully that completing the AT&T Comcast transaction
required Broadband or one of its affiliates to assume AT&T's obligations under
the AT&T Notes and that did not occur, then AT&T could be required to refinance
the AT&T Notes. Thus, while AT&T and Comcast could jointly waive the consent
condition to the AT&T Comcast transaction, AT&T is making the exchange offer
primarily to facilitate the AT&T Comcast transaction and to optimize the
respective capital structures of AT&T and AT&T Comcast in an economic and tax
efficient manner.
WHAT HAPPENS IF THE AT&T COMCAST TRANSACTION IS TERMINATED?
If the AT&T Comcast transaction is terminated:
- the Broadband Exchange Notes will not be exchanged for New Broadband Notes,
will become obligations only of AT&T with Broadband released as an obligor and
will not be entitled to the benefits of the cable guarantees; and
- the maturity date and/or interest rate on the New AT&T Notes will not change.
ARE THERE ANY RISKS THAT I SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER
AND CONSENT SOLICITATION?
Yes. You should carefully consider the risk factors starting on page 45, as
well as the risk factors discussed in AT&T's and Comcast Cable's filings with
the Securities and Exchange Commission incorporated by reference in this
prospectus.
WHEN DOES THE EXCHANGE OFFER EXPIRE?
THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON
NOVEMBER 1, 2002 UNLESS EXTENDED AS TO ANY ONE OR MORE SERIES OF NOTES IN OUR
DISCRETION.
WE WILL ANNOUNCE ANY EXTENSIONS BY PRESS RELEASE OR OTHER PERMITTED MEANS
NO LATER THAN 9:00 A.M., NEW YORK CITY TIME, THE NEXT BUSINESS DAY AFTER
EXPIRATION OF THE EXCHANGE OFFER FOR THAT SERIES OF NOTES.
IF I HOLD BROADBAND ELIGIBLE NOTES OR AT&T ELIGIBLE NOTES, HOW DO I TENDER OR
WITHDRAW THOSE NOTES IN THE EXCHANGE OFFER?
In order to tender eligible notes in the exchange offer, you must properly
submit your notes and a completed letter of transmittal and the other agreements
and documents described in this prospectus. If you own notes held through a
broker or other third party, or in "street name,"
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you will need to follow the instructions in the letter of transmittal on how to
instruct them to tender the notes on your behalf, as well as submit a completed
letter of transmittal and the other agreements and documents described in this
prospectus. Completing the letter of transmittal will constitute your consent to
the note amendment to the extent we accept your Broadband Eligible Notes or AT&T
Eligible Notes for exchange, unless you subsequently withdraw those notes prior
to the expiration of the exchange offer for the notes of that series. If the
requisite consents are received, the note amendment will be binding on the
relevant series of Broadband Eligible Notes or AT&T Eligible Notes that remain
outstanding.
You may withdraw tendered notes at any time prior to the expiration of the
exchange offer for the notes of that series. Validly withdrawing your notes will
revoke the associated consent to the note amendment.
HOW DO I TENDER BROADBAND ELIGIBLE NOTES OR AT&T ELIGIBLE NOTES THROUGH THE
LUXEMBOURG EXCHANGE AGENT?
For any 5.625% AT&T Eligible Notes Due 2004 (ISIN No. US 001957AU39), 6.00%
Broadband Eligible Notes Due 2009 (ISIN No. US 001957AV12) or 6.50% AT&T
Eligible Notes Due 2029 (ISIN No. US 001957AW94), referred to collectively as
the Luxembourg Notes, letters of transmittal may be submitted in accordance with
procedures that may be obtained by contacting the Luxembourg exchange agent at
the telephone number listed on the back cover page of this prospectus.
INSTRUCTIONS ON HOW TO TENDER OR WITHDRAW BROADBAND ELIGIBLE NOTES OR AT&T
ELIGIBLE NOTES FOR EXCHANGE ARE SET FORTH ON PAGE 76 AND IN THE LETTER OF
TRANSMITTAL.
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SUMMARY
This summary highlights selected information from this prospectus and may not
contain all of the information that is important to you. To better understand
the exchange offer, you should read this entire document carefully, as well as
those additional documents to which we refer you. See "Where You Can Find More
Information."
THE AT&T COMCAST TRANSACTION
Comcast and AT&T are planning to combine Comcast with the AT&T broadband
business. 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 AT&T Comcast transaction will occur in several steps. First, AT&T will
transfer the assets and liabilities of AT&T's broadband business to Broadband, a
company newly formed for the purpose of effectuating the AT&T Comcast
transaction. Second, AT&T will spin off Broadband to its shareholders. Third,
Comcast and Broadband will each merge with a different, wholly owned subsidiary
of AT&T Comcast. Comcast and AT&T shareholders will receive the shares of AT&T
Comcast. The merger agreement entered into in connection with the AT&T Comcast
transaction provides for all of the steps described above to occur on the
closing date for the AT&T Comcast transaction. The AT&T Comcast transaction
remains subject to regulatory and other approvals and other conditions,
including the receipt of specified note consents as described in this
prospectus, and is expected to close by the end of 2002.
See "Description of AT&T Comcast Transaction" for a description of the
principal agreements governing the AT&T Comcast transaction, the conditions to
completion of the AT&T Comcast transaction and more information.
THE EXCHANGE OFFER
THE EXCHANGE OFFER
AT&T is offering to exchange its Broadband Eligible Notes for a like
principal amount of Broadband Exchange Notes. The Broadband Exchange Notes will
be obligations of both AT&T and Broadband. Except as described in this
prospectus, the Broadband Exchange Notes will have terms substantially identical
to the Broadband Eligible Notes as amended by the note amendment. The Broadband
Exchange Notes are summarized under "Description of the Broadband Exchange
Notes" below. Upon consummation of the AT&T Comcast transaction, however, the
Broadband Exchange Notes will be mandatorily exchanged for New Broadband Notes
at the relevant exchange ratio. The exchange ratio will be announced by press
release two business days prior to the expiration of the exchange offer and will
be based on the relevant exchange spreads set forth on the cover of this
prospectus over the relevant reference U.S. Treasury rates. The exchange ratio
will be calculated as the exchange price per $1,000 principal amount of the
Broadband Eligible Notes divided by $1,000, and the exchange price is equal to
the present value of the Broadband Eligible Notes on the exchange settlement
date in accordance with standard market practice assuming the Broadband Eligible
Notes would be repaid at $1,000 at maturity, determined on the basis of a yield
to maturity equal to the sum of the relevant exchange spread set forth on the
cover of this prospectus and the related reference U.S. Treasury yield. The
related reference U.S. Treasury yield will be calculated by the dealer managers
in accordance with standard market practice based on the bid side price for such
reference security, as of 2:00 p.m., New York City time, two business days prior
to the expiration date of the exchange offer, as displayed in Bloomberg
Government Pricing Monitor, or any other recognized quotation source selected by
the dealer managers. The method for determining the exchange ratio is described
in detail under "Description of the Exchange Offer -- Exchange Ratio for the New
Broadband Notes."
The New Broadband Notes will be primary obligations only of Broadband,
fully and unconditionally guaranteed by Comcast Cable, AT&T Comcast, MediaOne
and TCI. The interest rates for each series of New Broadband Notes will be
announced by press release two business days prior to the expiration of the
exchange offer for that series and will be based on a credit spread over the
relevant reference U.S.
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Treasury rates. The reference U.S. Treasury rate with respect to each series of
New Broadband Notes will be calculated, by the dealers managers, in accordance
with standard market practice, based on the bid side price of the relevant
reference U.S. Treasury as listed on the relevant Bloomberg Government Pricing
Monitor or any other recognized quotation source selected by the dealer managers
at 2:00 p.m., New York City time, two business days prior to the expiration of
the exchange offer. The relevant reference U.S. Treasury has been selected to
approximate the maturity characteristics of the applicable series of New
Broadband Notes. The method for determining the interest rate is described in
detail under "Description of the Exchange Offer -- Interest Rate for the New
Broadband Notes" and the other terms of the New Broadband Notes are summarized
under "Description of the New Broadband Notes and the Cable Guarantees."
AT&T is also offering to exchange its AT&T Eligible Notes for a like
principal amount of New AT&T Notes. The New AT&T Notes will be obligations only
of AT&T. Except as described in this prospectus, the New AT&T Notes will have
terms substantially identical to the AT&T Eligible Notes as amended by the note
amendment. Upon completion of the AT&T Comcast transaction, however, the
interest rates for each applicable series of New AT&T Notes will be adjusted
automatically as set forth on the cover of this prospectus and the maturity date
of the New AT&T Notes issued in exchange for the 6.50% AT&T Eligible Notes due
March 15, 2029 will be changed to March 15, 2013. The material terms of the New
AT&T Notes are summarized under "Description of the New AT&T Notes" below.
Holders of Broadband Eligible Notes and AT&T Eligible Notes must consent to
the note amendment described below to the extent their notes are accepted for
exchange. Notes of any series not tendered for exchange and notes of any series
of Broadband Eligible Notes not accepted for exchange due to proration will
remain obligations only of AT&T, will not become obligations of Broadband, and
will not be subject to the cable guarantees but will be bound by the note
amendment if more than 50% by principal amount of that series consents to the
note amendment by participating in the exchange. For these purposes, all of the
Series A Medium Term Notes outstanding will be treated as part of a single
series. THE TERMS OF YOUR NOTES MAY BE AMENDED AS A RESULT OF THE EXCHANGE OFFER
WHETHER OR NOT YOU PARTICIPATE IN THE EXCHANGE.
The exchange offer is subject to a number of conditions summarized below
under "-- Conditions to the Exchange Offer" and in detail under "Description of
the Exchange Offer -- Conditions to the Exchange Offer."
Even if the exchange offer is completed, if the AT&T Comcast transaction is
terminated:
- the Broadband Exchange Notes will not be exchanged for New Broadband
Notes, will become obligations only of AT&T with Broadband released as an
obligor and will not be entitled to the benefits of the cable guarantees;
and
- the maturity date and interest rate on the New AT&T Notes will not
change.
PAYMENT OF INTEREST ACCRUED ON THE BROADBAND ELIGIBLE NOTES, THE BROADBAND
EXCHANGE NOTES, THE NEW BROADBAND NOTES, THE AT&T ELIGIBLE NOTES AND THE NEW
AT&T NOTES
You should refer to the specific terms of the notes described in this
prospectus to determine who will be eligible to receive accrued and unpaid
interest and when accrued and unpaid interest will be paid. Interest on each of
the notes will accrue from the date of original issuance of that series of new
notes, which will be on the date the exchange offer is completed with respect to
the Broadband Exchange Notes and the New AT&T Notes and which will be on the
date of mandatory exchange with respect to the New Broadband Notes. However:
- interest accrued and unpaid on any Broadband Eligible Notes accepted in
the exchange offer (a) will be paid along with the first payment of
interest on the relevant series of Broadband Exchange Notes or (b) if the
mandatory exchange of the Broadband Exchange Notes occurs prior to that
first payment of interest, will be paid at the time of mandatory
exchange;
- interest accrued and unpaid on any series of Broadband Exchange Notes
will be paid at the time of mandatory exchange;
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- interest accrued and unpaid on any AT&T Eligible Notes accepted in the
exchange offer will be paid along with the first payment of interest on
the relevant series of New AT&T Notes; and
- interest accrued and unpaid on any Broadband Eligible Notes or AT&T
Eligible Notes not accepted in the exchange offer will be paid on the
same interest payment dates as previously scheduled for the respective
series.
FRACTIONAL NOTES
Notes will be issued only in denominations of $1,000 and multiples of
$1,000. If the exchange of a series of Broadband Eligible Notes is subject to
proration and proration would result in your being entitled to receive a
fractional interest in the relevant series of Broadband Exchange Notes, the
principal amount of Broadband Eligible Notes accepted in the exchange will be
rounded to the nearest $1,000. This rounding will result in your receiving only
whole Broadband Exchange Notes in exchange for your Broadband Eligible Notes.
If the mandatory exchange of a series of Broadband Exchange Notes into New
Broadband Notes would result in your being entitled to receive a fractional
interest in the relevant series of New Broadband Notes, the principal amount you
receive will be rounded down to the nearest $1,000 multiple and you will receive
cash in lieu of a fractional New Broadband Note for the balance.
Because the exchange offer of New AT&T Notes for AT&T Eligible Notes is not
subject to proration and New AT&T Notes will be issued in a like principal
amount as the AT&T Eligible Notes accepted in exchange, there will not be any
need to pay cash in lieu of fractional New AT&T Notes.
MINIMUM AMOUNT OF NOTES TENDERED; PRORATION OF BROADBAND ELIGIBLE NOTES
No Broadband Eligible Notes or AT&T Eligible Notes of a series will be
accepted for exchange unless more than 50% of the principal amount of that
series of eligible notes has been validly tendered and not withdrawn by the
expiration of the exchange offer for that series. For these purposes, all of the
Series A Medium-Term Notes outstanding will be treated as part of a single
series. If more than the relevant proration percentage of the principal amount
of any series of Broadband Eligible Notes, as set forth on the cover of this
prospectus, is tendered and not withdrawn, notes of that series will be accepted
for exchange on a prorated basis. The exchange offer for each series of AT&T
Eligible Notes is for all notes of that series and is not subject to proration.
PURPOSE OF THE EXCHANGE OFFER AND NOTE AMENDMENT
The AT&T Comcast transaction is conditioned on AT&T's obtaining the consent
of, or having defeased, purchased, retired or acquired its debt in respect of
series representing at least 90% in aggregate principal amount outstanding on
December 19, 2001, which was approximately $12.7 billion, of debt securities
issued under the AT&T Indenture. As of the date of this prospectus,
approximately $11.8 billion of these debt securities, including the Broadband
Eligible Notes and the AT&T Eligible Notes, remained outstanding. AT&T and
Comcast could mutually agree to waive this condition with respect to all or any
portion of the AT&T Notes for which consents are not obtained.
If the AT&T Comcast transaction were to occur and if holders of the AT&T
Notes were to assert successfully that completing the AT&T Comcast transaction
required Broadband or one of its affiliates to assume AT&T's obligations under
the AT&T Notes and that did not occur, then AT&T could be required to refinance
the AT&T Notes. Thus, while AT&T and Comcast could jointly waive the consent
condition to the AT&T Comcast transaction, AT&T is making the exchange offer
primarily to facilitate the AT&T Comcast transaction and to optimize the
respective capital structures of AT&T and AT&T Comcast in an economic and tax
efficient manner.
THE CABLE GUARANTEES
The New Broadband Notes issued in exchange for Broadband Exchange Notes
upon completion of the AT&T Comcast transaction will be fully and
unconditionally guaranteed by Comcast Cable, AT&T Comcast, MediaOne and TCI,
which we collectively refer to as the cable guarantors. The cable guarantees
will rank equally with all other general unsecured and unsubordinated
obligations of the cable guarantors,
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including approximately $14.4 billion of outstanding indebtedness as of June 30,
2002 and up to $12.8 billion of new indebtedness which will be guaranteed by the
cable guarantors in connection with the closing of the AT&T Comcast transaction.
For more information regarding the cable guarantees, see "Description of the New
Broadband Notes and the Cable Guarantees" and "Other Indebtedness and the
Cross-Guarantees."
The New AT&T Notes will be obligations only of AT&T and will not be subject
to the cable guarantees.
THE NOTE AMENDMENT
If the requisite consents are received, the note amendment will clarify
that in connection with the AT&T Comcast transaction, the successor formed by
the consolidation or merger, or to which AT&T shall have transferred its
property, need not assume the obligations of AT&T under the notes of that series
and that the successor shall not succeed to and be substituted for AT&T under
the notes of that series.
Holders of the Broadband Eligible Notes and the AT&T Eligible Notes, to the
extent their notes are accepted for exchange, must consent to the note
amendment. The note amendment is designed to satisfy a condition to the AT&T
Comcast transaction.
Effectiveness of Note Amendment; Dissenters' Rights
The note amendment will be effective as to a series of notes if more than
50% by principal amount of the notes of that series consent. For these purposes,
all of the Series A Medium Term Notes outstanding will be treated as part of a
single series. You will not be entitled to any dissenters' rights if the note
amendment becomes effective without your consent.
Description of the Note Amendment
The note amendment clarifies the covenant in the AT&T Indenture regarding
the consolidation, merger with, or sale or conveyance of all or substantially
all of the property of AT&T. The note amendment will be effective with respect
to each series of notes that consents to the amendment and will provide that the
AT&T Comcast transaction, including all transactions completed as steps in the
AT&T Comcast transaction, (1) will not result in a consolidation, merger, sale,
conveyance or other transfer of property of AT&T (including stock of
subsidiaries) as an entirety or substantially as an entirety for purposes of the
AT&T Indenture, and (2) will not violate the successor clause of the AT&T
Indenture or any other provision of the AT&T Indenture or any security issued
under the AT&T Indenture, regardless of whether any person assumes any of the
indebtedness outstanding under the AT&T Indenture or any other obligation under
the AT&T Indenture or any security issued under the AT&T Indenture.
The merger covenant applicable to the Broadband Exchange Notes and the New
AT&T Notes will be the AT&T Indenture merger covenant as so amended.
EXPIRATION OF THE EXCHANGE OFFER
THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON
NOVEMBER 1, 2002 UNLESS IT IS EXTENDED AS TO ONE OR MORE SERIES OF NOTES IN OUR
DISCRETION.
WE WILL ANNOUNCE ANY EXTENSIONS BY PRESS RELEASE OR OTHER PERMITTED MEANS
NO LATER THAN 9:00 A.M., NEW YORK CITY TIME, THE NEXT BUSINESS DAY AFTER
EXPIRATION OF THE EXCHANGE OFFER FOR THAT SERIES OF NOTES.
AMENDMENT OF THE EXCHANGE OFFER
We reserve the right to determine whether the conditions of the exchange
offer have been satisfied and not to accept any of the notes of one or more
series we determine have not been validly tendered, and to otherwise interpret
or modify the terms of this exchange offer. We will comply with applicable laws
that require us to extend the period during which notes may be tendered or
withdrawn as a result of changes in the terms of or information relating to the
exchange offer.
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TENDERS AND WITHDRAWALS OF NOTES
In order to tender eligible notes in the exchange offer, you must properly
submit the notes and a completed letter of transmittal and the other agreements
and documents described in this prospectus and the letter of transmittal.
Completing the letter of transmittal will evidence your consent to the note
amendment to the extent your notes are accepted for exchange. If you own notes
held through a broker or other third party, or in "street name," you will need
to follow the instructions in the letter of transmittal on how to instruct them
to tender the notes on your behalf, as well as submit a completed letter of
transmittal and the other documents described in this prospectus and the letter
of transmittal. In addition, letters of transmittal may be submitted for any
Luxembourg Notes in accordance with the procedures that may be obtained by
contacting the Luxembourg exchange agent at the telephone number listed under
"-- The Luxembourg Exchange Agent." We will determine in our sole discretion
whether any notes have been validly tendered. Please carefully follow the
instructions on how to tender your notes contained in this prospectus and the
letter of transmittal.
If you decide to tender eligible notes in the exchange offer, you may
withdraw them at any time prior to the expiration of the exchange offer for the
notes of that series. Validly withdrawing your notes will revoke your consent to
the note amendment with respect to those notes withdrawn.
If we decide for any reason not to accept any eligible notes for exchange,
those eligible notes will be returned without expense promptly after the
exchange offer expires.
PLEASE SEE PAGE 76 AND THE LETTER OF TRANSMITTAL FOR PROCEDURES ON HOW TO
TENDER OR WITHDRAW YOUR NOTES.
CONDITIONS TO THE EXCHANGE OFFER
The exchange offer is subject to various conditions, including that AT&T
will not accept any eligible notes of a series unless more than 50% of the
aggregate principal amount of that series of notes has been validly tendered and
not withdrawn by the expiration of the exchange offer for that series. In
addition, AT&T is not required to complete the exchange offer, if on or before
the expiration date, among other things:
- we have not received, as of the expiration of the exchange offer, the
valid and unrevoked consents to the note amendment of the holders of more
than 50% in aggregate principal amount of those series of AT&T Notes
which will result in AT&T's obtaining the consent of, or having defeased,
purchased, retired or acquired debt in respect of series representing at
least 90% in aggregate principal amount outstanding on December 19, 2001,
which was approximately $12.7 billion, of debt securities issued under
the AT&T Indenture. As of the date of this prospectus, approximately
$11.8 billion of these debt securities, including the AT&T Notes,
remained outstanding;
- AT&T shall have received a private letter ruling from the Internal
Revenue Service with respect to the spin-off, the exchange offer and
certain related transactions, in form and substance reasonably
satisfactory to AT&T and Comcast;
- there has occurred any specified adverse change with respect to AT&T,
Comcast or Broadband -- or with respect to the expected benefits of the
exchange offer;
- there has occurred any specified adverse changes in the financial or
capital markets or in political, market, economic or financial conditions
in the United States or abroad; or
- the AT&T Comcast transaction has been terminated.
USE OF PROCEEDS
None of AT&T, Broadband or any other party will receive any proceeds from
the issuance of the new notes in the exchange offer. The amount that Broadband
would otherwise be required to pay to AT&T upon completion of the AT&T Comcast
transaction to satisfy intercompany indebtedness then outstanding will be
reduced based upon the aggregate principal amount of New Broadband Notes issued
in the exchange.
9
THE COMPANIES
AT&T CORP.
900 Routes 202/206 North
Bedminster, NJ 07921-0752
(908) 221-2000
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 AT&T Comcast transaction would separate and spin
off the AT&T Broadband Group into a separate company, Broadband, that
immediately would be combined with and become a subsidiary of AT&T Comcast.
Upon completion of the AT&T Comcast transaction, AT&T will consist of AT&T
Consumer Services Group, the leading provider of domestic and international long
distance service to residential customers in the United States, and AT&T
Business Services Group, one of the nation's largest business services
communications providers, providing a variety of global communications services
to over 4 million customers and operating one of the largest telecommunications
networks in the United States.
The table below sets forth the approximate percentages of consolidated
revenue, operating income, net loss, assets and indebtedness of AT&T, giving
prior effect to the split-off of the AT&T Wireless Services Group, that were
attributable to each of AT&T Broadband Group and AT&T excluding the AT&T
Broadband Group at or for the six month period ended June 30, 2002 and the year
ended December 31, 2001. These percentages will vary in the future 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 prospectus.
% OF
% OF % OF AT&T AT&T % OF
AT&T OPERATING NET AT&T % OF AT&T
REVENUE INCOME/LOSS LOSS* ASSETS DEBT
------- ----------- ------ ------ ---------
AT&T Broadband Group
At or for the year ended December 31,
2001.................................... 19.3% (111.4)% 61.0% 62.4% 43.5%
At or for the six month period ended June
30, 2002................................ 20.6% 124.3% 107.6% 59.3% 50.8%
AT&T Corp. (excluding AT&T Broadband Group)**
At or for the year ended December 31,
2001.................................... 81.2% 211.4% (1.9)% 37.7% 56.5%
At or for the six month period ended June
30, 2002................................ 80.1% (23.9)% (7.6)% 41.1% 49.2%
---------------
* Based on net loss from continuing operations before extraordinary gain and
cumulative effect of accounting change.
** 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 BROADBAND CORP.
188 Inverness Drive West
Englewood, Colorado 80112
(303) 858-3000
AT&T Broadband Corp. is a Delaware corporation newly formed for purposes of
effectuating the AT&T Comcast transaction. Throughout this prospectus, we refer
to AT&T Broadband Corp. as Broadband. As part of the AT&T Comcast transaction,
AT&T will transfer to Broadband substantially all
10
the assets, liabilities and businesses represented by AT&T Broadband Group, an
integrated business of AT&T Corp.
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 six month period ended June 30, 2002,
AT&T Broadband Group:
- owned and operated cable systems aggregating approximately 13.26 million
analog video subscribers;
- had approximately $5.0 billion in combined revenue;
- had approximately $14.7 billion in net loss;
- had debt of approximately $21.9 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.
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
financing and other matters contemplated by or incident to the merger agreement
entered into in connection with the AT&T Comcast transaction, and the
preparation of this prospectus. Upon completion of the AT&T Comcast transaction,
Comcast and 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.
COMCAST CORPORATION
1500 Market Street
Philadelphia, Pennsylvania 19102-2148
(215) 665-1700
Comcast is a Pennsylvania corporation incorporated in 1969. Comcast is
involved principally in three lines of business:
- cable -- through the development, management and operation of broadband
communications networks and regional sports programming networks;
- commerce -- through QVC, its electronic retailing subsidiary; and
- content -- through its consolidated subsidiaries, Comcast-Spectacor, E!
Entertainment Television, The Golf Channel and Outdoor Life Network, and
through its other programming investments.
Upon completion of the AT&T Comcast transaction, Comcast will become a
wholly owned subsidiary of AT&T Comcast.
COMCAST CABLE COMMUNICATIONS, INC.
1500 Market Street
Philadelphia, Pennsylvania 19102-2148
(215) 665-1700
Comcast Cable is a Delaware corporation incorporated in 1981 and a wholly
owned subsidiary of Comcast. Comcast Cable is currently the third largest cable
operator in the United States and has deployed digital cable applications and
high-speed Internet access service to the vast majority of its cable
communications systems to expand the products available on its broadband
communications networks.
11
Comcast's consolidated cable operations served approximately 8.5 million
subscribers and passed approximately 14.0 million homes as of June 30, 2002.
Comcast Cable will remain a wholly owned subsidiary of Comcast, and will
become an indirect wholly owned subsidiary of AT&T Comcast after completion of
the AT&T Comcast transaction.
MEDIAONE GROUP, INC.
188 Inverness Drive West
Englewood, Colorado 80112
(303) 858-3000
MediaOne is a Delaware corporation incorporated in 1999. MediaOne is a
subsidiary of AT&T and, upon completion of the AT&T Comcast transaction, will
become a wholly owned subsidiary of Broadband.
AT&T BROADBAND, LLC
188 Inverness Drive West
Englewood, Colorado 80112
(303) 858-3000
AT&T Broadband, LLC, referred to in this prospectus as TCI, is a Delaware
limited liability company formerly known as Tele-Communications, Inc., a
Delaware corporation that was formed in 1994. TCI is a subsidiary of AT&T that
holds the former Tele-Communications, Inc. business, and upon completion of the
AT&T Comcast transaction, will become a wholly owned subsidiary of Broadband.
DESCRIPTION OF THE BROADBAND EXCHANGE NOTES
The Broadband Exchange Notes will be entitled to the benefits and subject
to the terms and conditions of the AT&T Indenture as amended by the note
amendment and a supplemental indenture that will have the purpose of, among
other things, making Broadband a co-obligor on the Broadband Exchange Notes.
Except as described in this prospectus, the Broadband Exchange Notes will have
terms substantially identical to the Broadband Eligible Notes as amended by the
note amendment. Upon completion of the AT&T Comcast transaction, however, each
series of Broadband Exchange Notes will be mandatorily exchanged at the relevant
exchange ratio for New Broadband Notes, which will be primary obligations only
of Broadband, fully and unconditionally guaranteed by the cable guarantors, and
will not be obligations of AT&T.
AT&T intends to apply for listing of the Broadband Exchange Notes on the
New York Stock Exchange. If the AT&T Comcast transaction is terminated, AT&T
will use commercially reasonable efforts to list the 6.00% Broadband Exchange
Notes Due March 15, 2009 additionally on the Luxembourg Stock Exchange.
If the AT&T Comcast transaction is terminated, Broadband's obligations
under the Broadband Exchange Notes will be released and discharged and the
Broadband Exchange Notes will become solely obligations of AT&T and cease to be
exchangeable for New Broadband Notes.
DESCRIPTION OF THE NEW BROADBAND NOTES AND THE CABLE GUARANTEES
The New Broadband Notes will be entitled to the benefits and subject to the
terms and conditions of an indenture among Broadband, the cable guarantors and
The Bank of New York, as trustee. We refer to this indenture as the New
Broadband Indenture.
BASIC TERMS
The New Broadband Notes:
- will rank equally with all of Broadband's other unsecured and
unsubordinated debt and will be entitled to the benefits of the cable
guarantees described below; and
12
- will be issued in an aggregate principal amount based on the exchange
ratios, comprised as follows:
o New Broadband Notes Due 2013, maturing on March 15, 2013, with interest
payable semiannually on each March 15 and September 15 beginning on the
first March 15 or September 15 occurring after the initial issuance of
the New Broadband Notes Due 2013, to holders of record on the preceding
March 1 and September 1; and
o New Broadband Notes Due 2022, maturing on November 15, 2022, with
interest payable semiannually on each November 15 and May 15, beginning
on the first May 15 occurring after the initial issuance of the New
Broadband Notes Due 2022, to holders of record on the preceding November
1 and May 1.
The interest rate on each series of New Broadband Notes will be announced
by press release two business days prior to the expiration of the exchange offer
and will be based on spreads over the relevant reference U.S. Treasury rates as
described in "Description of the Exchange Offer -- Interest Rate for the New
Broadband Notes."
CABLE GUARANTEES
Broadband's obligations under the New Broadband Notes will be fully and
unconditionally guaranteed, on an unsecured and unsubordinated basis, by each of
Comcast Cable, AT&T Comcast, MediaOne and TCI. See "Description of the New
Broadband Notes and the Cable Guarantees -- Cable Guarantees."
MARKET FOR THE NEW BROADBAND NOTES; LISTING
Although Broadband has applied to list the New Broadband Notes on the New
York Stock Exchange, there is currently no public market for the New Broadband
Notes. In addition, Broadband does not intend to apply for listing of the New
Broadband Notes on the Luxembourg Stock Exchange. There can be no assurance as
to the development of any market for the New Broadband Notes.
OPTIONAL REDEMPTION
The New Broadband Notes will not be subject to optional redemption by
Broadband.
COVENANTS
The New Broadband Indenture under which Broadband will issue the New
Broadband Notes will contain covenants that, among other things, limit
Broadband's ability and the cable guarantors' ability to create secured
indebtedness and engage in sale and leaseback transactions and Broadband's
ability to enter into some types of mergers and consolidations. See "Description
of the New Broadband Notes and the Cable Guarantees -- Certain Covenants."
Neither the New Broadband Notes nor the cable guarantees will contain financial
covenants.
13
DESCRIPTION OF THE NEW AT&T NOTES
The New AT&T Notes will be entitled to the benefits and subject to the
terms and conditions of the AT&T Indenture, as amended by a supplemental
indenture that will have the purpose of, among other things, effecting the note
amendment with respect to each series of New AT&T Notes.
The terms of the New AT&T Notes and the AT&T Eligible Notes are
substantially identical, except that:
- the interest rate on the applicable New AT&T Notes will be adjusted
automatically upon completion of the AT&T Comcast transaction, as
described in further detail under "Description of the New AT&T
Notes -- Interest Payments;"
- the maturity date of the New AT&T Notes issued in exchange for the 6.50%
AT&T Eligible Notes Due March 15, 2029 will be changed automatically to
March 15, 2013 upon completion of the AT&T Comcast transaction; and
- the merger covenant applicable to the New AT&T Notes will be the AT&T
Indenture merger covenant as amended by the note amendment, which is
described in greater detail under "Description of the Broadband Exchange
Notes -- Certain Covenants -- Consolidation, Merger or Sale."
BASIC TERMS
The New AT&T Notes:
- will rank equally with all of AT&T's other unsecured and unsubordinated
debt;
- will be obligations only of AT&T;
- will be issued in an aggregate principal amount not exceeding
$5,485,563,000 comprised as follows:
- up to $2,000,000,000 in principal amount of New AT&T Notes Due 2004
(Series 1), maturing on March 15, 2004, with interest payable
semiannually on each March 15 and September 15, beginning the first
March 15 or September 15 occurring after the initial issuance of the New
AT&T Notes Due 2004 (Series 1), to holders of record on the preceding
March 1 and September 1;
- up to $400,000,000 in principal amount of New AT&T Notes Due 2004
(Series 2), maturing on April 1, 2004, with interest payable
semiannually on each April 1 and October 1, beginning the first April 1
or October 1 occurring after the initial issuance of the New AT&T Notes
Due 2004 (Series 2), to holders of record on the preceding March 15 and
September 15;
- up to $25,000,000 in principal amount of New Medium-Term Notes, Series A
(subseries 1) Due May 15, 2025, maturing on May 15, 2025, with interest
payable semiannually on each May 15 and November 15, beginning the first
May 15 or November 15 occurring after the initial issuance of the New
Medium-Term Notes, Series A (subseries 1) Due May 15, 2025, to holders
of record on the preceding May 1 and November 1;
- up to $50,000,000 in principal amount of New Medium-Term Notes, Series A
(subseries 2) Due May 15, 2025, maturing on May 15, 2025, with interest
payable semiannually on each May 15 and November 15, beginning the first
May 15 or November 15 occurring after the initial issuance of the New
Medium-Term Notes, Series A (subseries 2) Due May 15, 2025, to holders
of record on the preceding May 1 and November 1;
- up to $3,000,000,000 in principal amount of New AT&T Notes Due 2013,
maturing on March 15, 2029, however, upon completion of the AT&T Comcast
transaction, the maturity will be changed automatically to March 15,
2013, with interest payable semiannually on each March 15 and September
15, beginning the first March 15 or September 15 occurring after the
14
initial issuance of the New AT&T Notes Due 2013, to holders of record on
the preceding March 1 and September 1;
- up to $10,563,000 in principal amount of New FRN Medium-Term Notes,
Series A Due 2054, maturing on December 28, 2054, with interest payable
semiannually on each June 28 and December 28, beginning the first June
28 or December 28 occurring after the initial issuance of the New FRN
Medium-Term Notes, Series A Due 2054, to holders of record on the
preceding June 13 and December 13.
MARKET FOR THE NEW AT&T NOTES; LISTING
Although AT&T has applied to list each series of the New AT&T Notes, other
than the Series A Medium-Term Notes, on the New York Stock Exchange, there is
currently no public market for the New AT&T Notes. Application has been made to
list the New AT&T Notes Due 2004 (Series 1) and the New AT&T Notes Due 2013
additionally on the Luxembourg Stock Exchange. AT&T does not intend to apply for
listing of the Series A Medium-Term Notes on any national exchange. There can be
no assurance as to the development of any market for the New AT&T Notes.
OPTIONAL REDEMPTION
AT&T will have the right at its option to redeem certain of the New AT&T
Notes, other than the New AT&T Notes Due 2004 (Series 2), at any time or from
time to time, on at least 30 days, but not more than 60 days, prior notice
mailed to the registered address of each holder of the applicable series of New
AT&T Notes. The optional redemption terms for each series of New AT&T Notes is
described under "Description of the New AT&T Notes -- Optional Redemption."
COVENANTS
The AT&T Indenture under which AT&T will issue the New AT&T Notes contains
covenants that, among other things, limit AT&T's ability and its subsidiaries'
ability to create secured indebtedness and engage in sale and leaseback
transactions. See "Description of the New AT&T Notes."
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The U.S. federal income tax consequences to a holder of Broadband Eligible
Notes or AT&T Eligible Notes vary depending on which type of notes are held,
whether or not the holder participates in the exchange offer and whether or not
the AT&T Comcast transaction is completed. Depending on those facts, a holder of
eligible notes may recognize gain or loss for U.S. federal income tax purposes
in connection with the exchange and the modification of certain terms of such
notes upon consummation of the AT&T Comcast transaction. Please see "Description
of the Exchange Offer -- Material United States Federal Income Tax Consequences
of the Exchange Offer" beginning on page 83 of this prospectus.
15
THE DEALER MANAGERS
The following firms, listed in alphabetical order, will act as dealer
managers for the exchange offer, and can be reached at the addresses and
telephone numbers set forth on the back cover of this prospectus:
Credit Suisse First Boston Corporation
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
J.P. Morgan Securities Inc.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Morgan Stanley & Co. Incorporated
THE INFORMATION AGENT
We have engaged D.F. King & Co., Inc. as the information agent for the
exchange offer. Requests for additional copies of this prospectus or the letter
of transmittal and for assistance in tendering eligible notes should be directed
to the information agent below.
D.F. King & Co., Inc.
77 Water Street, 20th Floor
New York, New York 10005
Banks and Brokers Call Collect:
(212) 269-5550
All Others Call Toll Free:
(866) 868-2409
D.F. King (Europe) Limited
2 London Wall Buildings -- 2nd Floor
London EC2 M5PP
Telephone: 44 207 920 9700
THE EXCHANGE AGENT
We have engaged The Bank of New York as the exchange agent for purposes of
processing tenders and withdrawals of eligible notes in the exchange offer. The
address and telephone number of the exchange agent are as follows:
The Bank of New York
Corporate Trust Reorganization Unit
101 Barclay Street, 7E
New York, New York 10286
Attn: Kin Lau
Toll Free: (800) 254-2826
Telephone: (212) 815-3750
Facsimile: (212) 298-1915
THE LUXEMBOURG EXCHANGE AGENT
We have engaged The Bank of New York (Luxembourg) S.A. as the Luxembourg
exchange agent in connection with the exchange offer. In Luxembourg, you should
contact the Luxembourg exchange agent for services in connection with the
exchange offer, including to obtain copies of this prospectus and the letter of
transmittal or answers to questions about the terms and procedures of the
exchange offer, to have a letter of transmittal submitted on your behalf, or to
have the Luxembourg Notes delivered on your behalf. The address and telephone
number of the Luxembourg exchange agent are as follows:
The Bank of New York (Luxembourg) S.A.
Aerogolf Center -- 1A, Hoehenhof
L-1736 Senningerberg, Luxembourg
Attn: Sunjeeve R. Patel
Telephone: 44 207 964 6337
Facsimile: 44 207 964 6399
16
RETAIL SOLICITATION FEE
We will pay soliciting dealers named in a qualifying letter of transmittal
with respect to eligible notes as having solicited and obtained the tender from
a U.S. holder a retail solicitation fee of $2.50 per $1,000 of eligible notes
tendered by a beneficial holder of less than $250,000 in principal amount of
eligible notes and accepted in the exchange offer. See "Description of the
Exchange Offer -- Retail Solicitation Fee."
RECENT DEVELOPMENTS
On August 21, 2002, AT&T and Comcast announced that they had entered into
an agreement with AOL Time Warner providing for the restructuring of Time Warner
Entertainment Company L.P., or TWE. The restructuring agreement, which has been
publicly filed by AT&T as an exhibit to its Current Report on Form 8-K, dated
August 23, 2002, is intended to provide for a more orderly and timely
disposition of AT&T Broadband Group's entire stake in TWE than would likely be
available under the registration rights provisions of the TWE partnership
agreement, which AT&T Broadband Group has been pursuing. Under the restructuring
agreement, which is expected to close in the first half of 2003, for its 27.64%
interest in TWE, AT&T Broadband Group will receive $1.5 billion in common stock
of AOL Time Warner Inc. (valued at the time of the closing and subject to
certain limitations) and an effective 21% passive equity interest in all of AOL
Time Warner's cable properties, including those already in TWE, and AT&T
Broadband Group will also receive $2.1 billion in cash. As part of the
restructuring, TWE will distribute to AOL Time Warner all of TWE's major content
assets, which include Home Box Office (HBO), Warner Bros., and stakes in The WB
Network, Comedy Central and Court TV. Upon consummation of the AT&T Comcast
transaction, AT&T Comcast will assume all of AT&T's interest in TWE and in the
restructuring agreement. Time Warner Cable, which will own substantially all of
AOL Time Warner's cable interests, is expected to conduct an initial public
offering of common stock following the restructuring. Under the restructuring
agreement, AT&T Broadband Group will have registration rights enabling it to
dispose of its shares in Time Warner Cable and in AOL Time Warner.
In connection with the transactions, AT&T Broadband Group and Comcast will
also enter into a three-year non-exclusive agreement with AOL Time Warner under
which AOL High-Speed Broadband service would be made available on certain of
AT&T's, or AT&T Comcast's, cable systems which pass approximately 10 million
homes.
AT&T and Comcast intend, at or prior to the closing of the AT&T Comcast
transaction, to place AT&T's entire interest in TWE in trust for orderly
disposition. Any non-cash consideration received in respect of such interest,
including the AOL Time Warner common stock to be issued to AT&T Broadband Group
and AT&T Broadband Group's entire economic and voting interest in Time Warner
Cable will remain in trust until disposed of or regulatory approval is obtained
to remove such interests from the trust.
AT&T acquired its stake in TWE as part of its June 2000 acquisition of the
MediaOne Group. In February of 2001, AT&T requested that TWE convert from a
limited partnership into a corporation and create equity securities for
registration with the Securities and Exchange Commission. On July 30, 2002, AT&T
and TWE agreed to suspend the registration process to explore alternative
approaches that led to the transactions contemplated by the restructuring
agreement.
In connection with the Broadband spin-off, all of AT&T Broadband Group's
interests and rights with respect to TWE will be transferred to Broadband or its
subsidiaries.
The TWE restructuring is subject to receipt of certain regulatory approvals
and other closing conditions, certain of which are outside the control of AT&T
and Comcast. There can be no assurance that the transactions contemplated by the
TWE restructuring agreement will be consummated. If the restructuring agreement
is terminated without the restructuring being consummated, the parties will
return to the registration rights process under the TWE partnership agreement.
If the AT&T Comcast transaction is not completed, the TWE restructuring
agreement will remain in place between AT&T and AOL Time Warner, although
certain changes would be made to the Internet service provider carriage
agreement between them.
17
SELECTED FINANCIAL DATA OF AT&T
The consolidated income statement data below for the three years ended
December 31, 2001, and the consolidated balance sheet data at December 31, 2001
and 2000, were derived from audited consolidated financial statements of AT&T
Corp. incorporated by reference in this prospectus. The remaining data was
derived from AT&T's unaudited consolidated financial statements.
AT OR FOR THE SIX
MONTHS ENDED
JUNE 30, AT OR FOR THE YEARS ENDED DECEMBER 31,
------------------ --------------------------------------------------
2002(1) 2001 2001 2000(2) 1999(3) 1998 1997
-------- ------- -------- -------- -------- ------- -------
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
RESULTS OF OPERATIONS AND EARNINGS PER
SHARE:
Revenue............................... $ 24,088 $26,738 $ 52,550 $ 55,533 $ 54,973 $47,817 $46,910
Operating (loss) income............... (13,691) 2,178 3,754 4,228 11,458 7,632 6,835
(Loss) income from continuing
operations before extraordinary gain
and cumulative effect of accounting
changes............................. (12,909) (3,356) (6,842) 4,133 3,861 5,052 4,088
(LOSS) INCOME FROM CONTINUING
OPERATIONS BEFORE EXTRAORDINARY GAIN
AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGES:
AT&T Common Stock Group:
(Loss) income....................... (12,909) (534) (4,131) 2,645 5,883 5,052 4,088
(Loss) earnings per basic share..... (3.59) (0.28) (1.33) 0.76 1.91 1.89 1.53
(Loss) earnings per diluted share... (3.59) (0.28) (1.33) 0.75 1.87 1.87 1.53
Dividends declared per share........ 0.075 0.075 0.15 0.6975 0.88 0.88 0.88
Liberty Media Group(4):
(Loss) income....................... -- (2,822) (2,711) 1,488 (2,022) -- --
(Loss) earnings per basic and
diluted share..................... -- (1.09) (1.05) 0.58 (0.80) -- --
ASSETS AND CAPITAL:
Property, plant and equipment, net.... $ 41,460 -- $ 41,322 $ 41,269 $ 33,366 $21,780 $19,177
Total assets -- continuing
operations.......................... 137,895 -- 165,282 207,136 146,094 40,134 41,029
Total assets.......................... 137,895 -- 165,282 234,360 163,457 54,185 55,797
Long-term debt........................ 37,271 -- 40,527 33,089 23,214 5,555 7,840
Total debt............................ 43,160 -- 53,485 64,927 35,694 6,638 11,895
Mandatorily redeemable preferred
securities.......................... 858 -- 2,400 2,380 1,626 -- --
Shareowners' equity................... 42,755 -- 51,680 103,198 78,927 25,522 23,678
Debt ratio(5)......................... 47.6% -- 47.7% 57.2% 54.3% 36.7% 57.2%
Gross capital expenditures............ 3,278 -- 8,388 10,462 11,194 6,871 6,065
---------------
(1) During the second quarter of 2002, AT&T recorded non-cash franchise and
goodwill impairment charges of $16.5 billion ($11.8 billion after taxes).
(2) 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.
(3) In connection with the March 9, 1999 merger with Tele-Communications, Inc.,
AT&T issued separate tracking stock for LMG. LMG was accounted for as an
equity investment prior to its split-off from AT&T on August 10, 2001.
(4) No dividends have been declared for LMG tracking stocks.
(5) 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.
Effective January 1, 2002, AT&T adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 requires that goodwill and indefinite-lived
intangible assets no longer be amortized, but instead be tested for impairment
at least annually. Intangible assets that have finite useful lives will continue
to be amortized over their useful lives. In addition, the amortization period of
intangible assets with finite lives will no longer be limited to 40 years. We
have determined that our franchise costs are
18
indefinite-lived assets, as defined in SFAS No. 142, and therefore are not
subject to amortization beginning in 2002.
The following table presents the impact of SFAS No. 142 on net (loss)
income and (loss) earnings per share had the standard been in effect for the
three years ended December 31, 2001. AT&T Wireless Group tracking stock was
issued in April, 2000, therefore data for this group is not applicable for 1999.
AT&T WIRELESS
AT&T COMMON STOCK GROUP GROUP LIBERTY MEDIA GROUP
------------------------- --------------- --------------------------
2001 2000 1999 2001(1) 2000 2001(2) 2000 1999
------- ------ ------ ------- ----- ------- ------ -------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED DECEMBER 31,
Net (loss) income:
Reported (loss) income from continuing
operations before cumulative effect of
accounting change..................... $(4,131) $2,645 $5,883 $ -- $ -- $(2,711) $1,488 $(2,022)
Dividend requirements of preferred
stock................................. (652) -- -- -- -- -- -- --
Premium on wireless tracking stock
exchange.............................. (80) -- -- -- -- -- -- --
Reported (loss) from continuing
operations available to common
shareowners........................... (4,863) 2,645 5,883 -- -- (2,711) 1,488 (2,022)
Add back amortization, net of tax:
Goodwill *............................ 766 687 135 -- -- 350 568 424
Equity method excess basis............ 128 337 294 -- -- 346 654 285
Franchise costs....................... 754 645 445 -- -- 4 8 5
------- ------ ------ ----- ----- ------- ------ -------
Adjusted (loss) income from continuing
operations before cumulative effect of
accounting change..................... $(3,215) $4,314 $6,757 $ -- $ -- $(2,011) $2,718 $(1,308)
Reported income (loss) from discontinued
operations............................ 115 460 (433) 35 76 -- -- --
Add back discontinued operations
amortization, net of tax.............. 152 222 204 36 27 -- -- --
Gain on disposition of discontinued
operations............................ 13,503 -- -- -- -- -- -- --
Cumulative effect of accounting
change................................ 359 -- -- -- -- 545 -- --
------- ------ ------ ----- ----- ------- ------ -------
ADJUSTED NET INCOME (LOSS).............. $10,914 4,996 $6,528 $ 71 $ 103 $(1,466) $2,718 $(1,308)
------- ------ ------ ----- ----- ------- ------ -------
BASIC (LOSS) EARNINGS PER SHARE:
Reported basic (loss) earnings per share
from continuing operations before
cumulative effect of accounting
change................................ $ (1.33) $ 0.76 $ 1.91 $ -- $ -- $ (1.05) $ 0.58 $ (0.80)
Add back amortization, net of tax:
Goodwill *............................ 0.21 0.20 0.04 -- -- 0.14 0.22 0.17
Equity method excess basis............ 0.03 0.10 0.10 -- -- 0.13 0.25 0.11
Franchise costs....................... 0.21 0.18 0.14 -- -- -- 0.01 --
------- ------ ------ ----- ----- ------- ------ -------
Adjusted basic (loss) earnings per share
from continuing operations before
cumulative effect of accounting
change................................ $ (0.88) $ 1.24 $ 2.19 $ -- $ -- $ (0.78) $ 1.06 $ (0.52)
Reported earnings (loss) per share from
discontinued operations............... 0.03 0.13 (0.14) 0.08 0.21 -- -- --
Add back discontinued operations
amortization, net of tax.............. 0.04 0.06 0.07 0.08 0.08 -- -- --
Gain on disposition of discontinued
operations............................ 3.70 -- -- -- -- -- -- --
Cumulative effect of accounting
change................................ 0.10 -- -- -- -- 0.21 -- --
------- ------ ------ ----- ----- ------- ------ -------
ADJUSTED BASIC EARNINGS (LOSS) PER
SHARE................................. $ 2.99 $ 1.43 $ 2.12 $0.16 $0.29 $ (0.57) $ 1.06 $ (0.52)
======= ====== ====== ===== ===== ======= ====== =======
19
AT&T WIRELESS
AT&T COMMON STOCK GROUP GROUP LIBERTY MEDIA GROUP
------------------------- --------------- --------------------------
2001 2000 1999 2001(1) 2000 2001(2) 2000 1999
------- ------ ------ ------- ----- ------- ------ -------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED DECEMBER 31,
DILUTED (LOSS) EARNINGS PER SHARE:
Reported diluted (loss) earnings per
share from continuing operations
before cumulative effect of accounting
change................................ $ (1.33) $ 0.75 $ 1.87 $ -- $ -- $ (1.05) $ 0.58 $ (0.80)
Add back amortization, net of tax:
Goodwill *............................ 0.21 0.19 0.04 -- -- 0.14 0.22 0.17
Equity method excess basis............ 0.03 0.10 0.10 -- -- 0.13 0.25 0.11
Franchise costs....................... 0.21 0.18 0.14 -- -- -- 0.01 --
------- ------ ------ ----- ----- ------- ------ -------
Adjusted diluted (loss) earnings per
share from continuing operations
before cumulative effect of accounting
change................................ $ (0.88) $ 1.22 $ 2.15 $ -- $ -- $ (0.78) $ 1.06 $ (0.52)
Reported earnings (loss) per share from
discontinued operations............... 0.03 0.13 (0.13) 0.08 0.21 -- -- --
Add back discontinued operations
amortization, net of tax.............. 0.04 0.06 0.07 0.08 0.08 -- -- --
Gain on disposition of discontinued
operations............................ 3.70 -- -- -- -- -- -- --
Cumulative effect of accounting
change................................ 0.10 -- -- -- -- 0.21 -- --
------- ------ ------ ----- ----- ------- ------ -------
ADJUSTED DILUTED EARNINGS (LOSS) PER
SHARE................................. $ 2.99 $ 1.41 $ 2.09 $0.16 $0.29 $ (0.57) $ 1.06 $ (0.52)
======= ====== ====== ===== ===== ======= ====== =======
---------------
* Goodwill amortization is net of the Excite@Home minority interest impact on
goodwill.
(1) AT&T Wireless Group was split off from AT&T on July 9, 2001.
(2) Liberty Media Group was split off from AT&T on August 10, 2001.
20
SUMMARY PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION OF AT&T
The summary unaudited pro forma combined condensed financial information
set forth below for AT&T gives effect to:
- the Liberty Media Group distribution; and
- the AT&T Broadband Group distribution
as if such events had been completed on January 1, 1999 for income statement
purposes, and at June 30, 2002 for balance sheet purposes. Since Liberty Media
Group was split off from AT&T on August 10, 2001, no balance sheet or 2002
income statement pro forma adjustments were made for Liberty Media Group. 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 Broadband distribution or the Liberty Media Group distribution
occurred on such dates.
We have included detailed unaudited pro forma financial statements starting
on page F-3 of this prospectus.
AT OR FOR THE
SIX MONTHS AT OR FOR THE YEARS
ENDED JUNE 30, ENDED DECEMBER 31,
----------------- ---------------------------
2002 2001 2001 2000 1999
------- ------- ------- ------- -------
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Revenue...................................... $19,298 $21,602 $42,665 $47,204 $49,925
Operating income............................. 3,278 4,772 7,937 12,884 12,635
(Loss) income from continuing operations --
attributable to AT&T common stock group.... (6) 30 (3,475) 3,903 3,450
Weighted average AT&T common
shares -- basic............................ 3,598 3,789 3,695 3,526 3,115
(Loss) earnings per AT&T common share --
basic(1)................................... 0.00 0.01 (0.94) 1.11 1.11
Weighted average AT&T common
shares -- diluted.......................... 3,598 3,796 3,695 3,545 3,152
(Loss) earnings per AT&T common share --
diluted(1)................................. 0.00 0.01 (0.94) 1.10 1.09
Cash dividends declared per AT&T common
share...................................... 0.075 0.075 0.15 0.6975 0.88
BALANCE SHEET DATA:
Total assets................................. $56,618 -- -- -- --
Long-term debt............................... 21,218 -- -- -- --
Total shareowners' equity.................... 12,667 -- -- -- --
---------------
(1) Adjusted for the proposed one-for-five reverse stock split of AT&T common
stock, (loss) earnings per basic share would have been $(0.01) and $0.04 for
the six months ended June 30, 2002 and 2001, respectively, and $(4.70),
$5.53 and $5.54 for the years ended December 31, 2001, 2000 and 1999,
respectively. (Loss) earnings per diluted share on the same basis would have
been $(0.01) and $0.04 for the six months ended June 30, 2002 and 2001,
respectively, and $(4.70), $5.50 and $5.47 for the years ended December 31,
2001, 2000 and 1999, respectively.
21
SELECTED FINANCIAL DATA OF AT&T BROADBAND GROUP
Presented in the table below is selected 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 Broadband, a newly formed
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 known as Tele-Communications,
Inc.), acquired by AT&T on March 9, 1999, and MediaOne Group, Inc., acquired by
AT&T on June 15, 2000.
The combined income statement data of AT&T Broadband Group for the years
ended December 31, 2001 and 2000 and the ten months ended December 31, 1999 and
the combined balance sheet data of AT&T Broadband Group at December 31, 2001 and
2000 were derived from the audited combined financial statements of AT&T
Broadband Group. The remaining data was derived from unaudited combined
financial statements of AT&T Broadband Group.
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 F-13 of this prospectus.
AT OR FOR THE AT OR FOR THE
SIX MONTHS AT OR FOR THE YEARS TEN MONTHS
ENDED JUNE 30, ENDED DECEMBER 31, ENDED
------------------ ------------------- DECEMBER 31,
2002 2001 2001 2000(1) 1999(2)
-------- ------- -------- -------- -------------
(UNAUDITED)
(DOLLARS IN MILLIONS)
INCOME STATEMENT DATA:
Revenue................................ $ 4,965 $ 5,256 $ 10,132 $ 8,445 $ 5,080
Operating loss......................... (17,015) (2,594) (4,183) (8,656) (1,177)
Loss before extraordinary gain and
cumulative effect of accounting
changes.............................. (13,884) (2,529) (4,171) (5,370) (2,200)
BALANCE SHEET DATA:
Total assets........................... $ 81,840 -- $103,187 $117,534 $58,228
Total debt............................. 21,942 -- 23,285 28,420 14,900
Minority interest...................... 1,210 -- 3,302 4,421 2,327
Company-Obligated Convertible Quarterly
Preferred Securities................. 4,725 -- 4,720 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. The acquisition was accounted for under the purchase method
of accounting.
22
SELECTED FINANCIAL DATA OF BROADBAND
AT&T Broadband Corp. is a newly formed entity for purposes of effectuating
the AT&T Comcast transaction. From the date of inception on December 14, 2001
through June 30, 2002, AT&T Broadband Corp. had no operations.
The balance sheet data at December 31, 2001, was derived from the audited
balance sheet of AT&T Broadband Corp. The balance sheet data at June 30, 2002,
was derived from an unaudited balance sheet.
AT JUNE 30, AT DECEMBER 31,
2002 2001
------------------- -------------------
(UNAUDITED)
BALANCE SHEET DATA:
Total assets.............................................. $-- $--
Total debt................................................ -- --
23
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
OF AT&T COMCAST CORPORATION
The following Unaudited Pro Forma Combined Condensed Balance Sheet of AT&T
Comcast as of June 30, 2002 and the Unaudited Pro Forma Combined Condensed
Statements of Operations of AT&T Comcast for the six months ended June 30, 2002
and the year ended December 31, 2001 give effect to the AT&T Comcast
transaction. The pro forma financial statements account for the AT&T Comcast
transaction under the purchase method of accounting.
The Unaudited Pro Forma Combined Condensed Balance Sheet assumes the AT&T
Comcast transaction occurred on June 30, 2002. The Unaudited Pro Forma Combined
Condensed Statements of Operations assume the AT&T Comcast transaction occurred
on January 1, 2001. The unaudited pro forma financial data is based on the
historical consolidated financial statements of Comcast and the historical
combined financial statements of AT&T Broadband 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. See Note 5
to the consolidated financial statements of Comcast for the year ended December
31, 2001 included in this prospectus. 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 June 30, 2002, 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. No adjustment has been made to
AT&T Broadband Group's franchise rights. 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 shareholders 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.
The consideration to complete the AT&T Comcast transaction will consist of
shares of AT&T Comcast common stock, assumed debt of AT&T Broadband Group, the
intercompany indebtedness Broadband must pay AT&T upon closing and Comcast's
transaction costs. If the closing date of the AT&T Comcast transaction were as
of June 30, 2002, the estimated aggregate consideration to complete the AT&T
Comcast transaction would be $47,486 million, consisting of $25,583 million of
AT&T Comcast common stock based upon a per share price of $18.80, $21,273
million of assumed debt at estimated fair value, and $630 million of Comcast's
transaction costs directly related to the AT&T Comcast transaction.
The consideration in the form of AT&T Comcast common stock includes the
fair value of the issuance of approximately 1,234 million shares of AT&T Comcast
common stock to AT&T shareholders in
24
exchange for all of AT&T's interests in the AT&T Broadband Group, the fair value
of the issuance of 115 million shares of AT&T Comcast common stock to Microsoft
Corporation in exchange for Broadband shares that Microsoft will receive
immediately prior to the completion of the AT&T Comcast transaction for
settlement of its $5 billion aggregate principal amount in quarterly income
preferred securities (QUIPS), and the fair value of AT&T Comcast stock options
and stock appreciation rights issued in exchange for Broadband stock options and
stock appreciation rights.
Subsequent to the original merger agreement, economic and business factors
led AT&T and Comcast to agree to change the form of consideration to be paid in
the AT&T Comcast transaction. On August 12, 2002, AT&T, among others, filed a
registration statement with the SEC for the exchange offer contemplated by this
prospectus relating to $11.8 billion aggregate principal amount of AT&T's
existing debt securities. Modification of the original merger agreement to
provide for the assumption of a portion of AT&T's debt securities by Broadband
and the related reduction in the intercompany indebtedness represents a
substantive change in the non-equity, or "other" consideration being paid in the
AT&T Comcast transaction resulting in a new measurement date for determining the
value of the Comcast common stock used to value the AT&T Comcast securities to
be issued in the AT&T Comcast transaction. The new measurement date is
established as of the date of the substantive modification of the original
merger agreement and applies irrespective of whether the exchange offer is
completed.
The consideration in the form of assumed debt includes the short-term debt
due to AT&T, which is due at closing, of $6,486 million, as well as $14,787
million of long-term debt, including current portion, of AT&T Broadband Group.
If the exchange offer is successful, then upon completion of the AT&T Comcast
transaction a portion of AT&T's debt securities will cease being AT&T
obligations and become Broadband obligations (New Broadband Notes) guaranteed by
AT&T Comcast and a number of its cable subsidiaries. The AT&T debt securities
that become Broadband obligations will reduce the intercompany indebtedness
Broadband must pay AT&T. Absent additional deleveraging activities and the
effect of the exchange offer, it is expected that the amount of short-term debt
due to AT&T will increase to fund capital expenditures, operations and third
party debt maturities and redemptions through the completion of the AT&T Comcast
transaction. The amount of short-term and long-term debt may be lower or higher
at the closing date of the AT&T Comcast transaction.
The unaudited pro forma financial statements reflect that a substantive
modification of the original merger agreement has occurred resulting in a new
measurement date for accounting purposes. The unaudited pro forma financial
statements reflect a measurement date of August 12, 2002, the date the filing of
the registration statement with the SEC related to the exchange offer was
announced. Accordingly, the fair value of the shares to be issued for the AT&T
Broadband Group is based on a price per share of $18.80 which reflects the
weighted average market price of Comcast common stock during the period
beginning two days before and ending two days after the new measurement date.
In limited circumstances, the number of shares of AT&T Comcast stock to be
issued to certain AT&T security holders in connection with the AT&T Comcast
transaction is subject to adjustment. If this occurs, the fair value of all of
the shares to be issued would be based on the market price of Comcast common
stock on the closing date for the AT&T Comcast transaction.
A $1.00 increase/decrease in the per share price of Comcast Class A common
stock would result in a $1,349 million increase/decrease in the recorded value
of the estimated aggregate consideration in the form of AT&T Comcast common
stock.
Subsequent to the adoption of SFAS 142 on January 1, 2002, goodwill and
franchise rights are no longer amortized. An increase or decrease in goodwill
and/or franchise rights as a result of a change in the measurement date or in
the allocation of fair value through the appraisal process would not affect AT&T
Comcast's future results of operations other than in periods in which AT&T
Comcast may recognize an impairment charge. A change in the recorded value of
these intangible assets could increase or decrease the likelihood that AT&T
Comcast will recognize an impairment charge related to these intangible assets
at some time in the future.
25
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," 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 rights have indefinite lives based upon
an analysis utilizing the criteria in paragraph 11 of SFAS No. 142. The pro
forma adjustments to the Unaudited Pro Forma Combined Condensed Statement of
Operations for the year ended December 31, 2001 reflect the elimination of AT&T
Broadband Group's amortization expense related to goodwill and cable franchise
rights since this acquisition will be accounted for under the provisions of SFAS
No. 142.
Comcast incurred goodwill and cable and sports franchise rights
amortization expense of approximately $2,002 million for the year ended December
31, 2001. The historical consolidated financial statements of Comcast included
in the Unaudited Pro Forma Combined Condensed Statement of Operations for the
year ended December 31, 2001 include the amortization expense related to
Comcast's goodwill and cable and sports franchise rights, which has not been
eliminated in the pro forma adjustments. Effective January 1, 2002, Comcast, in
accordance with the provisions of SFAS No. 142, no longer amortizes goodwill and
cable and sports franchise rights.
Management of both companies believes that the assumptions used provide a
reasonable basis on which to present the unaudited pro forma financial data.
Both companies have completed other acquisitions and dispositions that 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 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 included herein.
26
AT&T COMCAST CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF JUNE 30, 2002
HISTORICAL
HISTORICAL AT&T PRO FORMA PRO FORMA
COMCAST(A) BROADBAND(A) ADJUSTMENTS AT&T COMCAST
---------- ------------ ----------- ------------
(AMOUNTS IN MILLIONS)
ASSETS
Current Assets
Cash and cash equivalents............................... $ 557.8 $ $ $ 557.8
Investments............................................. 1,057.6 414.0 1,471.6
Accounts receivable, net................................ 957.0 592.0 1,549.0
Inventories, net........................................ 414.0 414.0
Deferred income taxes................................... 135.9 135.9
Other current assets.................................... 337.7 420.0 57.5(b1) 815.2
--------- ---------- ---------- ----------
Total current assets.................................. 3,460.0 1,426.0 57.5 4,943.5
--------- ---------- ---------- ----------
INVESTMENTS............................................... 727.6 17,896.0 (1,164.0)(d) 17,459.6
--------- ---------- ---------- ----------
PROPERTY AND EQUIPMENT, NET............................... 7,023.1 14,861.0 21,884.1
--------- ---------- ---------- ----------
GOODWILL.................................................. 6,446.3 15,134.0 (7,591.0)(b2) 13,989.3
FRANCHISE RIGHTS.......................................... 16,599.4 29,083.0 45,682.4
OTHER INTANGIBLE ASSETS, NET.............................. 1,471.7 1,465.0 2,936.7
OTHER NON-CURRENT ASSETS, NET............................. 390.7 1,975.0 57.5(b3) 2,423.2
--------- ---------- ---------- ----------
$36,118.8 $ 81,840.0 $ (8,640.0) $109,318.8
========= ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable........................................ $ 680.1 $ 712.0 $ $ 1,392.1
(40.0)(b4)
Accrued expenses and other current liabilities.......... 1,371.7 2,244.0 1,786.8(b5) 5,362.5
Deferred income taxes................................... 121.8 488.0 609.8
57.5(b6)
Short-term debt......................................... 6,486.0 (1,993.7)(c) 4,549.8
Current portion of long-term debt....................... 206.9 2,050.0 (1,681.8)(c) 575.1
--------- ---------- ---------- ----------
Total current liabilities............................. 2,380.5 11,980.0 (1,871.2) 12,489.3
--------- ---------- ---------- ----------
572.5(b6)
(669.2)(b7)
LONG-TERM DEBT, LESS CURRENT PORTION...................... 10,543.5 13,406.0 3,675.5(c) 27,528.3
--------- ---------- ---------- ----------
DEFERRED INCOME TAXES..................................... 6,755.2 19,906.0 (79.2)(b8) 26,582.0
--------- ---------- ---------- ----------
(179.0)(b9)
OTHER NON-CURRENT LIABILITIES............................. 1,421.1 836.0 (6.4)(b10) 2,071.7
--------- ---------- ---------- ----------
MINORITY INTEREST......................................... 986.7 1,210.0 2,196.7
--------- ---------- ---------- ----------
Company-Obligated Convertible Quarterly Income Preferred
Securities of Subsidiary Trust Holding Solely
Subordinated Debt Securities of AT&T.................... 4,725.0 (4,725.0)(b11)
--------- ---------- ---------- ----------
STOCKHOLDERS' EQUITY
1,348.6(b12)
Common stock............................................ 946.7 (47.3)(d) 2,248.0
(1,116.7)(d)
Additional capital...................................... 11,791.5 24,234.4(b12) 34,909.2
Retained earnings....................................... 1,317.3 1,317.3
Accumulated other comprehensive loss.................... (23.7) (23.7)
Combined attributed net assets.......................... 29,777.0 (29,777.0)(b13)
--------- ---------- ---------- ----------
Total stockholders' equity............................ 14,031.8 29,777.0 (5,358.0) 38,450.8
--------- ---------- ---------- ----------
$36,118.8 $ 81,840.0 $ (8,640.0) $109,318.8
========= ========== ========== ==========
See Notes to Unaudited Pro Forma Combined Condensed Balance Sheet
27
AT&T COMCAST CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
(a) These columns reflect the historical balance sheets of the respective
companies. Certain reclassifications have been made 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
(1,233.6 million shares x $18.80).................... $1,233.6 $21,958.1 $ 23,191.7
Issuance of common stock to Microsoft Corporation
(115.0 million shares x $18.80)...................... 115.0 2,047.0 2,162.0
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........................................ 229.3 229.3
-------- --------- ----------
(b12) Comcast common stock equity consideration........... 1,348.6 24,234.4 25,583.0
(b6) Transaction costs (assumed to be funded -- $57.5
short-term debt and $572.5 long-term debt)........... 630.0
----------
Total............................................ $ 26,213.0
==========
Preliminary estimate of fair value of identifiable net
assets acquired
(b13) Book value of AT&T Broadband Group................... $ 29,777.0
Elimination of AT&T Broadband Group goodwill......... (15,134.0)
(b1) Current portion of deferred financing fees........... 57.5
(b3) Long-term portion of deferred financing fees......... 57.5
(b4) Elimination of accrued dividend for Microsoft
Corporation QUIPS (net of tax benefit)............... 40.0
(b5) Preliminary estimate of current tax liability arising
from the transaction................................. (1,786.8)
(b7) Preliminary estimate of adjustment to fair value of
AT&T Broadband Group assumed long-term debt.......... 669.2
(b8) Preliminary estimate of adjustment to deferred tax
liability on adjustments at combined federal and
state statutory rate................................. 79.2
(b9) Certain liabilities retained by AT&T related to
Excite@Home.......................................... 179.0
(b10) Preliminary estimate of adjustment to fair value of
other non-current liabilities........................ 6.4
(b11) Redemption of Microsoft Corporation QUIPS............ 4,725.0
----------
Preliminary estimate of adjustments to fair value of
identifiable net assets acquired....................... 18,670.0
----------
Acquisition goodwill................................... $ 7,543.0
==========
Calculation of goodwill acquisition adjustment
Acquisition goodwill................................... $ 7,543.0
Gross value of AT&T Broadband Group goodwill........... (15,134.0)
----------
(b2) Goodwill acquisition adjustment...................... $ (7,591.0)
==========
(i) Maximum number of shares of common stock that
could be issued in the AT&T Comcast
transaction..................................... 1,235.0
Share equivalent of intrinsic value of AT&T
Broadband Group stock options and stock
appreciation rights............................. (1.4)
--------
Common stock to be issued to AT&T
shareholders............................ 1,233.6
========
28
AT&T COMCAST CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(CONCLUDED)
Certain programming and other contracts of AT&T Broadband Group and Comcast
may, by their terms, be assumed, altered or terminated as a result of the
completion of the AT&T Comcast transaction. However, prior to closing
management does not expect to be able to estimate the impact, if any, of
favorable or unfavorable contracts that may result from the ultimate
allocation of purchase price. See note (l) to the Unaudited Pro Forma
Combined Condensed Statements of Operations for a sensitivity analysis of
purchase price allocation.
(c) Represents the refinancing of existing short-term debt due to AT&T
($6,486.0) and certain components of the current portion of long-term debt
($1,681.8) with new debt of AT&T Comcast. The refinancing is assumed to be
funded 55% with short-term debt and 45% with long-term debt. Short-term and
long-term debt amounts do not give effect to the Exchange Offer. The amount
of short-term debt will be reduced and the amount of long-term debt will be
increased based upon the amount of New Broadband Notes to be issued in
connection with the Exchange Offer in an amount to be mutually agreed.
(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... $(1,164.0)
Reclassification of Comcast stock held by AT&T Broadband
Group to equity (par value common stock $47.3 and
additional capital $1,116.7).............................. 1,164.0
---------
$ --
=========
29
AT&T COMCAST CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
HISTORICAL PRO FORMA
HISTORICAL AT&T INTERCOMPANY PRO FORMA AT&T
COMCAST(A) BROADBAND(A) ADJUSTMENTS ADJUSTMENTS(D) COMCAST(L)
---------- ------------ ------------ -------------- ----------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
REVENUES
Service revenues(m)............................ $ 5,756.9 $10,132.0 $(108.9)(b) $ $15,780.0
Net sales from electronic retailing............ 3,917.3 3,917.3
--------- --------- ------- --------- ---------
9,674.2 10,132.0 (108.9) 19,697.3
--------- --------- ------- --------- ---------
COSTS AND EXPENSES
Operating (excluding depreciation)............. 2,905.8 5,459.0 (62.8)(b) 8,302.0
Cost of goods sold from electronic retailing
(excluding depreciation)..................... 2,514.0 2,514.0
Selling, general and administrative(m)......... 1,552.6 2,582.0 (22.6)(b) 4,112.0
Depreciation................................... 1,141.8 2,626.0 3,767.8
Amortization................................... 2,306.2 2,154.0 (1,882.9)(e) 2,577.3
Asset impairment, restructuring and other
charges...................................... 1,494.0 1,494.0
--------- --------- ------- --------- ---------
10,420.4 14,315.0 (85.4) (1,882.9) 22,767.1
--------- --------- ------- --------- ---------
OPERATING LOSS................................... (746.2) (4,183.0) (23.5) 1,882.9 (3,069.8)
OTHER INCOME (EXPENSE)
61.4(f)
Interest expense............................... (731.8) (1,735.0) 64.9(g) (2,340.5)
Investment income (expense).................... 1,061.7 (1,947.0) (18.7)(b) (904.0)
(106.0)(h)
Equity in net income (losses) of affiliates.... (28.5) 148.0(e) 13.5
Other income (expense)......................... 1,301.0 (927.0) 374.0
--------- --------- ------- --------- ---------
1,602.4 (4,609.0) (18.7) 168.3 (2,857.0)
--------- --------- ------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY
INTEREST, EXTRAORDINARY ITEMS AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE.................... 856.2 (8,792.0) (42.2) 2,051.2 (5,926.8)
(576.7)(i)
INCOME TAX (EXPENSE) BENEFIT..................... (470.2) 3,857.0 (750.3)(c) 37.0(h) 2,096.8
--------- --------- ------- --------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST,
EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE.............................. 386.0 (4,935.0) (792.5) 1,511.5 (3,830.0)
Net loss from equity investments................. (69.0) 69.0(h)
MINORITY INTEREST INCOME (EXPENSE)............... (160.4) 833.0 (24.0)(b) 160.0(j) 808.6
--------- --------- ------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE......... $ 225.6 $(4,171.0) $(816.5) $ 1,740.5 $(3,021.4)
========= ========= ======= ========= =========
Earnings (loss) per share from continuing
operations -- basic............................ $ 0.24 $ (1.34)
Earnings (loss) per share from continuing
operations -- assuming dilution................ $ 0.23 $ (1.34)
Weighted average number of common shares
outstanding -- basic........................... 949.7 1,301.3(k) 2,251.0
Weighted average number of common shares
outstanding -- assuming dilution............... 964.5 1,286.5(k) 2,251.0
See Notes to Unaudited Pro Forma Combined Condensed Statement of Operations
30
AT&T COMCAST CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
HISTORICAL PRO FORMA
HISTORICAL AT&T INTERCOMPANY PRO FORMA AT&T
COMCAST(A) BROADBAND(A) ADJUSTMENTS ADJUSTMENTS(D) COMCAST(L)
---------- ------------ ------------ -------------- ----------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
REVENUES
Service revenues..................... $ 3,393.4 $ 4,965.0 $(23.5)(b) $ $ 8,334.9
Net sales from electronic
retailing.......................... 1,988.0 1,988.0
--------- ---------- ------ --------- ----------
5,381.4 4,965.0 (23.5) 10,322.9
--------- ---------- ------ --------- ----------
COSTS AND EXPENSES
Operating (excluding depreciation)... 1,469.4 2,591.0 (13.2)(b) 4,047.2
Cost of goods sold from electronic
retailing (excluding
depreciation)...................... 1,260.0 1,260.0
Selling, general and
administrative..................... 977.2 1,342.0 (10.3)(b) 2,308.9
Depreciation......................... 676.6 1,357.0 2.033.6
Amortization......................... 98.7 109.0 207.7
Goodwill and franchise impairment
charges............................ 16,525.0 16,525.0
Asset impairment, restructuring and
other charges...................... 56.0 56.0
--------- ---------- ------ --------- ----------
4,481.9 21,980.0 (23.5) 26,438.4
--------- ---------- ------ --------- ----------
OPERATING INCOME (LOSS)................ 899.5 (17,015.0) (16,115.5)
OTHER INCOME (EXPENSE)
(42.8)(f)
Interest expense..................... (369.3) (732.0) (0.8)(g) (1,144.9)
Investment expense................... (707.1) (1,217.0) (1,924.1)
Equity in net losses of affiliates... (48.4) (1,004.0)(h) (1,052.4)
Other income (expense)............... (14.0) 331.0 317.0
--------- ---------- ------ --------- ----------
(1,138.8) (1,618.0) (1,047.6) (3,804.4)
--------- ---------- ------ --------- ----------
LOSS BEFORE INCOME TAXES, MINORITY
INTEREST, EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE............................... (239.3) (18,633.0) (1,047.6) (19,919.9)
16.8(i)
INCOME TAX BENEFIT..................... 30.2 5,506.0 387.0(h) 5,940.0
--------- ---------- ------ --------- ----------
LOSS BEFORE MINORITY INTEREST,
EXTRAORDINARY ITEMS AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE.......... (209.1) (13,127.0) (643.8) (13,979.9)
Net loss related to equity
investments.......................... (617.0) 617.0(h)
MINORITY INTEREST EXPENSE.............. (89.4) (140.0) 80.0(j) (149.4)
--------- ---------- ------ --------- ----------
LOSS BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE............................... $ (298.5) $(13,884.0) $ $ 53.2 $(14,129.3)
========= ========== ====== ========= ==========
Loss per share from continuing
operations -- basic.................. $ (0.31) $ (6.27)
Loss per share from continuing
operations -- assuming dilution...... $ (0.31) $ (6.27)
Weighted average number of common
shares outstanding -- basic.......... 951.9 1,301.3(k) 2,253.2
Weighted average number of common
shares outstanding -- assuming
dilution............................. 951.9 1,301.3(k) 2,253.2
See Notes to Unaudited Pro Forma Combined Condensed Statement of Operations
31
AT&T COMCAST CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(a) These columns reflect the historical statements of operations of the
respective companies.
(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 and Excite@Home transactions.
(c) Represents the elimination of the aggregate historical income tax effects
recorded by Comcast and AT&T Broadband Group on Note (b) adjustments above.
(d) 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.
(e) Represents the elimination of AT&T Broadband Group's historical goodwill
and cable franchise rights amortization expense for consolidated
subsidiaries and equity method investments. Under the accounting rules set
forth in SFAS No. 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.
(f) 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 historical
interest rates for the historical debt outstanding and assumed interest
rates for the planned credit facilities. The pro forma financial
information assumes the financings occurred on January 1, 2001.
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 $10.3 million for the year ended December 31,
2001 and $5.2 million for the six months ended June 30, 2002.
(g) Represents the net effect 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 (b7) to the Unaudited Pro Forma Combined Condensed Balance Sheet. The
difference between the fair value and the face amount of each borrowing is
amortized to interest expense over the remaining term of the borrowing.
(h) Represents the reclassification of losses in equity investments for the
year ended December 31, 2001 and losses related to equity method
investments for the six months ended June 30, 2002 to conform with the
presentation currently used by Comcast.
(i) Represents the aggregate pro forma income tax effect of Notes (e) through
(g) above at the combined federal and state statutory rate.
(j) Represents the elimination of historical impact of the QUIPS exchanged for
AT&T Broadband Group common stock.
(k) For basic earnings (loss) 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
as well as adjustment for the year-ended December 31,
32
AT&T COMCAST CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS -- (CONCLUDED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
2001 to Comcast's historical average dilutive shares outstanding since such
shares would be anti-dilutive on a pro forma basis.
(l) 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 shares 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.
SIX MONTHS
YEAR ENDED ENDED
WEIGHTED AVERAGE LIFE DECEMBER 31, 2001 JUNE 30, 2002
--------------------- ----------------- -------------
Five years
Net Income........................................ $61.5 $30.8
Per Share......................................... $0.03 $0.01
Ten years
Net Income........................................ $30.8 $15.4
Per Share......................................... $0.01 $0.01
Twenty years
Net Income........................................ $15.4 $ 7.7
Per Share......................................... $0.01 $0.00
(m) Comcast's consolidated statement of operations for the year ended December
31, 2001 reflects franchise fees collected from cable subscribers as a
reduction of the related franchise fee expense included within selling,
general and administrative expenses. Upon adoption of EITF 01-14 "Income
Statement Characterization of Reimbursements Received for 'Out-of-Pocket'
Expenses Incurred," on January 1, 2002, Comcast reclassified such amounts to
service revenues. The change in classification had no impact on the
unaudited pro forma operating loss. The effect of the reclassification on
the Unaudited Pro Forma Combined Condensed Statement of Operations for the
ended December 31, 2001 would be to increase service revenues and selling,
general and administrative expenses by $192.3 million.
33
SELECTED FINANCIAL DATA OF COMCAST
The consolidated selected financial data of Comcast below for the six
months ended June 30, 2002 and 2001 were derived from the unaudited condensed
consolidated financial statements of Comcast, and the consolidated selected
financial data of Comcast for the years ended December 31, 2001, 2000, 1999,
1998 and 1997 were derived from the audited consolidated financial statements of
Comcast.
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
--------------------- ---------------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenues(1).......................... $ 5,381.4 $ 4,570.7 $ 9,674.2 $ 8,218.6 $ 6,529.2 $ 5,419.0 $ 4,700.4
Operating income (loss).............. 899.5 (233.8) (746.2) (161.0) 664.0 557.1 466.6
Income (loss) from continuing
operations before extraordinary
items and cumulative effect of
accounting change.................. (298.5) 651.9 225.6 2,045.1 780.9 1,007.7 (182.9)
Discontinued operations(2)........... 335.8 (31.4) (25.6)
Extraordinary items.................. (1.5) (23.6) (51.0) (4.2) (30.2)
Cumulative effect of accounting
change............................. 384.5 384.5
Net income (loss).................... (298.5) 1,036.4 608.6 2,021.5 1,065.7 972.1 (238.7)
BASIC EARNINGS (LOSS) FOR COMMON
STOCKHOLDERS PER COMMON SHARE(3)
Income (loss) from continuing
operations before extraordinary
items and cumulative effect of
accounting change................ $ (.31) $ .69 $ .24 $ 2.27 $ 1.00 $ 1.34 $ (.29)
Discontinued operations(2)......... .45 (.04) (.04)
Extraordinary items................ (.03) (.07) (.01) (.04)
Cumulative effect of accounting
change........................... .40 .40
--------- --------- --------- --------- --------- --------- ---------
Net income (loss).................. $ (.31) $ 1.09 $ .64 $ 2.24 $ 1.38 $ 1.29 $ (.37)
========= ========= ========= ========= ========= ========= =========
DILUTED EARNINGS (LOSS) FOR COMMON
STOCKHOLDERS PER COMMON SHARE(3)
Income (loss) from continuing
operations before extraordinary
items and cumulative effect of
accounting change................ $ (.31) $ .67 $ .23 $ 2.16 $ .95 $ 1.25 $ (.29)
Discontinued operations(2)......... .41 (.03) (.04)
Extraordinary items................ (.03) (.06) (.01) (.04)
Cumulative effect of accounting
change........................... .40 .40
--------- --------- --------- --------- --------- --------- ---------
Net income (loss).................. $ (.31) $ 1.07 $ .63 $ 2.13 $ 1.30 $ 1.21 $ (.37)
========= ========= ========= ========= ========= ========= =========
Cash dividends declared per common
share(3)........................... $ .0467 $ .0467
BALANCE SHEET DATA (AT PERIOD END):
Total assets......................... $36,118.8 $38,640.7 $38,131.8 $35,744.5 $28,685.6 $14,710.5 $11,234.3
Working capital...................... 1,079.5 704.6 1,419.5 1,670.9 4,771.6 2,497.0 13.6
Long-term debt....................... 10,543.5 11,450.7 11,741.6 10,517.4 8,707.2 5,464.2 5,334.1
Stockholders' equity................. 14,031.8 15,060.5 14,473.0 14,086.4 10,341.3 3,815.3 1,646.5
SUPPLEMENTARY FINANCIAL DATA:
Operating income before depreciation
and amortization(4)................ $ 1,674.8 $ 1,327.1 $ 2,701.8 $ 2,470.3 $ 1,880.0 $ 1,496.7 $ 1,293.1
Net cash provided by (used in)(5)
Operating activities............... 1,050.5 974.6 1,229.5 1,219.3 1,249.4 1,067.7 844.6
Financing activities............... (471.5) 1,346.0 1,476.3 (271.4) 1,341.4 809.2 283.9
Investing activities............... (371.2) (2,226.2) (3,007.3) (1,218.6) (2,539.3) (1,415.3) (1,045.8)
34
---------------
(1) Comcast's consolidated statement of operations for the years ended December
31, 2001, 2000, 1999, 1998 and 1997 reflect franchise fees collected from
cable subscribers as a reduction of the related franchise fee expense
included within selling, general and administrative expenses. Upon adoption
of EITF 01-14 "Income Statement Characterization of Reimbursements Received
for 'Out-of-Pocket' Expenses Incurred," on January 1, 2002, Comcast
reclassified such amounts to revenues. The effect of the reclassification on
the statement of operations for the years ended 2001, 2000, 1999, 1998 and
1997 would be to increase revenues and selling, general and administrative
expenses by $192.3 million, $152.3 million, $105.6 million, $94.7 million
and $72.8 million, respectively.
(2) In July 1999, Comcast sold Comcast Cellular Corporation to SBC
Communications, Inc. Comcast Cellular is presented as a discontinued
operation for all periods presented.
(3) Adjusted for Comcast's two-for-one stock split in the form of a 100% stock
dividend in May 1999.
(4) 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 Comcast's
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 our performance.
(5) Represents net cash provided by (used in) operating activities, financing
activities and investing activities as presented in Comcast's consolidated
statement of cash flows.
35
Comcast adopted SFAS No. 142 on January 1, 2002. Upon adoption of SFAS No.
142, Comcast no longer amortizes goodwill and other indefinite lived intangible
assets, which consist of cable and sports franchise rights. The following pro
forma financial information for the six months ended June 30, 2001, and for the
years ended December 31, 2001, 2000 and 1999, is presented as if SFAS No. 142
was adopted as of January 1, 1999 (amounts in millions, except per share data):
SIX
MONTHS
ENDED YEARS ENDED DECEMBER 31,
JUNE 30, ------------------------------
2001 2001 2000 1999
--------- -------- -------- --------
Net Income
As reported........................................ $1,036.4 $ 608.6 $2,021.5 $1,065.7
Amortization of goodwill........................ 154.4 334.8 303.5 128.5
Amortization of equity method goodwill.......... 11.1 15.0 15.2 4.4
Amortization of franchise rights................ 529.4 1,083.7 858.1 258.3
-------- -------- -------- --------
As adjusted........................................ $1,731.3 $2,042.1 $3,198.3 $1,456.9
======== ======== ======== ========
Income before extraordinary items and cumulative
effect of accounting change, as adjusted........ $1,346.8 $1,659.1 $3,221.9 $1,507.9
======== ======== ======== ========
Basic EPS
As reported........................................ $ 1.09 $ 0.64 $ 2.24 $ 1.38
Amortization of goodwill........................ 0.17 0.35 0.34 0.17
Amortization of equity method goodwill.......... 0.01 0.02 0.02 0.01
Amortization of franchise rights................ 0.56 1.14 0.96 0.35
-------- -------- -------- --------
As adjusted........................................ $ 1.83 $ 2.15 $ 3.56 $ 1.91
======== ======== ======== ========
Diluted EPS
As reported........................................ $ 1.07 $ 0.63 $ 2.13 $ 1.30
Amortization of goodwill........................ 0.16 0.35 0.32 0.16
Amortization of equity method goodwill.......... 0.01 0.02 0.02 0.01
Amortization of franchise rights................ 0.55 1.12 0.90 0.31
-------- -------- -------- --------
As adjusted........................................ $ 1.79 $ 2.12 $ 3.37 $ 1.78
======== ======== ======== ========
36
SELECTED FINANCIAL DATA OF COMCAST CABLE
The consolidated selected financial data of Comcast Cable for the six
months ended June 30, 2002 and 2001 were derived from the unaudited condensed
consolidated financial statements of Comcast Cable, and the consolidated
selected financial data of Comcast Cable for the years ended December 31, 2001,
2000, 1999, 1998 and 1997 were derived from the audited consolidated financial
statements of Comcast Cable.
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------ --------------------------------------------------------
2002 2001 2001(1) 2000(1) 1999(1) 1998 1997
------------ --------- --------- --------- --------- --------- --------
(DOLLARS IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Revenues(2).................... $ 2,932.3 $ 2,458.0 $ 5,002.8 $ 4,141.9 $ 2,906.5 $ 2,277.4 $2,073.0
Operating income (loss)........ 644.2 (362.8) (960.8) (758.7) (38.9) 110.3 83.3
Income (loss) before
extraordinary items and
cumulative effect of
accounting change............ 236.9 214.5 (360.9) 113.1 (247.5) (97.2) (112.1)
Extraordinary items............ (7.1) (6.2) (0.1) (16.7)
Cumulative effect of accounting
change....................... (61.3) (61.3)
Net income (loss).............. 236.9 153.2 (422.2) 106.0 (253.7) (97.3) (128.8)
BALANCE SHEET DATA (AT PERIOD
END):
Total assets................... $28,296.8 $29,029.1 $28,450.0 $25,804.0 $ 9,967.8 $ 6,449.4 $6,057.8
Working capital................ (245.4) (201.5) (514.3) (414.9) (628.3) (285.3) (225.1)
Long-term debt................. 8,144.1 7,840.1 8,359.4 6,771.0 4,735.3 3,462.1 2,554.9
Stockholders' equity........... 13,151.9 13,567.8 12,980.2 12,057.2 1,808.8 173.0 267.1
SUPPLEMENTARY FINANCIAL DATA:
Operating income before
depreciation and
amortization(3).............. $ 1,223.5 $ 1,027.7 $ 2,026.6 $ 1,624.0 $ 978.8 $ 784.4 $ 709.4
Net cash provided by (used
in)(4)
Operating activities......... 902.8 800.5 1,441.1 1,290.1 781.9 701.1 549.5
Financing activities......... (95.3) 974.2 1,009.1 857.7 936.8 320.1 (37.4)
Investing activities......... (688.7) (1,804.2) (2,449.3) (2,164.6) (1,692.2) (1,027.4) (509.8)
---------------
(1) You should see "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Comcast Cable's Annual Report on Form 10-K for
the year ended December 31, 2001, incorporated by reference in this
prospectus, for a discussion of events which affect the comparability of the
information reflected in this financial data.
(2) Comcast Cable's consolidated statement of operations for the years ended
December 31, 2001, 2000, 1999, 1998 and 1997 reflect franchise fees
collected from cable subscribers as a reduction of the related franchise fee
expense included within selling, general and administrative expenses. Upon
adoption of EITF 01-14 "Income Statement Characterization of Reimbursements
Received for 'Out-of-Pocket' Expenses Incurred," on January 1, 2002, Comcast
Cable reclassified such amounts to revenues. The effect of the
reclassification on the statement of operations for the years ended 2001,
2000, 1999, 1998 and 1997 would be to increase revenues and selling, general
and administrative expenses by $189.4 million, $149.9 million, $103.4
million, $94.7 million and $72.8 million, respectively.
(3) Operating income before depreciation and amortization is commonly referred
to in Comcast Cable'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
Cable's business 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 Cable's
industry, although Comcast
37
Cable'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 Cable's management to measure the operating performance of
Comcast Cable's business. 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 Cable's performance.
(4) This represents net cash provided by (used in) operating activities,
financing activities and investing activities as presented in Comcast
Cable's consolidated statement of cash flows.
Comcast Cable adopted SFAS No. 142 on January 1, 2002. Upon adoption of
SFAS No. 142, Comcast Cable no longer amortizes goodwill and other indefinite
lived intangible assets, which consist of cable franchise rights. The following
pro forma financial information for the six months ended June 30, 2001, and for
the years ended December 31, 2001, 2000 and 1999, is presented as if SFAS No.
142 was adopted as of January 1, 1999 (amounts in millions):
SIX
MONTHS
ENDED YEARS ENDED DECEMBER 31,
JUNE 30, ------------------------------
2001 2001 2000 1999
-------- --------- -------- -------
Net income (loss)
As reported........................................ $153.2 $ (422.2) $ 106.0 $(253.7)
Amortization of goodwill........................ 123.7 266.7 246.3 76.6
Amortization of equity method goodwill.......... 3.8 7.6 8.8
Amortization of franchise rights................ 521.3 1,067.4 842.9 255.2
------ --------- -------- -------
As adjusted........................................ $802.0 $ 919.5 $1,204.0 $ 78.1
====== ========= ======== =======
Income before extraordinary items and cumulative
effect of accounting change, as adjusted........ $863.3 $ 980.8 $1,211.1 $ 84.3
====== ========= ======== =======
38
RATIOS OF EARNINGS TO FIXED CHARGES
FOR THE SIX
MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31,
JUNE 30, -------------------------------------
2002 2001 2000 1999 1998 1997
------------ ----- ----- ----- ----- -----
AT&T(a)................................... (b) (b) 1.5x 6.2x 14.9x 11.7x
AT&T BROADBAND GROUP(a)................... (c) (c) (c) (c) (c) (c)
BROADBAND(d).............................. -- -- -- -- -- --
AT&T COMCAST(d)........................... -- -- -- -- -- --
COMCAST CABLE(e).......................... 2.29x (f) 1.79x (f) (f) (f)
MEDIAONE(a)............................... 3.1x 5.0x (g) -- -- --
TCI(a).................................... (h) (h) (h) -- -- --
COMCAST(i)................................ (j) 2.21x 6.24x 3.78x 5.44x 1.29x
---------------
(a) For the purpose of calculating the ratio of earnings to fixed charges,
earnings is calculated by adding fixed charges excluding capitalized
interest to income from continuing operations before income taxes, and by
adding distributions of less-than-fifty-percent-owned affiliates. By fixed
charges we mean total interest, including capitalized interest, dividend
requirements on preferred stock and interest on trust preferred securities
and a portion of rentals, which we believe is representative of the interest
factor of our rental expense, as applicable.
(b) AT&T's loss for the six months ended June 30, 2002 and the year ended
December 31, 2001 was inadequate to cover fixed charges, dividend
requirements on subsidiary preferred stock and interest on trust preferred
securities in the amount of $16.4 billion and $1.6 billion, respectively.
(c) AT&T Broadband Group's loss for the six months ended June 30, 2002, the
years ended December 31, 2001 and 2000, and the ten month period ended
December 31, 1999 was inadequate to cover fixed charges, dividend
requirements on subsidiary preferred stock and interest on trust preferred
securities in the amount of $18.8 billion, $9.2 billion, $10.4 billion and
$2.0 billion, respectively.
(d) From their respective dates of inception on December 14, 2001 and December
7, 2001 through June 30, 2002, Broadband and AT&T Comcast have had no
operations.
(e) For purposes of Comcast Cable's ratio of earnings to fixed charges, earnings
consist of income (loss) from continuing operations before income taxes,
extraordinary items, cumulative effect of accounting changes, minority
interest, equity in net (income) losses of affiliates and fixed charges.
Fixed charges consist of interest expense and interest expense on notes
payable to affiliates.
(f) For the years ended December 31, 2001, 1999, 1998 and 1997, Comcast Cable's
earnings, as defined above, were inadequate to cover fixed charges by $390.0
million, $399.2 million, $149.6 million and $176.7 million, respectively.
(g) MediaOne's loss for the period ended December 31, 2000 was inadequate to
cover fixed charges in the amount of $0.4 billion.
(h) TCI's loss for the six months ended June 30, 2002, the years ended December
31, 2001 and 2000, and the ten month period ended December 31, 1999 was
inadequate to cover fixed charges in the amount of $0.7 billion, $1.5
billion, $1.9 billion and $1.3 billion, respectively.
(i) For purposes of Comcast's ratio of earnings to fixed charges, earnings
consist of income (loss) from continuing operations before income taxes,
extraordinary items, cumulative effect of accounting changes, minority
interest, equity in net (income) losses of affiliates and fixed charges.
Fixed charges consist of interest expense and capitalized interest.
(j) For the six months ended June 30, 2002 Comcast's earnings, as defined above,
were inadequate to cover fixed charges by $190.9 million.
39
PRO FORMA RATIO OF EARNINGS TO
FIXED CHARGES
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2002 DECEMBER 31, 2001
---------------- -----------------
AT&T(k).............................................. 3.7x 5.2x
AT&T Comcast(l)...................................... (l) (l)
Broadband Group...................................... (c) (c)
---------------
(k) The pro forma AT&T ratio of earnings to fixed charges assumes the
distribution of Liberty Media Group and AT&T Broadband Group and utilizes
the same methodology as described in footnote (a). The detailed unaudited
pro forma financial statements on which these calculations were based can be
found beginning on page F-3 of this prospectus.
(l) For purposes of calculating the AT&T Comcast pro forma ratio of earnings to
fixed charges, earnings consist of income (loss) before income taxes,
extraordinary items, cumulative effect of accounting change, minority
interest, equity in net (income) losses affiliates and fixed charges. Fixed
charges consist of interest expense. For the six months ended June 30, 2002
and for the year ended December 31, 2001, earnings, as defined above, were
inadequate to cover fixed charges by $18.868 billion and $5.940 billion,
respectively.
MARKETS AND MARKET PRICES
The following table sets forth for each series of Broadband Eligible Notes
and AT&T Eligible Notes, the exchanges upon which those notes are listed for
trading, the symbols under which those notes are listed, and the high and low
sale prices paid for the notes for the periods indicated. The 7.75% Medium-Term
Notes, Series A Due May 15, 2025, the 8.00% Medium-Term Notes, Series A Due May
15, 2025 and the FRN Medium-Term Notes, Series A Due 2054 are not listed on any
exchange.
LAST SALE PRICE ON NYSE
-----------------------
HIGH LOW
---------- ----------
5.625% NOTES DUE 2004 (NYSE: T M04)
2000
First Quarter........................................ 94.500 93.000
Second Quarter....................................... 95.000 92.625
Third Quarter........................................ 95.500 93.625
Fourth Quarter....................................... 96.125 94.000
2001
First Quarter........................................ 99.250 96.000
Second Quarter....................................... 100.625 98.375
Third Quarter........................................ 102.250 99.625
Fourth Quarter....................................... 102.875 100.250
2002
First Quarter........................................ 102.375 99.750
Second Quarter....................................... 100.625 93.250
Third Quarter........................................ 100.000 91.875
Fourth Quarter (through October 2, 2002)............. 100.000 99.875
40
LAST SALE PRICE ON NYSE
-----------------------
HIGH LOW
---------- ----------
6.75% NOTES DUE 2004 (NYSE: T A04)
2000
First Quarter........................................ 98.750 96.750
Second Quarter....................................... 99.125 98.875
Third Quarter........................................ 99.375 97.250
Fourth Quarter....................................... 99.875 96.750
2001
First Quarter........................................ 102.875 98.500
Second Quarter....................................... 103.125 100.250
Third Quarter........................................ 103.875 102.000
Fourth Quarter....................................... 104.875 102.125
2002
First Quarter........................................ 103.875 101.125
Second Quarter....................................... 102.750 95.000
Third Quarter........................................ 101.875 94.750
Fourth Quarter (through October 2, 2002)............. 101.000 100.250
7.00% NOTES DUE 2005 (NYSE: T M05)
2000
First Quarter........................................ 100.000 97.625
Second Quarter....................................... 101.000 95.125
Third Quarter........................................ 101.000 98.500
Fourth Quarter....................................... 100.500 97.375
2001
First Quarter........................................ 103.250 99.875
Second Quarter....................................... 103.875 101.375
Third Quarter........................................ 105.000 101.750
Fourth Quarter....................................... 105.375 102.125
2002
First Quarter........................................ 105.000 101.000
Second Quarter....................................... 102.750 93.625
Third Quarter........................................ 100.875 87.125
Fourth Quarter (through October 2, 2002)............. 100.625 100.375
7.50% NOTES DUE 2006 (NYSE: T 06)
2000
First Quarter........................................ 101.750 99.500
Second Quarter....................................... 102.000 98.375
Third Quarter........................................ 102.750 100.000
Fourth Quarter....................................... 101.500 98.000
2001
First Quarter........................................ 106.000 101.125
Second Quarter....................................... 106.875 102.625
Third Quarter........................................ 107.000 102.500
Fourth Quarter....................................... 108.625 103.250
41
LAST SALE PRICE ON NYSE
-----------------------
HIGH LOW
---------- ----------
2002
First Quarter........................................ 106.125 102.000
Second Quarter....................................... 104.875 93.250
Third Quarter........................................ 101.625 86.000
Fourth Quarter (through October 2, 2002)............. 101.500 101.000
7.75% NOTES DUE 2007 (NYSE: T 07)
2000
First Quarter........................................ 103.000 101.000
Second Quarter....................................... 103.000 99.000
Third Quarter........................................ 103.000 101.000
Fourth Quarter....................................... 102.875 99.500
2001
First Quarter........................................ 106.875 101.500
Second Quarter....................................... 106.750 104.750
Third Quarter........................................ 108.250 105.125
Fourth Quarter....................................... 108.125 104.250
2002
First Quarter........................................ 107.000 103.000
Second Quarter....................................... 105.500 92.625
Third Quarter........................................ 101.500 86.750
Fourth Quarter (through October 2, 2002)............. 102.500 101.750
6.00% NOTES DUE 2009 (NYSE: T 09)
2000
First Quarter........................................ 90.875 88.250
Second Quarter....................................... 91.250 85.500
Third Quarter........................................ 90.375 88.375
Fourth Quarter....................................... 91.375 87.000
2001
First Quarter........................................ 95.500 89.625
Second Quarter....................................... 95.250 92.125
Third Quarter........................................ 98.000 93.875
Fourth Quarter....................................... 99.000 94.000
2002
First Quarter........................................ 97.000 92.625
Second Quarter....................................... 94.000 76.625
Third Quarter........................................ 91.125 73.000
Fourth Quarter (through October 2, 2002)............. 93.000 91.125
42
LAST SALE PRICE ON NYSE
-----------------------
HIGH LOW
---------- ----------
8.125% DEBENTURES DUE JANUARY 15, 2022 (NYSE: T 22)
2000
First Quarter........................................ 101.375 98.875
Second Quarter....................................... 100.375 96.500
Third Quarter........................................ 100.625 98.375
Fourth Quarter....................................... 99.875 93.000
2001
First Quarter........................................ 102.375 98.750
Second Quarter....................................... 102.250 98.875
Third Quarter........................................ 102.875 101.250
Fourth Quarter....................................... 102.750 99.125
2002
First Quarter........................................ 103.125 98.000
Second Quarter....................................... 100.000 75.875
Third Quarter........................................ 92.750 75.250
Fourth Quarter (through October 2, 2002)............. 89.500 88.875
8.125% DEBENTURES DUE JULY 15, 2024 (NYSE: T 24)
2000
First Quarter........................................ 101.500 98.125
Second Quarter....................................... 101.125 95.875
Third Quarter........................................ 100.875 98.000
Fourth Quarter....................................... 99.750 92.250
2001
First Quarter........................................ 103.000 98.250
Second Quarter....................................... 102.125 98.750
Third Quarter........................................ 103.500 101.125
Fourth Quarter....................................... 103.500 99.625
2002
First Quarter........................................ 103.000 98.250
Second Quarter....................................... 99.625 75.250
Third Quarter........................................ 91.500 74.625
Fourth Quarter (through October 2, 2002)............. 89.375 87.750
8.35% DEBENTURES DUE 2025 (NYSE: T 25)
2000
First Quarter........................................ 104.000 101.125
Second Quarter....................................... 103.000 97.625
Third Quarter........................................ 102.500 100.375
Fourth Quarter....................................... 102.125 95.125
2001
First Quarter........................................ 104.500 99.500
Second Quarter....................................... 103.750 98.750
Third Quarter........................................ 105.250 102.250
Fourth Quarter....................................... 104.750 100.625
43
LAST SALE PRICE ON NYSE
-----------------------
HIGH LOW
---------- ----------
2002
First Quarter........................................ 104.438 100.250
Second Quarter....................................... 102.250 76.625
Third Quarter........................................ 92.370 77.500
Fourth Quarter (through October 2, 2002)............. 89.500 88.875
6.50% NOTES DUE 2029 (NYSE: T 29)
2000
First Quarter........................................ 86.125 83.125
Second Quarter....................................... 88.250 78.250
Third Quarter........................................ 84.625 81.375
Fourth Quarter....................................... 82.875 78.000
2001
First Quarter........................................ 89.375 81.000
Second Quarter....................................... 87.500 81.875
Third Quarter........................................ 89.000 83.375
Fourth Quarter....................................... 90.500 82.625
2002
First Quarter........................................ 88.875 82.625
Second Quarter....................................... 84.375 65.875
Third Quarter........................................ 84.250 60.750
Fourth Quarter (through October 2, 2002)............. 85.000 82.875
8.625% DEBENTURES DUE DECEMBER 1, 2031 (NYSE: T 31)
2000
First Quarter........................................ 103.875 101.375
Second Quarter....................................... 102.750 98.500
Third Quarter........................................ 102.875 100.750
Fourth Quarter....................................... 102.125 96.125
2001
First Quarter........................................ 105.250 99.000
Second Quarter....................................... 104.250 100.125
Third Quarter........................................ 105.375 103.500
Fourth Quarter....................................... 105.000 101.125
2002
First Quarter........................................ 105.000 100.625
Second Quarter....................................... 102.875 79.000
Third Quarter........................................ 92.750 78.500
Fourth Quarter (through October 2, 2002)............. 95.500 94.500
44
RISK FACTORS
An investment in the Broadband Exchange Notes, New Broadband Notes or New
AT&T Notes involves a number of risks. You should consider the following
information about these risks, as well as the other information included in and
incorporated by reference into this prospectus. In particular you should
consider the risk factors discussed in AT&T's and Comcast Cable's filings with
the SEC.
RISKS RELATING TO THE EXCHANGE OFFER
THE NEW BROADBAND NOTES WILL BE UNSECURED AND WILL RANK EQUALLY WITH THE OTHER
UNSECURED OBLIGATIONS OF BROADBAND AND WILL BE EFFECTIVELY SUBORDINATED TO THE
INDEBTEDNESS AND OTHER OBLIGATIONS OF ANY SUBSIDIARY OF BROADBAND THAT IS NOT
A CABLE GUARANTOR, WHILE THE CABLE GUARANTEES OF THE NEW BROADBAND NOTES BY
THE CABLE GUARANTORS AT&T COMCAST, COMCAST CABLE, MEDIAONE AND TCI WILL BE
EFFECTIVELY SUBORDINATED TO THE INDEBTEDNESS AND OTHER OBLIGATIONS OF ANY
SUBSIDIARIES OF THE CABLE GUARANTORS (OTHER THAN BROADBAND) THAT ARE NOT
THEMSELVES CABLE GUARANTORS.
The New Broadband Notes will be unsecured and will be effectively
subordinated to the indebtedness and other obligations, including trade
payables, of all subsidiaries of Broadband other than MediaOne and TCI, and of
all subsidiaries of AT&T Comcast other than Broadband that are not themselves
cable guarantors. "Effectively subordinated" means that in the event of
bankruptcy, liquidation or reorganization of an obligor, the assets of each
subsidiary of that obligor will be available to pay obligations of the obligor
only after all of the indebtedness and other obligations of that subsidiary have
been paid in full. The indenture for the New Broadband Notes does not prohibit
or limit the incurrence of additional indebtedness and other liabilities by
Broadband, any of the cable guarantors or any of their subsidiaries other than
certain limits on the incurrence of additional secured indebtedness by Broadband
or the cable guarantors. The incurrence of additional indebtedness and other
liabilities by Broadband, by the cable guarantors or by their subsidiaries, or
of additional indebtedness and other liabilities by AT&T that are assumed by
Broadband or the cable guarantors in connection with the AT&T Comcast
transaction, could adversely affect Broadband's or the cable guarantors' ability
to pay their obligations on the New Broadband Notes. In addition, prior to the
consummation of the AT&T Comcast transaction, Broadband will be a shell company.
If, as a result of the foregoing, Broadband is unable to pay its obligations
under the New Broadband Notes, it will be necessary for you to rely on the cable
guarantees to receive payment. See "Description of the New Broadband Notes and
the Cable Guarantees -- Cable Guarantees."
AT&T WILL NOT BE AN OBLIGOR UNDER THE NEW BROADBAND NOTES, AND AT&T's
CO-OBLIGATION UNDER THE BROADBAND EXCHANGE NOTES WILL BE UNSECURED AND WILL
RANK EQUALLY WITH THE OTHER UNSECURED OBLIGATIONS OF AT&T, AND WILL BE
EFFECTIVELY SUBORDINATED TO THE INDEBTEDNESS AND OTHER OBLIGATIONS OF AT&T'S
SUBSIDIARIES OTHER THAN BROADBAND.
AT&T will not be an obligor of the New Broadband Notes. Accordingly if the
AT&T Comcast transaction is consummated, and Broadband is thereafter unable to
pay its obligations under the New Broadband Notes, it will be necessary for you
to rely on the cable guarantees of AT&T Comcast, Comcast Cable, MediaOne and TCI
to receive payment. AT&T's obligation with respect to the Broadband Exchange
Notes will be effectively subordinated to all indebtedness and other
obligations, including trade payables, of AT&T's subsidiaries other than
Broadband. The supplemental indenture for the Broadband Exchange Notes will not
place any restrictions on the incurrence of additional indebtedness and other
liabilities by AT&T or any of its subsidiaries other than certain limits on the
incurrence of additional secured indebtedness by Broadband or the cable
guarantors. The incurrence of additional indebtedness and other liabilities by
AT&T and its subsidiaries could adversely affect AT&T's ability to pay its
obligations under the Broadband Exchange Notes. In addition, prior to the
consummation of the AT&T Comcast transaction, Broadband will be a shell company.
If, as a result of the foregoing, Broadband is unable to pay its obligations
under the Broadband Exchange Notes, it will be necessary for you to rely on
AT&T's co-obligation.
45
THE NEW AT&T NOTES WILL BE EFFECTIVELY SUBORDINATED TO THE INDEBTEDNESS AND
OTHER OBLIGATIONS OF ALL SUBSIDIARIES OF AT&T.
The New AT&T Notes will be effectively subordinated to the indebtedness and
other obligations, including trade payables, of all subsidiaries of AT&T. The
indenture for the New AT&T Notes will not place any restrictions on the
incurrence of additional indebtedness and other liabilities by AT&T or any of
its subsidiaries other than certain limits on secured indebtedness. The
incurrence of additional indebtedness and other liabilities by AT&T and its
subsidiaries could adversely affect AT&T's ability to pay its obligations on the
New AT&T Notes.
NO PUBLIC TRADING MARKET EXISTS FOR THE BROADBAND EXCHANGE NOTES, THE NEW
BROADBAND NOTES OR THE NEW AT&T NOTES.
No established public trading market for the Broadband Exchange Notes, the
New Broadband Notes or the New AT&T Notes exists and there can be no assurance
that a liquid trading market for these notes will develop, that holders of these
notes will be able to sell those notes, the price at which the holders of these
notes would be able to sell those notes or whether a public trading market, if
it develops, will continue. If a public trading market were to develop, the
Broadband Exchange Notes, New Broadband Notes or the New AT&T Notes could trade
at prices higher or lower than their principal amount, depending on many
factors, including prevailing interest rates, the market for similar securities
and Broadband's, AT&T's or the cable guarantors' operating results.
IF YOU DO NOT TENDER YOUR BROADBAND ELIGIBLE NOTES OR AT&T ELIGIBLE NOTES, OR
ANY OF YOUR BROADBAND ELIGIBLE NOTES ARE NOT ACCEPTED AS A RESULT OF PRORATION,
THE ELIGIBLE NOTES YOU RETAIN ARE EXPECTED TO BECOME LESS LIQUID AS A RESULT OF
THE EXCHANGE OFFER.
Because we anticipate that most holders of the Broadband Eligible Notes and
AT&T Eligible Notes will elect to exchange their eligible notes, we expect that
the liquidity of the markets, if any, for eligible notes remaining after the
completion of the exchange offer may be substantially reduced. Any eligible
notes tendered and exchanged in the exchange offer will reduce the aggregate
principal amount of the eligible notes outstanding. After the exchange offer,
one or more series of Broadband Eligible Notes or AT&T Eligible Notes currently
listed on the NYSE may be subject to delisting.
IF WE DO NOT RECEIVE CONSENT TO THE NOTE AMENDMENT FROM HOLDERS OF THE
REQUISITE AMOUNT OF AT&T NOTES, AT&T COULD BE REQUIRED TO REFINANCE THAT
INDEBTEDNESS OR WE MAY NOT BE ABLE TO COMPLETE THE AT&T COMCAST TRANSACTION,
AND THE VALUE OF THE AT&T NOTES, NEW BROADBAND NOTES AND NEW AT&T NOTES COULD
BE ADVERSELY AFFECTED.
The AT&T Comcast transaction is conditioned on AT&T's obtaining the
consents, or deemed consents in the exchange offer, or having defeased,
purchased, retired or acquired debt in respect of series representing at least
90% in aggregate principal amount outstanding on December 19, 2001, which was
approximately $12.7 billion, of debt securities issued under the AT&T Indenture.
AT&T and Comcast could mutually agree to waive this condition with respect to
all or any portion of the AT&T Notes for which consents, or deemed consents, are
not obtained. If holders of the AT&T Notes were to assert successfully that
completing the AT&T Comcast transaction required Broadband or one of its
affiliates to assume AT&T's obligations under the AT&T Notes and that did not
occur, then AT&T could be required to refinance that indebtedness. Depending on
the amount of such indebtedness, market conditions and other factors, this could
have a material adverse effect on AT&T, including its liquidity, and the value
of its securities, including its indebtedness. There can be no assurance that
AT&T would be able to obtain additional financing on terms that would not
materially adversely affect AT&T or the value of the AT&T Notes, Broadband
Exchange Notes or New AT&T Notes, or that AT&T's ability to complete the AT&T
Comcast transaction would not be materially adversely affected.
46
IF YOU DO NOT TENDER ELIGIBLE NOTES OR OTHERWISE CONSENT TO THE NOTE AMENDMENT
AND THE NOTE AMENDMENT IS APPROVED WITH RESPECT TO THE SERIES OF NOTES YOU
HOLD, THE TERMS OF YOUR NOTES WILL BE AMENDED EVEN THOUGH YOU WITHHELD YOUR
CONSENT AND YOU WILL RECEIVE NO COMPENSATION FOR THIS NOTE AMENDMENT AND ANY
RESULTING RISKS.
The terms of your notes will be amended whether or not you tender if the
note amendment is consented to by the holders of at least 50% by principal
amount of the applicable series of notes. For these purposes, all of the Series
A Medium Term Notes will be treated as a single series. This means that you will
hold notes that will remain obligations of AT&T, but AT&T will no longer include
its broadband businesses and will consist of a smaller pool of less diversified
assets. You will not receive a consent payment or otherwise be compensated for
this change in the terms of your notes and any risks that result, and your notes
will not benefit from the cable guarantees.
RISKS RELATING TO THE AT&T COMCAST TRANSACTION
In addition to the other information contained in or incorporated by
reference in this prospectus, you should carefully consider the following risk
factors in deciding whether to tender your Broadband Eligible Notes and/or AT&T
Eligible Notes in the exchange offer.
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 Broadband expect to realize cost
savings and other financial and operating benefits as a result of the AT&T
Comcast transaction. However, Comcast and 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 Broadband will also require substantial attention
from management. The diversion of management attention and any difficulties
associated with integrating Comcast and Broadband could have a material adverse
effect on AT&T Comcast's operating results.
IF WE DO NOT COMPLETE THE AT&T COMCAST TRANSACTION, AT&T AND THE VALUE OF THE
SECURITIES OFFERED MAY BE MATERIALLY ADVERSELY AFFECTED.
Holders of AT&T Notes should consider that the nature and the value of the
securities they will receive in this exchange offer may be materially affected
by whether the AT&T Comcast transaction is completed. If the AT&T Comcast
transaction is not completed, the Broadband Exchange Notes will not be exchanged
for the New Broadband Notes, AT&T will become the sole obligor under the
Broadband Exchange Notes, with Broadband released as an obligor, and the cable
guarantees will not be provided, and the interest rates and maturity of the New
AT&T Notes will remain the same as the interest rates and maturity under the
AT&T Eligible Notes.
The AT&T Comcast transaction is subject to a number of conditions,
including without limitation receipt of Internal Revenue Service rulings,
regulatory approvals and the consent of the holders in respect of series
representing at least 90% in aggregate principal amount of specified
indebtedness of AT&T as contemplated by this prospectus. We cannot assure you
that these conditions will be met or that the AT&T Comcast transaction will be
completed.
If the AT&T Comcast transaction is not completed, there could be a material
adverse effect on AT&T and the value of its securities, including its
indebtedness and any notes issued in this exchange offer. Also, one of the
anticipated benefits of the AT&T Comcast transaction is the anticipated
improvement in AT&T's debt levels. If the AT&T Comcast transaction is not
completed, AT&T's credit ratings could be materially adversely affected, which
could have a material adverse effect on AT&T and could have a material adverse
effect on the trading price of its securities, including its indebtedness.
47
REGULATORY AGENCIES MAY IMPOSE CONDITIONS ON APPROVALS RELATING TO THE AT&T
COMCAST TRANSACTION.
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 Federal Communications Commission, the IRS 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 licenses and other entitlements, on the imposition of certain
conditions that could have a material adverse effect on AT&T Comcast's operating
results.
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 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, as described under "Description of AT&T Comcast
Transaction -- The Separation and Distribution Agreement," the ability of AT&T
Comcast and Broadband to engage in certain acquisitions, redeem stock or issue
equity securities will be limited for a period of 25 months following the
Broadband spin-off. See "Description of AT&T Comcast Transaction -- The
Separation and Distribution Agreement -- Post-Spin-Off Transactions." These
restrictions may limit AT&T Comcast's ability to issue equity securities to
satisfy its financing needs or to acquire businesses or assets.
AT&T COMCAST AND ITS SUBSIDIARIES MAY NOT BE ABLE TO OBTAIN THE NECESSARY
FINANCING AT ALL OR ON TERMS ACCEPTABLE TO IT.
To complete the AT&T Comcast transaction, Comcast estimates it will require
financing of $11 billion to $14 billion, assuming that the Microsoft
transaction, as described under "Description of AT&T Comcast Transaction -- The
Exchange Agreement and Instrument of Admission," is completed. This financing is
expected to include (1) approximately $9 billion to $10 billion to retire the
intercompany debt balance which Broadband is expected to owe AT&T upon
completion of the AT&T Comcast transaction, although this amount will be reduced
if the exchange offer is completed, (2) approximately $1 billion to $2 billion
to refinance certain Broadband debt that may be put for redemption by investors
or that will mature on or soon after the completion of the AT&T Comcast
transaction and (3) approximately $1 billion to $2 billion to provide
appropriate cash reserves to fund the operations and capital expenditures of
Broadband after completion of the AT&T Comcast transaction.
On May 3, 2002, Broadband and AT&T Comcast entered into definitive credit
agreements with a syndicate of lenders, including JPMorgan Chase Bank, Citibank,
N.A., Bank of America, N.A., Merrill Lynch Capital Corporation and Morgan
Stanley Senior Funding, Inc. for an aggregate of approximately $12.8 billion in
new indebtedness in order to satisfy these financing requirements. See "Other
Indebtedness and the Cross-Guarantees -- Description of New Credit Facilities."
Comcast may also use other available sources of financing to fund its
requirements, including existing cash, cash equivalents and short term
investments, amounts available under Comcast subsidiaries' lines of credit, and
the proceeds of sales of Comcast's and Broadband's investments.
Under the terms of the new credit agreements referred to above, the
obligations of the lenders to provide the financing upon completion of the AT&T
Comcast transaction are subject to a number of conditions, including the
condition that AT&T Comcast obtain an investment-grade credit rating. It is
possible that AT&T Comcast will not obtain an investment-grade credit rating or
that any of the other conditions to borrowing may not be satisfied. If the
conditions to borrowing are not satisfied, and if other
48
sources of financing are not sufficient or available, Comcast may not be able to
obtain the necessary financing. If Comcast fails to obtain the necessary
financing or fails to obtain it on acceptable terms, such failure could have a
material adverse effect on the business and financial condition of AT&T Comcast
and its subsidiaries. If Comcast is unable to obtain the necessary financing, it
may be forced to consider other alternatives to raise the necessary funds,
including sales of assets. There can be no assurance that Comcast will be able
to obtain the necessary financing at all or on terms acceptable to it.
AT&T COMCAST AND ITS SUBSIDIARIES WILL HAVE SIGNIFICANT DEBT AND DEBT-LIKE
OBLIGATIONS AND 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 Microsoft transaction,
as described under "Description of AT&T Comcast Transaction -- The Exchange
Agreement and Instrument of Admission," is completed, 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 Microsoft
transaction described in this prospectus, which is not a condition to the
completion of the AT&T Comcast transaction, is not completed. 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 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 approximately $4.8 billion in notional amount
(including approximately $1 billion in notional amount of debt which is expected
to be able to be put by holders) of debt as of the date of this prospectus,
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.
ATYPICAL GOVERNANCE ARRANGEMENTS MAY MAKE IT MORE DIFFICULT FOR AT&T COMCAST
SHAREHOLDERS TO ACT.
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 2004 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 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 2004 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.
49
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
sixth anniversary of the 2004 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.
AT&T COMCAST'S PRINCIPAL SHAREHOLDER WILL HAVE CONSIDERABLE INFLUENCE OVER THE
OPERATIONS OF AT&T COMCAST.
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. 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 HISTORICAL FINANCIAL INFORMATION OF AT&T BROADBAND GROUP AFTER THE
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,
and as a result the financial information of AT&T Broadband Group included in
this prospectus 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.
IF THE TRANSACTION WITH MICROSOFT CORPORATION IS NOT COMPLETED, AT&T COMCAST
MAY HAVE SIGNIFICANT ADDITIONAL DEBT AND MORE STRINGENT LIMITATIONS ON ITS
ABILITY TO ISSUE EQUITY.
The AT&T Comcast transaction is not conditioned on completion of the
transaction with Microsoft Corporation described in this prospectus under
"Description of AT&T Comcast Transaction -- The Exchange Agreement and
Instrument of Admission -- QUIPS Exchange." If the Microsoft transaction is not
completed, as described under "Description of AT&T Comcast Transaction -- The
Merger Agreement -- Covenants -- QUIPS Failure," Broadband will either assume
AT&T's obligations to Microsoft under the trust preferred securities, or QUIPS,
issued by AT&T Finance Trust I or pay AT&T an amount in cash equal to the fair
market value of the QUIPS and indemnify AT&T for certain possible related
liabilities. Absent selling assets or stock to pay down debt and depending on
which outcome occurs, AT&T Comcast and its subsidiaries would have up to an
additional $5 billion of debt upon completion of the AT&T Comcast transaction
and the risks detailed in two of the risk factors described in this
prospectus -- that AT&T Comcast and its subsidiaries may not be able to obtain
the necessary financing at all or on terms acceptable to it and that AT&T
Comcast and its subsidiaries will have significant debt and debt-like
obligations and may not obtain investment-grade credit ratings -- would be
significantly heightened. In addition, if the Microsoft transaction is not
completed, the limitations imposed by
50
Section 355(e) of the Code on AT&T Comcast's and Broadband's ability to issue
equity that are described above would be expected to be more stringent.
RISKS FOR AT&T RELATING TO THE AT&T COMCAST TRANSACTION
Holders of AT&T Notes should also consider the following risk factors in
deciding whether to tender eligible notes.
THE 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 Broadband spin-off. These restrictions
may limit AT&T's ability to issue equity securities to satisfy its financing
needs or to acquire businesses or assets.
IF THE AT&T COMCAST TRANSACTION IS COMPLETED, AT&T WILL NEED TO OBTAIN
FINANCING ON A STAND-ALONE BASIS WHICH MAY INVOLVE COSTS.
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.
On May 29, 2002, Moody's Investors Service lowered its ratings of long-term
debt issued or guaranteed by AT&T to Baa2 from A3. Moody's also confirmed AT&T's
short-term rating as Prime-2. Moody's ratings outlook for AT&T remains negative
but AT&T is not currently on review for any additional downgrade by Moody's. On
June 3, 2002, Fitch Ratings also downgraded AT&T's long-term debt rating to BBB+
from A-, with the rating remaining on Rating Watch Negative pending completion
of the AT&T Comcast transaction. AT&T's long-term debt ratings remain BBB+ and
on CreditWatch with negative implications by Standard & Poor's Ratings Group. A
recent press release from Standard & Poor's confirmed that following the AT&T
Comcast transaction Standard & Poor's expects AT&T to have a stable outlook.
However, further ratings actions could occur at any time.
The credit rating of AT&T following the AT&T Comcast transaction may be
different from the current 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.
51
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 prospectus 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 materially
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 Broadband, 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. In addition, there may be other tax costs incurred as a result
of the Broadband spin-off. If incurred, these costs could be significant to AT&T
and Broadband.
RISKS 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
PROSPECTUS.
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 prospectus 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.
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 case of certain services and products, whether
after completion of the AT&T Comcast transaction each of the existing
52
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 prospectus.
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 AND OTHER RISKS 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.
Additionally, AT&T Comcast will be subject to competition from
telecommunications providers and internet service providers, or 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. In
addition, any increase in vacancy rates in multi-dwelling units has historically
adversely impacted subscriber levels and is expected to do so in the future.
Subscriber levels also have historically demonstrated seasonal fluctuations,
particularly in markets that include major universities. The failure of seasonal
fourth quarter increases to offset decreases would adversely affect subscriber
levels.
AT&T COMCAST WILL HAVE SUBSTANTIAL CAPITAL REQUIREMENTS WHICH MAY REQUIRE IT
TO OBTAIN ADDITIONAL FINANCING THAT MAY BE DIFFICULT TO OBTAIN.
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
53
AT&T Comcast and result in the delay, change or abandonment of AT&T Comcast's
development or expansion plans.
Historically, AT&T Broadband Group's capital expenditures have
significantly exceeded its net cash provided by operations. For the year ended
December 31, 2001 and the six months ended June 30, 2002, AT&T Broadband Group's
capital expenditures exceeded its net cash provided by operations by $3.5
billion and $0.4 billion, respectively. In addition, for the year ended December
31, 2001, Comcast's capital expenditures exceeded its net cash provided by
operating activities by $952 million. See "Ratios of Earnings to Fixed Charges"
on page 39.
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. In 2002, Comcast
and AT&T anticipate that Broadband and Comcast's cable division will incur
capital expenditures of approximately $4.2 billion and $1.3 billion,
respectively. AT&T Comcast is expected to incur substantial capital expenditures
in the years following completion of the AT&T Comcast transaction. However, the
actual amount of the funds required for capital expenditures cannot be
determined with precision at this time. Capital expenditures are 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.
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.
Some of the entities currently attributed to AT&T Broadband Group, and
which will be subsidiaries of AT&T Comcast, are 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, AT&T Broadband Group's
predecessor, TCI, and AT&T Broadband Group's subsidiary, Satellite Services,
Inc., are parties to an affiliation term sheet with Starz Encore Group, an
affiliate of Liberty Media, which extends to 2022 and provides for a fixed price
payment, subject to adjustment for various factors including inflation, and may
require 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 Broadband systems. Furthermore, a subsidiary of Broadband
is party to an agreement that does not expire until December 31, 2013 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 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 a lawsuit
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
54
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. The parties agreed to extend the stay of the
litigation and the court extended the stay to and including January 31, 2003,
with a requirement that the parties attempt to mediate the dispute.
On March 13, 2002, AT&T Broadband Group informed CSG Systems, Inc. that
AT&T Broadband Group was considering the initiation of an arbitration against
CSG relating to a Master Subscriber Management System Agreement that the two
companies entered into in 1997. Pursuant to the Master Agreement, CSG provides
billing support to AT&T Broadband Group. On May 10, 2002, AT&T Broadband Group
filed a demand for arbitration against CSG before the American Arbitration
Association. On May 31, 2002, CSG answered AT&T Broadband Group's arbitration
demand and asserted various counterclaims. On June 21, 2002, CSG filed a lawsuit
against Comcast Corporation in federal court located in Denver, Colorado
asserting claims related to the Master Agreement and the pending arbitration. In
the event that this process results in the termination of the Master Agreement,
AT&T Broadband Group may incur significant costs in connection with its
replacement of these customer care and billing services and may experience
temporary disruptions to its operations.
AT&T COMCAST WILL BE SUBJECT TO REGULATION BY FEDERAL, STATE AND LOCAL
GOVERNMENTS WHICH MAY IMPOSE COSTS AND RESTRICTIONS.
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 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.
Numerous companies, including telephone companies, have introduced Digital
Subscriber Line technology, known as DSL, which provides Internet access to
subscribers at data transmission speeds 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, 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
operations.
In addition, over the past several years, a number of companies, including
telephone companies and ISPs, have asked local, state, and federal governmental
authorities to mandate that cable communications operators provide capacity on
their broadband infrastructure so that these and others may deliver Internet and
other interactive television services directly to customers over these cable
facilities. Some cable operators 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. Moreover, in
55
connection with their review of the AOL-Time Warner merger, the FCC and the
Federal Trade Commission imposed "open access," technical performance and other
requirements related to the merged company's Internet and Instant Messaging
platforms. The FCC recently concluded in a regulatory proceeding initiated by it
to consider "open access" and related regulatory issues that cable modem
service, as it is currently offered, is properly classified as an interstate
information service that is not subject to common carrier regulation but remains
subject to the FCC's jurisdiction. The FCC is seeking public comment regarding
the regulatory implications of this conclusion, including, among other things,
whether it is appropriate to impose "open access" requirements on these services
or whether consumers will be able to obtain a choice of ISPs without government
intervention.
A number of cable operators have reached agreements to provide unaffiliated
ISPs access to their cable systems in the absence of regulatory requirements.
Recently, Comcast reached an "access" agreement with United Online and Broadband
reached an "access" agreement with each of EarthLink, Internet Central and
Connected Data Systems. In addition, under the terms of the exchange agreement
that Comcast and AT&T have executed with Microsoft, upon completion of the
Microsoft transaction described in this prospectus and the AT&T Comcast
transaction, AT&T Comcast will be required, with respect to each such agreement
with another ISP, to offer Microsoft an "access" agreement on terms no less
favorable than those provided to the other ISP with respect to the specific
cable systems covered under the agreement with the other ISP. Notwithstanding
the foregoing, there can be no assurance that regulatory authorities will not
impose "open access" or similar requirements on AT&T Comcast as part of the
regulatory review of the AT&T Comcast transaction or as part of an industry-wide
requirement. Such requirements could have a negative impact on AT&T Comcast's
business operations.
AT&T COMCAST, THROUGH 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 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. AT&T
Broadband Group has cable partnerships with each of AOL Time Warner, Insight
Communications, Adelphia Communications, Midcontinent and US Cable. Materially
adverse financial or other developments with respect to a partner could
adversely impact the applicable partnership. See "Summary -- Recent
Developments."
On June 25, 2002, three cable partnerships between subsidiaries of AT&T and
subsidiaries of Adelphia Communications Corporation commenced bankruptcy
proceedings by the filing of chapter 11 petitions in the Bankruptcy Court for
the Southern District of New York at about the same time that other Adelphia
entities filed for bankruptcy. These partnerships are: Century-TCI California
Communications, L.P. (in which AT&T Broadband Group holds a 25% interest through
a wholly-owned subsidiary and which as of December 31, 2001 had an aggregate of
approximately 775,000 subscribers in the greater Los Angeles, California area),
Parnassos Communications, L.P. (in which AT&T Broadband Group holds a 33.33%
interest through a wholly owned subsidiary) and Western NY Cablevision, L.P. (in
which AT&T Broadband Group holds a 33.33% interest through a wholly-owned
subsidiary and which as of December 31, 2001 had, together with Parnassos
Communications, L.P., an aggregate of approximately 470,000 subscribers in
Buffalo, New York and the surrounding areas). AT&T cannot predict what the
outcome of these proceedings will be on any of the partnerships and the
proceedings may have a material adverse impact on the partnerships.
AT&T Broadband Group recorded an impairment charge through net losses
related to equity investments of $143 million, net of taxes of $90 million, in
connection with the bankruptcy proceedings of the Adelphia partnerships.
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AT&T COMCAST, THROUGH COMCAST, AND BROADBAND FACE RISKS ARISING FROM THEIR AND
AT&T'S RELATIONSHIP WITH AT HOME CORPORATION AND US AIRWAYS GROUP INC.
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, which filed for bankruptcy protection on September 28, 2001. Until
October 1, 2001, AT&T appointed a majority of At Home's directors, and it now
appoints none.
Since September 28, 2001, some creditors of At Home have threatened to
commence litigation against AT&T relating to the conduct of AT&T or its
designees on the At Home Board in connection with At Home's declaration of
bankruptcy and At Home's subsequent aborted efforts to dispose of some of its
businesses or assets in a bankruptcy court-supervised auction, as well as in
connection with other aspects of AT&T's relationship with At Home. The liability
for any such lawsuits would be shared equally between AT&T and Broadband. No
such lawsuits have been filed to date. On May 1, 2002, At Home filed a proposed
plan of liquidation pursuant to Chapter 11 of the U.S. Bankruptcy Code, which,
as modified on June 18, 2002, among other things, implements the creditor's
settlement and provides that all claims and causes of action of the bankrupt
estate of At Home against AT&T and other shareholders will be transferred to a
liquidating trust owned ratably by the bondholders of At Home and funded with at
least $12 million, and as much as $17 million, to finance the litigation of
those claims. The plan was approved by the bankruptcy court on August 15, 2002
and became effective on or about October 1, 2002.
Purported class action lawsuits have been filed in California state court
on behalf of At Home shareholders against AT&T, At Home, Comcast and former
directors of At Home. The lawsuits claim that the defendants breached fiduciary
obligations of care, candor and loyalty in connection with a transaction
announced in March 2000 in which, among other things, AT&T, Cox and Comcast
agreed to extend existing distribution agreements, the At Home board of
directors was reorganized, and AT&T agreed to give Cox and Comcast rights to
sell their At Home shares to AT&T. These actions have been consolidated by the
court. At the request of At Home's bondholders, on September 10, 2002, the
bankruptcy court ruled that the claims asserted in these actions belong to At
Home's bankruptcy estate, not its shareholders, that the actions must be
dismissed, and that the claims in the actions are to be prosecuted by the At
Home bondholders liquidating trust under the confirmed Chapter 11 plan. The
order remains subject to appeal. The liability for these lawsuits would be
shared equally between AT&T and Broadband.
On September 23, 2002, the Official Committee of Unsecured Bondholders of
At Home filed suit in the United States District Court for the District of
Delaware against Comcast, Cox, Brian L. Roberts in his capacity as a director of
At Home, and other corporate and individual defendants. The complaint seeks
alleged "short-swing" profits under Section 16(b) of the Securities and Exchange
Act in connection with At Home put options Comcast and Cox entered into with
AT&T. The complaint alleges a total of at least $600 million in damages in the
aggregate from Comcast and Cox in connection with this claim. The complaint also
seeks damages in an unspecified amount for alleged breaches of fiduciary duty by
the defendants in connection with transactions entered into among AT&T, At Home,
Comcast and Cox. Comcast believes this suit is without merit and intends to
vigorously defend itself in the action.
In the Spring of 2002, three purported class actions were filed in the
United States District Court for the Southern District of New York against,
among others, AT&T and certain of its senior officers alleging violations of the
federal securities laws in connection with the disclosures made by At Home in
the period from March 28, 2000 through August 28, 2001. These actions have been
consolidated. Any liabilities resulting from this lawsuit would be shared
equally between AT&T and Broadband.
As part of a portfolio of lease and project financing assets Broadband
assumed in connection with the acquisition of MediaOne, Broadband is the lessor
of some airplanes under leveraged leases to US Airways Group. Under a leveraged
lease, the assets are secured with debt, which is non-recourse to Broadband. On
August 11, 2002, US Airways filed for Chapter 11 bankruptcy protection. In
connection with the bankruptcy filing, US Airways can reject or reaffirm its
leases. Broadband does not know if the leases will be rejected or reaffirmed. If
the leases are rejected and the non-recourse debtholder forecloses on the
57
assets, Broadband could incur an after-tax loss of approximately $35 to $45
million (based on June 30, 2002 balances).
RISKS 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 noteholders 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.
On May 29, 2002, Moody's Investors Service lowered its ratings of long-term
debt issued or guaranteed by AT&T to Baa2 from A3. Moody's also confirmed AT&T's
short-term rating as Prime-2. Moody's ratings outlook for AT&T remains negative
but AT&T is not currently on review for any additional downgrade by Moody's. On
June 3, 2002, Fitch Ratings also downgraded AT&T's long-term debt rating to BBB+
from A-, with the rating remaining on Rating Watch Negative pending completion
of the AT&T Comcast transaction. AT&T's long-term debt ratings remain BBB+ and
on CreditWatch with negative implications by Standard & Poor's Ratings Group. A
recent press release from Standard & Poor's confirmed that following the AT&T
Comcast transaction Standard & Poor's expects AT&T to have a stable outlook.
However, further ratings actions could occur at any time.
Any downgrade by either Standard & Poor's or Moody's increases, by
one-quarter of one percent (0.25%) for each ratings notch downgrade by either
agency, the interest rates paid by AT&T on approximately $10.1 billion of
long-term debt, which would increase AT&T's interest costs by approximately $25
million per year for each such ratings notch downgrade by either rating agency.
As a result, the Moody's downgrade referred to above increased by one-half of
one percent (0.50%) the interest rates paid by AT&T on approximately $10.1
billion of long-term debt, which will increase AT&T's interest costs by
approximately $50 million per year. Any ratings downgrade by Standard & Poor's
would also increase such interest costs by one-quarter of one percent (0.25%)
for each ratings notch downgrade.
In addition to the increased interest costs on the $10.1 billion of
long-term debt referred to above, AT&T could incur increased costs in the
replacement or renewal of its credit facility and refinancings of approximately
$5 billion of debt and certain operating leases through June 30, 2003. Assuming
current market conditions and assumptions regarding the type of financing
available, the additional annualized cost increases could approximate $100
million, although it is not possible to predict the actual amount of any such
interest cost increase as a result of a rating notch downgrade. Additional
ratings downgrades could result in greater interest rate increases for each
notch downgrade. In addition, interest expense could be higher in subsequent
periods than it otherwise would have been as additional maturing debt is
replaced by debt with higher interest rate spreads due to the lower credit
ratings. Also, in addition to interest rates, differences in credit ratings
affect the amounts of indebtedness, types of financing structures and debt
markets that may be available to AT&T. For example, 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 or increase its borrowings under its securitization
program. If our ratings were downgraded below investment grade, there are
provisions in our securitization programs which could require the outstanding
balances to be paid by collection of the receivables. In addition, there are
provisions in several of our debt instruments that require us to pay the present
value of up to $0.7 billion of future interest payments if our credit ratings
are downgraded below investment grade.
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
58
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.
AT&T is in the process of replacing its $8 billion 364-day term bank
facility (under which no amounts are drawn) that expires in December 2002 with a
new 364-day term bank facility of up to $4 billion at or prior to the spin-off
of Broadband. The old facility would cease to be effective if, among other
things, AT&T consummated the AT&T Comcast transaction without AT&T's long term
debt being rated at least Baa1 by Moody's. AT&T has received commitments for the
$4 billion facility, subject to completion of documentation. AT&T and the banks
are in the final stages of documentation. The amount available under this
facility would be reduced to $3 billion upon the completion of the AT&T Comcast
transaction.
RISKS RELATING TO THE BUSINESSES OF 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 and loss of key customers;
- 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 or fairly priced
elements of local carriers' networks.
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
59
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. In addition, other long distance companies are
beginning to offer local residential services bundled with long distance
in portions of over 30 states.
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 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 a 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. Many of these new products and services are
substitutes for traditional telephone service. In particular, the rapid
expansion of usage of wireless and email services has led and is expected
to lead to an overall decline in telephone voice 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 PRICES CHARGED TO AT&T CONSUMER SERVICES GROUP FOR NETWORK UTILIZATION MAY
INCREASE OVER TIME AND MAY BE ADVERSELY IMPACTED BY THE VOLUME OF THE BUSINESS
OF AT&T BUSINESS SERVICES GROUP.
During the next few years, AT&T's voice traffic volumes may decline at a
rate faster than the rate at which AT&T is able to reduce the cost of operating
its circuit switched network, resulting in higher unit
60
costs for both AT&T Consumer Services Group and AT&T Business Services Group.
Under the terms of a proposed master carrier agreement, AT&T Consumer Services
Group will be required to procure all of its telecommunications needs from
Network Services within the AT&T Business Group. The pricing of these services
will be based on the costs to Network Services of providing those services,
unless otherwise agreed. Also, the agreement will contain provisions intended to
assure that the AT&T Consumer Services Group is treated no less favorably than
the AT&T Business Services Group with respect to the allocation of costs between
the units, including a fair allocation of any low cost capacity Network Services
provides or obtains.
The overall level of network utilization by AT&T Consumer Services Group
and AT&T Business Services Group together will impact the per minute cost of
providing telecommunications services. There are substantial fixed costs
associated with providing telecommunications services and it is possible that
overall levels of usage (including usage by AT&T Business Services Group) may
decrease faster than the related decrease in variable costs. As a result,
although it will depend upon a variety of factors that are difficult to predict,
it is possible that costs per minute may increase over time. Since the terms of
this arrangement by which AT&T Consumer Services Group purchases
telecommunications services are essentially cost based, any such cost increase
would increase the charges to the AT&T Consumer Services Group and could
materially adversely impact the results of operations and financial condition of
the Group.
Since per minute costs are affected by both the level of usage of the AT&T
Consumer Services Group and AT&T Business Services Group, adverse business
conditions of either Group could increase per minute costs. As a result, the
costs charged to AT&T Consumer Services Group may increase as a result of a
decrease in the volume of usage by AT&T Business Services, and vice versa.
AT&T Consumer Services Group, however, may be more adversely affected by a
downturn in telecommunications traffic than its competitors since it is required
to obtain all of its telecommunications services from AT&T, even if more
favorable pricing is available elsewhere.
AT&T FACES RISKS IN CONNECTION WITH AT&T CANADA, ALESTRA AND US AIRWAYS GROUP
INC.
AT&T has an approximately 31% equity ownership in AT&T Canada. On June 25,
2002, AT&T provided notice triggering the requirement to purchase in cash the
outstanding shares of AT&T Canada from the public at the greater of fair market
value and a floor price. AT&T has arranged for Tricap Investments Corporation, a
wholly owned subsidiary of Brascan Financial Corporation, and CIBC Capital
Partners to acquire such AT&T Canada shares. AT&T has agreed to pay the purchase
price for the AT&T Canada shares on behalf of Tricap and CIBC Capital Partners.
On June 11, 2002, AT&T completed an offering of 200,000,000 shares of AT&T
common stock to the public together with 30,000,000 shares of AT&T common stock
pursuant to the underwriters' over-allotment option. The offer price to the
public was $11.25 per share of AT&T common stock. The underwriting discount and
commission was $0.2897 per share of AT&T common stock. AT&T will use the
proceeds from this offering to satisfy a portion of its obligations to AT&T
Canada common stockholders.
In 2001, AT&T recorded $1.8 billion of after tax charges ($3.0 billion of
pretax charges) reflecting the estimated loss on AT&T's commitment to purchase
the publicly owned shares of AT&T Canada. Included in these charges was
approximately $0.6 billion related to the assumption of British
Telecommunications plc's obligation to purchase the publicly owned shares of
AT&T Canada. In the first and second quarters of 2002, AT&T recorded an
additional $0.3 billion in after-tax charges ($0.5 billion pretax) reflecting
further deterioration in the underlying value of AT&T Canada as well as the
accretion of the floor price. These charges reflect the difference between the
underlying value of AT&T Canada shares and the price AT&T has committed to pay
for them, and are included in "Net losses related to other equity investments"
in the Consolidated Statement of Income and the related liability of $3.7
billion within current liabilities in the Consolidated Balance Sheet. The
liability at June 30, 2002, also reflects foreign currency translation losses
due to fluctuations in the Canadian dollar of $0.2 billion pretax. AT&T has a
hedge related to this obligation and at June 30, 2002, had realized and
unrealized gains of $0.2 billion pretax relating to this hedge.
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AT&T no longer records equity earnings or losses related to AT&T Canada
since AT&T's investment balance was written down to zero, largely through losses
generated by AT&T Canada. In the event AT&T acquires more than 50% of the voting
equity of AT&T Canada, AT&T Canada's results will be consolidated into AT&T's
results. At April 26, 2002, AT&T Canada had outstanding debt of approximately
$2.9 billion.
On March 14, 2002, AT&T Canada announced that it has formed a board
committee to help management address what AT&T Canada described as "complex
issues" facing the company. It also said one of the committee's first steps had
been to hire Greenhill & Co. LLC as its financial adviser to work with the
committee and management to evaluate various scenarios regarding what it
described as "the issues, opportunities and alternatives for the company."
On March 15, 2002, a group of more than 20 investors holding almost $1
billion of AT&T Canada public notes announced that they have organized as an ad
hoc committee to express their concerns about the company's business operations
and financial prospects. They stated that the group was formed in response to
several recent "troubling financial releases" from AT&T Canada and the rating
agency downgrades of AT&T Canada's public notes, including the notes issued by
MetroNet Communications.
On April 18, 2002, the counsel to the ad hoc group of bondholders issued a
press release stating that this group was concerned about AT&T's and AT&T
Canada's failure to engage in a dialogue concerning the commitment to
bondholders. The committee said it was troubled that AT&T would not commit to
stand behind the AT&T Canada bonds, alleging that senior executives of AT&T
participated in the road shows for placement of the AT&T Canada notes and made
certain statements to rating agencies. Further, the release stated that, in the
absence of AT&T committing to support AT&T Canada, the committee will have no
choice but to explore any and all available remedies. As stated above,
approximately Canadian $4.5 billion (approximately U.S. $2.9 billion) in
aggregate amount of indebtedness of AT&T Canada was outstanding as of April 26,
2002. AT&T expressly disclaims any obligation with respect to the bonds.
On May 9, 2002, a group of institutional investors holding approximately
$458 million of AT&T Canada's public notes announced that it had filed an
oppression application with the Ontario Superior Court of Justice asserting that
the conduct of AT&T Canada and its directors has been oppressive and unfairly
prejudicial to, and has unfairly disregarded, the interests of AT&T Canada's
noteholders. The investors also stated that the Application is supported by
other AT&T Canada noteholders holding an additional $250 million of AT&T
Canada's notes. Among other things, the Application seeks the following relief:
replacement of all current directors of AT&T Canada or orders regulating the
conduct of current directors; an order restraining AT&T Canada from collapsing
any "in the money" foreign currency swaps; and an order requiring AT&T Canada
and its directors to preserve assets and liquidity pending a restructuring.
On September 11, 2002, AT&T Canada reported that it has elected not to make
bond interest payments totaling approximately U.S. $47.8 million, due on
September 15, 2002 and approximately Canadian $5.4 million due on September 23,
2002. Under the terms of the indentures governing these series of bonds, AT&T
Canada has 30 days from the scheduled interest payment date to make the required
interest payment. On September 16, 2002, Standard & Poor's cut its long-term
corporate credit rating on AT&T Canada to "D," effectively a default rating,
from double "C."
On October 2, 2002, AT&T Canada announced that the applicant institutional
investors have withdrawn the oppression application referred to above and that
an order has been made by the court dismissing that Application.
On October 3, 2002, an investor holding U.S. $4 million of AT&T Canada's
public notes filed an application in the Ontario Superior Court of Justice
alleging, among other things, that the purchase from the public deposit receipt
holders of the outstanding shares of AT&T Canada constitutes a change of control
as defined in an AT&T Canada Indenture dated as of June 10, 1998 and noting that
AT&T Canada has announced that it does not intend to make a change of control
offer to MetroNet bondholders. The Application seeks to enjoin completion of the
purchase unless AT&T Canada undertakes to meet AT&T Canada's alleged obligations
to make a change of control offer. The Application is scheduled to be heard on
October 4, 2002.
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AT&T has no contractual restrictions on selling shares that may cause a
change of control and AT&T has the express right under the purchase agreement to
purchase or designate third party purchasers of the public shares of AT&T
Canada, without reference to whether any purchase might cause a change of
control. Accordingly, although no assurance can be given regarding how a court
may rule, AT&T believes the claim is without merit and intends to contest it
vigorously. However, an adverse determination in this Application could have
materially adverse consequences for AT&T. AT&T Canada has advised AT&T that
counsel to the bondholder has agreed to dismiss the application.
According to AT&T Canada's public statements:
Effective January 1, 2002, AT&T Canada adopted new accounting standards for
Business Combinations and Goodwill and Other Intangible Assets and recorded an
impairment of goodwill totaling Canadian $1,530.8 million. During the second
quarter of 2002, AT&T Canada performed an assessment of the carrying value of
its remaining goodwill and recorded an impairment of Canadian $108.2 million.
Also in the second quarter of 2002, AT&T Canada performed an assessment for
impairment of the carrying values of its property, plant and equipment that
resulted in a charge of Canadian $1,095.0 million.
AT&T Business Services also owns a 49% economic interest in Alestra S. de
R.L. de C.V., a telecommunications company in Mexico that offers voice, data and
internet services throughout Mexico to residential, small business and
enterprise customers. Alestra has announced that it may not be able to make a
$35 million bond payment due in November 2002 and that it is working jointly
with Morgan Stanley in analyzing available options to address the company's
financial condition, including its liquidity position. Standard & Poor's has
downgraded Alestra's corporate credit rating and said the company would likely
default on its debt obligations during financial year 2002, probably by way of a
bond restructuring. Moody's also downgraded all ratings of Alestra stating that
"based upon current long distance network asset valuations, Moody's considers
that unsecured debt holders face poor recovery prospects in a distress
scenario." On September 23, Alestra filed a preliminary registration statement
with the U.S. Securities and Exchange Commission relating to a proposed offer to
repurchase and exchange new debt securities for any and all of the outstanding
$270 million 12 1/8% Senior Notes due 2006 and the $300 million 12 5/8% Senior
Notes due 2009. As part of the exchange offer, Alestra intends to include a cash
alternative that will allow it to repurchase a portion of the outstanding
securities, subject to pro-ration if the cash alternative is oversubscribed. The
financial terms of the offer have not yet been set. AT&T cannot predict the
success of the proposed restructuring and the ultimate impacts of these
activities on Alestra and AT&T.
In addition, adverse business developments involving AT&T Canada and
Alestra could affect AT&T in a variety of ways. For example, in the event AT&T
no longer obtains telecommunications services from AT&T Canada, there are a
variety of other carriers that could provide AT&T with the telecommunications
services necessary to service its customers. However, there may be some
difficulty in obtaining services with comparable features and functions and
prices from these carriers which could adversely impact AT&T's ability to
provide products and services to its customers. In addition, AT&T may incur
significant costs as a result.
As part of portfolios of lease and project financing assets AT&T assumed in
connection with the IPO and subsequent sale of AT&T Capital Corp. and in the
acquisition of Media One, AT&T is the lessor of some airplanes under leveraged
leases to US Airways Group. Under a leveraged lease, the assets are secured with
debt, which is non-recourse to AT&T. On August 11, 2002, US Airways filed for
Chapter 11 bankruptcy protection. In connection with the bankruptcy filing, US
Airways can reject or reaffirm its leases. AT&T does not know if the leases will
be rejected or reaffirmed. If the leases are rejected and the non-recourse
debtholder forecloses on the assets, AT&T could incur an after-tax loss of
approximately $70 to $80 million (based on June 30, 2002 balances), with $35 to
$45 million of such loss attributable to Broadband.
63
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 regulation 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 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.
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.
64
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 CONSUMER SERVICES GROUP'S POTENTIAL GROWTH IN ITS AT&T DSL SERVICE
COMBINING VOICE AND DATA SERVICES UTILIZING DSL TECHNOLOGY INVOLVES
TECHNOLOGICAL, MARKETING 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, marketing success, 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, WHICH MAKES
COMPETITION MORE DIFFICULT FOR AT&T.
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 that it
obtains from network services within AT&T Business Services Group under a Master
Carrier Agreement. 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.
65
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 actively evaluate pursuing growth
opportunities by providing local telecommunications service. AT&T Consumer
Services Group faces risk associated with effective entry into local markets due
to non-competitive pricing and the emergence of few facilities-based competitors
to regional phone companies and the absence of any significant alternative
source of supply for most access and local services. AT&T Consumer Services
Group is also evaluating pursuing further growth opportunities in these markets
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 be incurred by AT&T
Business Services and charged to AT&T Consumer Services Group as part of its
network usage under the transport agreement. These outlays are currently
estimated to be approximately $1 billion over a three-year planning period, to
deploy on the planned scale, but are subject to adjustment for change in
competitive conditions and market uncertainties. 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.
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.
66
DESCRIPTION OF THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
We are making this exchange offer in connection with the proposed transfer
of AT&T's broadband businesses to Broadband, the spin-off of Broadband, and the
subsequent combination of Broadband with Comcast into a new entity, AT&T
Comcast. The AT&T Comcast transaction is described under "Description of AT&T
Comcast Transaction."
The AT&T Comcast transaction is conditioned on AT&T's obtaining the
consents, or deemed consents in the exchange offer, or having defeased,
purchased, retired or acquired its debt in respect of series representing at
least 90% in aggregate principal amount outstanding on December 19, 2001, which
was approximately $12.7 billion, of debt securities issued under the AT&T
Indenture. AT&T and Comcast could mutually agree to waive this condition with
respect to all or any portion of the AT&T Notes for which consents, or deemed
consents, are not obtained. If the AT&T Comcast transaction were to occur and if
holders of the AT&T Notes were to assert successfully that completing the AT&T
Comcast transaction required Broadband or one of its affiliates to assume AT&T's
obligations under the AT&T Notes and that did not occur, then AT&T could be
required to refinance the AT&T Notes. Thus, while AT&T and Comcast could jointly
waive the consent condition to the AT&T Comcast transaction, AT&T is making the
exchange offer primarily to facilitate the AT&T Comcast transaction and to
optimize the respective capital structures of AT&T and AT&T Comcast in an
economic and tax efficient manner.
The exchange offer is not being made to, nor will we accept tenders for
exchange from, holders of Broadband Eligible Notes and AT&T Eligible Notes in
any jurisdiction in which the exchange offer or the acceptance of it would not
be in compliance with the securities or blue sky laws of such jurisdiction.
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING
This prospectus and the accompanying letter of transmittal contain the
terms and conditions of the exchange offer. Upon the terms and subject to the
conditions included in this prospectus and in the accompanying letter of
transmittal, which together are the exchange offer, we will accept for exchange
Broadband Eligible Notes and AT&T Eligible Notes which are properly tendered on
or prior to the expiration date, unless you have previously withdrawn them.
- When you tender to us Broadband Eligible Notes and AT&T Eligible Notes as
provided below, our acceptance of the Broadband Eligible Notes and AT&T
Eligible Notes will constitute a binding agreement between you and us
upon the terms and subject to the conditions in this prospectus and in
the accompanying letter of transmittal.
- For each $1,000 principal amount of Broadband Eligible Notes accepted by
us in the exchange offer, we will give you a like principal amount of
Broadband Exchange Notes. Upon completion of the AT&T Comcast
transaction, the Broadband Exchange Notes will be mandatorily exchanged
at an exchange ratio based upon the exchange spread set forth on the
cover page of this prospectus for New Broadband Notes. For each $1,000
principal amount of AT&T Eligible Notes accepted by us in the exchange
offer, we will give you a like principal amount of New AT&T Notes.
- AT&T will accept Broadband Eligible Notes in the exchange offer only up
to the applicable proration percentage set forth on the cover of this
prospectus of the aggregate principal amount outstanding with respect to
each series of Broadband Eligible Notes. If Broadband Eligible Notes of
any series are tendered in excess of that amount, the tendered notes of
that series will be subject to proration as described under
"-- Proration" when the exchange offer expires. The exchange offer for
each series of AT&T Eligible Notes is for all notes of that series and is
not subject to proration.
- Notes will only be issued in denominations of $1,000 and multiples of
$1,000. If the exchange of a series of Broadband Eligible Notes is
subject to proration and proration would result in your being entitled to
receive a fractional interest in the relevant series of Broadband
Eligible Notes, the principal amount of Broadband Eligible Notes accepted
in the exchange will be rounded to the
67
nearest $1,000, which will result in your receiving only whole Broadband
Exchange Notes in the exchange. If the mandatory exchange of a series of
Broadband Exchange Notes into New Broadband Notes would result in your
being entitled to receive a fractional interest in the relevant series of
New Broadband Notes, the principal amount you receive will be rounded
down to the nearest $1,000 multiple and you will receive cash in lieu of
a fractional New Broadband Note for the balance.
- With respect to each series of Broadband Eligible Notes and AT&T Eligible
Notes, the exchange offer is conditioned upon the holders of at least 50%
in principal amount of that series having validly tendered and not
withdrawn their notes. For these purposes, all of the Series A Medium-
Term Notes are treated as part of a single series.
- AT&T's obligation to accept Broadband Eligible Notes and/or AT&T Eligible
Notes for exchange in the exchange offer is also subject to the
conditions described under "-- Conditions to the Exchange Offer."
- The exchange offer expires at 12:00 midnight, New York City time, on
November 1, 2002. AT&T may, however, in its sole discretion, extend the
period of time for which the exchange offer is open as to any one or more
series of Broadband Eligible Notes or AT&T Eligible Notes. References in
this prospectus to the expiration date with respect to any series of
Broadband Eligible Notes or AT&T Eligible Notes mean November 1, 2002 or,
if extended by AT&T, the latest time and date to which the exchange offer
is extended by AT&T as to that series of notes.
- AT&T will keep the exchange offer open for not less than 20 business
days, or longer if required by applicable law, after the date that we
first mail notice of the exchange offer to the holders of the Broadband
Eligible Notes and AT&T Eligible Notes. We are sending this prospectus,
together with the letter of transmittal, on or about the date of this
prospectus to all of the registered holders of Broadband Eligible Notes
and AT&T Eligible Notes at their addresses listed in the trustee's
security register with respect to those notes.
- AT&T expressly reserves the right, at any time, to extend the period of
time during which the exchange offer is open with respect to any one or
more series of Broadband Eligible Notes or AT&T Eligible Notes, and
thereby delay acceptance of any series of Broadband Eligible Notes or
AT&T Eligible Notes to which the extension applies, by giving oral or
written notice of an extension to the exchange agent and notice of that
extension to the holders as described below. During any extension, all
Broadband Eligible Notes and AT&T Eligible Notes previously tendered will
remain subject to the exchange offer unless withdrawal rights are
exercised. Any Broadband Eligible Notes and AT&T Eligible Notes not
accepted for exchange for any reason will be returned without expense to
the tendering holder as promptly as practicable after the expiration or
termination of the exchange offer.
- AT&T expressly reserves the right to amend or terminate the exchange
offer with respect to any series of Broadband Eligible Notes or AT&T
Eligible Notes, and not to accept for exchange any Broadband Eligible
Notes or AT&T Eligible Notes that it has not yet accepted for exchange,
if any of the conditions of the exchange offer specified below under
"-- Conditions to the Exchange Offer" are not satisfied.
- AT&T will give oral or written notice of any extension, amendment,
termination or non-acceptance described above to holders of the Broadband
Eligible Notes and AT&T Eligible Notes as promptly as practicable. If
AT&T extends the expiration date with respect to any one or more series,
AT&T will give notice by means of a press release or other public
announcement no later than 9:00 a.m., New York City time, on the business
day after the previously scheduled expiration date. Without limiting the
manner in which AT&T may choose to make any public announcement and
subject to applicable law, AT&T will have no obligation to publish,
advertise or otherwise communicate any public announcements other than by
issuing a release to the Dow Jones News Service. Notices in Luxembourg
with respect to these matters will be published in the Luxemburger Wort.
68
- Holders of Broadband Eligible Notes and AT&T Eligible Notes do not have
any appraisal or dissenters' rights in connection with the exchange
offer.
- Broadband Eligible Notes and AT&T Eligible Notes which are not tendered
for exchange or are tendered but not accepted in connection with the
exchange offer will remain outstanding and be subject to the note
amendment described below under "Description of the Note Amendment -- The
Note Amendment," assuming the note amendment receives the requisite
consents as described under "Description of the Note
Amendment -- Requisite Consents; Outstanding Notes."
- Holders of Broadband Eligible Notes and AT&T Eligible Notes that validly
tender and do not withdraw their notes must consent to the note
amendment, as described under "Description of the Note Amendment -- The
Note Amendment," to the extent their notes are actually exchanged. See
"-- Required Consent."
- We intend to conduct the exchange offer in accordance with the applicable
requirements of the Exchange Act and the applicable rules and regulations
of the SEC, and with respect to the eligible notes listed on the
Luxembourg Stock Exchange, with the applicable rules and regulations of
the Commission de Surveillance du Secteur Financier.
IMPORTANT RESERVATION OF RIGHTS REGARDING THE EXCHANGE OFFER
You should note that:
- All questions as to the validity, form, eligibility, time of receipt and
acceptance of Broadband Eligible Notes and AT&T Eligible Notes tendered
for exchange will be jointly determined by AT&T and Comcast in their sole
discretion, which determination shall be final and binding.
- AT&T reserves the absolute right to reject any and all tenders of any
particular Broadband Eligible Notes and/or AT&T Eligible Notes not
properly tendered or to not accept any particular Broadband Eligible
Notes and/or AT&T Eligible Notes which acceptance might, in AT&T's or
Comcast's judgment or the judgment of AT&T's or Comcast's counsel, be
unlawful.
- AT&T and Comcast also reserve the absolute right to jointly waive any
defects or irregularities or conditions of the exchange offer as to any
particular Broadband Eligible Notes and/or AT&T Eligible Notes either
before or after the expiration date, including the right to waive the
ineligibility of any holder who seeks to tender Broadband Eligible Notes
and/or AT&T Eligible Notes in the exchange offer. Unless AT&T and Comcast
agree to waive any defect or irregularity in connection with the tender
of Broadband Eligible Notes and/or AT&T Eligible Notes for exchange, you
must cure any defect or irregularity within any reasonable period of time
as AT&T and Comcast shall determine.
- AT&T's and Comcast's interpretation of the terms and conditions of the
exchange offer as to any particular Broadband Eligible Notes and/or AT&T
Eligible Notes either before or after the expiration date shall be final
and binding on all other parties.
- None of AT&T, Comcast, the exchange agent, the Luxembourg exchange agent
or any other person shall be under any duty to give notification of any
defect or irregularity with respect to any tender of Broadband Eligible
Notes and/or AT&T Eligible Notes for exchange, nor shall any of them
incur any liability for failure to give any notification.
EXCHANGE RATIO FOR THE NEW BROADBAND NOTES
- The exchange ratio will be calculated as the exchange price per $1,000
principal amount of the Broadband Eligible Notes divided by $1,000, and
the exchange price is equal to the present value of the Broadband
Eligible Notes on the exchange settlement date in accordance with
standard market practice assuming the Broadband Eligible Notes would be
repaid at $1,000 at maturity, determined on the basis of a yield to
maturity equal to the sum of the relevant exchange spread set forth on
the cover of this prospectus and the table below and the related
reference U.S. Treasury yield. The
69
related reference U.S. Treasury yield will be calculated by the dealer
managers in accordance with standard market practice based on the bid
side price for such reference security, as of 2:00 p.m., New York City
time, two business days prior to the expiration date of the exchange
offer, as displayed in Bloomberg Government Pricing Monitor, or any other
recognized quotation source selected by the dealer managers.
- The reference U.S. Treasury rate with respect to each series of Broadband
Eligible Notes is set forth in the table below and has been selected to
approximate the maturity characteristics for the applicable series of
Broadband Eligible Notes. For current yield information for a particular
U.S. Treasury security, you should consult publicly available sources.
BROADBAND ELIGIBLE NOTES REFERENCE US TREASURY BLOOMBERG PAGE EXCHANGE SPREAD
------------------------ --------------------- -------------- ---------------
7.00% Notes Due May 15,
2005.................. 6.50% US Treasury Note PX5 2.85%
Due 05/15/05
7.50% Notes Due 2006.... 4.625% US Treasury Note PX5 3.40
Due 05/15/06
7.75% Notes Due March 1,
2007.................. 6.25% US Treasury Note PX6 3.40
Due 02/15/07
6.00% Notes Due 2009.... 5.50% US Treasury Note PX6 2.65
Due 5/15/09
8.125% Debentures Due
January 15, 2022...... 5.375% US Treasury Bond PX8 3.15
Due 02/15/31
8.125% Debentures Due
July 15, 2024......... 5.375% US Treasury Bond PX8 3.20
Due 02/15/31
8.35% Debentures Due
2025.................. 5.375% US Treasury Bond PX8 3.35
Due 02/15/31
8.625% Debentures Due
December 1, 2031...... 5.375% US Treasury Bond PX8 3.35
Due 02/15/31
70
CALCULATION OF EXCHANGE PRICE
The following formula will be used to calculate the exchange price of a
relevant series of Broadband Eligible Notes based upon a given exchange spread
over the relevant reference U.S. treasury security.
P(BEN) = The price per $1,000 principal amount of the series of
Broadband Eligible Notes being calculated (excluding accrued
interest), rounded to the second digit after the decimal
point.
N = The number of remaining cash payment dates (both principal
and interest) for the series of Broadband Eligible Notes
whose price is being determined from but excluding the
settlement date for that series to and including the
maturity date for such securities.
CF(i) = The aggregate amount of cash per $1,000 principal amount
scheduled to be paid on the securities being priced on the
"ith" of the N remaining cash payment dates from such
securities. Scheduled payments of cash include interest and,
on the applicable maturity date, principal.
YLD = The specified yield to maturity (expressed as a decimal
number) equal to the Exchange Spread set forth on the cover
of this prospectus for that series of Broadband Eligible
Notes plus the interest rate for the applicable reference
U.S. Treasury security.
D(i) = The number of days from and including the settlement date
for that series of Broadband Eligible Notes to but excluding
the "ith" out of the N remaining cash payment dates for the
securities being priced. The number of days is computed
using the 30/360 day count method in accordance with market
convention.
N Summate. The term to the right of summation symbol is
(Sum = separately calculated "N" times (substituting for the "i" in
sign) that term each whole number between 1 and N, inclusive) and
i=1 the separate calculations are then added together.
Accrued
Interest = Accrued and unpaid interest per $1,000 principal amount of
the Broadband Eligible Notes from and including the last
applicable interest payment date to but excluding the
applicable settlement date.
N
P(BEN) = (Sum [ (CF(i)) ] - Accrued Interest
sign) ------------
i=1 (1+YLD)( Di )
--
2 180
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HYPOTHETICAL EXCHANGE RATIO CALCULATION
The following table sets forth a hypothetical example for $100,000
principal amount of Broadband Eligible Notes assuming relevant U.S. Treasury
yields on the applicable reference U.S. Treasury as reported on October 3, 2002
plus the applicable Exchange Spread for a settlement date of November 6, 2002.
EXCHANGE
PRICE OF
BROADBAND BROADBAND
PRORATED REFERENCE ELIGIBLE ELIGIBLE
BROADBAND US NOTE NOTE AT
EXCHANGE TREASURY EXCHANGE EXCHANGE EXCHANGE EXCHANGE
BROADBAND ELIGIBLE NOTE NOTE REFERENCE U.S. TREASURY YIELD SPREAD YIELD YIELD RATIO
----------------------- --------- ----------------------- --------- -------- --------- --------- --------
7.00% Notes Due May 15, 6.50% US Treasury 1.950% 2.850% 4.800% $1,051.71 1.05171
2005....................... $65,000 Note Due 05/15/05
4.625% US Treasury
7.50% Notes Due 2006......... 65,000 Note Due 05/15/06 2.320 3.400 5.720 1,056.68 1.05668
7.75% Notes Due March 1, 6.25% US Treasury 2.560 3.400 5.960 1,067.16 1.06716
2007....................... 65,000 Note Due 02/15/07
5.50% US Treasury
6.00% Notes Due 2009......... 65,000 Note Due 05/15/09 3.200 2.650 5.850 1,007.78 1.00778
8.125% Debentures Due 5.375% US Treasury 4.740 3.150 7.890 1,022.85 1.02285
January 15, 2022........... 65,000 Bond Due 02/15/31
8.125% Debentures Due 5.375% US Treasury 4.740 3.200 7.940 1,018.81 1.01881
July 15, 2024.............. 65,000 Bond Due 02/15/31
5.375% US Treasury
8.35% Debentures Due 2025.... 65,000 Bond Due 02/15/31 4.740 3.350 8.090 1,026.41 1.02641
8.625% Debentures Due 5.375% US Treasury 4.740 3.350 8.090 1,059.43 1.05943
December 1, 2031........... 65,000 Bond Due 02/15/31
FACE
AMOUNT OF
NEW RESIDUAL
BROADBAND CASH
BROADBAND ELIGIBLE NOTE NOTES AMOUNT
----------------------- --------- --------
7.00% Notes Due May 15, $68,000 $361.15
2005.......................
7.50% Notes Due 2006......... 68,000 684.20
7.75% Notes Due March 1, 69,000 365.40
2007.......................
6.00% Notes Due 2009......... 65,000 505.70
8.125% Debentures Due 66,000 485.25
January 15, 2022...........
8.125% Debentures Due 66,000 222.65
July 15, 2024..............
8.35% Debentures Due 2025.... 66,000 716.65
8.625% Debentures Due 68,000 862.95
December 1, 2031...........
INTEREST RATE FOR THE NEW BROADBAND NOTES
The interest rate for each series of New Broadband Notes will be announced
by press release two business days prior to the expiration of the exchange offer
for that series and will be based on a credit spread over the relevant reference
U.S. Treasury rates. The reference U.S. Treasury rate with respect to each
series of New Broadband Notes will be calculated, by the dealer managers, in
accordance with standard market practice, based on the bid side price of the
relevant reference U.S. Treasury as listed on the relevant Bloomberg Government
Pricing Monitor or any other recognized quotation source selected by the dealer
managers at 2:00 p.m., New York City time, two business days prior to the
expiration of the exchange offer. The relevant reference U.S. Treasury has been
selected to approximate the maturity characteristics of the applicable series of
New Broadband Notes. The interest rate will be equal to the reference U.S.
Treasury rate plus the applicable credit spread as set forth below. For current
yield information for a particular U.S. Treasury security, you should consult
publicly available sources. While those spreads have been selected so that as of
the date of calculation the New Broadband Notes would initially trade at par,
there can be no assurance as to the price at which the New Broadband Notes will
actually trade, either initially or thereafter. In addition, because the New
Broadband Notes will not be issued until completion of the AT&T Comcast
transaction, it is not possible to determine the present value of the combined
cash flows on any series of Broadband Exchange Notes and the related series of
New Broadband Notes.
BLOOMBERG
NEW BROADBAND NOTES REFERENCE U.S. TREASURY PAGE CREDIT SPREAD
------------------- ----------------------- --------- -------------
Notes Due March 15, 2013............. 4.375% US Treasury Note Due 08/15/12 PX7 4.35%
Notes Due November 15, 2022.......... 5.375% US Treasury Note Due 02/15/31 PX8 4.40%
OTHER TERMS OF THE BROADBAND EXCHANGE NOTES, NEW BROADBAND NOTES AND THE NEW
AT&T NOTES
Descriptions of the terms of the Broadband Exchange Notes, the New
Broadband Notes and the cable guarantees, and the New AT&T Notes are included in
this prospectus under "Description of the
72
Broadband Exchange Notes," "Description of the New Broadband Notes and the Cable
Guarantees" and "Description of the New AT&T Notes," respectively. A comparison
of the terms of the New Broadband Notes to those of the Broadband Exchange Notes
is included in this prospectus under "Comparison of the New Broadband Notes and
the Broadband Exchange Notes." The material differences in the terms of the
Broadband Exchange Notes from those of the Broadband Eligible Notes, and in the
terms of the New AT&T Notes from those of the AT&T Eligible Notes, are described
under "Description of the Broadband Exchange Notes" and "Description of the New
AT&T Notes," respectively.
CONDITIONS TO THE EXCHANGE OFFER
Unless holders of more than 50% of the principal amount of any series of
Broadband Eligible Notes or AT&T Eligible Notes have consented to the note
amendment discussed below and validly tendered and not withdrawn their notes
prior to the expiration date of the exchange offer for that series, no notes of
that series will be accepted for exchange. For these purposes, all of the Series
A Medium-Term Notes are treated as part of a single series.
The following table sets forth the aggregate principal amount outstanding
of each series of Broadband Eligible Notes and AT&T Eligible Notes as of the
date of this prospectus:
PRINCIPAL AMOUNT
BROADBAND ELIGIBLE NOTES OUTSTANDING
------------------------ ----------------
7.00% Notes Due May 15, 2005................................ $ 300,000,000
7.50% Notes Due 2006........................................ 500,000,000
7.75% Notes Due March 1, 2007............................... 500,000,000
6.00% Notes Due 2009........................................ 3,000,000,000
8.125% Debentures Due January 15, 2022...................... 500,000,000
8.125% Debentures Due July 15, 2024......................... 500,000,000
8.35% Debentures Due 2025................................... 300,000,000
8.625% Debentures Due December 1, 2031...................... 676,000,000
AT&T ELIGIBLE NOTES
-------------------
5.625% Notes Due 2004....................................... 2,000,000,000
6.75% Notes Due 2004........................................ 400,000,000
7.75% Medium-Term Notes, Series A Due May 15, 2025.......... 25,000,000
8.00% Medium-Term Notes, Series A Due May 15, 2025.......... 50,000,000
6.50% Notes Due 2029........................................ 3,000,000,000
FRN Medium-Term Notes, Series A Due 2054.................... 10,563,000
---------------
TOTAL............................................. $11,761,563,000
===============
Even if this condition is met with respect to each series of eligible
notes, despite any other term of the exchange offer, AT&T will not be required
to accept for exchange any Broadband Eligible Notes or AT&T Eligible Notes and
may terminate, amend, or extend the exchange offer before the acceptance of the
Broadband Eligible Notes and/or AT&T Eligible Notes, if, on or before the
expiration date:
- AT&T has not received, as of the expiration of the exchange offer, the
valid and unrevoked consents to the note amendment of the holders of more
than 50% in aggregate principal amount of those series of AT&T Notes
which will result in AT&T's obtaining the consent of, or having defeased,
purchased, retired or acquired its debt in respect of series representing
at least 90% in aggregate principal amount outstanding on December 19,
2001, which was approximately $12.7 billion, of debt securities issued
under the AT&T Indenture. As of the date of this prospectus,
approximately $11.8 billion of these debt securities, including Broadband
Eligible Notes and AT&T Eligible Notes, remained outstanding;
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- AT&T shall have received a private letter ruling from the Internal
Revenue Service with respect to the spin-off, the exchange offer and
certain related transactions, in form and substance reasonably
satisfactory to AT&T and Comcast;
- any action, proceeding or litigation seeking to enjoin, make illegal,
delay the completion of or challenge in any respect the exchange offer or
the AT&T Comcast transaction or otherwise relating in any manner to the
exchange offer or AT&T Comcast transaction is pending, instituted or
threatened;
- any order, stay, judgment or decree is issued by any court, government,
governmental authority or other regulatory or administrative authority
and is in effect or any statute, rule, regulation, governmental order or
injunction shall have been proposed, enacted, enforced or deemed
applicable to the exchange offer or AT&T Comcast transaction, any of
which would or might restrain, prohibit or delay completion of the
exchange offer or the AT&T Comcast transaction or impair the contemplated
benefits of the exchange offer or the AT&T Comcast transaction to AT&T,
Broadband or AT&T Comcast;
- there has occurred
o any general suspension of trading in, or limitation on prices for,
securities on any national securities exchange or in the
over-the-counter market in the United States or the European Union,
o the declaration of a banking moratorium or any suspension of payments in
respect of banks in the United States or the European Union,
o the commencement of a war, armed hostilities or other international or
national calamity (or, with regard to the conflict in Afghanistan or the
Middle East, any material escalation or expansion of such conflicts)
directly or indirectly involving the United States or any of its
territories,
o any limitation (whether or not mandatory) by any governmental,
regulatory or administrative agency or authority on, or any event, or
any disruption or adverse change in the financial or capital markets
generally or the market for loan syndications in particular, that, in
our or Comcast's judgment, might affect the extension of credit by banks
or other lending institutions in the United States,
o any change in the general political, market, economic or financial
conditions in the United States or abroad that could, in our or
Comcast's judgment, have an adverse effect on the business, condition
(financial or other), income, operations, assets, liabilities,
properties, securities ownership or prospects of the AT&T broadband
business, taken as a whole, AT&T and its subsidiaries (other than the
AT&T broadband business), taken as a whole, Comcast and its
subsidiaries, taken as a whole, or AT&T Comcast and its subsidiaries,
taken as a whole, or otherwise affects, or may impair in any way the
contemplated future conduct of the business of, any of the foregoing or
that otherwise materially affects the expected benefits of the exchange
offer or the AT&T Comcast transaction,
o any event or events that have resulted or may result, in our or
Comcast's judgment, in an actual or threatened change in the business
condition (financial or other), income, operations, assets, liabilities,
properties, securities ownership or prospects of AT&T and its
subsidiaries (other than the AT&T broadband business) taken as a whole,
or the AT&T broadband business, taken as a whole, Comcast and its
subsidiaries, taken as a whole, or AT&T Comcast and its subsidiaries,
taken as a whole, or that otherwise affects, or may impair in any way
the contemplated future conduct of the business of, any of the
foregoing, or that otherwise materially affects the expected benefits of
the exchange offer or the AT&T Comcast transaction; or
- the AT&T Comcast transaction has been terminated.
The exchange of the Broadband Eligible Notes for the Broadband Exchange
Notes is not contingent upon the completion of the AT&T Comcast transaction,
however the Broadband Exchange Notes will not be exchanged for the New Broadband
Notes if the AT&T Comcast transaction is terminated. In addition, if the AT&T
Comcast transaction is terminated, the interest rate and maturity of each series
of New
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AT&T Notes shall remain the same as the interest rate and maturity applicable to
the AT&T Eligible Notes tendered for those New AT&T Notes.
The conditions listed above are for AT&T's and Comcast's sole benefit and
may be asserted by AT&T or Comcast regardless of the circumstances giving rise
to any of these conditions. On or before the expiration date, AT&T and Comcast
may waive these conditions in their sole discretion in whole or in part at any
time and from time to time. The conditions may only be waived by AT&T and
Comcast jointly. The failure by AT&T or Comcast at any time to exercise any of
the above rights will not be considered a waiver of that right, and these rights
will be considered to be ongoing rights which may be asserted, before the
expiration date, at any time and from time to time.
If either AT&T or Comcast determines in its reasonable discretion that any
of the conditions are not satisfied, AT&T may:
- refuse to accept any Broadband Eligible Notes or AT&T Eligible Notes,
return any tendered Broadband Eligible Notes or AT&T Eligible Notes to
the tendering holders, and terminate the exchange offer with respect to
one or more series of Broadband Eligible Notes or AT&T Eligible Notes;
- extend the exchange offer and retain all Broadband Eligible Notes and
AT&T Eligible Notes tendered before the expiration of the exchange offer,
subject, however, to the rights of holders to withdraw these Broadband
Eligible Notes and AT&T Eligible Notes (see "-- Withdrawal Rights"
below); or
- determine jointly with Comcast to waive unsatisfied conditions relating
to the exchange offer with respect to one or more series of Broadband
Eligible Notes or AT&T Eligible Notes and accept all properly tendered
Broadband Eligible Notes and AT&T Eligible Notes of those series that
have not been withdrawn.
PRORATION
AT&T will accept in the exchange offer up to the applicable proration
percentage set forth on the cover page of this prospectus of the aggregate
principal amount outstanding of each series of Broadband Eligible Notes. If,
upon the expiration date, holders of any one or more series of Broadband
Eligible Notes have validly tendered a number of Broadband Eligible Notes in
excess of the applicable proration percentage of the aggregate principal amount
outstanding of that series of notes, AT&T will accept, on a prorated basis, the
notes of that series validly tendered and not withdrawn. This means that, with
respect to any series of Broadband Eligible Notes for which the exchange offer
is oversubscribed, a percentage of the total number of Broadband Eligible Notes
of that series that are validly tendered and not withdrawn will be accepted by
AT&T for exchange. That percentage will be equal to (1) the aggregate principal
amount of notes equal to the applicable proration percentage of the aggregate
principal amount outstanding of that series of notes divided by (2) the
aggregate principal amount of notes of that series validly tendered and not
withdrawn. The exchange offer for each series of AT&T Eligible Notes is for all
notes of that series and is not subject to proration.
FRACTIONAL NOTES
Notes will only be issued in denominations of $1,000 and multiples of
$1,000. If the exchange of a series of Broadband Eligible Notes is subject to
proration and proration would result in your being entitled to receive a
fractional interest in the relevant series of Broadband Exchange Notes, the
principal amount of Broadband Eligible Notes accepted in the exchange will be
rounded to the nearest $1,000. This rounding will result in your receiving only
whole Broadband Exchange Notes in exchange for your Broadband Eligible Notes.
If the mandatory exchange of a series of Broadband Exchange Notes into New
Broadband Notes would result in your being entitled to receive a fractional
interest in the relevant series of New Broadband Notes, the principal amount you
receive will be rounded down to the nearest $1,000 multiple and you will receive
cash in lieu of a fractional New Broadband Note for the balance.
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Because the exchange offer of New AT&T Notes for AT&T Eligible Notes is not
subject to proration and will be issued in a like principal amount as the AT&T
Eligible Notes accepted in exchange, there will not be any need to pay cash in
lieu of fractional New AT&T Notes.
REQUIRED CONSENT
If you wish to tender your Broadband Eligible Notes or AT&T Eligible Notes,
you must also consent to the note amendment to the indenture governing the
Broadband Eligible Notes and AT&T Eligible Notes to the extent your notes are
accepted for exchange. By submitting a letter of transmittal, you will be
granting that consent. See "Description of the Note Amendment." Any Broadband
Eligible Notes or AT&T Eligible Notes that are validly tendered and not
withdrawn but are not exchanged as a result of the proration feature described
under "-- Proration" will be treated as if they have not consented to the note
amendment.
PROCEDURES FOR TENDERING
WHAT TO SUBMIT AND HOW
If you, as the registered holder of Broadband Eligible Notes and/or AT&T
Eligible Notes, wish to tender your Broadband Eligible Notes or AT&T Eligible
Notes for exchange in the exchange offer, you must transmit a properly completed
and duly executed letter of transmittal to The Bank of New York or, in the case
of the Luxembourg Notes held in Luxembourg, The Bank of New York (Luxembourg)
S.A., the Luxembourg exchange agent, at the address set forth below under
"-- Exchange Agent" and "-- Luxembourg Exchange Agent," respectively, on or
prior to the expiration date.
In addition,
(1) certificates for the Broadband Eligible Notes and/or AT&T Eligible
Notes must be received by the exchange agent along with the letter of
transmittal, or
(2) a timely confirmation of a book-entry transfer of the Broadband
Eligible Notes and/or AT&T Eligible Notes, if such procedure is available,
into the exchange agent's account at DTC using the procedure for book-entry
transfer described below, must be received by the exchange agent prior to
the expiration date, or
(3) you must deliver a letter of transmittal and, if applicable,
comply with the guaranteed delivery procedures described below.
For any Luxembourg Notes, letters of transmittal may be submitted in
accordance with procedures that may be obtained by contacting the Luxembourg
exchange agent at the telephone number listed on the back cover of this
prospectus. In addition, in Luxembourg you may contact the Luxembourg exchange
agent to obtain delivery of documents or for other assistance.
The method of delivery of Broadband Eligible Notes and/or AT&T Eligible
Notes, letters of transmittal and notices of guaranteed delivery is at your
election and risk. If delivery is by mail, we recommend that registered mail,
properly insured, with return receipt requested, be used. In all cases,
sufficient time should be allowed to assure timely delivery. No letters of
transmittal or Broadband Eligible Notes or AT&T Eligible Notes should be sent to
AT&T, AT&T Comcast, any dealer manager or any other person other than the
exchange agent or the Luxembourg exchange agent.
HOW TO SIGN YOUR LETTER OF TRANSMITTAL AND OTHER DOCUMENTS
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Broadband Eligible Notes and/or AT&T
Eligible Notes being surrendered for exchange are tendered:
(1) by a registered holder of the Broadband Eligible Notes or AT&T
Eligible Notes who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the letter of
transmittal, or
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(2) for the account of an eligible institution.
If signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, the signatures must be guaranteed by
an "eligible guarantor institution" meeting the requirements of the exchange
agent, which requirements include membership or participation in the Security
Transfer Agent Medallion Program, referred to in this prospectus as STAMP, or
such other "signature guarantee program" as may be determined by the exchange
agent in addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
If the letter of transmittal or any powers of attorney are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers or
corporations or others acting in a fiduciary or representative capacity, the
person should so indicate when signing and, unless waived by AT&T, proper
evidence satisfactory to AT&T of its authority to so act must be submitted.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the Broadband Eligible Notes and AT&T Eligible Notes at DTC for purposes of
the exchange offer promptly after the date of this prospectus. Any financial
institution that is a participant in DTC's systems, or indirectly, any
organization which is an indirect participant in DTC's systems, including
Euroclear and Clearstream, may make book-entry delivery of Broadband Eligible
Notes and AT&T Eligible Notes by causing DTC to transfer Broadband Eligible
Notes and AT&T Eligible Notes into the exchange agent's account in accordance
with DTC's Automated Tender Offer Program procedures for transfer. However, the
exchange for the Broadband Eligible Notes and AT&T Eligible Notes so tendered
will only be made after timely confirmation of book-entry transfer of Broadband
Eligible Notes and AT&T Eligible Notes into the exchange agent's account, and
timely receipt by the exchange agent of an agent's message, transmitted by DTC
and received by the exchange agent and forming a part of a book-entry
confirmation. The agent's message must state that DTC has received an express
acknowledgment from the participant tendering Broadband Eligible Notes and AT&T
Eligible Notes that are the subject of that book-entry confirmation that the
participant has received and agrees to be bound by the terms of the letter of
transmittal, and that we may enforce the agreement against that participant.
If your Broadband Eligible Notes or AT&T Eligible Notes are held through
DTC, you must complete a form called "instructions to registered holder and/or
book-entry participant," which will instruct the DTC participant through whom
you hold your notes of your intention to tender your Broadband Eligible Notes
and AT&T Eligible Notes and complete a letter of transmittal on your behalf or
not tender your Broadband Eligible Notes and AT&T Eligible Notes. Please note
that delivery of documents to DTC in accordance with its procedures does not
constitute delivery to the exchange agent, and we will not be able to accept
your tender of notes until the exchange agent receives a letter of transmittal,
and a book-entry confirmation from DTC, with respect to your notes. A copy of
that form is available from the exchange agent.
Except as described under "Description of the New Broadband Notes and the
Cable Guarantees -- Certificated Notes" and "Description of the Broadband
Exchange Notes -- Certificated Notes" (which description also applies to the New
AT&T Notes) we have arranged for the New Broadband Notes and the New AT&T Notes
to be issued in the form of global notes registered in the name of DTC or its
nominee and each holder's interest in it will be transferable only in book-entry
form through DTC. Those series of New AT&T Notes that will be listed on the
Luxembourg Stock Exchange will be required to be accepted for clearance on
Euroclear and Clearstream.
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GUARANTEED DELIVERY PROCEDURES
If you are a registered holder of Broadband Eligible Notes and/or AT&T
Eligible Notes and you want to tender your Broadband Eligible Notes or AT&T
Eligible Notes but your Broadband Eligible Notes or AT&T Eligible Notes are not
immediately available, or time will not permit your Broadband Eligible Notes or
AT&T Eligible Notes to reach the exchange agent before the expiration date, or
the procedure for book-entry transfer cannot be completed on a timely basis, a
tender may be effected if:
(1) the tender is made through an eligible institution;
(2) prior to the expiration date, the exchange agent receives, by facsimile
transmission, mail or hand delivery, from that eligible institution a properly
completed and duly executed letter of transmittal and notice of guaranteed
delivery, in the form provided by us, stating:
- the name and address of the holder of Broadband Eligible Notes or AT&T
Eligible Notes;
- the amount of Broadband Eligible Notes and/or AT&T Eligible Notes
tendered; and
- the tender is being made by delivering that notice and guaranteeing that
within three New York Stock Exchange trading days after the date of
execution of the notice of guaranteed delivery, the certificates of all
physically tendered Broadband Eligible Notes and/or AT&T Eligible Notes,
in proper form for transfer, or a book-entry confirmation, as the case
may be, will be deposited by that eligible institution with the exchange
agent; and
(3) the certificates for all physically tendered Broadband Eligible Notes
and/or AT&T Eligible Notes, in proper form for transfer, or a book-entry
confirmation, as the case may be, are received by the exchange agent within
three New York Stock Exchange trading days after the date of execution of the
notice of guaranteed delivery.
ACCEPTANCE OF ELIGIBLE NOTES AND DELIVERY OF NEW NOTES
Once all of the conditions to the exchange offer are satisfied or waived,
AT&T will accept, promptly after the expiration date, subject to the completion
of the proration process described under "-- Proration" with respect to any
series of Broadband Eligible Notes, all Broadband Eligible Notes and AT&T
Eligible Notes properly tendered and AT&T and Broadband will issue the Broadband
Exchange Notes and AT&T will issue New AT&T Notes promptly after acceptance of
the Broadband Eligible Notes and AT&T Eligible Notes. See "-- Conditions to the
Exchange Offer" above. For purposes of the exchange offer, AT&T's giving of oral
or written notice of its acceptance to the exchange agent will be considered its
acceptance of the exchange offer.
In all cases, AT&T (and Broadband, with respect to Broadband Exchange
Notes) will issue Broadband Exchange Notes and New AT&T Notes in exchange for
Broadband Eligible Notes and AT&T Eligible Notes, respectively, that are
accepted for exchange only after timely receipt by the exchange agent of:
- certificates for the Broadband Eligible Notes and/or AT&T Eligible Notes;
or
- a timely book-entry confirmation of transfer of the Broadband Eligible
Notes and/or AT&T Eligible Notes into the exchange agent's account at DTC
using the book-entry transfer procedures described above; and
- a properly completed and duly executed letter of transmittal.
AT&T will have accepted validly tendered Broadband Eligible Notes and AT&T
Eligible Notes if and when it has given oral or written notice to the exchange
agent. The exchange agent will act as agent for the tendering holders for the
purposes of receiving the Broadband Exchange Notes and the New AT&T Notes from
us. The exchange agent will make the exchange on, or promptly after, the date it
receives notice of acceptance from AT&T, and as a result of this exchange the
holders in whose names the Broadband Exchange Notes and the New AT&T Notes will
be issuable upon exchange will be deemed to be the holders of record of the
Broadband Exchange Notes and the New AT&T Notes, respectively.
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The reasons AT&T may not accept tendered Broadband Eligible Notes and/or
AT&T Eligible Notes are:
- the Broadband Eligible Notes or AT&T Eligible Notes were not validly
tendered pursuant to the procedures for tendering; see "-- Procedures for
Tendering;"
- AT&T or Comcast determines in its reasonable discretion that one or more
of the conditions to the exchange offer has not been satisfied; see
"-- Conditions to the Exchange Offer;"
- a holder has validly withdrawn a tender of Broadband Eligible Notes or
AT&T Eligible Notes as described under "-- Withdrawal Rights;"
- AT&T has, in its sole discretion, delayed or terminated the exchange
offer; see "-- Terms of the Exchange Offer; Period for Tendering;" or
- the proration feature applies to any series of Broadband Eligible Notes;
see "-- Proration" and "-- Fractional Notes."
If AT&T does not accept any tendered Broadband Eligible Notes or AT&T
Eligible Notes for any reason included in the terms and conditions of the
exchange offer, including as a result of the proration feature, or if you submit
certificates representing Broadband Eligible Notes or AT&T Eligible Notes in a
greater principal amount than you wish to exchange, AT&T will return any
unaccepted or non-exchanged Broadband Eligible Notes or AT&T Eligible Notes
without expense to the tendering holder or, in the case of Broadband Eligible
Notes or AT&T Eligible Notes tendered by book-entry transfer into the exchange
agent's account at DTC using the book-entry transfer procedures described above,
non-exchanged Broadband Eligible Notes or AT&T Eligible Notes will be credited
to an account maintained with DTC as promptly as practicable after the
expiration or termination of the exchange offer.
Broadband Eligible Notes or AT&T Eligible Notes which are not tendered for
exchange or are tendered but not accepted in connection with the exchange offer
will remain outstanding and remain subject to the AT&T Indenture, as modified by
the note amendment.
WITHDRAWAL RIGHTS
You can withdraw your tender of Broadband Eligible Notes and/or AT&T
Eligible Notes at any time on or prior to the expiration date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the exchange agent at one of the addresses listed below under
"-- Exchange Agent." Any notice of withdrawal must specify:
- the name of the person having tendered the Broadband Eligible Notes or
AT&T Eligible Notes to be withdrawn;
- the Broadband Eligible Notes or AT&T Eligible Notes to be withdrawn;
- the principal amount of the Broadband Eligible Notes or AT&T Eligible
Notes to be withdrawn;
- if certificates for Broadband Eligible Notes or AT&T Eligible Notes have
been delivered to the exchange agent, the name in which the Broadband
Eligible Notes or AT&T Eligible Notes are registered, if different from
that of the withdrawing holder;
- if certificates for Broadband Eligible Notes or AT&T Eligible Notes have
been delivered or otherwise identified to the exchange agent, then, prior
to the release of those certificates, you must also submit the serial
numbers of the particular certificates to be withdrawn and a signed
notice of withdrawal with signatures guaranteed by an eligible
institution unless you are an eligible institution; and
- if Broadband Eligible Notes or AT&T Eligible Notes have been tendered
using the procedure for book-entry transfer described above, any notice
of withdrawal must specify the name and number of the account at DTC to
be credited with the withdrawn Broadband Eligible Notes or AT&T Eligible
Notes and otherwise comply with the procedures of that facility.
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Please note that all questions as to the validity, form, eligibility and
time of receipt of notices of withdrawal will be determined by AT&T and Comcast,
and their determination shall be final and binding on all parties. Any Broadband
Eligible Notes or AT&T Eligible Notes so withdrawn will be considered not to
have been validly tendered for exchange for purposes of the exchange offer. In
addition, any Broadband Eligible Notes or AT&T Eligible Notes so withdrawn will
be considered not to have consented to the note amendment described under
"Description of the Note Amendment -- The Note Amendment."
If you have properly withdrawn Broadband Eligible Notes or AT&T Eligible
Notes and wish to re-tender them, you may do so by following one of the
procedures described under "-- Procedures for Tendering" above at any time on or
prior to the expiration date.
THE DEALER MANAGERS
We have retained the following firms, listed in alphabetical order, to act
as dealer managers in connection with the exchange offer:
Credit Suisse First Boston Corporation
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
J.P. Morgan Securities Inc.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Morgan Stanley & Co. Incorporated
The principal solicitation in connection with the exchange offer and the
note amendment is being made by mail. However, additional solicitation may be
made by telephone, facsimile, electronic media or in person by the dealer
managers, the soliciting dealers, and their officers, regular employees and
affiliates. In addition, additional solicitation may be made by telephone,
facsimile, electronic media or in person by our officers, regular employees and
affiliates. We will not pay any additional compensation to any of our officers
and employees who engage in soliciting tenders. In any jurisdiction in which the
securities laws or blue sky laws require solicitations to be made by a licensed
broker or dealer, any solicitations in connection with the exchange offer and
the note amendment will be deemed to be made on behalf of AT&T and the other
registrants by the dealer managers or their affiliates that are licensed under
the laws of the applicable jurisdictions.
The dealer managers have provided, and we expect will provide, investment
banking, advisory and commercial banking services to AT&T, Comcast and AT&T
Comcast, as the case may be, for which they received, and we expect will receive
customary fees. In particular,
- Credit Suisse First Boston Corporation, Deutsche Bank Securities Inc. and
Goldman, Sachs & Co. advised AT&T in the AT&T Comcast transaction;
- J.P. Morgan Securities Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Morgan Stanley & Co. Incorporated advised Comcast in the
AT&T Comcast transaction.
In addition, affiliates of certain of the dealer managers will act as lenders to
AT&T, Broadband and AT&T Comcast under their new credit facilities.
AT&T, Comcast, AT&T Comcast and the cable guarantors will enter into a
dealer manager agreement with the dealer managers. In that agreement, AT&T,
Comcast, AT&T Comcast and the cable guarantors will indemnify the dealer
managers for liabilities under the federal securities and other laws.
At any given time, the dealer managers may trade the New AT&T Notes, the
Broadband Exchange Notes and the New Broadband Notes or other securities of
AT&T, Broadband or the cable guarantors for their own accounts or for the
accounts of their customers, and accordingly, may hold a long or a short
position in the notes or such other securities.
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None of the dealer managers assumes any responsibility for the accuracy or
completeness of the information concerning the exchange offers, AT&T, Comcast,
AT&T Comcast, Comcast Cable, MediaOne and TCI contained in this prospectus or
any documents incorporated herein by reference or for any failure by us to
disclose events that may have occurred and may affect the significance or
accuracy of such information.
Questions regarding the terms of the exchange offer should be directed to
the dealer managers at the addresses and telephone numbers set forth on the back
cover of this prospectus.
RETAIL SOLICITATION FEE
AT&T will pay to soliciting dealers a retail solicitation fee of $2.50 per
$1,000 of eligible notes tendered and accepted for exchange in the exchange
offer. As used herein, a "soliciting dealer" is an entity covered by a letter of
transmittal which names the dealer as having solicited and obtained the tender
from a U.S. holder, and is:
- any broker or dealer in securities, excluding the dealer manager, which
is a member of any national securities exchange or of the National
Association of Securities Dealers, Inc. ("NASD");
- any foreign broker or dealer not eligible for membership in the NASD
which agrees to conform to the NASD's Rules of Fair Practice in
soliciting tenders outside the United States to the same extent as though
it were an NASD member; or
- any bank or trust company.
No fee shall be payable to a soliciting dealer:
- to the extent eligible notes tendered due to solicitation by that dealer
are not validly tendered or otherwise are not accepted in the exchange
offer;
- with respect to the tender of eligible notes by a holder unless the
letter of transmittal accompanying such tender designates that soliciting
dealer;
- with respect to the tender of eligible notes by a holder as to which a
soliciting dealer fee has already been paid;
- with respect to the tender of eligible notes by a beneficial holder of
more than $250,000 in principal amount of eligible notes;
- in respect of eligible notes registered in the name of that soliciting
dealer unless the eligible notes are held by that soliciting dealer as
nominee and the eligible notes are being tendered for the benefit of one
or more beneficial owners identified on the letter of transmittal;
- if the soliciting dealer is a dealer manager;
- if the soliciting dealer is required for any reason to transfer the
amount of the fee to a tendering holder other than itself; or
- with respect to eligible notes tendered for that soliciting dealer's own
account.
Soliciting dealers should take care to ensure proper record-keeping to
document their entitlement to any solicitation fee. AT&T and the exchange agent
reserve the right to require additional information, as deemed warranted in
their sole discretion.
No broker, dealer, bank, trust company or fiduciary shall be deemed to be
the agent of AT&T, Broadband, the cable guarantors, DTC, any of the dealer
managers or the information agent for purposes of the exchange offer.
AT&T will also, upon request, reimburse soliciting dealers for reasonable
and customary handling and mailing expenses incurred by them in forwarding
materials relating to the exchange offer to their customers.
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All questions as to the validity, form, and eligibility, including time of
receipt of notices of solicited tenders will be determined by the exchange
agent, AT&T and Comcast, in their sole discretion, which determination will be
final and binding. Neither AT&T, Comcast, the exchange agent nor any other
person will be under any duty to give notification of any defects or
irregularities in a notice of solicited tender or incur any liability for
failure to give such notification.
INFORMATION AGENT
We have engaged D.F. King & Co. as the information agent for the exchange
offer. Questions and requests for assistance, requests for additional copies of
this prospectus or of the letter of transmittal and requests for notices of
guaranteed delivery should be directed to the information agent. The information
agent may be contacted as follows:
D. F. King & Co., Inc. D.F. King (Europe) Limited
77 Water Street, 20th Floor 2 London Wall Buildings, 2nd Floor
New York, New York 10005 London EC2M5PP
Banks and Brokers Call Collect: Telephone: 44 207 920 9700
(212) 269-5550
All Others Call Toll Free:
(866) 868-2409
EXCHANGE AGENT
We have engaged The Bank of New York as the exchange agent for the exchange
offer. All executed letters of transmittal (other than in Luxembourg) should be
directed to the exchange agent at the address set forth below:
Deliver To:
The Bank of New York, Exchange Agent
Corporate Trust Reorganization Unit
101 Barclay Street, 7E
New York, New York 10286
Attn: Kin Lau
Facsimile Transmissions:
(212) 298-1915
To Confirm by Telephone
or for Information:
Toll Free (800) 254-2826
(212) 815-3750
Delivery to an address other than as listed above or transmission of
instructions via facsimile other than as listed above does not constitute a
valid delivery.
LUXEMBOURG EXCHANGE AGENT
We have engaged The Bank of New York (Luxembourg) S.A. to act as the
Luxembourg exchange agent in connection with the exchange offer. In Luxembourg,
all services in connection with the exchange offer are available through the
Luxembourg exchange agent as more fully set forth in this prospectus and the
transmittal letter. In Luxembourg, you may contact the Luxembourg exchange agent
at the telephone number listed on the back cover for assistance in connection
with the exchange offer, including (1) to obtain the exchange offer materials,
(2) to obtain additional copies of the exchange offer materials, (3) for answers
to questions concerning the terms and procedures of the exchange offer, (4) to
have a letter of transmittal submitted on your behalf by the Luxembourg exchange
agent and (5) to have Luxembourg Notes accepted for exchange delivered on your
behalf by the Luxembourg exchange agent to the exchange agent. The Luxembourg
exchange agent will also have information available regarding the exchange offer
during the exchange offer period.
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FEES AND EXPENSES
The information agent, exchange agent and Luxembourg exchange agent will
receive reasonable and customary compensation for their services, and will be
reimbursed by AT&T for various reasonable out-of-pocket expenses.
The dealer managers, information agent, exchange agent and Luxembourg
exchange agent will be indemnified against various liabilities in connection
with the exchange offer, including liabilities under the federal securities
laws.
Except as set forth above under "-- Retail Solicitation Fee" no fees or
commissions (other than fees to the dealer managers, information agent and
exchange agent) will be payable by AT&T to brokers, dealers or other persons for
soliciting tenders of eligible notes pursuant to the exchange offer. AT&T,
however, upon request, will reimburse brokers, dealers and commercial banks for
customary mailing and handling expenses incurred by them in forwarding this
prospectus and related materials to the beneficial owners of notes held by them
as a nominee or in a fiduciary capacity. Other than the dealer managers, no
broker, dealer, commercial bank or trust company has been authorized to act as
the agent of AT&T for purposes of the exchange offer.
We estimate that the approximate amount of out-of-pocket fees and other
expenses of the exchange offer will be $70 million.
TRANSFER TAXES
Holders who tender their Broadband Eligible Notes and AT&T Eligible Notes
for exchange will not be obligated to pay any U.S. transfer taxes in connection
therewith, except that holders who instruct us to register Broadband Exchange
Notes, New Broadband Notes or New AT&T Notes in the name of, or request that
Broadband Eligible Notes and AT&T Eligible Notes not tendered or not accepted in
the exchange offer be returned to, a person other than the registered tendering
holder will be responsible for the payment of any applicable transfer tax
thereon.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER
The following is a summary of the material United States federal income tax
consequences to holders of (i) Broadband Eligible Notes resulting from the
exchange of such notes for Broadband Exchange Notes which, in turn, are
mandatorily exchanged for New Broadband Notes, (ii) AT&T Eligible Notes
resulting from the exchange of such notes for New AT&T Notes and the amendment
of certain terms of the New AT&T Notes upon consummation of the AT&T Comcast
transaction, and (iii) New Broadband Notes and New AT&T Notes that acquired such
notes pursuant to the exchange offer regarding the ownership and disposition of
the New Broadband Notes and New AT&T Notes after consummation of the AT&T
Comcast transaction. This summary assumes that the AT&T Comcast transaction will
be completed. If the AT&T Comcast transaction does not occur, there should be no
federal income tax consequences from the exchange of Broadband Eligible Notes
for Broadband Exchange Notes or AT&T Eligible Notes for New AT&T Notes, as the
case may be, and the federal income tax consequences regarding the ownership and
disposition of such notes will be the same as those of the Broadband Eligible
Notes and AT&T Eligible Notes.
Except where otherwise noted, this summary is based on the Internal Revenue
Code of 1986, as amended (the "Code"), administrative pronouncements, judicial
decisions and existing and proposed U.S. Treasury Regulations, all as in effect
on the date of this exchange offer and prospectus and all of which are subject
to change, possibly with retroactive effect. This summary assumes that the notes
are held as capital assets (within the meaning of Section 1221 of the Code) and
does not address the tax consequences that may be relevant to a holder subject
to special U.S. tax rules, including, but not limited to, non-U.S. holders,
certain expatriates, dealers in securities or foreign currency, banks, trusts,
insurance companies, tax-exempt organizations, persons that hold notes as part
of a straddle, hedge against currency risk or constructive sale or conversion
transaction, persons that have a functional currency other than the U.S. dollar,
investors in pass-through entities and persons that acquired such notes as
"qualified replacement property" within the meaning of Section 1042 of the Code.
Moreover, this discussion does not
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address any aspect of state, local or foreign tax considerations and does not
address federal income tax consequences that may be relevant to a particular
holder in light of his or her personal circumstances.
As used herein, a "holder" means a beneficial owner of an eligible note or
new note who is, for federal income tax purposes:
- a citizen or resident of the United States;
- a corporation (or an entity taxable as a corporation for federal income
tax purposes) created or organized in or under the laws of the United
States or of any political subdivision thereof;
- an estate the income of which is subject to federal income taxation
regardless of its source; or
- a trust if a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust.
The Exchange of Broadband Eligible Notes
AT&T intends to take the position that the exchange of Broadband Eligible
Notes for Broadband Exchange Notes is not an exchange pursuant to which gain or
loss should be realized for federal income tax purposes. If the exchange is not
one pursuant to which gain or loss should be realized, there will be no federal
income tax consequences to the exchange of Broadband Eligible Notes for
Broadband Exchange Notes and the federal income tax consequences regarding the
ownership and disposition of Broadband Exchange Notes will be the same as those
of Broadband Eligible Notes. For federal income tax purposes, the exchange of a
Broadband Eligible Note for a Broadband Exchange Note followed by an exchange of
such Broadband Exchange Note for a New Broadband Note, should be treated as a
single exchange of a Broadband Eligible Note for a New Broadband Note upon the
consummation of the AT&T Comcast transaction and the following discussion is
based on this assumption. For purposes of the following discussion in this
section entitled "-- Material United States Federal Income Tax Consequences of
the Exchange Offer," all references to "Broadband Eligible Notes" shall include
Broadband Exchange Notes.
Subject to the discussion below relating to excess principal amount, the
exchange of Broadband Eligible Notes for New Broadband Notes pursuant to the
mandatory exchange will not be treated as a taxable transaction for federal
income tax purposes if both the Broadband Eligible Notes and the New Broadband
Notes are treated as securities under the relevant provisions of the Code. The
term "securities" is not defined under the Code or in the regulations
promulgated thereunder. Under applicable administrative pronouncements and
judicial decisions, as a general matter, the determination of whether a debt
instrument is a security depends on the terms, conditions and other facts and
circumstances relating to the instrument and, consequently, is inherently
uncertain.
Broadband Eligible Notes due January 15, 2022, July 15, 2024, 2025 and
December 1, 2031. The Broadband Eligible Notes due January 15, 2022, July
15, 2024, 2025 and December 1, 2031 and the corresponding series of New
Broadband Notes will be treated as securities for purposes of the relevant
provisions of the Code. Except as described below with respect to cash
received in lieu of fractional New Broadband Notes, the material federal
income tax consequences of the exchange of such notes to a holder will be
as follows:
- no gain or loss will be recognized on the exchange, except that gain
(measured by the amount by which the "issue price" (as defined below) of
the New Broadband Note exceeds the adjusted tax basis (discussed below)
of the Broadband Eligible Note), if any, should be recognized but not in
an amount in excess of the fair market value of any excess of the
principal amount of the New Broadband Note received over the principal
amount of the Broadband Eligible Note surrendered (the "excess principal
amount");
- the holding period of the New Broadband Note will include the holding
period of the Broadband Eligible Note exchanged for the New Broadband
Note;
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- the adjusted tax basis of the New Broadband Note will be the same as the
adjusted tax basis of the Broadband Eligible Note exchanged for the New
Broadband Note;
- any bond premium applicable to the Broadband Eligible Note will carry
over to the New Broadband Note;
- any accrued market discount on the Broadband Eligible Note not previously
treated as ordinary income will carry over to the New Broadband Note to
the extent that the holder's tax basis in the Broadband Eligible Note is
less than the issue price of the New Broadband Note; and
- any additional market discount on the Broadband Eligible Note will be
converted to original issue discount (discussed below) on the New
Broadband Note.
The calculation of excess principal amount is not entirely clear under
current federal income tax law. In particular, such calculation might be based
upon the difference between the stated principal amounts of the Broadband
Eligible Note and the New Broadband Note, or, alternatively, the difference
between the issue price of the New Broadband Note and the adjusted issue price
of the Broadband Eligible Note. Holders should consult their own tax advisors
regarding alternative interpretations of excess principal amount and the federal
income tax consequences thereof.
Broadband Eligible Notes due May 15, 2005, 2006, March 1, 2007 and
2009. The Broadband Eligible Notes due May 15, 2005, 2006, March 1, 2007 and
2009 may be treated as securities and the corresponding series of New Broadband
Notes should be treated as securities for purposes of the relevant provisions of
the Code. If such Broadband Eligible Notes and the corresponding series of New
Broadband Notes are properly classified as securities, the material federal
income tax consequences of the exchange of such notes will be as described in
the immediately preceding section. If the Broadband Eligible Notes due May 15,
2005, 2006, March 1, 2007 and 2009 or the corresponding series of New Broadband
Notes are not properly classified as securities, the material federal income tax
consequences of the exchange of such Broadband Eligible Notes for the New
Broadband Notes will be a taxable exchange and, except as described below with
respect to cash received in lieu of fractional New Broadband Notes, the material
federal income tax consequences of the exchange of such notes will be as
follows:
- Gain or loss will be recognized in an amount equal to the difference
between the issue price of the New Broadband Note (except to the extent
the issue price is attributable to accrued but unpaid interest, which is
taxable as ordinary interest income upon the exchange) and the holder's
adjusted tax basis in the Broadband Eligible Note. If the New Broadband
Notes are "traded on an established market" (generally meaning that they
are listed on a major securities exchange, appear on a quotation medium
of general circulation or otherwise are readily quotable by dealers,
brokers or traders during the 60-day period ending 30 days after the date
of the exchange), the issue price of the New Broadband Notes will be
equal to their fair market value on the date of the mandatory exchange.
Otherwise, the issue price of the New Broadband Notes will be equal to
the fair market value of the Broadband Eligible Notes exchanged on such
date.
- The adjusted tax basis in the Broadband Eligible Note will generally
equal the cost of the note to the holder, increased by the amount of any
market discount and accrued but unpaid interest previously included in
income by the holder with respect to such Broadband Eligible Note and
decreased by any amount of any amortizable bond premium previously
deducted from income by the holder with respect to such note.
- The gain or loss recognized on the exchange will generally be capital
gain (subject to the market discount rules discussed below) or loss and
will be long-term capital gain or loss if at the time of the exchange the
Broadband Eligible Note has been held for more than one year. The
deduction of capital losses for federal income tax purposes is subject to
limitations.
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Cash Received in Connection with the Exchange by Holders of Broadband
Eligible Notes
A holder of Broadband Eligible Notes will not be entitled to receive any
fractional New Broadband Notes in exchange for Broadband Eligible Notes but will
receive cash in lieu of such fractional interest. For federal income tax
purposes, a holder may be treated as if it received the fractional New Broadband
Note pursuant to the mandatory exchange and received the cash in retirement of
such fractional interest. In that case, a holder generally would recognize
taxable gain or loss based upon the difference between the amount of cash
received and such holder's adjusted tax basis in the fractional New Broadband
Note. The gain or loss recognized on the retirement of a fractional New
Broadband Note would be treated as described below for the sale or disposition
of a New Broadband Note. Alternatively, a holder may be treated as having
received New Broadband Notes and cash in exchange for Broadband Eligible Notes.
In that event, holders of Broadband Eligible Notes that qualify as securities
for federal income tax purposes would recognize gain (but not loss) in an amount
equal to the lesser of the gain realized, if any, with respect to the Broadband
Eligible Notes exchanged and the cash received. Such holders should consult
their own tax advisors regarding alternative characterizations of any cash
received in lieu of fractional New Broadband Notes.
Payments of accrued interest on any series of Broadband Eligible Notes made
at the time of the mandatory exchange will be taxable to a holder as ordinary
interest income, unless such holder has previously included such amount in
income in accordance with its method of accounting for federal income tax
purposes.
The Exchange of AT&T Eligible Notes
AT&T intends to take the position that the exchange of AT&T Eligible Notes
for New AT&T Notes is not an exchange pursuant to which gain or loss should be
realized for federal income tax purposes. If the exchange is not one pursuant to
which gain or loss should be realized, there will be no federal income tax
consequences to the exchange of AT&T Eligible Notes for New AT&T Notes and the
federal income tax consequences regarding the ownership and disposition of New
AT&T Notes prior to the consummation of the AT&T Comcast transaction will be the
same as those of AT&T Eligible Notes. As described below, for federal income tax
purposes, the modification of a New AT&T Note in connection with the AT&T
Comcast transaction may be treated as an exchange. For purposes of the following
discussion in this section entitled "-- Material United States Federal Income
Tax Consequences of the Exchange Offer," all references to "AT&T Eligible Notes"
shall include New AT&T Notes prior to the modification of the terms of such
notes upon consummation of the AT&T Comcast transaction.
AT&T Eligible Notes due 2054. For federal income tax purposes, a
"significant modification" of a debt instrument -- i.e., a modification that
results in a debt instrument that differs materially either in kind or in
extent -- may be treated as a taxable exchange of the debt instrument for a new
debt instrument, whether or not evidenced by a physical surrender of the debt
instrument for a newly-issued debt instrument. Under applicable Treasury
regulations, a change in yield of a debt instrument generally is a significant
modification if the yield, as modified (determined taking into account any
payments made to the holder as consideration for the modification), varies from
the yield of the unmodified instrument by more than the greater of (i) 0.25% and
(ii) 5% of the annual yield of the unmodified instrument.
If the adjusted rate of interest that will be received by a holder of a New
AT&T Note due 2054 upon consummation of the AT&T Comcast transaction does not
increase the yield of a New AT&T Note held by such holder by more than the
greater of (i) 0.25% and (ii) 5% of the AT&T Eligible Note's current annual
yield, the adjustment will not result in a deemed exchange pursuant to which
gain or loss should be realized for federal income tax purposes. In that event,
there should be no federal income tax consequences from the adjustment of the
interest rate of the AT&T Eligible Notes due 2054 and the federal income tax
consequences regarding the ownership and disposition of such notes will be the
same as those of the AT&T Eligible Notes due 2054.
If the adjustment of the interest rate does increase the yield of a New
AT&T Note held by a holder of an AT&T Eligible Note due 2054 by more than the
greater of (i) 0.25% and (ii) 5% of the AT&T
86
Eligible Note's current annual yield, the adjustment will result in a deemed
exchange pursuant to which gain or loss should be realized. In that event, the
federal income tax consequences of the deemed exchange will depend on whether
the AT&T Eligible Notes due 2054 and the corresponding New AT&T Notes are
treated as securities for purposes of the relevant provisions of the Code.
Holders should consult their own tax advisors to evaluate whether the AT&T
Eligible Notes due 2054 qualify as securities for federal income tax purposes
and the tax consequences of a deemed exchange to them.
AT&T Eligible Notes due 2029. AT&T intends to take the position that the
change of the maturity of the AT&T Eligible Notes due 2029 from March 15, 2029
to March 15, 2013 that would occur upon consummation of the AT&T Comcast
transaction is not a deemed exchange pursuant to which gain or loss should be
realized for federal income tax purposes. In the event that there also were an
adjustment to the rate of interest which will be received by a holder of a New
AT&T Note due March 15, 2013 upon consummation of the AT&T Comcast transaction
and such adjustment does not increase the yield of a New AT&T Note held by such
holder by more than the greater of (i) 0.25% and (ii) 5% of the AT&T Eligible
Note's current annual yield, there will be no federal income tax consequences
from the adjustment, if any, of the interest rate and the federal income tax
consequences regarding the ownership and disposition of such notes will be the
same as those of the AT&T Eligible Notes due 2029.
If the change of the maturity or the adjustment, if any, of the interest
rate of the AT&T Eligible Notes due 2029 resulted in a deemed exchange pursuant
to which gain or loss is realized, since the AT&T Eligible Notes due 2029 and
the corresponding New AT&T Notes will be treated as securities for purposes of
the relevant provisions of the Code, the federal income tax consequences of such
deemed exchange would be the same as those described above for the exchange of
Broadband Eligible Notes that qualify as securities for New Broadband Notes that
qualify as securities, except that the issue price of the New AT&T Notes will be
determined in the manner described below with respect to the AT&T Eligible Notes
due May 15, 2025.
AT&T Eligible Notes due 2004 and May 15, 2025. The adjusted rate of
interest, which will be received by a holder that exchanges an AT&T Eligible
Note due 2004 or May 15, 2025 for a corresponding New AT&T Note upon
consummation of the AT&T Comcast transaction, may increase the yield of a New
AT&T Note held by such holder by more than both (i) 0.25% and (ii) 5% of the
AT&T Eligible Note's current annual yield. Accordingly, for federal income tax
purposes, a holder of such an AT&T Eligible Note may be deemed to have exchanged
the AT&T Eligible Note for a New AT&T Note in a taxable exchange.
If the adjusted rate of interest that will be received by a holder of a New
AT&T Note due 2004 or May 15, 2025 upon consummation of the AT&T Comcast
transaction does not increase the yield of a New AT&T Note held by such holder
by more than the greater of (i) 0.25% and (ii) 5% of the AT&T Eligible Note's
current annual yield, the adjustment will not result in a deemed exchange
pursuant to which gain or loss should be recognized for federal income tax
purposes. In that event, there should be no federal income tax consequences from
the adjustment of the interest rate and the federal income tax consequences
regarding the ownership and disposition of such notes will be the same as those
of the AT&T Eligible Notes due 2004 or May 15, 2025. Otherwise, the adjustment
will result in a deemed exchange pursuant to which gain or loss should be
recognized for federal income tax purposes and the material federal income tax
consequences of such deemed exchange are as described below.
The AT&T Eligible Notes due 2004 may be treated as securities and the
corresponding series of New AT&T Notes will not be treated as securities for
purposes of the relevant provisions of the Code. The material federal income tax
consequences of a deemed exchange of such notes will be as described above for
the exchange of Broadband Eligible Notes for New Broadband Notes in which the
Broadband Eligible Notes and/or the New Broadband Notes do not qualify as
securities, except that (1) the issue price of the New AT&T Notes will be
determined in the manner described below with respect to the AT&T Eligible Notes
due May 15, 2025 and (2) holders that are cash method taxpayers may need to
include in income interest that has accrued but has not yet been paid as of the
date of the deemed exchange, but any such interest would not be included in
income when it is actually paid.
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The AT&T Eligible Notes due May 15, 2025 and the corresponding series of
New AT&T Notes will be treated as securities for purposes of the relevant
provisions of the Code. Consequently, the material federal income tax
consequences of a deemed exchange of such notes will be as described above for
the exchange of Broadband Eligible Notes that qualify as securities for New
Broadband Notes that qualify as securities, except that the issue price of the
New AT&T Notes will be equal to their fair market value if such notes are
considered to be "traded on an established market" or, alternatively, equal to
the fair market value of the AT&T Eligible Notes deemed exchanged, in each case
as of the date on which the deemed exchange occurs.
Nonparticipation in the Exchange Offer
While the matter is not free from doubt, AT&T intends to take the position
that the adoption of the note amendment should not constitute a significant
modification of the terms of the Broadband Eligible Notes or AT&T Eligible
Notes. As such, holders of Broadband Eligible Notes or AT&T Eligible Notes that
do not participate in the exchange offer should not be deemed to have exchanged
their Broadband Eligible Notes or AT&T Eligible Notes, and otherwise should not
recognize income, gain or loss solely as a result of the adoption of the note
amendment.
Similarly, there should be no federal income tax consequences of the
exchange offer to a participating holder with respect to any portion of the
holder's eligible notes that are not tendered, are withdrawn prior to the
expiration of the exchange offer, or are not exchanged because of proration.
Furthermore, if the AT&T Comcast transaction does not occur, there should be no
federal income tax consequences from the exchange of Broadband Eligible Notes
for Broadband Exchange Notes or AT&T Eligible Notes for New AT&T Notes, as the
case may be, and the federal income tax consequences regarding the ownership and
disposition of such notes will be the same as those of the Broadband Eligible
Notes and AT&T Eligible Notes.
Broadband Eligible Notes or AT&T Eligible Notes Purchased With Market
Discount
Any gain recognized by a holder on the exchange of Broadband Eligible Notes
or AT&T Eligible Notes having market discount will be treated as ordinary income
to the extent of the market discount that has accrued while such Broadband
Eligible Notes or AT&T Eligible Notes were held by the holder, unless the holder
has included market discount in income currently as it accrues. In general,
market discount is the excess, if any, of the Broadband Eligible Notes' or AT&T
Eligible Notes' stated redemption price at maturity over the holder's tax basis
therein immediately after its acquisition (unless the amount of such excess is
less than a specified de minimis amount, in which case the market discount is
considered to be zero).
Consequences of Holding New Broadband Notes or New AT&T Notes
The following is a summary of the principal federal income tax consequences
resulting from the ownership and disposition of (i) New Broadband Notes and (ii)
New AT&T Notes after the consummation of the AT&T Comcast transaction. To the
extent that the adjustment to the rate of interest of the AT&T Eligible Notes
due 2054 or the change of the maturity of the AT&T Eligible Notes due 2029 upon
consummation of the AT&T Comcast transaction did not result in a deemed exchange
pursuant to which gain or loss is realized for federal income tax purposes, the
principal federal income tax consequences resulting from the ownership and
disposition of such notes will not change. The discussion that follows,
therefore, is not applicable to the New AT&T Notes due 2054 or the New AT&T
Notes due 2013.
Payments of Interest and Original Issue Discount. Qualified stated
interest (defined as stated interest that is unconditionally payable in cash or
property at least annually at a single fixed rate of interest) paid on a New
Broadband Note or New AT&T Note will be taxable to a holder as ordinary interest
income at the time it accrues or is received in accordance with the holder's
method of accounting for federal income tax purposes. Each New Broadband Note or
New AT&T Note will be considered to be issued with original issue discount
("OID") if the "stated redemption price at maturity" of the New Broadband Note
or New AT&T Note exceeds its "issue price", provided such excess is greater than
a specified de minimis
88
amount. For purposes of the foregoing, the general rule is that the stated
redemption price at maturity of a debt instrument is the sum of all payments
provided by the debt instrument other than payments of qualified stated
interest. The issue price of each New Broadband Note or New AT&T Note (other
than a New AT&T Note due 2054) will be equal to such note's fair market value if
such note is considered to be "traded on an established market" or,
alternatively, equal to the to the fair market value of the Eligible Broadband
Notes exchanged or Eligible AT&T Notes deemed exchanged, in each case as of the
date on which the exchange or deemed exchange occurs. Holders of New AT&T Notes
due 2054 should consult their own tax advisors regarding the determination of
the issue price of such notes and the amounts of qualified stated interest and
OID.
Each New Broadband Note and each New AT&T Note may be issued with OID that
exceeds the specified de minimis amount. In that event, each holder will be
required to include in income each year, without regard to whether any cash
payments of interest are made with respect to the New Broadband Notes and New
AT&T Notes and without regard to the holder's method of accounting for federal
income tax purposes, a portion of the OID on the New Broadband Notes and New
AT&T Notes so as to provide a constant yield to maturity, subject to reductions
in respect of acquisition premium as described below. The amount required to be
so included will be treated as ordinary income. Any amount of such OID included
in income will increase a holder's adjusted tax basis in a New Broadband Note or
New AT&T Note, and any payments from the issuer to the holder, other than
payments of qualified stated interest, will decrease a holder's adjusted tax
basis in such notes. A holder will not be subject to federal income tax on such
payments. In compliance with U.S. Treasury regulations, AT&T or Broadband, as
the case may be, will provide certain information to the Internal Revenue
Service ("IRS") and holders that is relevant to determining the amount of OID in
each accrual period.
If a holder's tax basis in a New Broadband Note or New AT&T Note
immediately after the exchange of a Broadband Eligible Note for a New Broadband
Note or an AT&T Eligible Note for a New AT&T Note, exceeds the sum of all
amounts payable on such New Broadband Note or New AT&T Note other than qualified
stated interest then the holder will not be required to include OID in gross
income.
Acquisition Premium and Amortizable Bond Premium. If a holder's adjusted
tax basis in a New Broadband Note or New AT&T Note immediately after the
exchange of a Broadband Eligible Note for a New Broadband Note or the deemed
exchange of an AT&T Eligible Note for a New AT&T Note, (i) is less than or equal
to the sum of all amounts payable on the New Broadband Note or New AT&T Note
(other than payments of qualified stated interest), but (ii) exceeds the
adjusted issue price of such New Broadband Note or New AT&T Note, such excess
will be considered "acquisition premium". In such case, a holder may reduce its
OID inclusions with respect to the New Broadband Note or New AT&T Note by an
amount equal to the amount of OID such holder would otherwise include in its
gross income multiplied by a fraction, the numerator of which is the amount of
acquisition premium and the denominator of which is the excess of the sum of all
amounts (other than qualified stated interest) payable on the New Broadband Note
or New AT&T Note after the date of the exchange over the adjusted issue price of
the New Broadband Note or New AT&T Note. Alternatively, a holder may elect to
amortize acquisition premium on a constant-yield basis.
If a holder's adjusted tax basis in a New Broadband Note or New AT&T Note
immediately after the exchange of a Broadband Eligible Note for a New Broadband
Note or the deemed exchange of an AT&T Eligible Note for a New AT&T Note exceeds
the amount that is payable at maturity, the holder will be considered to have
amortizable bond premium equal to such excess. The holder may elect to amortize
this premium using a constant yield method, over the remaining term of the note
(where the note is not optionally redeemable prior to its maturity date). If the
note may be optionally redeemed prior to maturity, the amount of amortizable
bond premium is determined with reference to the amount payable on maturity or,
if it results in a smaller premium attributable to the period up to the earlier
redemption date, with reference to the amount payable on the earlier redemption
date. A holder who elects to amortize bond premium may offset each interest
payment on such note by the portion of the bond premium allocable to such
payment and must reduce its tax basis in the note by the amount of the premium
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amortized in any year. An election to amortize bond premium applies to all
taxable debt obligations then owned and thereafter acquired by the holder and
may be revoked only with the consent of the IRS.
Market Discount. Market discount on a Broadband Eligible Note or AT&T
Eligible Note will carry over to the New Broadband Note or New AT&T Note to the
extent that the holder's tax basis in the Broadband Eligible Note or AT&T
Eligible Note is less than the issue price of the New Broadband Note or AT&T
Eligible Note. A holder will be required to treat any principal payment on, or
any gain on the sale, exchange, retirement or other disposition of a New
Broadband Note or New AT&T Note as ordinary income to the extent of the market
discount on the note at the time of the payment or disposition unless the market
discount has been previously included in income by the holder pursuant to an
election by the holder to include the market discount in income as it accrues,
or pursuant to a constant yield election by the holder. If the New Broadband
Note or New AT&T Note is disposed of in certain nontaxable transactions, accrued
market discount will be includible as ordinary income to the holder as if the
holder had sold the note at its then fair market value. In addition, the holder
may be required to defer, until the maturity of the note or its earlier
disposition (including certain nontaxable transactions), the deduction of all or
a portion of the interest expense on any indebtedness incurred or maintained to
purchase or carry such note.
Sale, Exchange, Redemption or other Taxable Disposition of New Broadband
Notes or New AT&T Notes. Upon the sale, exchange, redemption or other taxable
disposition of a New Broadband Note or New AT&T Note, a holder will recognize
gain or loss, if any, for federal income tax purposes equal to the difference
between (i) the amount realized upon the sale, exchange, redemption or other
taxable disposition (except to the extent such amount is attributable to accrued
but unpaid interest, which is taxable as ordinary interest income upon the sale,
exchange, redemption or other taxable disposition) and (ii) such holder's
adjusted tax basis in such New Broadband Notes or New AT&T Notes. A holder's
adjusted tax basis in a New Broadband Note or New AT&T Note that was received in
a tax-free exchange of a Broadband Eligible Note or AT&T Eligible Note is
generally the adjusted tax basis of such Broadband Eligible Note or AT&T
Eligible Note, and a holder's adjusted tax basis in a New Broadband Note or a
New AT&T Note that was received in a taxable exchange of a Broadband Eligible
Note or AT&T Eligible Note is generally the issue price of such note, in each
case increased by any original issue discount, accrued but unpaid interest and
market discount, if any, included in such holder's income and reduced (but not
below zero) by any amortized bond premium which a holder has elected to deduct
from taxable income on an annual basis and any payments other than payments of
"qualified stated interest" with respect to a New Broadband Note or New AT&T
Note.
Except as provided below, any gain or loss recognized on the sale, exchange
or redemption of a New Broadband Note or New AT&T Note will generally be capital
gain or loss and will be long-term capital gain or loss if at the time of sale,
exchange or redemption the holder's holding period of the New Broadband Note or
New AT&T Note for federal income tax purposes is more than one year. A holder
that has market discount with respect to a New Broadband Note or New AT&T Note
will generally be required to treat gain realized on the sale, exchange,
redemption or other disposition of the New Broadband Notes or New AT&T Notes
(including certain dispositions which are nonrecognition transactions under the
Code) as ordinary income to the extent of the market discount accrued to the
date of the disposition, less any accrued market discount previously reported as
ordinary income.
Information Reporting and Backup Withholding
Information reporting requirements will generally apply to certain payments
made and OID with respect to the New Broadband Notes and New AT&T Notes. To
prevent backup withholding at the then applicable rate with respect to such
payments and with respect to the exchange, federal income tax law requires that
each exchanging holder must provide the exchange agent with such holder's
correct taxpayer identification number which, in the case of an individual is
his or her social security number, and certain other information, or otherwise
establish a basis for exemption from backup withholding. Exempt holders
(including, among others, all corporations, and certain foreign individuals) are
not subject to these backup withholding and information reporting requirements.
Backup withholding tax is not an additional federal
90
income tax. Rather, the federal income tax liability of persons subject to
backup withholding tax will be offset by the amount of tax withheld. If backup
withholding tax results in an overpayment of federal income tax, a refund or
credit may be obtained from the IRS, provided the required information is
furnished.
THE FOREGOING DISCUSSION IS NOT INTENDED TO BE A COMPLETE ANALYSIS OR
DESCRIPTION OF ALL POTENTIAL FEDERAL INCOME TAX CONSIDERATIONS OR ANY OTHER
CONSIDERATIONS RELATING TO THE EXCHANGE OF BROADBAND ELIGIBLE NOTES OR AT&T
ELIGIBLE NOTES OR THE MODIFICATION OF CERTAIN TERMS OF SUCH NOTES UPON
CONSUMMATION OF THE AT&T COMCAST TRANSACTION. THUS, HOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE TENDER TO
THEM, INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE APPLICABILITY AND EFFECT
OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER APPLICABLE TAX LAWS AND THE EFFECT
OF ANY PROPOSED CHANGES IN THE TAX LAWS.
CONSEQUENCES OF FAILURES TO PROPERLY TENDER BROADBAND ELIGIBLE NOTES AND AT&T
ELIGIBLE NOTES IN THE EXCHANGE OFFER
Issuance of the Broadband Exchange Notes and the New AT&T Notes in exchange
for the Broadband Eligible Notes and AT&T Eligible Notes, respectively, under
the exchange offer will be made only after timely receipt by the exchange agent
of such Broadband Eligible Notes or AT&T Eligible Notes, a properly completed
and duly executed letter of transmittal and all other required documents, and
the completion of the proration process with respect to any series of Broadband
Eligible Notes. Therefore, holders desiring to tender Broadband Eligible Notes
or AT&T Eligible Notes in exchange for Broadband Exchange Notes or New AT&T
Notes, as applicable, should allow sufficient time to ensure timely delivery. We
are under no duty to give notification of defects or irregularities of tenders
of Broadband Eligible Notes or AT&T Eligible Notes for exchange.
To the extent that Broadband Eligible Notes and AT&T Eligible Notes are
tendered and accepted in connection with the exchange offer, any trading markets
for the remaining Broadband Eligible Notes and AT&T Eligible Notes could be
adversely affected. See "Risk Factors -- Risks Relating to the Exchange Offer."
To the extent that any Broadband Eligible Notes and AT&T Eligible Notes
remain outstanding following completion of the exchange offer, they will remain
obligations of AT&T.
USE OF PROCEEDS
None of AT&T, Broadband or any other party will receive any proceeds from
the issuance of the new notes in the exchange offer. The amount that Broadband
would otherwise be required to pay to AT&T upon completion of the AT&T Comcast
transaction to satisfy intercompany indebtedness then outstanding will be
reduced based upon the aggregate principal amount of New Broadband Notes issued
in the mandatory exchange.
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DESCRIPTION OF THE NOTE AMENDMENT
THE NOTE AMENDMENT
Any holders of Broadband Eligible Notes or AT&T Eligible Notes whose notes
are accepted in the exchange offer must consent to the note amendment to the
AT&T Indenture governing each series of those notes, upon the terms and subject
to the conditions set forth in this prospectus, the accompanying letter of
transmittal, applicable law and, to the extent applicable, the AT&T Indenture.
The note amendment would change the terms of the notes regarding the
consolidation, merger with, or sale or conveyance of all or substantially all of
the property of, AT&T to clarify that in connection with the AT&T Comcast
transaction the successor formed by the consolidation or merger, or to which
AT&T shall have transferred the property, need not assume the obligations of
AT&T under the notes of that series and that such a successor shall not succeed
to and be substituted for AT&T under the notes of that series. The note
amendment is described in further detail under "-- Terms of the Note Amendment."
The note amendment is designed to satisfy a condition to the AT&T Comcast
transaction. The AT&T Comcast transaction is conditioned on AT&T's obtaining the
consent of, or having defeased, purchased, retired or acquired debt in respect
of series representing 90% in aggregate principal amount of AT&T Notes
outstanding on December 19, 2001, which was approximately $12.7 billion, of debt
securities issued under the AT&T Indenture. As of the date of this prospectus,
approximately $11.8 billion of these debt securities, including the Broadband
Eligible Notes and AT&T Eligible Notes, remained outstanding. AT&T and Comcast
could mutually agree to waive this condition with respect to all or any portion
of the AT&T Notes for which consents are not obtained. If the AT&T Comcast
transaction were to occur and if holders of the AT&T Notes were to assert
successfully that completing that AT&T Comcast transaction required Broadband or
one of its affiliates to assume AT&T's obligations under the AT&T Notes and that
did not occur, then AT&T could be required to refinance that indebtedness. Thus,
while AT&T and Comcast could jointly waive the consent condition to the AT&T
Comcast transaction, AT&T is making the exchange offer primarily to facilitate
the AT&T Comcast transaction and to optimize the respective capital structures
of AT&T and AT&T Comcast in an economic and tax efficient manner.
TERMS OF THE NOTE AMENDMENT
The note amendment is an amendment to the AT&T Indenture covenant regarding
the consolidation, merger with, or sale or conveyance of all or substantially
all of the property of AT&T. The note amendment will be effective with respect
to each series of notes that consents to the amendment and will provide that the
AT&T Comcast transaction, including all transactions consummated as steps in the
AT&T Comcast transaction, (1) will not result in a consolidation, merger, sale,
conveyance or other transfer of property of AT&T (including stock of
subsidiaries) as an entirety or substantially as an entirety for purposes of the
AT&T Indenture, and (2) will not violate the successor clause of the AT&T
Indenture or any other provision of the AT&T Indenture or any security issued
under the AT&T Indenture, regardless of whether any person assumes any of the
indebtedness outstanding under the AT&T Indenture or any other obligation under
the AT&T Indenture or any security issued under the AT&T Indenture.
The foregoing description of the terms of the note amendment is qualified
in its entirety by reference to the forms of the supplemental indenture with
respect to the Broadband Exchange Notes and the supplemental indenture with
respect to all other AT&T Notes, which are filed as exhibits to the registration
statement of which this prospectus is a part. The forms of supplemental
indentures to the AT&T Indenture may be modified or supplemented before their
execution in a manner that would not require us to obtain additional consents
under the terms of the AT&T Indenture. The description is also qualified in its
entirety by reference to the full provisions of the AT&T Indenture, which is
filed as an exhibit to the registration statement of which this prospectus is a
part, and copies of which the information agent can provide to you. Holders of
Broadband Eligible Notes or AT&T Eligible Notes should carefully review the note
amendment before consenting to the note amendment by tendering and not
withdrawing their notes in the exchange offer.
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CONDITIONS TO THE NOTE AMENDMENT
The adoption of the note amendment is conditioned on
- our receiving the requisite consents to the note amendment and AT&T
having so certified to the indenture trustee; see "-- Requisite Consents;
Outstanding Notes;" and
- the AT&T Comcast transaction not having been terminated.
If these conditions are satisfied, AT&T and Broadband expect to execute and
deliver to the indenture trustee the supplemental indentures with respect to
each consenting series of notes as soon as the requisite consents are obtained.
The supplemental indentures will be effective as soon as they are executed.
REQUISITE CONSENTS; OUTSTANDING NOTES
In order for the note amendment to be effective as to a series of Broadband
Eligible Notes or AT&T Eligible Notes, registered holders of more than 50% in
aggregate principal amount of the notes of that series outstanding at the
expiration of the exchange offer must have been accepted in the exchange offer
and consented to the note amendment as of the expiration of the exchange offer
with respect to that series. For these purposes, all of the Series A Medium-Term
Notes outstanding are treated as part of a single series. The following table
sets forth the principal amount outstanding of each series of Broadband Eligible
Notes and AT&T Eligible Notes as of the date of this prospectus.
PRINCIPAL AMOUNT
BROADBAND ELIGIBLE NOTES OUTSTANDING
------------------------ ----------------
7.00% Notes Due May 15, 2005................................ $ 300,000,000
7.50% Notes Due 2006........................................ 500,000,000
7.75% Notes Due March 1, 2007............................... 500,000,000
6.00% Notes Due 2009........................................ 3,000,000,000
8.125% Debentures Due January 15, 2022...................... 500,000,000
8.125% Debentures Due July 15, 2024......................... 500,000,000
8.35% Debentures Due 2025................................... 300,000,000
8.625% Debentures Due December 1, 2031...................... 676,000,000
AT&T ELIGIBLE NOTES
-------------------
5.625% Notes Due 2004....................................... 2,000,000,000
6.75% Notes Due 2004........................................ 400,000,000
7.75% Medium-Term Notes, Series A Due May 15, 2025.......... 25,000,000
8.00% Medium-Term Notes, Series A Due May 15, 2025.......... 50,000,000
6.50% Notes Due 2029........................................ 3,000,000,000
FRN Medium-Term Notes, Series A Due 2054.................... 10,563,000
---------------
TOTAL............................................. $11,761,563,000
===============
The failure of a holder of Broadband Eligible Notes or AT&T Eligible Notes
to have those notes accepted in the exchange offer, including any failures
resulting from failures by brokers to properly tender or to receive instructions
from their clients as to whether to tender Broadband Eligible Notes or AT&T
Eligible Notes in the exchange offer, will have the same effect as if that
holder had not granted a consent to the note amendment.
To our knowledge, no director or executive officer of AT&T, Broadband or
any of their affiliates held any Broadband Eligible Notes or AT&T Eligible Notes
as of the close of business on September 25, 2002.
NO CONSENT FEE
Holders of Broadband Eligible Notes or AT&T Eligible Notes, to the extent
their notes are accepted for exchange, must consent to the note amendment and
will not receive any consent payment. Notes of any series not accepted for
exchange will not receive any payment but will be bound by the note
93
amendment provided that more than 50% of the notes of that series have consented
and been accepted for exchange.
EXPIRATION DATE; EXTENSION OF THE EXCHANGE OFFER; AMENDMENT; TERMINATION
If, at the expiration of the exchange offer, we have obtained the requisite
consents, AT&T will so certify to the indenture trustee, and the consents will
be effective and irrevocable. If we do not receive the requisite consents before
the expiration of the exchange offer, we reserve the right to extend the
exchange offer as to any one or more series of Broadband Eligible Notes or AT&T
Eligible Notes on one or more occasions. If we extend the exchange offer, we
will give oral or written notice of this extension to the indenture trustee and
make a public announcement of this extension by no later than 9:00 a.m. (Eastern
time) on the next business day after the scheduled expiration date of the
exchange offer.
AT&T reserves the right, exercisable in its sole discretion, to terminate
the exchange offer and not adopt the note amendment, whether or not we have
received the requisite consents, by giving oral or written notice of termination
to the indenture trustee and making a public announcement of termination. AT&T
also reserves the right, subject to applicable laws, to amend the exchange offer
in any respect by giving oral or written notice of the amendment to the
indenture trustee and making a public announcement of the note amendment.
If we make any public announcement in connection with the exchange offer,
we will disseminate it to AT&T noteholders in a manner reasonably designed to
inform noteholders of the announced change on a timely basis. Without limiting
the manner in which we may choose to make a public announcement, except as may
be required by applicable law, we will have no obligation to publish, advertise
or otherwise communicate any public announcement other than by issuing a release
to the Dow Jones News Service. Notices in Luxembourg with respect to these
matters will be published in the Luxemburger Wort.
CONSEQUENCES TO NON-CONSENTING HOLDERS; DISSENTERS' RIGHTS
If we obtain the requisite consents and execute the note amendment with
respect to a series of Broadband Eligible Notes or AT&T Eligible Notes, it will
be binding on each holder of notes of that series, regardless of whether or not
that holder consented. You will not be entitled to any appraisal or dissenters'
rights if the note amendment becomes effective without your consent.
CONSENT PROCEDURES
In order to consent to the note amendment, a holder of Broadband Eligible
Notes or of AT&T Eligible Notes must validly tender and not withdraw its notes
in the exchange offer. The letter of transmittal will include the holder's
consent with respect to all of that holder's notes accepted in the exchange
offer. See "Description of the Exchange Offer -- Required Consent."
REVOCATION OF CONSENTS
If you consent by validly tendering AT&T Eligible Notes or Broadband
Eligible Notes, you may automatically revoke your consent by withdrawing those
notes from the exchange offer prior to their acceptance. See "Description of the
Exchange Offer -- Withdrawal Rights."
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DESCRIPTION OF THE BROADBAND EXCHANGE NOTES
The Broadband Exchange Notes initially will be AT&T's and Broadband's
direct unsecured and unsubordinated obligations; however, upon completion of the
AT&T Comcast transaction, the Broadband Exchange Notes will be mandatorily
exchanged for New Broadband Notes, which will be primary obligations only of
Broadband, fully and unconditionally guaranteed by AT&T Comcast, Comcast Cable,
MediaOne and TCI, referred to as the cable guarantors. See "-- Mandatory
Exchange Upon Completion of the AT&T Comcast Transaction" below. If the AT&T
Comcast transaction is terminated, the Broadband Exchange Notes will not be
exchanged for New Broadband Notes, will become obligations only of AT&T with
Broadband released as an obligor and will not be entitled to the benefits of the
cable guarantees. The Broadband Eligible Notes were issued under the AT&T
Indenture. The Broadband Exchange Notes will be issued under the AT&T Indenture,
as amended by the note amendment and a supplemental indenture that will have the
purpose of, among other things, making Broadband a co-obligor on the Broadband
Exchange Notes, each as described below in this section and under "Description
of the Note Amendment." We refer to this supplemental indenture as the
"Broadband Exchange Supplemental Indenture." The terms of the Broadband Exchange
Notes include those stated in the AT&T Indenture and the note amendment, those
stated in the Broadband Exchange Supplemental Indenture and those made part of
the AT&T Indenture by reference to the Trust Indenture Act of 1939.
The following is a summary of the material provisions of the AT&T Indenture
as amended by the note amendment and the Broadband Exchange Supplemental
Indenture. Because this is a summary, it may not contain all the information
that is important to you. You should read the AT&T Indenture, the note amendment
and the Broadband Exchange Supplemental Indenture, which have been filed as
exhibits to the registration statement of which this prospectus is a part, in
their entirety.
The terms of the Broadband Exchange Notes are substantially identical to
the terms of the Broadband Eligible Notes, except that:
- the Broadband Exchange Notes will be:
o co-obligations of AT&T and Broadband unless the AT&T Comcast transaction
is terminated; and
o mandatorily exchanged upon completion of the AT&T Comcast transaction
for New Broadband Notes, which will be primary obligations only of
Broadband, fully and unconditionally guaranteed by the cable guarantors;
- the merger covenant applicable to the Broadband Exchange Notes will be
the AT&T Indenture merger covenant, as amended by the note amendment,
which is described in greater detail under "-- Certain
Covenants -- Consolidation, Merger or Sale;" and
- AT&T has applied to list the Broadband Exchange Notes on the New York
Stock Exchange; if the AT&T Comcast transaction is terminated, AT&T will
use its commercially reasonable efforts to list the 6.00% Broadband
Exchange Notes Due 2009 additionally on the Luxembourg Stock Exchange.
For information regarding the New Broadband Notes and the cable guarantees
and for a summary of the material differences between the New Broadband Notes
and the Broadband Exchange Notes, see "Description of the New Broadband Notes
and the Cable Guarantees" and "Comparison of the New Broadband Notes and the
Broadband Exchange Notes."
BASIC TERMS OF THE BROADBAND EXCHANGE NOTES
The Broadband Exchange Notes:
- will be co-obligations of AT&T and Broadband (unless the AT&T Comcast
transaction is terminated, in which case Broadband's obligations under
the Broadband Exchange Notes will be automatically fully and completely
discharged and released) ranking equally with all of AT&T's and
Broadband's other unsecured and unsubordinated debt;
95
- will be mandatorily exchanged upon completion of the AT&T Comcast
transaction for the applicable series of New Broadband Notes, which will
be primary obligations only of Broadband, fully and unconditionally
guaranteed by the cable guarantors;
- in the event that the AT&T Comcast transaction is terminated, will cease
to be exchangeable for New Broadband Notes;
- will be issued in an aggregate principal amount not exceeding
$4,079,400,000, comprised as follows:
o up to $195,000,000 in principal amount of 7.00% Broadband Exchange Notes
Due May 15, 2005, with interest payable semiannually on each May 15 and
November 15, beginning the first May 15 or November 15 occurring after
the initial issuance of the 7.00% Broadband Exchange Notes Due May 15,
2005, to holders of record on the preceding May 1 and November 1;
o up to $325,000,000 in principal amount of 7.50% Broadband Exchange Notes
Due June 1, 2006, with interest payable semiannually on each June 1 and
December 1, beginning the first June 1 or December 1 occurring after the
initial issuance of the 7.50% Broadband Exchange Notes Due June 1, 2006,
to holders of record on the preceding May 15 and November 15;
o up to $325,000,000 in principal amount of 7.75% Broadband Exchange Notes
Due March 1, 2007, with interest payable semiannually on each March 1
and September 1, beginning the first March 1 or September 1 occurring
after the initial issuance of the 7.75% Broadband Exchange Notes Due
March 1, 2007, to holders of record on the preceding February 15 and
August 15;
o up to $1,950,000,000 in principal amount of 6.00% Broadband Exchange
Notes Due March 15, 2009, with interest payable semiannually on each
March 15 and September 15, beginning the first March 15 or September 15
occurring after the initial issuance of the 6.00% Broadband Exchange
Notes Due March 15, 2009, to holders of record on the preceding March 1
and September 1;
o up to $325,000,000 in principal amount of 8.125% Broadband Exchange
Notes Due January 15, 2022, with interest payable semiannually on each
January 15 and July 15, beginning the first January 15 or July 15
occurring after the initial issuance of the 8.125% Broadband Exchange
Notes Due January 15, 2022, to holders of record on the preceding
January 1 and July 1;
o up to $325,000,000 in principal amount of 8.125% Broadband Exchange
Notes Due July 15, 2024, with interest payable semiannually on each
January 15 and July 15, beginning the first January 15 or July 15
occurring after the initial issuance of the 8.125% Broadband Exchange
Notes Due July 15, 2024, to holders of record on the preceding January 1
and July 1;
o up to $195,000,000 in principal amount of 8.35% Broadband Exchange Notes
Due January 15, 2025, with interest payable semiannually on each January
15 and July 15, beginning the first January 15 or July 15 occurring
after the initial issuance of the 8.35% Broadband Exchange Notes Due
January 15, 2025, to holders of record on the preceding January 1 and
July 1; and
o up to $439,400,000 in principal amount of 8.625% Broadband Exchange
Notes Due December 1, 2031, with interest payable semiannually on each
June 1 and December 1, beginning the first June 1 or December 1
occurring after the initial issuance of the 8.625% Broadband Exchange
Notes Due December 1, 2031, to holders of record on the preceding May 15
and November 15;
- are issuable in fully registered form, in denominations of $1,000 and
multiples thereof.
MANDATORY EXCHANGE UPON COMPLETION OF THE AT&T COMCAST TRANSACTION
Upon completion of the AT&T Comcast transaction, the Broadband Exchange
Notes will be automatically and mandatorily exchanged for the applicable series
of New Broadband Notes without any action on the part of the holders of the
Broadband Exchange Notes. You will find a summary of the material terms and
conditions of the New Broadband Notes, the New Broadband Indenture pursuant to
which the New Broadband Notes will be issued and the cable guarantees in
"Description of the New Broadband Notes and the Cable Guarantees" and a summary
of the material differences between the New
96
Broadband Notes and the Broadband Exchange Notes in "Comparison of the New
Broadband Notes and the Broadband Exchange Notes." New global notes (or
certificates, as the case may be) representing the New Broadband Notes will be
delivered to holders of the Broadband Exchange Notes, which will become void.
Upon completion of the AT&T Comcast transaction, each $1,000 principal
amount of Broadband Exchange Notes will be mandatorily exchanged for that
principal amount times the relevant exchange ratio announced by press release
two business days prior to the expiration of the exchange offer of New Broadband
Notes, Broadband will be released and discharged from all obligations under the
AT&T Indenture and holders of the Broadband Exchange Notes will become holders
of New Broadband Notes, entitled to look only to Broadband and the cable
guarantors under the cable guarantees for payment of principal, premium, if any,
and interest on the New Broadband Notes.
INTEREST PAYMENTS
Interest accrued and unpaid on any Broadband Eligible Notes accepted in an
exchange offer (a) will be paid along with the first payment of interest on the
relevant series of Broadband Exchange Notes or (b) if the mandatory exchange of
the Broadband Exchange Notes occurs prior to that first payment of interest,
will be paid at the time of the mandatory exchange.
Interest accrued and unpaid on any series of Broadband Exchange Notes will
be paid at the time of mandatory exchange.
Interest for the Broadband Exchange Notes will be computed on the basis of
a 360-day year consisting of twelve 30-day months. Interest on the notes accrues
from the date of original issuance, which will be on the date this exchange
offer is completed with respect to each series of Broadband Exchange Notes, or
from the next recent interest payment date to which interest has been paid as
duly provided for, and is payable semiannually on interest payment dates
described of each year.
For more information on payment and transfer procedures for the Broadband
Exchange Notes, see "-- Book-Entry System," "-- Same-Day Payment" and
"-- Additional Terms Pertaining Only to the 6.00% Broadband Exchange Notes Due
March 15, 2009 -- Payment of Additional Amounts."
ADDITIONAL TERMS PERTAINING ONLY TO THE 6.00% BROADBAND EXCHANGE NOTES DUE MARCH
15, 2009
PAYMENT OF ADDITIONAL AMOUNTS
AT&T will, subject to the exceptions and limitations set forth below, pay
as additional interest on the 6.00% Broadband Exchange Notes Due March 15, 2009
such additional amounts as are necessary so that the net payment by AT&T or a
paying agent of the principal of and interest on the 6.00% Broadband Exchange
Notes Due March 15, 2009 to a person that is not a United States Holder (as
defined below), after deduction for any present or future tax, assessment or
governmental charge of the United States or a political subdivision or taxing
authority thereof or therein, imposed by withholding with respect to the
payment, will not be less than the amount that would have been payable in
respect of the 6.00% Broadband Exchange Notes Due March 15, 2009 had no such
withholding or deduction been required.
As used herein, a "United States Holder" of a note means a beneficial owner
that is for United States federal income tax purposes: (a) a citizen or resident
of the United States, (b) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, (c) an estate or trust the income of which is subject to
United States federal income taxation regardless of its source or (d) any other
person whose income from a note is effectively connected with the conduct of a
United States trade or business.
AT&T's obligation to pay additional amounts will not apply:
1. to a tax, assessment or governmental charge that is imposed or
withheld solely because the holder, or a fiduciary, settlor, beneficiary,
member or shareholder of the holder if the holder is an
97
estate, trust, partnership or corporation, or a person holding a power over
an estate or trust administered by a fiduciary holder:
(a) is or was present or engaged in trade or business in the
United States or has or had a permanent establishment in the United
States;
(b) has a current or former relationship with the United States,
including a relationship as a citizen or resident thereof;
(c) is or has been a foreign or domestic personal holding company,
a passive foreign investment company or a controlled foreign corporation
with respect to the United States or a corporation that has accumulated
earnings to avoid United States federal income tax; or
(d) is or was a "10-percent shareholder" of AT&T as defined in
section 871(h)(3) of the United States Internal Revenue Code or any
successor provision;
2. to any holder that is not the sole beneficial owner of the 6.00%
Broadband Exchange Notes Due March 15, 2009, or a portion thereof, or that
is a fiduciary or partnership, but only to the extent that the beneficial
owner, a beneficiary or settlor with respect to the fiduciary, or a member
of the partnership would not have been entitled to the payment of an
additional amount had such beneficial owner, beneficiary, settlor or member
received directly its beneficial or distributive share of the payment;
3. to a tax, assessment or governmental charge that is imposed or
withheld solely because the holder or any other person failed to comply
with certification, identification or information reporting requirements
concerning the nationality, residence, identity or connection with the
United States of the holder or beneficial owner of the 6.00% Broadband
Exchange Notes Due March 15, 2009, if compliance is required by statute, by
regulation of the United States Treasury Department or by an applicable
income tax treaty to which the United States is a party as a precondition
to exemption from such tax, assessment or other governmental charge;
4. to a tax, assessment or governmental charge that is imposed other
than by withholding by AT&T or a paying agent from the payment;
5. to a tax, assessment or governmental charge that is imposed or
withheld solely because of a change in law, regulation, or administrative
or judicial interpretation that becomes effective more than 15 days after
the payment becomes due or is duly provided for, whichever occurs later;
6. to an estate, inheritance, gift, sales, excise, transfer, wealth
or personal property tax or a similar tax, assessment or governmental
charge;
7. to any tax, assessment or other governmental charge any paying
agent must withhold from any payment of principal of or interest on any
6.00% Broadband Exchange Notes Due March 15, 2009, if such payment can be
made without such withholding by any other paying agent; or
8. in the case of any combination of the above items.
The 6.00% Broadband Exchange Notes Due March 15, 2009 are subject in all
cases to any tax, fiscal or other law or regulation or administrative or
judicial interpretation applicable. Except as specifically provided under this
heading "-- Payment of Additional Amounts" and below under "-- Redemption Upon a
Tax Event," AT&T does not have to make any payment with respect to any tax,
assessment or governmental charge imposed by any government or a political
subdivision or taxing authority.
REDEMPTION UPON A TAX EVENT
If (a) AT&T becomes or will become obligated to pay additional amounts as
described above under "-- Payment of Additional Amounts" as a result of any
change in, or amendment to, the laws (or any regulations or rulings promulgated
thereunder) of the United States (or any political subdivision or taxing
authority thereof or therein), or any change in, or amendments to, any official
position regarding the
98
application or interpretation of such laws, regulations or rulings, which change
or amendment is announced or becomes effective on or after March 23, 1999, or
(b) a taxing authority of the United States takes an action on or after March
23, 1999, whether or not with respect to AT&T or any of its affiliates, that
results in a substantial probability that AT&T will or may be required to pay
such additional amounts, then AT&T may, at its option, redeem, as a whole, but
not in part, the 6.00% Broadband Exchange Notes Due March 15, 2009 on any
interest payment date on not less than 30 nor more than 60 calendar days' prior
notice, at a redemption price equal to 100% of their principal amount, together
with interest accrued thereon to the date fixed for redemption, provided that
AT&T determines, in its business judgment, that the obligation to pay such
additional amounts cannot be avoided by the use of reasonable measures available
to AT&T, not including substitution of the obligor under the 6.00% Broadband
Exchange Notes Due March 15, 2009. No redemption pursuant to (b) above may be
made unless AT&T has received an opinion of independent counsel to the effect
that an act taken by a taxing authority of the United States results in a
substantial probability that AT&T will or may be required to pay the additional
amounts described herein under the heading "-- Payment of Additional Amounts"
and delivered to the trustee a certificate, signed by a duly authorized officer
stating, that based on such opinion AT&T is entitled to redeem the notes
pursuant to their terms.
OPTIONAL REDEMPTION
AT&T will have the right, at its option, to redeem those Broadband Exchange
Notes indicated below at any time or from time to time during specified periods,
with at least 30 days, but not more than 60 days, prior notice mailed to the
registered address of each holder of such series of notes.
On and after the redemption date, interest will cease to accrue on the
Broadband Exchange Notes or any portion thereof that is called for redemption
(unless AT&T defaults in the payment of the redemption price and accrued and
unpaid interest). On or before the redemption date, AT&T will deposit with a
paying agent (or the trustee) money sufficient to pay the redemption price of
and accrued interest on the notes to be redeemed on such date. If less than all
of the Broadband Exchange Notes are to be redeemed, the notes to be redeemed
shall be selected by the trustee by such method as the trustee shall deem fair
and appropriate.
The optional redemption terms for each series of notes are described below.
7.00% BROADBAND EXCHANGE NOTES DUE MAY 15, 2005
The 7.00% Broadband Exchange Notes Due May 15, 2005 will not be subject to
optional redemption by AT&T.
7.50% BROADBAND EXCHANGE NOTES DUE JUNE 1, 2006
The 7.50% Broadband Exchange Notes Due June 1, 2006 will not be subject to
optional redemption by AT&T.
7.75% BROADBAND EXCHANGE NOTES DUE MARCH 1, 2007
The 7.75% Broadband Exchange Notes Due March 1, 2007 will not be subject to
optional redemption by AT&T.
6.00% BROADBAND EXCHANGE NOTES DUE MARCH 15, 2009
The 6.00% Broadband Exchange Notes Due March 15, 2009 will be redeemable at
AT&T's option at any time or from time to time, in whole or in part. If you hold
any of these notes and AT&T decides to redeem them, then AT&T will pay you the
greater of:
(1) 100% of the principal amount of the 6.00% Broadband Exchange
Notes Due March 15, 2009 to be redeemed and
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(2) the sum of the present values of the Remaining Scheduled Payments
(as defined below) discounted, on a semiannual basis (assuming a 360-day
year consisting of twelve 30-day months), at a rate equal to the sum of the
Treasury Rate (as defined below under "-- Certain Definitions") and 15
basis points.
In the case of each of clause (1) and (2), accrued interest will be payable
to the redemption date.
Please see "-- Additional Terms Pertaining Only to the 6.00% Broadband
Exchange Notes Due March 15, 2009" for information regarding AT&T's option to
redeem the 6.00% Broadband Exchange Notes Due March 15, 2009 upon the occurrence
of certain tax events.
8.125% BROADBAND EXCHANGE NOTES DUE JANUARY 15, 2022
The 8.125% Broadband Exchange Notes Due January 15, 2022 will be redeemable
at AT&T's option at any time or from time to time, as a whole or in part, at the
following prices (expressed as percentages of the principal amount), together
with accrued interest to the date fixed for redemption.
If redeemed during the 12-month period beginning January 15:
YEAR PERCENTAGE
---- ----------
2002........................................................ 103.21%
2003........................................................ 102.89
2004........................................................ 102.57
2005........................................................ 102.25
2006........................................................ 101.93
2007........................................................ 101.60
2008........................................................ 101.28
2009........................................................ 100.96
2010........................................................ 100.64
2011........................................................ 100.32
and thereafter at 100%.
8.125% BROADBAND EXCHANGE NOTES DUE JULY 15, 2024
The 8.125% Broadband Exchange Notes Due July 15, 2024 will be redeemable at
AT&T's option at any time or from time to time, as a whole or in part, at the
following prices (expressed as percentages of the principal amount), together
with accrued interest to the date fixed for redemption.
If redeemed during the 12-month period beginning July 15:
YEAR PERCENTAGE
---- ----------
2002........................................................ 103.971%
2003........................................................ 103.640
2004........................................................ 103.309
2005........................................................ 102.978
2006........................................................ 102.647
2007........................................................ 102.316
2008........................................................ 101.985
2009........................................................ 101.655
2010........................................................ 101.324
2011........................................................ 100.993
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YEAR PERCENTAGE
---- ----------
2012........................................................ 100.662
2013........................................................ 100.331
and thereafter at 100%.
8.35% BROADBAND EXCHANGE NOTES DUE JANUARY 15, 2025
The 8.35% Broadband Exchange Notes Due January 15, 2025 will not be
redeemable prior to January 15, 2005. On or after such date, the 8.35% Broadband
Exchange Notes Due January 15, 2025 will be redeemable at AT&T's option at any
time or from time to time, as a whole or in part, at the following prices
(expressed as percentages of the principal amount), together with accrued
interest to the date fixed for redemption.
If redeemed during the 12-month period beginning January 15:
YEAR PERCENTAGE
---- ----------
2005........................................................ 103.288%
2006........................................................ 102.959
2007........................................................ 102.630
2008........................................................ 102.302
2009........................................................ 101.973
2010........................................................ 101.644
2011........................................................ 101.315
2012........................................................ 100.986
2013........................................................ 100.658
2014........................................................ 100.329
and thereafter at 100%.
8.625% BROADBAND EXCHANGE NOTES DUE DECEMBER 1, 2031
The 8.625% Broadband Exchange Notes Due December 1, 2031 will be redeemable
at AT&T's option at any time, as a whole or in part, at the following prices
(expressed as percentages of the principal amount), together with accrued
interest to the date fixed for redemption:
If redeemed during the 12-month period beginning December 1:
YEAR PERCENTAGE
---- ----------
2001........................................................ 105.56%
2002........................................................ 105.28
2003........................................................ 105.00
2004........................................................ 104.73
2005........................................................ 104.45
2006........................................................ 104.17
2007........................................................ 103.89
2008........................................................ 103.61
2009........................................................ 103.34
2010........................................................ 103.06
2011........................................................ 102.78
2012........................................................ 102.50
2013........................................................ 102.22
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YEAR PERCENTAGE
---- ----------
2014........................................................ 101.95
2015........................................................ 101.67
2016........................................................ 101.39
2017........................................................ 101.11
2018........................................................ 100.83
2019........................................................ 100.56
2020........................................................ 100.28
and thereafter at 100%.
NO MANDATORY REDEMPTION OR SINKING FUND
There will be no mandatory redemption prior to maturity or sinking fund
payments for the Broadband Exchange Notes.
ADDITIONAL DEBT
The AT&T Indenture does not limit the amount of debt that AT&T may issue
under the AT&T Indenture or otherwise.
CERTAIN COVENANTS
AT&T has agreed to some restrictions on its activities for the benefit of
holders of all series of debt securities issued under the AT&T Indenture. The
restrictive covenants summarized below will apply, unless the covenants are
waived or amended, so long as any of the debt securities are outstanding. Please
see "-- Certain Definitions" for the meaning of the capitalized terms used in
describing the covenants.
LIMITATION ON SECURED INDEBTEDNESS
AT&T will not, and AT&T will not permit any of its Restricted Subsidiaries
to, create, assume, incur or guarantee any Secured Indebtedness unless AT&T
secures the debt securities issued under the AT&T Indenture to the same extent
as such Secured Indebtedness. However, AT&T may incur Secured Indebtedness
without securing these debt securities if, immediately after incurring the
Secured Indebtedness, the aggregate amount of all Secured Indebtedness and the
discounted present value of all net rentals payable under leases entered into in
connection with sale and leaseback transactions would not exceed 10% of
Consolidated Net Tangible Assets. The aggregate amount of all Secured
Indebtedness in the preceding sentence excludes Secured Indebtedness which is
secured to the same extent as these debt securities and Secured Indebtedness
that is being repaid concurrently with the issuance of new Secured Indebtedness.
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS
AT&T will not, and AT&T will not permit any of its Restricted Subsidiaries
to, enter into any lease longer than three years, excluding leases of newly
acquired, improved or constructed property, covering any Principal Property of
AT&T or any Restricted Subsidiary that is sold to any other person in connection
with such lease, unless either
- immediately thereafter, the sum of
o the discounted present value of all net rentals payable under all such
leases entered into after April 1, 1986 (except for any lease entered
into by a Restricted Subsidiary before it became a Restricted
Subsidiary) and
o the aggregate amount of all Secured Indebtedness, excluding Secured
Indebtedness which is secured to the same extent as these debt
securities
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does not exceed 10% of Consolidated Net Tangible Assets, or
- an amount equal to the greater of
o the net proceeds to AT&T or a Restricted Subsidiary from such sale and
o the discounted present value of all net rentals payable thereunder
is used within 180 days to retire long-term debt of AT&T or a Restricted
Subsidiary. However, debt which is subordinate to these debt securities or
which is owed to AT&T or a Restricted Subsidiary may not be retired.
CONSOLIDATION, MERGER OR SALE
AT&T has agreed not to consolidate with or merge into any other corporation
or convey or transfer substantially all of its properties and assets to any
person except as set forth below, unless
- that person is authorized to acquire and operate its property and
- the successor corporation expressly assumes by a supplemental indenture
the due and punctual payment of the principal of and any premium or any
interest on all the debt securities and the performance of every covenant
in the AT&T Indenture that AT&T would otherwise have to perform.
In addition, the merger covenant will be the merger covenant set forth in
the AT&T Indenture as amended by the note amendment, and will provide that the
AT&T Comcast transaction, including all transactions completed as steps in the
AT&T Comcast transaction, (1) will not result in a consolidation, merger, sale,
conveyance or other transfer of property of AT&T (including stock of
subsidiaries) as an entirety or substantially as an entirety for purposes of the
AT&T Indenture; and (2) will not violate the successor clause of the AT&T
Indenture or any other provision of the AT&T Indenture or any security issued
under the AT&T Indenture, regardless of whether any person assumes any of the
indebtedness outstanding under the AT&T Indenture or any other obligation under
the AT&T Indenture or any security issued under the AT&T Indenture.
MODIFICATION OF THE AT&T INDENTURE
AT&T's rights and obligations and the rights of the holders under the AT&T
Indenture may be modified if the holders of a majority in aggregate principal
amount of the outstanding debt securities of each series affected by the
modification consent to it. No modification of the principal or interest payment
terms, and no modification reducing the percentage required for modifications,
is effective against any holder without its consent.
EVENTS OF DEFAULT
The AT&T Indenture specifies Events of Default for the debt securities
issued under the AT&T Indenture. An Event of Default with respect to a series of
debt securities will occur if:
- AT&T fails to pay the principal or any premium on any debt security of
that series when due;
- AT&T fails to pay interest when due on any debt security of that series
for 90 days;
- AT&T fails to perform any other covenant in the AT&T Indenture and this
failure continues for 90 days after AT&T receives written notice of it
from the trustee or from the holders of 25% in principal amount of the
outstanding debt securities of that series; or
- AT&T or a court take certain actions relating to the bankruptcy,
insolvency or reorganization of AT&T for the benefit of its creditors.
103
A default under AT&T's other indebtedness is not a default under the AT&T
Indenture, and a default under one series of debt securities under the AT&T
Indenture is not necessarily a default under another series.
The trustee may withhold notice to the holders of debt securities of any
default, except in the payment of principal or interest, if it considers such
withholding of notice to be in the best interests of the holders. Default means
any event which is an Event of Default described above or would be an Event of
Default but for the giving of notice or the passage of time.
If an Event of Default for any series of debt securities occurs and
continues, the trustee or the holders of at least 25% in aggregate principal
amount of the debt securities of such series may require AT&T to repay
immediately the entire principal and accrued but unpaid interest on the debt
securities of such series.
The holders of a majority of the aggregate principal amount of the debt
securities of the affected series can rescind this accelerated payment
requirement or waive any past default or Event of Default or allow AT&T to not
comply with any provision of the AT&T Indenture. However, among other things,
they cannot waive a default in payment of principal of, premium, if any, or
interest on, any of the debt securities of such series.
Other than its duties in case of a default, the trustee will not be
obligated to exercise any of its rights or powers under the AT&T Indenture at
the request, order or direction of any holders, unless the holders offer the
trustee reasonable indemnity. If they provide reasonable indemnity, the holders
of a majority in principal amount of any series of debt securities, may, subject
to certain limitations, direct the time, method and place of conducting any
proceeding or any remedy available to the trustee, or exercising any power
conferred upon the trustee, for any series of debt securities.
AT&T is not required to provide the trustee with any certificate or other
document saying that AT&T is in compliance with the AT&T Indenture or that there
are no defaults.
DISCHARGE AND DEFEASANCE
The term defeasance means discharge of AT&T from some or all of its
obligations under the AT&T Indenture. If AT&T deposits with the trustee
sufficient cash or government securities to pay the principal, interest, any
premium and any other sums due to the stated maturity date or a redemption date
of the debt securities of a particular series, then at AT&T's option:
- AT&T will be discharged from its obligations with respect to the debt
securities of such series; or
- AT&T will no longer be under any obligation to comply with certain
restrictive covenants under the AT&T Indenture, and certain Events of
Default will no longer apply to AT&T.
If this happens, the holders of the debt securities of the affected series
will not be entitled to the benefits of the AT&T Indenture except for
registration of transfer and exchange of the debt securities and replacement of
lost, stolen or mutilated debt securities. Such holders may look only to such
deposited funds or obligations for payment.
AT&T must deliver to the trustee an opinion of counsel to the effect that
the deposit and related defeasance would not cause the holders of the debt
securities to recognize income, gain or loss for Federal income tax purposes.
AT&T must also deliver a ruling to such effect received from or published by the
United States Internal Revenue Service if AT&T is discharged from its
obligations with respect to the debt securities.
NO PERSONAL LIABILITY OF STOCKHOLDERS, OFFICERS, DIRECTORS OR EMPLOYEES
No stockholder, officer, director or employee of AT&T or Broadband shall
have any liability under the Broadband Exchange Notes. Each holder, by accepting
the Broadband Exchange Notes, waives and releases all such liability.
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CONCERNING THE TRUSTEE
The AT&T Indenture provides that, except during the continuance of a
default, the trustee will not be liable, except for the performance of such
duties as are specifically set forth in the AT&T Indenture. If an event of
default occurs and is continuing, the trustee will exercise such rights and
powers vested in it under the AT&T Indenture and will use the same degree of
care and skill in its exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs. AT&T and Broadband
may have normal banking relationships with the trustee under the AT&T Indenture
in the ordinary course of business.
GOVERNING LAW
The AT&T Indenture and the debt securities issued under the AT&T Indenture
will be governed by, and construed in accordance with, the internal laws of the
State of New York.
BOOK-ENTRY SYSTEM
AT&T and Broadband will initially issue the Broadband Exchange Notes in the
form of one or more global notes (the "Global Notes"). The Global Notes will be
deposited with, or on behalf of, The Depository Trust Company ("DTC") and
registered in the name of DTC or its nominee. Except as set forth below, the
Global Notes may be transferred, in whole and not in part, only to DTC or
another nominee of DTC. A holder may hold beneficial interests in the Global
Notes directly through DTC if such holder has an account with DTC or indirectly
through organizations which have accounts with DTC, including Euroclear and
Clearstream.
For more information on DTC and clearance and settlement of the securities
through DTC, please see "Description of the New Broadband Notes and the Cable
Guarantees -- Book-Entry System -- DTC."
CERTIFICATED NOTES
If DTC is at any time unwilling or unable to continue as depositary and a
successor depositary is not appointed by AT&T within 90 days, AT&T will issue
Broadband Exchange Notes in definitive form in exchange for the Global Notes. In
addition, AT&T may at any time and in its sole discretion determine not to have
its debt securities issued under the AT&T Indenture represented by the Global
Notes and, in such event, will issue the debt securities in definitive form in
exchange for the Global Notes. In any such instance, an owner of a beneficial
interest in the Global Notes will be entitled to physical delivery in definitive
form of AT&T's debt securities represented by the Global Notes equal in
principal amount to such beneficial interest and to have such debt securities
registered in its name. AT&T's debt securities so issued in definitive form will
be issued as registered debt securities in denominations of $1,000 and multiples
thereof, unless otherwise specified by AT&T. AT&T's definitive debt securities
can be transferred by presentation for registration to the registrar at its New
York or Luxembourg offices and must be duly endorsed by the holder or his
attorney duly authorized in writing, or accompanied by a written instrument or
instruments of transfer in form satisfactory to AT&T or the trustee duly
executed by the holder or his attorney duly authorized in writing. AT&T may
require payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection with any exchange or registration of
transfer of definitive AT&T debt securities.
SAME-DAY PAYMENT
The AT&T Indenture requires payments to be made in respect of the
applicable Broadband Exchange Notes represented by the Global Notes (including
principal, premium and interest) by wire transfer of immediately available funds
to the accounts specified by the holder thereof or, if no such account is
specified, by mailing a check to such holder's registered address.
Payments (including principal, premium and interest) and transfers with
respect to Broadband Exchange Notes in certificated form may be executed at the
office or agency maintained for such purpose
105
within the City and State of New York (initially the office of the paying agent
maintained for such purpose) or, at AT&T's option, by check mailed to the
holders thereof at the respective addresses set forth in the register of holders
of the applicable Broadband Exchange Notes, provided that all payments
(including principal, premium and interest) on Broadband Exchange Notes in
certificated form, for which the holders thereof have given wire transfer
instructions, will be required to be made by wire transfer of immediately
available funds to the accounts specified by the holders thereof. No service
charge will be made for any registration of transfer, but payment of a sum
sufficient to cover any tax or governmental charge payable in connection with
that registration may be required.
CERTAIN DEFINITIONS
The following definitions have been used to describe the restrictive
covenants that are contained in the AT&T Indenture and described above.
"PRINCIPAL PROPERTY" means land, land improvements, buildings and
associated factory, laboratory, office and switching equipment (excluding all
products marketed by AT&T or any of its subsidiaries) constituting a
manufacturing, development, warehouse, service, office or operating facility
owned by or leased to AT&T or a Restricted Subsidiary, located within the United
States and having an acquisition cost plus capitalized improvements in excess of
0.25 per cent of Consolidated Net Tangible Assets of the date of such
determination, other than any such property financed through the issuance of
tax-exempt governmental obligations, or which the Board of Directors determines
is not of material importance to AT&T and its Restricted Subsidiaries taken as a
whole, or in which the interest of AT&T and all its subsidiaries does not exceed
50%.
"CONSOLIDATED NET TANGIBLE ASSETS" means the total assets of AT&T and its
subsidiaries, less current liabilities and certain intangible assets (other than
product development costs).
"RESTRICTED SUBSIDIARY" means any subsidiary of AT&T which has
substantially all its property in the United States, which owns or is a lessee
of any Principal Property and in which the investment of AT&T and all its
subsidiaries exceeds 0.25 per cent of Consolidated Net Tangible Assets as of the
date of such determination, other than certain financing subsidiaries and
subsidiaries formed or acquired after April 1, 1986 for the purpose of acquiring
the business or assets of another person and that do not acquire all or any
substantial part of the business or assets of AT&T or any Restricted Subsidiary.
In addition, the Board of Directors of AT&T may designate any other subsidiary
as a Restricted Subsidiary.
"SECURED INDEBTEDNESS" means:
- indebtedness of AT&T or any Restricted Subsidiary secured by any lien
upon any Principal Property or the stock or indebtedness of a Restricted
Subsidiary or
- any conditional sale or other title retention agreement covering any
Principal Property or Restricted Subsidiary;
but does not include any indebtedness secured by any lien or any
conditional sale or other title retention agreement:
o outstanding on April 1, 1986;
o incurred or entered into after April 1, 1986 to finance the acquisition,
improvement or construction of such property and either secured by
purchase money mortgages or liens placed on such property within 180
days of acquisition, improvement or construction;
o on Principal Property or the stock or indebtedness of Restricted
Subsidiaries and existing at the time of acquisition of the property,
stock or indebtedness;
o owing to AT&T or any other Restricted Subsidiary;
o existing at the time a corporation becomes a Restricted Subsidiary;
106
o incurred to finance the acquisition or construction of property in favor
of any country or any of its political subdivisions; and
o replacing, extending or renewing any such indebtedness (to the extent
such indebtedness is not increased).
The following definitions have been used to describe the optional
redemption provisions applicable to each of the 6.00% Broadband Exchange Notes
Due March 15, 2009, described above, and the New AT&T Notes Due 2004 (Series 1)
and the New AT&T Notes Due 2013, which are described below under "Description of
the New AT&T Notes -- Optional Redemption."
"TREASURY RATE" means, with respect to any redemption date, the rate per
annum equal to the semiannual equivalent yield to maturity of the Comparable
Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as
a percentage of its principal amount) equal to the Comparable Treasury Price for
such redemption date.
"COMPARABLE TREASURY ISSUE" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term of the 6.00% Broadband Exchange Notes Due March 15, 2009, New
AT&T Notes Due 2004 (Series 1) or the New AT&T Notes Due 2013, as the case may
be, to be redeemed that would be utilized, at the time of selection and in
accordance with customary financial practice, in pricing new issues of corporate
debt securities of comparable maturity to the remaining term of such notes.
"Independent Investment Banker" means one of the Reference Treasury Dealers
appointed by AT&T.
"COMPARABLE TREASURY PRICE" means, with respect to any redemption date, (1)
the average of the Reference Treasury Dealer Quotations for such redemption date
after excluding the highest and lowest of such Reference Treasury Dealer
Quotations, or (2) if the Trustee obtains fewer than five such Reference
Treasury Dealer Quotations, the average of all such quotations. "Reference
Treasury Dealer Quotations" means, with respect to each Reference Treasury
Dealer and any redemption date, the average, as determined by the Trustee, of
the bid and asked prices for the Comparable Treasury Issue (expressed in each
case as a percentage of its principal amount) quoted in writing to the Trustee
by such Reference Treasury Dealer at 3:30 p.m., New York City time, on the third
business day preceding such redemption date.
"REFERENCE TREASURY DEALER" means each of Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Salomon Smith Barney Inc., Deutsche Bank Securities Inc.,
Banc One Capital Markets, Inc., Lehman Brothers Inc., J.P. Morgan Securities
Inc. and Banc of America Securities LLC and their respective successors. If any
of the foregoing ceases to be a primary U.S. Government securities dealer (a
"Primary Treasury Dealer"), AT&T will substitute another nationally recognized
investment banking firm that is a Primary Treasury Dealer.
"REMAINING SCHEDULED PAYMENTS" means, with respect to each note to be
redeemed, the remaining scheduled payments of principal of and interest on such
note that would be due after the related redemption date but for such
redemption. If such redemption date is not an interest payment date with respect
to such note, the amount of the next succeeding scheduled interest payment on
such note will be reduced by the amount of interest accrued on such note to such
redemption date.
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DESCRIPTION OF THE NEW BROADBAND NOTES AND THE CABLE GUARANTEES
The New Broadband Notes will be Broadband's direct unsecured and
unsubordinated obligations and will be fully and unconditionally guaranteed by
Comcast Cable, AT&T Comcast, MediaOne and TCI, referred to as the cable
guarantors, as described below. The New Broadband Notes will be issued under an
indenture among Broadband, the cable guarantors and The Bank of New York, as
trustee. The term "New Broadband Indenture" refers to this indenture. The terms
of the New Broadband Notes include those stated in the New Broadband Indenture
and those made part of the New Broadband Indenture by reference to the Trust
Indenture Act of 1939.
The following is a summary of the material provisions of the New Broadband
Indenture, the New Broadband Notes and the cable guarantees. Because this is a
summary, it may not contain all the information that is important to you. You
should read the New Broadband Indenture, which has been filed as an exhibit to
the registration statement of which this prospectus is a part, in its entirety.
BASIC TERMS OF THE NEW BROADBAND NOTES
The New Broadband Notes:
- will rank equally with all of Broadband's other unsecured and
unsubordinated debt and will be entitled to the benefits of the cable
guarantees described below;
- will be issued in an aggregate principal amount based on the exchange
ratios, comprised as follows:
o New Broadband Notes Due 2013, maturing on March 15, 2013, with interest
payable semiannually on each March 15 and September 15, beginning the
first March 15 or September 15 occurring after the initial issuance of
the New Broadband Notes Due 2013, to holders of record on the preceding
March 1 and September 1; and
o New Broadband Notes Due 2022, maturing on November 15, 2022, with
interest payable semiannually on each November 15 and May 15, beginning
the first May 15 occurring after the initial issuance of the New
Broadband Notes Due 2022, to holders of record on the preceding November
1 and May 1; and
- are issuable in fully registered form, in denominations of $1,000 and
multiples thereof.
Broadband has applied to list the New Broadband Notes on the New York Stock
Exchange.
INTEREST PAYMENTS
The interest rate for each series of New Broadband Notes will be announced
by press release two business days prior to the expiration of the exchange offer
and each will be based on spreads over the relevant U.S. Treasury rates. The
method for determining the interest rate is described in detail under
"Description of the Exchange Offer -- Interest Rate for the New Broadband
Notes."
Interest for the New Broadband Notes will be computed on the basis of a
360-day year consisting of twelve 30-day months. Interest on the New Broadband
Notes will accrue from the date of original issuance, which will be the date of
mandatory exchange with respect to the New Broadband Notes, or from the most
recent interest payment date to which interest has been paid and will be payable
semiannually on interest payment dates described of each year.
For more information on payment and transfer procedures for the New
Broadband Notes, see "-- Book-Entry System" and "-- Same-Day Payment."
CABLE GUARANTEES
The obligations of Broadband, including the payment of principal, premium,
if any, and interest, will be fully and unconditionally guaranteed by each of
Comcast Cable, AT&T Comcast, MediaOne and TCI.
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The cable guarantees will rank equally with all other general unsecured and
unsubordinated obligations of the cable guarantors.
The cable guarantees will not contain any restrictions on the ability of
any of cable guarantor to (i) pay dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment with respect to, any of that
cable guarantor's capital stock or (ii) make any payment of principal, interest
or premium, if any, on or repay, repurchase or redeem any debt securities of
that cable guarantor.
NO OPTIONAL REDEMPTION
The New Broadband Notes will not be subject to optional redemption by
Broadband.
NO MANDATORY REDEMPTION OR SINKING FUND
There will be no mandatory redemption prior to maturity or sinking fund
payments for the New Broadband Notes.
ADDITIONAL DEBT
The New Broadband Indenture does not limit the amount of debt Broadband may
issue under the New Broadband Indenture or otherwise.
CERTAIN COVENANTS
Broadband and the cable guarantors will agree to some restrictions on their
activities for the benefit of holders of all series of debt securities issued
under the New Broadband Indenture. The restrictive covenants summarized below
will apply, unless the covenants are waived or amended, so long as any of the
debt securities are outstanding.
The New Broadband Indenture will not contain any financial covenants other
than those summarized below and will not restrict Broadband or its subsidiaries
or AT&T Comcast from paying dividends or incurring additional debt. In addition,
the New Broadband Indenture will not protect holders of notes issued under it in
the event of a highly leveraged transaction or a change in control.
LIMITATION ON LIENS SECURING INDEBTEDNESS
Neither Broadband nor any cable guarantor shall create, incur or assume any
Lien (other than any Permitted Lien) on such person's assets, including the
Capital Stock of its wholly owned subsidiaries to secure the payment of
Indebtedness of Broadband or any cable guarantor, unless Broadband secures the
outstanding New Broadband Notes equally and ratably with (or prior to) all
Indebtedness secured by such Lien, so long as such Indebtedness shall be so
secured.
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS
Neither Broadband nor any cable guarantor shall enter into any Sale and
Leaseback Transaction involving any of such person's assets, including the
Capital Stock of its wholly owned subsidiaries.
The restriction in the foregoing paragraph shall not apply to any Sale and
Leaseback Transaction if:
- the lease is for a period of not in excess of three years, including
renewal of rights;
- the lease secures or relates to industrial revenue or similar financing;
- the transaction is solely between Broadband and a cable guarantor or
between or among cable guarantors; or
- Broadband or such cable guarantor, within 270 days after the sale is
completed, applies an amount equal to or greater than (a) the net
proceeds of the sale of the assets or part thereof leased or
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(b) the fair market value of the assets or part thereof leased (as
determined in good faith by Broadband's Board of Directors) either to:
o the retirement (or open market purchase) of notes, other long-term
Indebtedness of Broadband ranking on a parity with or senior to the New
Broadband Notes or long-term Indebtedness of a cable guarantor; or
o the purchase by Broadband or any cable guarantor of other property,
plant or equipment related to the business of Broadband or any cable
guarantor having a value at least equal to the value of the assets or
part thereof leased.
This provision and the provision described under "-- Limitation on Liens
Securing Indebtedness" do not apply to any subsidiaries of AT&T Comcast other
than the cable guarantors and Broadband.
"CAPITALIZED LEASE" means, as applied to any person, any lease of any
property (whether real, personal, or mixed) of which the discounted present
value of the rental obligations of such person as lessee, in conformity with
GAAP, is required to be capitalized on the balance sheet of such person; and
"Capitalized Lease Obligation" is defined to mean the rental obligations, as
aforesaid, under such lease.
"CAPITAL STOCK" means, with respect to any person, any and all shares,
interests, participations, or other equivalents (however designated, whether
voting or non-voting) of such person's capital stock or other ownership
interests, whether now outstanding or issued after the date of the New Broadband
Indenture, including, without limitation, all common stock and preferred stock.
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement, or other similar agreement or arrangement designed to protect against
the fluctuation in currency values.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of determination, including, without
limitation, those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as approved by a significant segment
of the accounting profession. All ratios and computations contained in the New
Broadband indenture shall be computed in conformity with GAAP applied on a
consistent basis.
"GUARANTEE" means any obligation, contingent or otherwise, of any person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such person:
- to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such other person
(whether arising by virtue of partnership arrangements, or by agreement
to keep-well, to purchase assets, goods, securities, or services, to
take-or-pay, or to maintain financial statement conditions or otherwise);
or
- entered into for purposes of assuring in any other manner the obligee of
such Indebtedness or other obligation of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in
part);
Provided that the term "Guarantee" shall not include endorsements for collection
or deposit in the ordinary course of business. The term "Guarantee" used as a
verb has a corresponding meaning.
"INDEBTEDNESS" means, with respect to any person at any date of
determination (without duplication):
- all indebtedness of such person for borrowed money;
- all obligations of such person evidenced by bonds, debentures, notes, or
other similar instruments;
- all obligations of such person in respect of letters of credit or other
similar instruments (including reimbursement obligations with respect
thereto);
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- all obligations of such person to pay the deferred and unpaid purchase
price of property or services (but excluding trade accounts payable or
accrued liabilities arising in the ordinary course of business);
- all obligations of such person as lessee under Capitalized Leases;
- all Indebtedness of other persons secured by a Lien on any asset of such
person, whether or not such Indebtedness is assumed by such person;
provided that the amount of such Indebtedness shall be the lesser of:
o the fair market value of such asset at such date of determination; and
o the amount of such Indebtedness;
- all Indebtedness of other persons Guaranteed by such person to the extent
such Indebtedness is Guaranteed by such person; and
- to the extent not otherwise included in this definition, obligations
under Currency Agreements and Interest Rate Agreements.
The amount of Indebtedness of any person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation; provided:
- that the amount outstanding at any time of any Indebtedness issued with
original issue discount is the face amount of such Indebtedness less the
remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in conformity with GAAP; and
- that Indebtedness shall not include any liability for federal, state,
local, or other taxes.
"INTEREST RATE AGREEMENTS" means any obligations of any person pursuant to
any interest rate swaps, caps, collars, and similar arrangements providing
protection against fluctuations in interest rates. For purposes of the
indenture, the amount of such obligations shall be the amount determined in
respect thereof as of the end of the then most recently ended fiscal quarter of
such person, based on the assumption that such obligation had terminated at the
end of such fiscal quarter, and in making such determination, if any agreement
relating to such obligation provides for the netting of amounts payable by and
to such person thereunder or if any such agreement provides for the simultaneous
payment of amounts by and to such person, then in each such case, the amount of
such obligations shall be the net amount so determined, plus any premium due
upon default by such person.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind, or any other type of
preferential arrangement that has the practical effect of creating a security
interest, in respect of such asset. For the purposes of the New Broadband
Indenture, Broadband or any cable guarantor shall be deemed to own subject to a
Lien any asset that it has acquired or holds subject to the interest of a vendor
or lessor under any conditional sale agreement, capital lease or other title
retention agreement relating to such asset.
"PERMITTED LIENS" means:
- any Lien on any asset incurred prior to the date of the New Broadband
Indenture;
- any Lien on any assets acquired after the date of the New Broadband
Indenture (including by way of merger or consolidation) by Broadband or
any cable guarantor, which Lien is created, incurred or assumed
contemporaneously with such acquisition, or within 270 days thereafter,
to secure or provide for the payment or financing of any part of the
purchase price thereof, or any Lien upon any assets acquired after the
date of the New Broadband Indenture existing at the time of such
acquisition (whether or not assumed by Broadband or any cable guarantor),
provided that any such Lien shall attach only to the assets so acquired;
- any Lien on any assets in favor of Broadband or any cable guarantor;
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- any Lien on assets incurred in connection with the issuance of tax-exempt
governmental obligations (including, without limitation, industrial
revenue bonds and similar financing);
- any Lien granted by any cable guarantor on assets to the extent
limitations on the incurrence of such Liens are prohibited by any
agreement to which such cable guarantor is subject as of the date of the
New Broadband Indenture; and
- any renewal of or substitution for any Lien permitted by any of the
preceding bullet points, including any Lien securing reborrowing of
amounts previously secured within 270 days of the repayment thereof,
provided that no such renewal or substitution shall extend to any assets
other than the assets covered by the Lien being renewed or substituted.
"SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement
with any person or to which any such person is a party, providing for the
leasing to Broadband or a cable guarantor of any property, whether owned by
Broadband or such cable guarantor at the date of the original issuance of the
New Broadband Notes or later acquired, which has been or is to be sold or
transferred by Broadband or such cable guarantor to such person or to any other
person by whom funds have been or are to be advanced on the security of such
property.
FINANCIAL INFORMATION
Broadband will file, whether or not required to do so under applicable law,
with the trustee, within 15 days after being required to file the same under the
Securities Exchange Act of 1934, copies of the annual reports and the
information, documents and other reports to be filed pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934. Broadband intends to file all such
reports, information and documents with the SEC, whether or not required by
Section 13 or 15(d), and will send copies to the trustee within such 15-day
period. Notwithstanding the foregoing, if AT&T Comcast is required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
that includes combined or consolidating financial information of Broadband
pursuant to Rule 3-10 of Regulation S-X, this covenant shall be deemed satisfied
by AT&T Comcast filing with the trustee, within 15 days after AT&T Comcast is
required to file the same under the Securities Exchange Act of 1934, copies of
AT&T Comcast annual reports and the information, documents and other reports to
be filed by it pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The New Broadband Indenture will restrict Broadband's ability to
consolidate with, merge with or into, or sell, convey, transfer, lease, or
otherwise dispose of all or substantially all of its property and assets as an
entirety or substantially an entirety in one transaction or a series of related
transactions to any person (other than a consolidation with or merger with or
into or a sale, conveyance, transfer, lease or other disposition to a
wholly-owned subsidiary with a positive net worth; provided that, in connection
with any merger of Broadband and a wholly-owned subsidiary, no consideration
other than common stock in the surviving person shall be issued or distributed
to Broadband's stockholders) or permit any person to merge with or into such
party unless:
- Broadband is the continuing person or the person formed by such
consolidation or into which such party is merged or that acquired or
leased such property and assets shall be a corporation or limited
liability company organized and validly existing under the laws of the
United States of America or any jurisdiction thereof and shall expressly
assume, by a supplemental indenture, executed and delivered to the
trustee, all of Broadband's obligations on all of the New Broadband Notes
and under the New Broadband Indenture;
- immediately after giving effect to such transaction, no default or event
of default shall have occurred and be continuing; and
- Broadband delivers to the trustee an officers' certificate and opinion of
counsel, in each case stating that such consolidation, merger, or
transfer and such supplemental indenture complies with this
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provision and that all conditions precedent provided for in the New
Broadband Indenture and notes relating to such transaction have been
complied with;
provided, however, that the foregoing limitations will not apply if, in the good
faith determination of Broadband's board of directors, whose determination must
be set forth in a board resolution, the principal purpose of such transaction is
to change the state of incorporation of such party; and provided further that
any such transaction shall not have as one of its purposes the evasion of the
foregoing limitations.
Upon any express assumption of Broadband's obligations as described above,
Broadband shall be released and discharged from all obligations and covenants
under the New Broadband Indenture and all the New Broadband Notes.
The New Broadband Indenture and the cable guarantees do not limit the
ability of any guarantor to consolidate with or merge into or sell all or
substantially all its assets. Upon the sale or disposition of any guarantor (by
merger, consolidation, the sale of its capital stock or the sale of all or
substantially all of its assets) to any person, that guarantor will be deemed
released from all its obligations under the New Broadband Indenture and its
guarantee.
MODIFICATION AND WAIVER
Broadband and the trustee may amend or supplement the New Broadband
Indenture or the New Broadband Notes without notice to or the consent of any
holder:
- to cure any ambiguity, defect, or inconsistency in the New Broadband
Indenture; provided that such amendments or supplements shall not
adversely affect the interests of the holders in any material respect;
- to comply with the provisions described under "-- Certain
Covenants -- Consolidation, Merger and Sale of Assets;"
- to comply with any requirements of the SEC in connection with the
qualification of the New Broadband Indenture under the Trust Indenture
Act;
- to evidence and provide for the acceptance of appointment hereunder by a
successor trustee;
- to establish the form or forms or terms of the New Broadband Notes as
permitted by the New Broadband Indenture;
- to provide for uncertificated notes and to make all appropriate changes
for such purpose;
- to make any change that does not adversely affect the rights of any
holder;
- to add to its covenants such new covenants, restrictions, conditions or
provisions for the protection of the holders, and to make the occurrence,
or the occurrence and continuance, of a default in any such additional
covenants, restrictions, conditions or provisions an event of default; or
- to make any change so long as no New Broadband Notes or Broadband
Exchange Notes are outstanding.
Subject to certain conditions, without prior notice to any holder of New
Broadband Notes, modifications and amendments of the New Broadband Indenture may
be made by Broadband and the trustee with respect to any series of New Broadband
Notes with the written consent of the holders of a majority in principal amount
of the affected series of New Broadband Notes, and compliance by Broadband with
any provision of the New Broadband Indenture with respect to any series of New
Broadband Notes may be waived by written notice to the trustee by the holders of
a majority in principal amount of the affected series of New Broadband Notes
outstanding; provided, however, that each affected holder must consent to any
modification, amendment or waiver that:
- changes the stated maturity of the principal of, or any installment of
interest on, the New Broadband Notes of the affected series;
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- reduces the principal amount of, or premium, if any, or interest on, the
New Broadband Notes of the affected series;
- changes the place or currency of payment of principal of, or premium, if
any, or interest on, the New Broadband Notes of the affected series;
- changes the provisions for calculating the optional redemption price,
including the definitions relating thereto;
- changes the provisions relating to the waiver of past defaults or changes
or impairs the right of holders to receive payment or to institute suit
for the enforcement of any payment of the New Broadband Notes of the
affected series on or after the due date therefor;
- reduces the above-stated percentage of outstanding New Broadband Notes of
the affected series the consent of whose holders is necessary to modify
or amend or to waive certain provisions of or defaults under the New
Broadband Indenture;
- waives a default in the payment of principal of, premium, if any, or
interest on the New Broadband Notes; or
- modifies any of the provisions of this paragraph, except to increase any
required percentage or to provide that certain other provisions cannot be
modified or waived without the consent of the holder of each New
Broadband Note of the series affected by the modification.
It is not necessary for the consent of the holders under the New Broadband
Indenture to approve the particular form of any note amendment, supplement or
waiver, but it shall be sufficient if such consent approves the substance
thereof. After an amendment, supplement or waiver under the New Broadband
Indenture becomes effective, notice must be given to the holders affected
thereby briefly describing the amendment, supplement, or waiver. Supplemental
indentures will be mailed to holders upon request. Any failure to mail such
notice, or any defect therein, shall not, however, in any way impair or affect
the validity of any such supplemental indenture or waiver.
EVENTS OF DEFAULT
For purposes of this section, the term "Obligor" shall mean each of
Broadband, AT&T Comcast, Comcast Cable, MediaOne and TCI, in each case excluding
such entities' subsidiaries.
An event of default for a series of New Broadband Notes is defined under
the New Broadband Indenture as being:
(1) a default by any Obligor in the payment of principal or premium on
the New Broadband Notes of such series when the same becomes due and
payable whether at maturity, upon acceleration, redemption or otherwise;
(2) a default by any Obligor in the payment of interest on the New
Broadband Notes of such series when the same becomes due and payable, if
that default continues for a period of 30 days;
(3) default by any Obligor in the performance of or breach by any
Obligor of any of its other covenants or agreements in the New Broadband
Indenture applicable to all the New Broadband Notes or applicable to the
New Broadband Notes of any series and that default or breach continues for
a period of 30 consecutive days after written notice is received from the
trustee or from the holders of 25% or more in aggregate principal amount of
the New Broadband Notes of all affected series;
(4) any cable guarantee is not (or claimed by any of AT&T Comcast,
Comcast Cable, MediaOne or TCI not to be) in full force and effect;
(5) a court having jurisdiction enters a decree or order for:
- relief in respect of any Obligor in an involuntary case under any
applicable bankruptcy, insolvency, or other similar law now or
hereafter in effect;
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- appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator or similar official of any Obligor for any
substantial part of such party's property and assets; or
- the winding up or liquidation of any Obligor's affairs
and such decree or order shall remain unstayed and in effect for a
period of 180 consecutive days; or
(6) any Obligor:
- commences a voluntary case under any applicable bankruptcy,
insolvency, or other similar law now or hereafter in effect, or
consent to the entry of an order for relief in an involuntary case
under any such law;
- consents to the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator, or similar
official of such party or for any substantial part of such party's
property; or
- effects any general assignment for the benefit of creditors.
A default under any Obligor's other indebtedness is not a default under the
New Broadband Indenture.
If an event of default other than an event of default specified in clauses
(5) and (6) above occurs with respect to an issue of New Broadband Notes and is
continuing under the New Broadband Indenture, then, and in each and every such
case, either the trustee or the holders of not less than 25% in aggregate
principal amount of such New Broadband Notes then outstanding under the New
Broadband Indenture by written notice to Broadband and to the trustee, if such
notice is given by the holders, may, and the trustee at the request of such
holders shall, declare the principal amount of and accrued interest, if any, on
such New Broadband Notes to be immediately due and payable. The amount due upon
acceleration shall include only the original issue price of the New Broadband
Notes and accrued to the date of acceleration and accrued interest, if any. Upon
a declaration of acceleration, such principal amount of and accrued interest, if
any, on such New Broadband Notes shall be immediately due and payable. If an
event of default specified in clauses (5) and (6) above occurs with respect to
any Obligor, the principal amount of and accrued interest, if any, on each issue
of New Broadband Notes then outstanding shall be and become immediately due and
payable without any notice or other action on the part of the trustee or any
holder.
Upon certain conditions such declarations may be rescinded and annulled and
past defaults may be waived by the holders of a majority in aggregate principal
amount of an issue of New Broadband Notes that has been accelerated.
Furthermore, subject to various provisions in the New Broadband Indenture, the
holders of at least a majority in aggregate principal amount of an issue of New
Broadband Notes by notice to the trustee may waive an existing default or event
of default with respect to such New Broadband Notes and its consequences, except
a default in the payment of principal of or interest on such New Broadband Notes
or in respect of a covenant or provision of the New Broadband Indenture which
cannot be modified or amended without the consent of the holders of each such
New Broadband Notes. Upon any such waiver, such default shall cease to exist,
and any event of default with respect to such New Broadband Notes shall be
deemed to have been cured, for every purpose of the New Broadband Indenture; but
no such waiver shall extend to any subsequent or other default or event of
default or impair any right consequent thereto. For information as to the waiver
of defaults, see "-- Modification and Waiver."
The holders of at least a majority in aggregate principal amount of an
issue of New Broadband Notes may direct the time, method, and place of
conducting any proceeding for any remedy available to the trustee or exercising
any trust or power conferred on the trustee with respect to such New Broadband
Notes. However, the trustee may refuse to follow any direction that conflicts
with law or the New Broadband Indenture, that may involve the trustee in
personal liability, or that the trustee determines in good faith may be unduly
prejudicial to the rights of holders of such issue of New Broadband Notes not
joining in the giving of such direction and may take any other action it deems
proper that is not inconsistent with any such direction received from holders of
such issue of New Broadband Notes. A
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holder may not pursue any remedy with respect to the New Broadband Indenture or
any series of New Broadband Notes unless:
- the holder gives the trustee written notice of a continuing event of
default;
- the holders of at least 25% in aggregate principal amount of such series
of New Broadband Notes make a written request to the trustee to pursue
the remedy in respect of such event of default;
- the requesting holder or holders offer the trustee indemnity satisfactory
to the trustee against any costs, liability, or expense;
- the trustee does not comply with the request within 60 days after receipt
of the request and the offer of indemnity; and
- during such 60-day period, the holders of a majority in aggregate
principal amount of such series of New Broadband Notes do not give the
trustee a direction that is inconsistent with the request.
These limitations, however, do not apply to the right of any holder of a
New Broadband Note to receive payment of the principal of, premium, if any, or
interest on such New Broadband Note, or to bring suit for the enforcement of any
such payment, on or after the due date for the New Broadband Notes, which right
shall not be impaired or affected without the consent of the holder.
The New Broadband Indenture will require certain of officers of Broadband
to certify, on or before a date not more than 120 days after the end of each
fiscal year, as to their knowledge of Broadband's compliance with all conditions
and covenants under the New Broadband Indenture, such compliance to be
determined without regard to any period of grace or requirement of notice
provided under the New Broadband Indenture.
DISCHARGE AND DEFEASANCE
The New Broadband Indenture provides that, except as otherwise provided in
this paragraph, Broadband may discharge its obligations with respect to an issue
of New Broadband Notes and the New Broadband Indenture with respect to that
series of New Broadband Notes if:
- the New Broadband Notes of the affected series previously authenticated
and delivered with certain exceptions, have been delivered to the trustee
for cancellation and Broadband has paid all sums payable under the New
Broadband Indenture; or
- the New Broadband Notes of the affected series mature within one year or
all of them are to be called for redemption within one year under
arrangements satisfactory to the trustee for giving the notice of
redemption and:
o Broadband irrevocably deposits in trust with the trustee, as trust funds
solely for the benefit of the holders of the New Broadband Notes of the
affected series, for that purpose, money or U.S. government obligations
or a combination thereof sufficient (unless such funds consist solely of
money, in the opinion of a nationally recognized firm of independent
public accountants expressed in a written certification thereof
delivered to the trustee), without consideration of any reinvestment and
after payment of all federal, state and local taxes or other charges and
assessments in respect thereof payable by the trustee, to pay principal
of and interest on the New Broadband Notes of the affected series to
maturity or redemption, as the case may be, and to pay all other sums
payable by it under the New Broadband Indenture; and
o Broadband delivers to the trustee an officers' certificate and an
opinion of counsel, in each case stating that all conditions precedent
provided for in the New Broadband Indenture relating to the satisfaction
and discharge of the New Broadband Indenture with respect to the New
Broadband Notes of the affected series have been complied with.
With respect to all New Broadband Notes which have been delivered to the
trustee for cancellation and for which have been paid all sums payable by
Broadband under the New Broadband Indenture, only
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Broadband's obligations to compensate and indemnify the trustee and Broadband's
right to recover excess money held by the trustee under the New Broadband
Indenture shall survive. With respect to New Broadband Notes which mature within
one year or are to be called for redemption within one year under redemption
arrangements deemed appropriate by the trustee, only Broadband's obligations
with respect to the issue of defeased New Broadband Notes to execute and deliver
such New Broadband Notes for authentication, to set the terms of such New
Broadband Notes, to maintain an office or agency in respect of such New
Broadband Notes, to have moneys held for payment in trust, to register the
transfer or exchange of such New Broadband Notes, to deliver such New Broadband
Notes for replacement or cancellation, to compensate and indemnify the trustee
and to appoint a successor trustee, and Broadband's right to recover excess
money held by the trustee shall survive until such New Broadband Notes are no
longer outstanding. Thereafter, only Broadband's obligations to compensate and
indemnify the trustee, and Broadband's right to recover excess money held by the
trustee shall survive.
The New Broadband Indenture also provides that, except as otherwise
provided in this paragraph, Broadband:
- will be deemed to have paid and will be discharged from any and all
obligations in respect of a series of New Broadband Notes, and the
provisions of the New Broadband Indenture and the cable guarantees will
no longer be in effect with respect to those New Broadband Notes ("legal
defeasance"); and
- may omit to comply with any term, provision or condition of the New
Broadband Indenture described above under "-- Certain Covenants" and such
omission shall be deemed not to be an event of default under the third
clause of the first paragraph of "-- Events of Default" with respect to
that series of New Broadband Notes ("covenant defeasance");
provided that the following conditions shall have been satisfied:
- Broadband has irrevocably deposited in trust with the trustee as trust
funds solely for the benefit of the holders of the New Broadband Notes of
such series, for payment of the principal of and interest on the New
Broadband Notes of such series, money or U.S. government obligations or a
combination thereof sufficient (unless such funds consist solely of
money, in the opinion of a nationally recognized firm of independent
public accountants expressed in a written certification thereof delivered
to the trustee) without consideration of any reinvestment and after
payment of all federal, state and local taxes or other charges and
assessments in respect thereof payable by the trustee, to pay and
discharge the principal of and accrued interest on the New Broadband
Notes of such series to maturity or earlier redemption (irrevocably
provided for under arrangements satisfactory to the trustee), as the case
may be;
- such deposit will not result in a breach or violation of, or constitute a
default under, the New Broadband Indenture, the cable guarantees or any
other material agreement or instrument to which Broadband is a party or
by which Broadband is bound;
- no default or event of default with respect to the New Broadband Notes of
such series shall have occurred and be continuing on the date of such
deposit;
- Broadband shall have delivered to the trustee:
o either an opinion of counsel that the holders of the New Broadband
Notes of such series will not recognize income, gain or loss for
federal income tax purposes as a result of Broadband exercising its
option under this provision of the New Broadband Indenture and will be
subject to federal income tax on the same amount and in the same manner
and at the same times as would have been the case if such deposit and
defeasance had not occurred (which opinion, in the case of a legal
defeasance, shall be based upon a change in law) or a ruling directed
to the trustee received from the Internal Revenue Service to the same
effect; and
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o an opinion of counsel that the holders of the New Broadband Notes of
such series have a valid security interest in the trust funds subject
to no prior liens under the Uniform Commercial Code; and
- Broadband has delivered to the trustee an officers' certificate and an
opinion of counsel, in each case stating that all conditions precedent
provided for in the New Broadband Indenture relating to the defeasance
contemplated of the New Broadband Notes of such series have been complied
with.
Subsequent to legal defeasance under the first bullet point above, the
obligations of Broadband with respect to the issue of defeased New Broadband
Notes to execute and deliver such New Broadband Notes for authentication, to set
the terms of such New Broadband Notes, to maintain an office or agency in
respect of such New Broadband Notes, to have moneys held for payment in trust,
to register the transfer or exchange of such New Broadband Notes, to deliver
such New Broadband Notes for replacement or cancellation, to compensate and
indemnify the trustee and to appoint a successor trustee, and right of Broadband
to recover excess money held by the trustee shall survive until such New
Broadband Notes are no longer outstanding. After such New Broadband Notes are no
longer outstanding, in the case of legal defeasance under the first bullet point
above, only Broadband's obligations to compensate and indemnify the trustee and
Broadband's right to recover excess money held by the trustee shall survive.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS OR
EMPLOYEES
The New Broadband Indenture and the cable guarantees provide that no
recourse shall be had under or upon any obligation, covenant, or agreement of
Broadband or the cable guarantors in the New Broadband Indenture or any
supplemental indenture, or in any of the New Broadband Notes or in any of the
cable guarantees or because of the creation of any indebtedness represented
thereby, against any incorporator, stockholder, officer, director, employee of
Broadband or any cable guarantor or of any successor person thereof under any
law, statute or constitutional provision or by the enforcement of any assessment
or by any legal or equitable proceeding or otherwise. Each holder, by accepting
the New Broadband Notes, waives and releases all such liability.
CONCERNING THE TRUSTEE
The New Broadband Indenture provides that, except during the continuance of
a default, the trustee will not be liable, except for the performance of such
duties as are specifically set forth in the New Broadband Indenture. If an event
of default has occurred and is continuing, the trustee will exercise such rights
and powers vested in it under the New Broadband Indenture and will use the same
degree of care and skill in its exercise as a prudent person would exercise
under the circumstances in the conduct of such person's own affairs. Broadband
may have normal banking relationships with the trustee under the New Broadband
Indenture in the ordinary course of business.
GOVERNING LAW
The New Broadband Indenture, the New Broadband Notes and the cable
guarantees will be governed by, and construed in accordance with, the internal
laws of the State of New York.
BOOK-ENTRY SYSTEM
Broadband will initially issue the New Broadband Notes in the form of one
or more global notes (the "Global Notes"). The Global Notes will be deposited
with, or on behalf of, The Depository Trust Company ("DTC") and registered in
the name of DTC or its nominee. Except as set forth below, the Global Notes may
be transferred, in whole and not in part, only to DTC or another nominee of DTC.
A holder may hold beneficial interests in the Global Notes directly through DTC
if such holder has an account with DTC or indirectly through organizations which
have accounts with DTC, including Euroclear and Clearstream.
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DTC
DTC has advised Broadband as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System a clearing corporation within the meaning of the New York
Uniform Commercial Code and a clearing agency registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities of institutions that have accounts with DTC ("participants") and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Access to DTC's book-entry system is also available to others
such as banks, brokers, dealers and trust companies (collectively, the "indirect
participants") that clear through or maintain a custodial relationship with a
participant, whether directly or indirectly.
Broadband expects that pursuant to procedures established by DTC, upon the
deposit of the Global Notes with DTC, DTC will credit on its book entry
registration and transfer system the principal amount of New Broadband Notes
represented by such Global Notes to the accounts of participants. Ownership of
beneficial interests in the Global Notes will be limited to participants or
persons that may hold interests through participants. Ownership of beneficial
interests in the Global Notes will be shown on and the transfer of those
ownership interests will be effected only through, records maintained by DTC
(with respect to participants' interests), the participants and the indirect
participants (with respect to the owners of beneficial interests in the Global
Note other than participants). All interests in a Global Note deposited with DTC
are subject to the procedures and requirements of DTC.
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and laws may impair the ability to transfer or pledge beneficial
interests in the Global Notes.
So long as DTC (or its nominee) is the registered holder and owner of a
Global Note, DTC (or such nominee) will be considered the sole legal owner and
holder of the notes evidenced by such Global Note for all purposes of such notes
and the indenture. Except as set forth below under "-- Certificated Notes," as
an owner of a beneficial interest in a Global Note, you will not be entitled to
have the notes represented by such Global Note registered in your name, will not
receive or be entitled to receive physical delivery of certificated notes and
will not be considered to be the owner or holder of any notes under such Global
Note. We understand that under existing industry practice, in the event an owner
of a beneficial interest in a Global Note desires to take any action that DTC,
as the holder of such Global Note, is entitled to take, DTC would authorize the
participants to take such action, and the participants would authorize
beneficial owners owning through such participants to take such action or would
otherwise act upon the instructions of beneficial owners owning through them.
Broadband will make payments of principal of, premium, if any, and interest
on the New Broadband Notes represented by the Global Notes registered in the
name of and held by DTC or its nominee to DTC or its nominee, as the case may
be, as the registered owner and holder of the Global Notes.
Broadband expects that DTC (or its nominee), upon receipt of any payment of
principal of, premium, if any, or interest on the Global Notes will credit the
accounts of their relevant participants or account holders, as applicable, with
payments in amounts proportionate to their respective beneficial interests in
the principal amount of the applicable Global Note as shown on the records of
DTC (or its nominee). Broadband also expects that payments by participants or
indirect participants or account holders, as applicable, to owners of beneficial
interests in the Global Notes held through such participants or indirect
participants or account holders will be governed by standing instructions and
customary practices and will be the responsibility of such participants or
indirect participants or account holders, as applicable. Broadband will not have
any responsibility or liability for any aspect of the records relating to, or
payments made on account of, beneficial ownership interests in the Global Notes
for any New Broadband Notes or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests or for any other aspect
of the relationship between DTC and its participants or indirect participants,
or the
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relationship between such participants or indirect participants, and the owners
of beneficial interests in the Global Notes owning through such participants.
All amounts payable under the New Broadband Notes will be payable in U.S.
dollars, except as may otherwise be agreed between any applicable securities
clearing system and any holders. Payments will be subject in all cases to any
fiscal or other laws and regulations (including any regulations of any
applicable securities clearing system) applicable thereto. None of the trustee,
Broadband, the cable guarantors or any of their respective agents shall be
liable to any holder of a Global Note or other person for any commissions,
costs, losses or expenses in relation to or resulting from any currency
conversion or rounding effected in connection therewith. Investors may be
subject to foreign exchange risks that may have important economic and tax
consequences to them.
CERTIFICATED NOTES
Subject to certain conditions, the New Broadband Notes represented by the
Global Notes are exchangeable for certificated notes in definitive form of like
tenor in denominations of $1,000 principal amount and multiples thereof if:
(1) DTC provides notification that it is unwilling or unable to
continue as depositary for the Global Notes or DTC ceases to be a clearing
agency registered under the Exchange Act and, in either case, a successor
is not appointed within 90 days;
(2) Broadband in its discretion at any time determines not to have all
the New Broadband Notes represented by the Global Notes; or
(3) a default entitling the holders of the applicable New Broadband
Notes to accelerate the maturity thereof has occurred and is continuing.
Any New Broadband Note that is exchangeable as above is exchangeable for
certificated notes issuable in authorized denominations and registered in such
names as DTC shall direct. Subject to the foregoing, a Global Note is not
exchangeable, except for a Global Note of the same aggregate denomination to be
registered in the name of DTC (or its nominee).
SAME-DAY PAYMENT
The New Broadband Indenture requires payments to be made in respect of the
applicable New Broadband Notes represented by the Global Notes (including
principal, premium and interest) by wire transfer of immediately available funds
to the accounts specified by the holder thereof or, if no such account is
specified, by mailing a check to such holder's registered address.
Payments (including principal, premium and interest) and transfers with
respect to New Broadband Notes in certificated form may be executed at the
office or agency maintained for such purpose within the City and State of New
York (initially the office of the paying agent maintained for such purpose) or,
at Broadband's option, by check mailed to the holders thereof at the respective
addresses set forth in the register of holders of the applicable New Broadband
Notes, provided that all payments (including principal, premium and interest) on
New Broadband Notes in certificated form, for which the holders thereof have
given wire transfer instructions, will be required to be made by wire transfer
of immediately available funds to the accounts specified by the holders thereof.
No service charge will be made for any registration of transfer, but payment of
a sum sufficient to cover any tax or governmental charge payable in connection
with that registration may be required.
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COMPARISON OF THE NEW BROADBAND NOTES
AND THE BROADBAND EXCHANGE NOTES
The following comparison of the New Broadband Notes and the Broadband
Exchange Notes summarizes the material differences between the New Broadband
Notes and the Broadband Exchange Notes. See "Description of the Broadband
Exchange Notes" for a more complete discussion of the material terms of the AT&T
Indenture, the Broadband Exchange Supplemental Indenture and the Broadband
Exchange Notes, and "Description of the New Broadband Notes and the Cable
Guarantees" for a more complete discussion of the material terms of the New
Broadband Indenture, the New Broadband Notes and the cable guarantees. Because
this is a summary, it may not contain all the information that is important to
you. You should read the AT&T Indenture, the Broadband Exchange Supplemental
Indenture and the New Broadband Indenture, which have been filed as exhibits to
the registration statement of which this prospectus is a part, in their
entirety.
COMPARISON OF BASIC TERMS
CHANGES IN OBLIGORS
The Broadband Exchange Notes will be the co-obligations of AT&T and
Broadband. The New Broadband Notes will be the primary obligations of Broadband
only, fully and unconditionally guaranteed by the cable guarantors. The
Broadband Exchange Notes will not have the benefit of the cable guarantees.
CERTAIN CHANGES TO INTEREST RATE, MATURITY DATE, INTEREST PAYMENT DATES AND
RECORD DATES
The interest rate on the Broadband Exchange Notes will not be the same as
the interest rate on the applicable series of New Broadband Notes into which
they are expected to be exchanged. The interest rate for each series of New
Broadband Notes will be announced by press release two business days prior to
the expiration of the exchange offer and will be based on spreads over the
relevant U.S. Treasury rates set forth on the cover of this prospectus. For a
more complete discussion of the method of calculating interest on the New
Broadband Notes, see "Description of the Exchange Offer -- Interest Rate for the
New Broadband Notes."
Interest on the New Broadband Notes accrues from the date of original
issuance, which will be the date of mandatory exchange with respect to the New
Broadband Notes, or from the most recent interest payment date to which interest
has been paid.
Interest accrued and unpaid on any Broadband Eligible Notes accepted in an
exchange offer (a) will be paid along with the first payment of interest on the
relevant series of Broadband Exchange Notes or (b) if the mandatory exchange of
the Broadband Exchange Notes occurs prior to that first payment of interest,
will be paid at the time of mandatory exchange.
Interest accrued and unpaid on any series of Broadband Exchange Notes will
be paid at the time of mandatory exchange.
The New Broadband Notes Due 2013 mature on March 15, 2013, with interest
payable semiannually on each March 15 and September 15, beginning on the first
March 15 or September 15 occurring after the initial issuance of the New
Broadband Notes Due 2013, to holders of record on the preceding March 1 and
September 1, which are changes from the respective current maturity dates,
interest payment dates and record dates for the 7.00% Broadband Exchange Notes
Due May 15, 2005, the 7.50% Broadband Exchange Notes Due June 1, 2006, the 7.75%
Broadband Exchange Notes Due March 1, 2007 and the 6.00% Broadband Exchange
Notes Due March 15, 2009 for which the New Broadband Notes Due 2013 are expected
to be exchanged.
The New Broadband Notes Due 2022 mature on November 15, 2022, with interest
payable semiannually on each November 15 and May 15, beginning on the first May
15 occurring after the initial issuance of the New Broadband Notes Due 2022, to
holders of record on the preceding November 1 and May 1, which are changes from
the respective maturity dates, interest payment dates and record dates
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for the 8.125% Broadband Exchange Notes Due July 15, 2022, the 8.125% Broadband
Exchange Notes Due July 15, 2024, the 8.35% Broadband Exchange Notes Due January
15, 2025 and the 8.625% Broadband Exchange Notes Due December 1, 2031 for which
the New Broadband Notes Due 2022 are expected to be exchanged.
ELIMINATION OF LUXEMBOURG EXCHANGE LISTING
The New Broadband Notes will not be listed on the Luxembourg Exchange. If
the AT&T Comcast transaction is terminated, AT&T will use its commercially
reasonable efforts to list the 6.00% Broadband Exchange Notes Due March 15, 2009
on the Luxembourg Stock Exchange. The 6.00% Broadband Eligible Notes Due March
15, 2009 are currently listed on the Luxembourg Stock Exchange.
ELIMINATION OF PAYMENT OF ADDITIONAL AMOUNTS; REDEMPTION UPON A TAX EVENT
The 6.00% Broadband Exchange Notes Due March 15, 2009 provide for the
payment of additional amounts and redemption upon a tax event as described under
"Description of the Broadband Exchange Notes -- Additional Terms Pertaining Only
to the 6.00% Broadband Exchange Notes Due March 15, 2009." No series of New
Broadband Notes, including the New Broadband Notes Due 2013 issued in exchange
for the 6.00% Broadband Exchange Notes Due March 15, 2009, will contain similar
provisions.
OPTIONAL REDEMPTION
The New Broadband Notes will not be subject to optional redemption by
Broadband.
Certain series of Broadband Exchange Notes for which the New Broadband
Notes will be exchanged upon completion of the AT&T Comcast transaction are
subject to optional redemption. The 6.00% Broadband Exchange Notes Due March 15,
2009, the 8.125% Broadband Exchange Notes Due January 15, 2022, the 8.125%
Broadband Exchange Notes Due July 15, 2024 and the 8.625% Broadband Exchange
Notes Due December 1, 2031 will be subject to optional redemption by AT&T upon
issuance. The 8.35% Broadband Exchange Notes Due January 15, 2025 will be
subject to optional redemption on and after January 15, 2005.
COVENANTS
The New Broadband Indenture:
- contains covenants that restrict Broadband's ability and the cable
guarantors' ability to create secured indebtedness and engage in sale and
leaseback transactions that are different from those covenants that are
in the AT&T Indenture described under "Description of the Broadband
Exchange Notes -- Certain Covenants -- Limitation on Secured
Indebtedness" and "-- Limitation on Sale and Leaseback Transactions" and
- modifies the "-- Consolidation, Merger or Sale" covenant as described
below.
LIMITATIONS ON LIENS SECURING INDEBTEDNESS AND ON SALE AND LEASEBACK
TRANSACTIONS
Under the New Broadband Indenture, neither Broadband nor any cable
guarantor will be permitted to create any lien, other than certain permitted
liens, on such person's assets, including the capital stock of its wholly owned
subsidiaries, to secure the payment of indebtedness of Broadband or any cable
guarantor, unless Broadband secures the outstanding New Broadband Notes equally
and ratably with (or prior to) all indebtedness secured by such lien, so long as
such indebtedness shall be so secured. See "Description of the New Broadband
Notes and the Cable Guarantees -- Certain Covenants -- Limitation on Liens
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Securing Indebtedness" for a more complete discussion of the provisions of the
new Broadband Indenture relating to restrictions on the ability of Broadband and
the cable guarantors to create secured indebtedness. The New Broadband Indenture
also restricts Broadband's ability and the cable guarantors' ability to engage
in sale and leaseback transactions. A more complete discussion of these
provisions is set forth in "Description of the New Broadband Notes and the Cable
Guarantees -- Certain Covenants -- Limitation on Sale and Leaseback
Transactions." These provisions do not apply to any subsidiaries of AT&T Comcast
other than the cable guarantors and Broadband.
Under the AT&T Indenture, AT&T cannot, and AT&T cannot permit certain
subsidiaries to, create any secured indebtedness unless AT&T secures the debt
securities issued under the AT&T Indenture to the same extent as such secured
indebtedness or enter into any leases longer than three years. However, AT&T and
its subsidiaries may incur secured indebtedness without securing those debt
securities or enter into leases longer than three years if immediately after
incurring the secured indebtedness or entering into the lease, the aggregate
amount of all secured indebtedness and the discounted present value of all net
rentals payable under leases entered into in connection with sale and leaseback
transactions would not exceed 10% of consolidated net tangible assets. See
"Description of the Broadband Exchange Notes -- Certain Covenants -- Limitation
on Secured Indebtedness" and "-- Limitation on Sale and Leaseback Transactions"
for a more complete discussion of the provisions of the AT&T Indenture relating
to restrictions on the ability of AT&T and its subsidiaries to create secured
indebtedness.
MODIFICATION OF CONSOLIDATION, MERGER OR SALE
Pursuant to the AT&T Indenture, AT&T may not consolidate with or merge into
any other corporation or convey or transfer substantially all of its properties
and assets to any person, unless
- that person is authorized to acquire and operate its property and
- the successor corporation expressly assumes by a supplemental indenture
the due and punctual payment of the principal of and any premium or any
interest on all the debt securities and the performance of every covenant
in the AT&T Indenture that AT&T would otherwise have to perform.
Pursuant to the New Broadband Indenture, these provisions would not:
- apply to a consolidation with or merger with or into or a sale,
conveyance, transfer, lease or other disposition to a wholly owned
subsidiary with a positive net worth; provided that, in connection with
any merger of either party and a wholly-owned subsidiary, no
consideration other than common stock in the surviving person or
Broadband's shall be issued or distributed to such party's stockholders;
or
- expressly require such person to be authorized to acquire and operate its
property.
In addition, the New Broadband Indenture will expressly provide that upon
express assumption of any party's obligations as described above, that party
shall be discharged from all obligations and covenants under the New Broadband
Indenture and on all of the New Broadband Notes.
See "Description of the New Broadband Notes and the Cable
Guarantees -- Certain Covenants -- Consolidation, Merger and Sale of Assets" for
a more complete discussion of the provisions of the New Broadband Indenture
relating to restrictions on the ability of the Broadband to consolidate, merge
or sell property and assets.
MODIFICATION AND WAIVER
In addition to the kinds of amendments, modifications or waivers that may
be made under the AT&T Indenture without notice to or the consent of any holder,
the New Broadband Indenture further provides
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that Broadband and the trustee may amend or supplement the New Broadband
Indenture or the New Broadband Notes without notice to or the consent of any
holder:
- to comply with any requirements of the SEC in connection with the
qualification of the New Broadband Indenture under the Trust Indenture
Act of 1939;
- to evidence and provide for the acceptance of appointment under the New
Broadband Indenture by a successor trustee; and
- to make any change so long as no New Broadband Notes or Broadband
Exchange Notes are outstanding.
In addition, whereas the AT&T Indenture permits AT&T and the trustee to
amend or supplement the AT&T Indenture or the Broadband Exchange Notes without
notice to or the consent of any holder to cure any ambiguity, defect, or
inconsistency in the AT&T Indenture provided that such amendments or supplements
shall not adversely affect the interests of the holders, the New Broadband
Indenture permits these amendments or supplements provided that the amendment or
supplement shall not adversely affect the interests of the holders in any
material respect (added text in italics).
In addition, the New Broadband Indenture includes the requirement in
instances where modifications and amendments of the Broadband Indenture and the
New Broadband Notes may be made by Broadband and the trustee with the written
consent of the holders of a majority in principal amount of an issue of New
Broadband Notes that each affected holder must consent to any modification,
amendment or waiver that changes the provisions for calculating the optional
redemption price, including the definitions thereto, which requirement is not
contained in the AT&T Indenture.
See "Description of the New Broadband Notes and the Cable
Guarantees -- Modification and Waiver" for a more complete discussion of the
rights of Broadband and the trustee to amend or supplement the New Broadband
Indenture or the New Broadband Notes.
EVENTS OF DEFAULT
For purposes of this section, the term "Obligor" shall mean each of
Broadband, AT&T Comcast, Comcast Cable, MediaOne and TCI, in each case excluding
such entities' subsidiaries.
Pursuant to the AT&T Indenture governing the Broadband Exchange Notes, an
Event of Default would occur if:
(a) a court having jurisdiction enters a decree or order for:
- relief in respect of AT&T in an involuntary case under any
applicable bankruptcy, insolvency, or other similar law now or
hereafter in effect;
- appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator, or similar official of AT&T for all or
substantially all of AT&T's property and assets; or
- the winding up or liquidation of AT&T's affairs and such decree or
order shall remain unstayed and in effect for a period of 60
consecutive days; or
(b) AT&T:
- commences a voluntary case under any applicable bankruptcy,
insolvency, or other similar law now or hereafter in effect, or
consents to the entry of an order for relief in an involuntary case
under any such law;
- consents to the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator, or similar
official of such party or for any substantial part of its property;
- effects any general assignment for the benefit of creditors;
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- admits in writing its inability to pay its debts generally as they
become due; or
- takes corporate action in furtherance of any of the foregoing.
The New Broadband Indenture's provisions relating to Events of Defaults
apply to Broadband and each cable guarantor. However, the New Broadband
Indenture would extend the period for which the court's decree or order for the
winding up or liquidation of the Obligors' affairs would be required to remain
unstayed and in effect to trigger an event of default to 180 consecutive days
from the 60 consecutive days currently required by the AT&T Indenture and would
eliminate as Events of Default (i) the admission in writing by an Obligor of its
inability to pay its debts generally as they become due and (ii) the taking of
an Obligor of corporate action in furtherance of any action specified in clause
(b).
In addition, the New Broadband Indenture shortens to 30 days from the 90
days currently required by the AT&T Indenture the consecutive day period for
which:
- a default by any Obligor in the payment of interest on the New Broadband
Notes of a series when the same becomes due and payable must continue
before triggering an Event of Default and
- a default by any Obligor in the performance of or breach by an Obligor
of any of its other covenants or agreements in the New Broadband
Indenture applicable to all the New Broadband Notes or applicable to the
New Broadband Notes of any series must continue after written notice is
received from the trustee or from holders of 25% or more in aggregate
principal amount of the New Broadband Notes of all affected series
before triggering an Event of Default.
In addition, the AT&T Indenture requires that the trustee or holders of not
less than 25% in aggregate principal amount of the affected series of Broadband
Exchange Notes then outstanding give notice of any event of default set forth in
clauses (a) and (b) above to declare the principal amount of and accrued
interest, if any, on such Broadband Exchange Notes to be immediately due and
payable. The New Broadband Indenture eliminates this requirement and if an event
of default specified in clauses (a) and (b) above occurs with respect to any
Obligor, the principal amount of and accrued interest, if any, on each issue of
New Broadband Notes then outstanding shall be and become immediately payable
without any notice or other action on the part of the trustee or any holder.
An additional Event of Default not included in the AT&T Indenture that
occur under the New Broadband Indenture if, at any time, any cable guarantee is
not (or claimed by any of AT&T Comcast, Comcast Cable, MediaOne or TCI not to
be) in full force and effect.
Another change in the New Broadband Indenture as compared to the AT&T
Indenture is that the New Broadband Indenture will require certain officers of
Broadband to certify no later than 120 days after the end of each fiscal year,
as to their knowledge, as to Broadband's compliance with all conditions and
covenants under the New Broadband Indenture, such compliance to be determined
without regard to any period of grace or requirement of notice provided under
the New Broadband Indenture.
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DESCRIPTION OF THE NEW AT&T NOTES
The New AT&T Notes will be direct unsecured and unsubordinated obligations
of AT&T. The AT&T Eligible Notes were issued under the AT&T Indenture. The New
AT&T Notes will be issued under the AT&T Indenture, as amended by a supplemental
indenture that will have the purpose of, among other things, effecting the note
amendment with respect to each series of New AT&T Notes and each other series of
AT&T Notes that have consented to the note amendment, each as described in this
section and under "Description of the Note Amendment." We refer to this
supplemental indenture as the "New AT&T Supplemental Indenture." The terms of
the New AT&T Notes include those stated in the AT&T Indenture, those stated in
the New AT&T Supplemental Indenture and those made a part of the AT&T Indenture
by reference to the Trust Indenture Act of 1939.
The summary of the material provisions of the New AT&T Notes provided in
this section should be read in conjunction with provisions of the AT&T Indenture
summarized under the subheadings "-- Additional Debt," "-- Certain Covenants,"
"-- Modification of the AT&T Indenture," "-- Events of Default," "-- Discharge
and Defeasance," "-- No Personal Liability of Stockholders, Officers, Directors
or Employees," "-- Concerning the Trustee," "-- Governing Law," "-- Certain
Definitions," "-- Book-Entry System," "-- Certificated Notes" and "-- Same-Day
Payment" under "Description of the Broadband Exchange Notes." Because this is a
summary, it may not contain all the information that is important to you. You
should read both the AT&T Indenture and the New AT&T Supplemental Indenture,
which have been filed as exhibits to the registration statement of which this
prospectus is a part, in their entirety.
The terms of the New AT&T Notes are substantially identical to the terms of
the AT&T Eligible Notes, except that:
- the interest rate on the applicable New AT&T Notes will be adjusted
automatically upon completion of the AT&T Comcast transaction, as
described in further detail under "-- Interest Payments" below;
- the maturity date of the New AT&T Notes issued in exchange for the 6.50%
AT&T Eligible Notes Due March 15, 2029 will be changed automatically to
March 15, 2013 upon completion of the AT&T Comcast transaction; and
- the merger covenant applicable to the New AT&T Notes will be the AT&T
Indenture merger covenant as amended by the note amendment, which is
described in greater detail under "Description of the Broadband Exchange
Notes -- Certain Covenants -- Consolidation, Merger or Sale."
BASIC TERMS OF THE NEW AT&T NOTES
The New AT&T Notes:
- will rank equally with all of AT&T's other unsecured and unsubordinated
debt;
- will be obligations only of AT&T;
- will be issued up to $5,485,563,000 in aggregate principal amount of
notes comprised as follows:
o up to $2,000,000,000 in principal amount of New AT&T Notes Due 2004
(Series 1), maturing on March 15, 2004, with interest payable
semiannually on each March 15 and September 15, beginning the first
March 1 or September 1 occurring after the initial issuance of the New
AT&T Notes Due 2004 (Series 1), to holders of record on the preceding
March 1 and September 1;
o up to $400,000,000 in principal amount of New AT&T Notes Due 2004
(Series 2), maturing on April 1, 2004, with interest payable
semiannually on each April 1 and October 1, beginning the first April 1
or October 1 occurring after the initial issuance of the New AT&T Notes
Due 2004 (Series 2), to holders of record on the preceding March 15 and
September 15;
o up to $25,000,000 in principal amount of New Medium-Term Notes, Series A
(subseries 1) Due May 15, 2025, maturing on May 15, 2025, with interest
payable semiannually on each May 15
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and November 15, beginning the first May 15 or November 15 occurring after the
initial issuance of the New Medium-Term Notes Due 2025 Series A (subseries 1)
Due May 15, 2025, to holders of record on the preceding May 1 and November 1;
o up to $50,000,000 in principal amount of New Medium-Term Notes, Series A
(subseries 2) Due May 15, 2025, maturing on May 15, 2025, with interest
payable semiannually on each May 15 and November 15, beginning the first
May 15 or November 15 occurring after the initial issuance of the New
Medium-Term Notes Due 2025 Series A (subseries 2) Due May 15, 2025, to
holders of record on the preceding May 1 and November 1;
o up to $3,000,000,000 in principal amount of New AT&T Notes Due 2013,
maturing on March 15, 2029, however upon the completion of the AT&T
Comcast transaction, the maturity will be changed automatically to March
15, 2013, with interest payable semiannually on each March 15 and
September 15, beginning the first March 15 or September 15 occurring
after the initial issuance of the New AT&T Notes Due 2013, to holders of
record on the preceding March 1 and September 1; and
o up to $10,563,000 in principal amount of New FRN Medium-Term Notes,
Series A Due 2054, maturing on December 28, 2054, with interest payable
semiannually on each June 28 and December 28, beginning the first June
28 or December 28 occurring after the initial issuance of the New FRN
Medium-Term Notes, Series A Due 2054, to holders of record on the
preceding June 13 and December 13;
- will be issued issuable in fully registered form, in denominations of
$1,000 and multiples thereof, other than the New FRN Medium-Term Notes,
Series A Due 2054, which will be issued in denominations of $25,000 and
multiples of $1,000 thereof.
AT&T has applied to have each series of the New AT&T Notes, other than
those issued in exchange for Series A Medium-Term Notes, listed on the New York
Stock Exchange. Application has been made to have the New AT&T Notes Due 2004
(Series 1) and the New AT&T Notes Due 2013 additionally listed on the Luxembourg
Stock Exchange. See "-- Luxembourg Listing" for more information with respect to
the proposed listing of the New AT&T Notes Due 2004 (Series 1) and the New AT&T
Notes Due 2013.
AT&T does not intend to apply for listing of the New AT&T Notes issued in
exchange for the Series A Medium-Term Notes on any national exchange.
INTEREST PAYMENTS
Initially, each series of New AT&T Notes will have the same interest rate
as the series of AT&T Eligible Notes for which it is exchangeable. Interest
accrued and unpaid on any AT&T Eligible Notes accepted in an exchange offer will
be paid along with the first payment of interest on the relevant series of New
AT&T Notes.
Upon completion of the AT&T Comcast transaction, the interest rate on each
applicable series of New AT&T Notes will be adjusted automatically as set forth
on the cover of this prospectus.
Except with respect to the New FRN Medium-Term Notes, Series A Due 2054
described below, interest for the New AT&T Notes will be computed on the basis
of a 360-day year consisting of twelve 30-day months. Interest on the notes will
accrue from the date of original issuance, which will be the date the exchange
offer is completed with respect to each series of New AT&T Notes, or from the
most recent interest payment date to which interest has been paid and is payable
semiannually on interest payment dates described of each year.
NEW FRN MEDIUM-TERM NOTES, SERIES A DUE 2054
Initially the New FRN Medium-Term Notes, Series A Due 2054 will have the
same interest rate as the series of AT&T Eligible Notes for which they are
exchangeable. Upon completion of the AT&T Comcast transaction, the New FRN
Medium-Term Notes, Series A Due 2054 will bear interest at the
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interest rate calculated with reference to the Commercial Paper Rate and the New
Spread described below.
The rate of interest on each New FRN Medium-Term Note, Series A Due 2054
will be reset monthly commencing the 28th calendar day of the first month
occurring after the initial issuance of the New FRN Medium-Term Notes, Series A
Due 2054 and on completion of the AT&T Comcast Transaction (such period being
the "Interest Reset Period" for such New FRN Medium-Term Note, Series A Due 2054
and the first date of each Interest Reset Period being an "Interest Reset
Date"); provided, however, that the interest rate in effect from the date of
issue to the first Interest Reset Date (the "Initial Interest Reset Date") with
respect to a New FRN Medium-Term Note, Series A Due 2054 will be the same
interest rate as the series of AT&T Eligible Notes for which it is exchangeable.
If any Interest Reset Date for any New FRN Medium-Term Note, Series A Due
2054 would otherwise be a day that is not a business day, such Interest Reset
Date will be postponed to the next succeeding business day.
For purposes of this section "Spread" refers to the Old Spread until the
completion of the AT&T Comcast Transaction and to the New Spread thereafter. The
interest rate on each New FRN Medium-Term Note, Series A Due 2054 will be
calculated by reference to the Commercial Paper Rate plus or minus the Spread.
Interest payments on New FRN Medium-Term Note, Series A Due 2054 will be the
amount of interest accrued from, and including, the date of issue or the last
date to which interest has been paid to, but excluding, the Interest Payment
Date or date of maturity, as the case may be; provided that if the maturity date
that would otherwise fall on a day that is not a business day is postponed or
changed as described above, the interest payable on such date shall accrue to,
but exclude, the date that would have been the or maturity date had it been a
business day.
With respect to a New FRN Medium-Term Note, Series A Due 2054, accrued
interest shall be calculated by multiplying the principal amount of such New FRN
Medium-Term Note, Series A Due 2054 by an accrued interest factor. Such accrued
interest factor will be computed by adding the interest factors calculated for
each day in the Interest Reset Period or from the last date from which accrued
interest is being calculated. The interest factor for each such day is computed
by dividing the interest rate applicable to such day by 360. The interest rate
applicable to any day that is an Interest Reset Date is the applicable rate as
reset on such date. The interest rate applicable to any other day is the
interest rate for the immediately preceding Interest Reset Date (or, if none,
the Initial Interest Rate, as described below).
Upon the request of the holder of any New FRN Medium-Term Note, Series A
Due 2054, the calculation agent with respect to the New FRN Medium-Term Notes,
Series A Due 2054 will provide the interest rate then in effect and, if
determined, the interest rate which will become effective on the next Interest
Reset Date with respect to such New FRN Medium-Term Note, Series A Due 2054.
All percentages resulting from any calculation of the rate of interest on a
New FRN Medium-Term Note, Series A Due 2054 will be rounded, if necessary, to
the nearest one-hundred-thousandth of a percentage point (.0000001), with five
one-millionths of a percentage point rounded upward, and all dollar amounts used
in or resulting from such calculation on New FRN Medium-Term Notes, Series A Due
2054 will be rounded to the nearest cent (with one-half cent rounded upward).
The interest rate for each Interest Reset Date subsequent to the Initial
Interest Reset Date will be determined by the calculation agent as follows. The
"Calculation Date" pertaining to any Commercial Paper Interest Determination
Date will be the earlier of, either (i) the tenth calendar day after such date,
or, if such tenth day is not a business day, the next succeeding business day,
or (ii) the business day preceding the applicable Interest Payment Date or date
of maturity, as the case may be.
The "Commercial Paper Rate" for each Interest Reset Date will be determined
on the Calculation Date by the calculation agent as of the second business day
prior to such Interest Reset Date (a "Commercial Paper Interest Determination
Date") and shall be the Money Market Yield (as defined below) on such Commercial
Paper Interest Determination Date of the rate for commercial paper having a
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30-day maturity, as such rate shall be published by the Board of Governors of
the Federal Reserve System in "Statistical Release H.15(519), Selected Interest
Rates" ("H.15(519)"), or any successor publication, under the heading
"Commercial Paper." In the event that such rate is not published prior to 9:00
A.M., New York City time, on the Calculation Date, then the Commercial Paper
Rate shall be the Money Market Yield on such Commercial Paper Interest
Determination Date of the rate for commercial paper having a 30-day maturity as
published by the Federal Reserve Bank of New York in its daily statistical
release "Composite 3:30 P.M. Quotations for U.S. Government Securities"
("Composite Quotations") under the heading "Commercial Paper." If by 3:00 P.M.,
New York City time, on such Calculation Date such rate is not yet published in
either H.15(519) (or any successor publication) or Composite Quotations, then
the Commercial Paper Rate shall be the Money Market Yield of the arithmetic mean
of the offered rates as of 11:00 A.M., New York City time, on such Commercial
Paper Interest Determination Date of three leading dealers of commercial paper
in The City of New York selected by the calculation agent for commercial paper
having a 30-day maturity, placed for an industrial issuer whose bond rating is
AA, or the equivalent, from a nationally recognized rating agency; provided,
however, that if the dealers selected as aforesaid by the calculation agent are
not quoting offered rates as mentioned in this sentence, the rate of interest in
effect for the applicable period will be the rate of interest in effect on such
Commercial Paper Interest Determination Date.
"Money Market Yield" shall be a yield calculated in accordance with the
following formula:
D x 360
Money Market Yield = x 100
------------
360 -(D x M)
where "D" refers to the applicable per annum rate for commercial paper quoted on
a bank discount basis and expressed as a decimal, and "M" refers to the actual
number of days in the period for which interest is being calculated.
The "Old Spread" and "New Spread" to the Commercial Paper Rate are adjusted
each Interest Period based upon the Standard and Poor's (S&P) long-term senior
debt rating of AT&T as follows:
AT&T RATING OLD SPREAD NEW SPREAD
----------- ---------------- ----------------
AAA............................................... -30 basis points +30 basis points
AA+............................................... -27 basis points +33 basis points
AA................................................ -25 basis points +35 basis points
AA-............................................... -23 basis points +37 basis points
A+................................................ -21 basis points +39 basis points
A................................................. -19 basis points +41 basis points
A-................................................ -17 basis points +43 basis points
BBB+.............................................. -15 basis points +45 basis points
BBB............................................... -13 basis points +47 basis points
BBB-.............................................. -11 basis points +49 basis points
Below BBB......................................... +35 basis points +95 basis points
If S&P ceases to exist, then the calculation agent and AT&T shall mutually
select a nationally recognized securities ratings agency, with preference, if
possible, given to one contemporaneously assigning the same rating to AT&T as
that of S&P at the time of S&P's cessation, to act as a substitute rating
agency, and mutually make any necessary adjustments to provide for an equivalent
ratings scale.
Interest payments will include the amount of interest accrued from and
including the most recent Interest Payment Date to which interest has been paid
(or from and including the original issue date if no interest has been paid on
the notes) to, but excluding the applicable Interest Payment Date.
The Aggregate Interest Amount shall be the sum of (i) the Interest Amount
calculated for such Interest Period, (ii) the Aggregate Carry-over Interest
Amount in respect of such Interest Period and
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(iii) the Compounding Amount. If the Interest Reset Date is an Interest Payment
Date, then the Aggregate Interest Amount will be the Interest Payment Amount
payable on such Interest Payment Date. If the Interest Reset Date is not an
Interest Payment Date, then such amount shall be deemed to be the Aggregate
Carry-over Interest Amount for the next succeeding Interest Period and no
payment shall be made on that date. Interest Amount means with respect to each
Interest Period, the product of the Principal Amount and an accrued Interest
Factor. This accrued Interest Factor will be computed by adding the Interest
Factors calculated for each day in the Interest Period. The Interest Factor for
the notes for each such day will be computed by dividing the Interest Rate
applicable to such day by 360.
Interest Period means each of the following periods: (i) from and including
the original issue date to but excluding the Initial Reset Date and (ii) from
and including each Interest Reset Date (other than the maturity date) to but
excluding the next Interest Reset Date. Aggregate Carry-over Interest Amount
shall be zero with respect to each interest period immediately succeeding an
Interest Payment Date and with respect to each of the succeeding Interest
Periods, means the amount calculated as provided above. Aggregate Interest
Amount means the amount calculated as provided above. Compounding Amount means
the amount which is the product of (i) the accrued Interest Factor for any
relevant Interest Period and (ii) the Aggregate Carry-over Interest Amount for
such Interest Period.
ADDITIONAL TERMS PERTAINING ONLY TO THE NEW AT&T NOTES DUE 2004 (SERIES 1) AND
NEW AT&T NOTES DUE 2013
PAYMENT OF ADDITIONAL AMOUNTS
AT&T will, subject to the exceptions and limitations set forth below, pay
as additional interest on the New AT&T Notes Due 2004 (Series 1) and the New
AT&T Notes due 2013 such additional amounts as are necessary so that the net
payment by AT&T or a paying agent of the principal of and interest on the New
AT&T Notes Due 2004 (Series 1) and the New AT&T Notes Due 2013 to a person that
is not a United States Holder (as defined above under "Description of the
Broadband Exchange Notes -- Additional Terms Pertaining Only to the 6.00%
Broadband Exchange Notes Due March 15, 2009"), after deduction for any present
or future tax, assessment or governmental charge of the United States or a
political subdivision or taxing authority thereof or therein, imposed by
withholding with respect to the payment, will not be less than the amount that
would have been payable in respect of such New AT&T Notes had no such
withholding or deduction been required.
AT&T's obligation to pay additional amounts shall not apply:
(1) to a tax, assessment or governmental charge that is imposed or
withheld solely because the holder, or a fiduciary, settlor, beneficiary,
member or shareholder of the holder if the holder is an estate, trust,
partnership or corporation, or a person holding a power over an estate or
trust administered by a fiduciary holder:
(a) is or was present or engaged in trade or business in the United
States or has or had a permanent establishment in the United States;
(b) has a current or former relationship with the United States,
including a relationship as a citizen or resident thereof;
(c) is or has been a foreign or domestic personal holding company,
a passive foreign investment company or a controlled foreign corporation
with respect to the United States or a corporation that has accumulated
earnings to avoid United States federal income tax; or
(d) is or was a "10-percent shareholder" of AT&T as defined in
section 871(h)(3) of the United States Internal Revenue Code or any
successor provision;
(2) to any holder that is not the sole beneficial owner of such New
AT&T Notes, or a portion thereof, or that is a fiduciary or partnership,
but only to the extent that the beneficial owner, a beneficiary or settlor
with respect to the fiduciary, or a member of the partnership would not
have
130
been entitled to the payment of an additional amount had such beneficial
owner, beneficiary, settlor or member received directly its beneficial or
distributive share of the payment;
(3) to a tax, assessment or governmental charge that is imposed or
withheld solely because the holder or any other person failed to comply
with certification, identification or information reporting requirements
concerning the nationality, residence, identity or connection with the
United States of the holder or beneficial owner of such notes, if
compliance is required by statute, by regulation of the United States
Treasury Department or by an applicable income tax treaty to which the
United States is a party as a precondition to exemption from such tax,
assessment or other governmental charge;
(4) to a tax, assessment or governmental charge that is imposed other
than by withholding by AT&T or an exchange agent from the payment;
(5) to a tax, assessment or governmental charge that is imposed or
withheld solely because of a change in law, regulation, or administrative
or judicial interpretation that becomes effective more than 15 days after
the payment becomes due or is duly provided for, whichever occurs later;
(6) to an estate, inheritance, gift, sales, excise, transfer, wealth
or personal property tax or a similar tax, assessment or governmental
charge;
(7) to any tax, assessment or other governmental charge any paying
agent must withhold from any payment of principal of or interest on such
note, if such payment can be made without such withholding by any other
paying agent; or
(8) in the case of any combination of the above items.
The New AT&T Notes Due 2004 (Series 1) and the New AT&T Notes Due 2013 are
subject in all cases to any tax, fiscal or other law or regulation or
administrative or judicial interpretation applicable. Except as specifically
provided under this heading "-- Payment of Additional Amounts" and under the
heading "-- Redemption Upon a Tax Event," we do not have to make any payment
with respect to any tax, assessment or governmental charge imposed by any
government or a political subdivision or taxing authority.
REDEMPTION UPON A TAX EVENT
If (a) AT&T becomes or will become obligated to pay additional amounts as
described above under the heading "-- Payment of Additional Amounts" as a result
of any change in, or amendment to, the laws (or any regulations or rulings
promulgated thereunder) of the United States (or any political subdivision or
taxing authority thereof or therein), or any change in, or amendments to, any
official position regarding the application or interpretation of such laws,
regulations or rulings, which change or amendment is announced or becomes
effective on or after March 23, 1999, or (b) a taxing authority of the United
States takes an action on or after March 23, 1999, whether or not with respect
to AT&T or any of its affiliates, that results in a substantial probability that
AT&T will or may be required to pay such additional amounts, then AT&T may, at
its option, redeem, as a whole, but not in part, the New AT&T Notes Due 2004
(Series 1) and/or the New AT&T Notes Due 2013 on any interest payment date on
not less than 30 nor more than 60 calendar days' prior notice, at a redemption
price equal to 100% of their principal amount, together with interest accrued
thereon to the date fixed for redemption; provided that AT&T determines, in its
business judgment, that the obligation to pay such additional amounts cannot be
avoided by the use of reasonable measures available to it, not including
substitution of the obligor under such notes. No redemption pursuant to (b)
above may be made unless AT&T shall have received an opinion of independent
counsel to the effect that an act taken by a taxing authority of the United
States results in a substantial probability that AT&T will or may be required to
pay the additional amounts described above under the heading "-- Payment of
Additional Amounts" and AT&T shall have delivered to the trustee a certificate,
signed by a duly authorized officer stating, that based on such opinion AT&T is
entitled to redeem the notes pursuant to their terms.
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OPTIONAL REDEMPTION
AT&T shall have the right, at its option, to redeem certain of the New AT&T
Notes, other than the New AT&T Notes Due 2004 (Series 2), at any time or from
time to time during specified periods, with at least 30 days, but not more than
60 days, prior notice mailed to the registered address of each holder of such
series of notes.
On and after the redemption date, interest will cease to accrue on the New
AT&T Notes or any portion of the New AT&T Notes called for redemption (unless
AT&T defaults in the payment of the redemption price and accrued interest). On
or before the redemption date, AT&T will deposit with a paying agent (or the
trustee) money sufficient to pay the redemption price of and accrued interest on
the New AT&T Notes. If less than all of the New AT&T Notes are to be redeemed,
the New AT&T Notes to be redeemed shall be selected by the trustee by such
method as the trustee shall deem fair and appropriate.
The optional redemption terms for each series of notes are described below.
NEW AT&T NOTES DUE 2004 (SERIES 1) AND NEW AT&T NOTES DUE 2013
The New AT&T Notes Due 2004 (Series 1) and the New AT&T Notes Due 2013 will
be redeemable by AT&T at any time or from time to time, as a whole or in part.
If you hold any of these notes and AT&T decides to redeem them then AT&T will
pay you the greater of:
(1) 100% of the principal amount of the series of New AT&T Notes to be
redeemed and
(2) the sum of the present values of the Remaining Scheduled Payments
(as defined under "Description of the Broadband Exchange Notes -- Certain
Definitions") discounted, on a semiannual basis (assuming a 360-day year
consisting of twelve 30-day months), at a rate equal to the sum of the
Treasury Rate (as defined under "Description of the Broadband Exchange
Notes -- Certain Definitions") and:
- 10 basis points for the New AT&T Notes Due 2004 (Series 1)
- 20 basis points for the New AT&T Notes Due 2013.
In the case of each of clause (1) and (2), accrued interest will be payable
to the redemption date.
NEW AT&T NOTES DUE 2004 (SERIES 2)
The New AT&T Notes Due 2004 (Series 2) will not be subject to optional
redemption by AT&T.
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NEW MEDIUM-TERM NOTES, SERIES A DUE MAY 15, 2025 (SUBSERIES 1)
The New Medium-Term Notes, Series A Due May 15, 2025 (subseries 1) will not
be redeemable prior to May 15, 2005. On or after such date, the New Medium-Term
Notes, Series A Due May 15, 2025 (subseries 1) will be redeemable by AT&T at any
time or from time to time, as a whole or in part, at the following prices
(expressed as percentages of the principal amount), together with accrued
interest to the date fixed for redemption:
If redeemed during the 12-month period beginning May 15:
YEAR PERCENTAGE
---- ----------
2005........................................................ 103.7130%
2006........................................................ 103.3417
2007........................................................ 102.9704
2008........................................................ 102.5991
2009........................................................ 102.2278
2010........................................................ 101.8565
2011........................................................ 101.4852
2012........................................................ 101.1139
2013........................................................ 100.7426
2014........................................................ 100.3713
and thereafter at 100%.
NEW MEDIUM-TERM NOTES, SERIES A DUE MAY 15, 2025 (SUBSERIES 2)
The New Medium-Term Notes, Series A Due May 15, 2025 (subseries 2) will not
be redeemable prior to May 15, 2005. On or after such date, the New Medium-Term
Notes, Series A Due May 15, 2025 (subseries 2) will be redeemable by AT&T at any
time or from time to time, as a whole or in part, at the following prices
(expressed as percentages of the principal amount), together with accrued
interest to the date fixed for redemption:
If redeemed during the 12-month period beginning May 15:
YEAR PERCENTAGE
---- ----------
2005........................................................ 104.062%
2006........................................................ 103.656
2007........................................................ 103.250
2008........................................................ 102.843
2009........................................................ 102.437
2010........................................................ 102.031
2011........................................................ 101.625
2012........................................................ 101.219
2013........................................................ 100.812
2014........................................................ 100.406
and thereafter at 100%.
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NEW FRN MEDIUM-TERM NOTES, SERIES A DUE 2054
The New FRN Medium-Term Notes, Series A Due 2054 will not be redeemable
prior to December 28, 2009. On or after such date the New FRN Medium-Term Notes,
Series A Due 2054 will be redeemable prior to maturity at the option of AT&T on
December 28, 2009 and on December 28th every year thereafter with not less than
30 calendar days notice, at the following prices (expressed as a percentage of
the principal amount):
If redeemed on December 28th:
YEAR PERCENTAGE
---- ----------
2009 through 2013........................................... 110.000%
2014 through 2018........................................... 108.000
2019 through 2023........................................... 107.000
2024 through 2028........................................... 106.000
2029 through 2035........................................... 105.500
2036........................................................ 105.000
2037........................................................ 104.375
2038........................................................ 103.750
2039........................................................ 103.125
2040........................................................ 102.500
2041........................................................ 101.875
2042........................................................ 101.250
2043........................................................ 100.625
2044 through 2054........................................... 100.000
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OPTIONAL REPAYMENT TERMS PERTAINING ONLY TO THE NEW FRN MEDIUM-TERM NOTES,
SERIES A DUE 2054
The New FRN Medium-Term Notes, Series A Due 2054 are repayable at the
option of the holders on December 28, 2005 and on each December 28th every third
year thereafter with not less than 30 calendar days notice, at the following
redemption prices (expressed as a percentage of the principal amount) plus
interest accrued from, and including, the last date to which interest has been
paid to but excluding the applicable optional repayment date:
If repaid on December 28th:
YEAR PERCENTAGE
---- ----------
2005........................................................ 99.40%
2008........................................................ 99.52
2011........................................................ 99.64
2014........................................................ 99.78
2017........................................................ 99.92
2020........................................................ 100.00
2023........................................................ 100.00
2026........................................................ 100.00
2029........................................................ 100.00
2032........................................................ 100.00
2035........................................................ 100.00
2038........................................................ 100.00
2041........................................................ 100.00
2044........................................................ 100.00
2047........................................................ 100.00
2050........................................................ 100.00
2053........................................................ 100.00
The New FRN Medium-Term Notes, Series A Due 2054 are repayable at the
option of the holders upon the occurrence and continuance of any Event of
Default specified in the AT&T Indenture at the next Interest Payment Date at
100.00% of principal amount plus interest accrued from, and including, the last
date to which interest has been paid to, but excluding, the Interest Payment
Date for repayment.
In order for the repayment option applicable to a New FRN Medium-Term Note,
Series A Due 2054 to be exercised, the trustee must receive at least 30 days but
no more than 45 days prior to the repayment date (i) the New FRN Medium-Term
Note, Series A Due 2054 with the form entitled "Option to Elect Repayment" on
the reverse of the note duly completed or (ii) a telegram, telex, facsimile
transmission or a letter from a member of a national securities exchange or the
National Association of Securities Dealers, Inc. or a commercial bank or trust
company in the United States setting forth the name of the holder of the note,
the principal amount of the note, the principal amount of the note to be repaid,
the certificate number or a description of the tenor and terms of the note, and
containing a statement that the option to elect repayment is being exercised
thereby and a guarantee that the note to be repaid with the form entitled
"Option to Elect Repayment" on the reverse of the note duly completed will be
received by the trustee not later than five business days after the date of such
telegram, telex, facsimile transmission or letter and such note and form duly
completed are received by the trustee by such fifth business day. The repayment
option may be exercised by the holder of a New FRN Medium-Term Note, Series A
Due 2054 for less than the entire principal amount of the note, provided that
the principal amount of the New FRN Medium-Term Note, Series A Due 2054
remaining outstanding after repayment is an authorized denomination.
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NO MANDATORY REDEMPTION OR SINKING FUND
There will be no mandatory redemption prior to maturity or sinking fund
payments for the New AT&T Notes.
NOTICES
Notices to holders of the New AT&T Notes will be published in authorized
newspapers in The City of New York, in London, and, with respect to any New AT&T
Notes listed on the Luxembourg Stock Exchange, in Luxembourg. It is expected
that publication will be made in The City of New York in The Wall Street
Journal, in London in the Financial Times and in Luxembourg in the Luxemburger
Wort. AT&T will be deemed to have given such notice on the date of each
publication or, if published more than once, on the date of the first such
publication.
LUXEMBOURG LISTING
Application has been made to list the New AT&T Notes Due 2004 (Series 1)
and the New AT&T Notes Due 2013 on the Luxembourg Stock Exchange. In connection
with our listing application, the Amended and Restated Certificate of
Incorporation and the By-laws of AT&T and a legal notice relating to the
issuance of the New AT&T Notes Due 2004 (Series 1) and the New AT&T Notes Due
2013 will be deposited prior to listing with the Chief Registrar of the District
Court of Luxembourg, where copies may be inspected or obtained upon request.
Copies of the above documents, together with this prospectus, any supplements or
amendments hereto, the AT&T Indenture, the New AT&T Supplemental Indenture, and
AT&T's current and future quarterly and annual reports, so long as any of the
New AT&T Notes Due 2004 (Series 1) and the New AT&T Notes Due 2013 are listed on
the Luxembourg stock exchange, may be obtained free of charge from the
Luxembourg exchange agent. We have engaged the Bank of New York (Luxembourg)
S.A. as the Luxembourg exchange agent to act as intermediary between AT&T and
the holders of the New AT&T Notes Due 2004 (Series 1) and the New AT&T Notes Due
2013.
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DESCRIPTION OF AT&T COMCAST TRANSACTION
Comcast and AT&T are planning to combine Comcast with the AT&T broadband
business. 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.
STRUCTURE OF THE TRANSACTION
The AT&T Comcast transaction will occur in several steps. First, AT&T will
transfer the assets and liabilities of AT&T's broadband business to Broadband, a
company newly formed for the purpose of effectuating the AT&T Comcast
transaction. Second, AT&T will spin off Broadband to its shareholders. Third,
Comcast and Broadband will each merge with a different, wholly owned subsidiary
of AT&T Comcast. The Comcast and AT&T shareholders will receive the shares of
AT&T Comcast. The merger agreement provides for all of the steps described above
to occur on the closing date for the mergers. The AT&T Comcast transaction
remains subject to regulatory and other approvals and other conditions,
including the receipt of the specified note consents as described in this
prospectus, and is expected to close by the end of 2002.
Immediately after the completion of the spin off of Broadband, Broadband
Acquisition Corp., a wholly owned subsidiary of AT&T Comcast, will merge with
and into Broadband, with Broadband continuing as the surviving corporation and a
wholly owned subsidiary of AT&T Comcast. This merger is referred to in this
prospectus as the "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
prospectus as the "Comcast merger." After completion of the mergers, the
shareholders of Comcast and Broadband will be shareholders of AT&T Comcast.
TIMING OF CLOSING
The closing date for the AT&T Comcast 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 Broadband spin-off on
the closing date for the transaction at a time that is mutually agreeable to
Comcast and AT&T.
THE MERGER AGREEMENT
The following summary of the terms of the merger agreement for the AT&T
Comcast transaction, and of the agreements related to that transaction, is
qualified in its entirety by reference to the complete text of the merger
agreement, as amended, which is included as an exhibit to the registration
statement of which this prospectus is a part.
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 AT&T Comcast
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 or amend or modify
in any 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
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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. Each party has also agreed to restrictions on its
ability to issue equity securities with some exceptions, including in the case
of AT&T the issuance of up to 275 million shares of AT&T common stock in
connection with the acquisition of shares of AT&T Canada and to satisfy
obligations relating to deferred compensation plans and in the case of Comcast
the issuance of shares of Comcast common stock having a value of up to $3
billion. In May 2002, AT&T issued approximately 14 million shares of AT&T common
stock to satisfy obligations relating to deferred compensation plans and in June
2002, AT&T completed an offering of 230 million shares of AT&T common stock in
connection with the acquisition of shares of AT&T Canada.
Covenant to Obtain Regulatory Approvals. Under U.S. antitrust laws,
Comcast and AT&T may not complete the AT&T Comcast transaction until Comcast and
AT&T have notified the Antitrust Division of the United States Department of
Justice and the Federal Trade 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 AT&T Comcast
transaction. On February 21, 2002, Comcast and AT&T received a request from the
United States Department of Justice, the reviewing agency, for additional
information regarding the AT&T Comcast transaction. Comcast and AT&T complied
with this request, and the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, referred to as the HSR Act, applicable to the AT&T
Comcast transaction has expired. At this time, the HSR Act no longer prohibits
the parties from closing the AT&T Comcast transaction. To the extent that the
Antitrust Division of the U.S. Department of Justice requests any additional
information from AT&T and Comcast concerning the AT&T Comcast transaction, AT&T
and Comcast expect to continue to cooperate.
Under federal communications law and local franchise requirements, Comcast
and AT&T must also obtain the approval of the FCC and a number of state and
local authorities in connection with the AT&T Comcast transaction. Comcast and
AT&T have filed the required applications with the FCC and these state and local
authorities. The FCC and a number of these state and local authorities have not
completed their reviews of 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 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.
TOPrS Covenant. AT&T Comcast has agreed, on the earliest date on which
the Broadband debt known by the acronym TOPrS as to which AT&T has guaranteed
certain obligations may be redeemed, to either redeem that series of TOPrS,
cause AT&T to be released from any guarantee or post a letter of credit in
respect of that debt. As of the date of this filing, $500 million in principal
amount of outstanding TOPrS remains subject to this obligation.
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
Microsoft transaction described below under "-- The Exchange Agreement and
Instrument of Admission -- QUIPS Exchange" 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 Microsoft transaction
or, if it appears reasonably likely that the Microsoft transaction will not
occur, the transfer of the obligations under the QUIPS (the "QUIPS Transfer")
from
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AT&T to Broadband, in either case on the closing date for the AT&T Comcast
transaction. If neither the Microsoft transaction nor the QUIPS Transfer occurs
on the closing date for the AT&T Comcast transaction during this period,
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, and will indemnify AT&T for certain possible related
liabilities. 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 Broadband with sufficient funds to pay AT&T the QUIPS fair market value.
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 Microsoft
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 Microsoft
transaction and (3) AT&T, and not 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 Microsoft 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.
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 prospectus and is not
adverse to the other party.
POST-TRANSACTION GOVERNANCE ARRANGEMENTS
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 then existing Comcast directors designated by
Comcast, five of whom will be then existing AT&T directors designated by
AT&T, and two of whom will be independent persons jointly designated by
Comcast and AT&T. Except for pre-approved designees, the director
designees 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 preapproved Comcast director designees and C. Michael
Armstrong is a pre-approved AT&T director designee;
- the term of the AT&T Comcast Board will not expire until the 2004 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 directors will be able to be removed
only for cause, AT&T Comcast shareholders will not be able to replace the
initial AT&T
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Comcast Board members prior to that meeting. After the 2004 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;
- 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
nonexecutive Chairman of the Board after April 1, 2004 and until the 2005
annual meeting of AT&T Comcast shareholders. After the 2005 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. Removal of the Chairman of the Board will require
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 sixth anniversary of the 2004
annual meeting of shareholders;
- 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 sixth anniversary of the 2004 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;
- 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 membership interests
representing a majority of the voting power of all Sural LLC equity; and
- AT&T Comcast will adopt a shareholder rights plan 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.
EMPLOYEE BENEFITS MATTERS
In the merger agreement, AT&T Comcast has agreed to honor the terms of all
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 of Broadband and its subsidiaries (other than those subject to
collective bargaining obligations or agreements) aggregate employee benefits and
compensation that are substantially comparable in the aggregate to those
provided by Broadband and its subsidiaries as of the completion of the AT&T
Comcast transaction, other than benefits provided under severance or separation
plans of Broadband or its subsidiaries. Until December 31, 2003, AT&T Comcast
has agreed to continue certain severance plans of Broadband and its subsidiaries
without adverse change.
AT&T Comcast has also agreed to special severance arrangements for AT&T
executive officers expected to become employees of Broadband prior to
consummation of the AT&T Comcast merger transaction. Based on currently
available information, if all such executive officers were terminated without
cause immediately following completion of the AT&T Comcast transaction, they
would receive severance payments approximately equal in the aggregate to
$44,700,000.
COVENANT REGARDING COMCAST'S AT&T STOCK. Comcast and AT&T have agreed
that, prior to the Broadband spin-off, Comcast will exchange all of its shares
of AT&T common stock for shares of a newly
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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 cap described below, 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. Based on the
closing price of AT&T common stock of $12.06 per share on October 2, 2002, the
most recent practicable date prior to the printing and mailing of this
prospectus, Comcast's AT&T interest had a value of approximately $500.7 million.
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.
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:
- 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 AT&T Comcast 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;
- 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,
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 Broadband spin-off;
- execution of all of the transaction agreements described or referred to
in the merger agreement;
- 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 Broadband
spin-off will be
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tax-free, the mergers will not cause the separation and the Broadband
spin-off to fail to qualify as tax-free, and the separation and the
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 the consent of, 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 outstanding as of December 19, 2001, which was approximately
$12.7 billion.
Additional Conditions to the Obligations of AT&T. The obligations of
AT&T to consummate the 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 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
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 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.
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:
o 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;
o the other party breaches the merger agreement such that the related
closing conditions cannot be satisfied by March 1, 2003; or
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o 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.
- AT&T may terminate the merger agreement if the closing date for the AT&T
Comcast 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
AT&T Comcast transaction by the 60th day after the QUIPS Failure Date.
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.
EXPENSES
The merger agreement provides that all costs and expenses incurred in
connection with the AT&T Comcast 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 Broadband that are in excess of $120 million (exclusive of any costs
and expenses incurred by Broadband as described in clauses (2), (3), (4) and (5)
of this sentence), (2) Broadband will pay any costs and expenses incurred in
connection with any financing arrangement entered into by Broadband, except that
Comcast will pay any costs and expenses incurred in connection with the credit
facilities referred to in the first sentence of the second paragraph under "Risk
Factors -- Risk Relating to the AT&T Comcast Transaction -- AT&T Comcast and its
subsidiaries may not be able to obtain the necessary financing at all or on
terms acceptable to it," (3) 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) 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 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 the prospectus and the
registration statement used in connection with the AT&T Comcast transaction.
However, the merger agreement does not expressly contemplate the exchange
offer described in this prospectus. AT&T and Comcast have agreed on a framework
to allocate the effective costs of note consents obtained by means of this
exchange offer.
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 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 shareholders of Comcast or AT&T, respectively, unless
such required approval is obtained.
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THE SEPARATION AND DISTRIBUTION AGREEMENT
The following summary of the separation and distribution agreement, as
amended, is qualified in its entirety by reference to the complete text of the
separation and distribution agreement, as amended, which is an exhibit to the
registration statement of which this prospectus is a part.
THE SEPARATION
Assignment. AT&T will assign and transfer to 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 Broadband or 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 Group 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 Group balance sheet dated as of December 31, 2000; and
- assets that are not reflected in the AT&T Broadband Group balance sheet
or the AT&T Communications Group 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, Broadband will assume all
of the liabilities of AT&T's broadband business that are not already liabilities
of Broadband or a 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 Group 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 Group 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 Group balance sheet, in
each case dated as of December 31, 2000; and
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- Liabilities that are not reflected in the 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.
TIMING OF THE SEPARATION AND THE BROADBAND SPIN-OFF
The separation and the Broadband spin-off are scheduled to occur on the
closing date for the mergers. See "-- Timing of Closing." On the closing date,
the separation will occur prior to the Broadband spin-off which will occur prior
to the mergers.
REPAYMENT OF INTRACOMPANY DEBT
Broadband has agreed to pay to AT&T at the completion of the AT&T Comcast
transaction an amount equal to the amount of debt that it or any Broadband
subsidiary owes to AT&T or any AT&T subsidiary, other than Broadband or any
Broadband subsidiary, in exchange for a contribution of such debt to Broadband's
capital and for the contribution of the Broadband business. As described under
"Other Indebtedness and the Cross-Guarantees -- Description of New Credit
Facilities" Comcast has agreed to arrange for the financing necessary to permit
Broadband to repay debt owed by Broadband and its subsidiaries to AT&T and its
subsidiaries, other than Broadband and its subsidiaries. As described under
"Other Indebtedness and the Cross-Guarantees -- Description of New Credit
Facilities" on May 3, 2002, Broadband and AT&T Comcast entered into definitive
credit agreements arranged by Comcast with a syndicate of lenders providing for
the financing that is anticipated to be necessary to repay this intracompany
debt, which as of June 30, 2002, was $6.49 billion. The amount that Broadband
would otherwise be required to pay to AT&T upon completion of the AT&T Comcast
transaction to satisfy intercompany indebtedness then outstanding will be
reduced based upon the aggregate principal amount of New Broadband Notes issued
in the exchange. 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. See "Risk Factors -- Risks Relating to the AT&T Comcast
Transaction -- AT&T Comcast and its subsidiaries may not be able to obtain the
necessary financing at all or on terms acceptable to it."
AT&T has agreed to repay at the completion of the AT&T Comcast transaction
any debt that it or any of its subsidiaries, other than Broadband or any
Broadband subsidiary, owes to Broadband or any Broadband subsidiary.
POST-SPIN-OFF TRANSACTIONS
The ability of AT&T and 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 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 Broadband spin-off may be
limited for a period of 25 months following the Broadband spin-off.
CONDITIONS TO THE COMPLETION OF THE BROADBAND SPIN-OFF
The obligations of AT&T to complete the separation and the 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
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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 Broadband spin-off
to qualify as a tax-free distribution to AT&T, Broadband and the AT&T
shareholders and absence of any condition likely to prevent the Broadband
spin-off from qualifying as a tax-free distribution to AT&T, Broadband
and the AT&T shareholders;
- absence of a legal prohibition on the separation or the Broadband
spin-off; 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 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 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 Broadband spin-off, subject to certain exceptions
specified in the separation and distribution agreement.
Indemnification by AT&T. After completion of the Broadband spin-off,
AT&T will indemnify 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.
Indemnification by Broadband. After completion of the Broadband
spin-off, 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 Broadband or any of its subsidiaries or any other person
to pay any liabilities, or perform under any contracts, of AT&T's
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 Broadband, and
- if neither the Microsoft 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, if 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,
Broadband will indemnify AT&T against 50% of the taxes and related costs
assessed against AT&T resulting from the
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disqualification of the separation and the 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 Broadband occurring after the Broadband spin-off, from Broadband's
failure to remain actively engaged in a trade or business or from the failure of
any representation made with respect to Broadband in connection with certain tax
opinions and Internal Revenue Service rulings, then 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 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 Broadband is not required to
indemnify AT&T against any such taxes or related costs.
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 Broadband, in which case the acting party bears full responsibility
for any resulting AT&T liabilities. Broadband's obligation described in the
preceding sentence is reduced by 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. Subject to the next sentence, AT&T and 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 Broadband spin-off or in any other filing made by AT&T or Broadband with
the Securities and Exchange Commission in connection with the separation, the
Broadband spin-off, the Broadband merger or any related agreements. AT&T will
indemnify Broadband and AT&T Comcast for any liability resulting from any untrue
statement or omission of a material fact in any registration statement relating
to the Consumer Services charter amendment proposal, any other proposal related
to the creation of AT&T Consumer Services Group tracking stock, the reverse
stock split proposal or any AT&T 2002 annual meeting proposal other than the
AT&T transaction proposal or the AT&T Comcast charter proposal.
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 AT&T Comcast transaction if, but only
if, such amendment or waiver is in writing and is signed, in the case of an
amendment, by 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.
THE EXCHANGE AGREEMENT AND INSTRUMENT OF ADMISSION
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 by executing the instrument of admission. On
March 11, 2002, Comcast, AT&T, AT&T Comcast and Microsoft amended the exchange
agreement and instrument of admission. The following summary of the exchange
agreement and the instrument of admission, in each case as amended, is qualified
in its entirety by reference to the
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complete texts of the exchange agreement and the instrument of admission, in
each case as amended, which are incorporated by reference and attached as
exhibits to the registration statement of which this prospectus is a part.
QUIPS EXCHANGE
QUIPS. Microsoft (through a wholly owned subsidiary) holds $5 billion
of aggregate liquidation preference amount of 5% Convertible Quarterly Income
Preferred Securities (referred to in this prospectus 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 Broadband spin-off, Microsoft has
agreed to exchange the QUIPS for a number of shares of Broadband common stock
that, subject to the limitation described in the next sentence, will be
converted in the Broadband merger into 115 million shares of AT&T Comcast Class
A common stock. To the extent necessary so that Microsoft and its affiliates
will not hold more than 4.95% of AT&T Comcast's voting power as a result of the
AT&T Comcast transaction, Microsoft has agreed to accept shares of the
non-voting AT&T Comcast Class A Special common stock in the Broadband merger
instead of an equivalent number of shares of voting AT&T Comcast common stock.
If Microsoft transfers shares of voting AT&T Comcast common stock or its voting
interest in AT&T Comcast is diluted below 4.95%, subject to certain conditions,
Microsoft will have the right to cause AT&T Comcast to exchange the shares of
non-voting AT&T Comcast Class A Special common stock received in the Broadband
merger for shares of voting AT&T Comcast common stock provided that its voting
interest in AT&T Comcast does not exceed 4.95% after the exchange.
Internet Access. Until the fifth anniversary of the Microsoft
transaction, subject to the completion of the Microsoft transaction and the AT&T
Comcast 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. Because Comcast has entered into an access agreement with United Online
and Broadband has entered into an access agreement with each of EarthLink,
Internet Central, Connected Data Systems, Galaxy Internet Services and Connect
Plus International, upon completion of the Microsoft transaction and the AT&T
Comcast transaction AT&T Comcast will be required, with respect to each such
agreement with another ISP, to offer an access agreement to Microsoft on terms
no less favorable than those provided to the other ISP with respect to the
specific cable systems covered under the agreement with the other ISP.
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 Broadband or
AT&T Comcast shareholders.
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Lockup. Prior to six months after completion of the Microsoft
transaction, subject to certain exceptions, Microsoft has agreed that neither
Microsoft nor any of its wholly owned subsidiaries will 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
Microsoft 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 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.
CONDITIONS TO THE COMPLETION OF THE MICROSOFT TRANSACTION
Conditions to the Obligations of Microsoft. The obligations of
Microsoft to complete the Microsoft transaction are subject to the satisfaction
or waiver, to the extent permissible, of the following conditions:
- absence of a material legal prohibition on the Microsoft 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 Microsoft
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 Broadband spin-off, 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 Microsoft 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.
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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 Microsoft transaction
illegal or a permanent injunction prohibiting completion of the Microsoft
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 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 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 prospectus and attached as an exhibit to
the registration statement in which this prospectus is included.
In General. Broadband is currently included in AT&T's federal
consolidated income tax group and Broadband's tax liability will be included in
the consolidated federal income tax liability of AT&T for 2002 until the time of
the Broadband spin-off. The tax sharing agreement provides for tax sharing
payments between Broadband and AT&T for periods prior to the Broadband spin-off,
based on the taxes or tax benefits of hypothetical affiliated groups consisting
of the businesses, assets and liabilities that make up 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 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 Broadband consistent with the allocations
under the tax sharing agreement. As between AT&T and Broadband, certain tax
items are specially allocated to the AT&T group and Broadband group under the
tax sharing agreement.
Broadband Spin-off. AT&T and Broadband have agreed that taxes related
to intercompany transactions that are triggered by the Broadband spin-off will
be generally allocated to Broadband.
Non-Income Tax Liabilities. AT&T and Broadband have agreed that joint
non-income tax liabilities will generally be allocated between AT&T and
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 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.
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Post-Spin-off Tax Attributes. Generally, 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 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.
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, 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
Broadband have entered into various other commercial agreements in connection
with the AT&T Comcast transaction. A brief summary of these agreements follows:
NETWORK SERVICE AGREEMENTS. AT&T and Broadband have entered into principal
network service agreements as follows.
- Master Carrier Agreement. This agreement reflects the rates, terms
and conditions on which AT&T Business Services Group will provide
voice, data and Internet services to Broadband, including both
wholesale services (those used as a component in Broadband's services
to its customers) and "administrative" services (for internal
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 Business Services Group will provide certain local network
connectivity services to Broadband for use in providing local
telephone services to Broadband's subscribers. This agreement consists
of two parts:
o a capital lease from AT&T Business Services Group to Broadband of
certain network switching and transport assets to be used exclusively
by Broadband for a term of up to ten years, commencing January 1,
2001 for initial assets leased under the agreement, and
o an operating agreement for the provision of local network
connectivity, management and operational services in support of
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
Broadband or its controlled affiliates, together with related
services. In addition, Broadband will construct and lease to AT&T new
fiber facilities in the areas served by Broadband's cable systems for
use in providing telecommunications services. The term of the
build-out period will expire on January 8, 2013. 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:
o the origination or termination of interexchange traffic for the other
party, and
o the exchange of local traffic between the parties' local customers.
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- 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 Broadband in
its provision of broadband Internet services to 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 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 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 AT&T Comcast 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 AT&T Comcast transaction, AT&T and Broadband may also
enter into other agreements in connection with the AT&T Comcast transaction.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE AT&T COMCAST TRANSACTION
Subject to the limitations and qualifications described herein, the
following is a summary of the material U.S. federal income tax consequences of
the Broadband spin-off to AT&T and Broadband and the material U.S. federal
income tax consequences of the mergers to Comcast, Broadband, the Broadband
merger subsidiary and the Comcast merger subsidiary. This summary 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). This summary assumes that all conditions to
the AT&T Comcast transaction have been satisfied.
No gain or loss will be recognized by, and no amount will be included in
the income of, AT&T or Broadband upon the separation and the Broadband spin-off
other than gains related to certain intercompany transactions that will be
triggered by the Broadband spin-off.
No gain or loss will be recognized by Comcast, Broadband, the Broadband
merger subsidiary, or the Comcast merger subsidiary as a result of the mergers.
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OTHER INDEBTEDNESS AND THE CROSS-GUARANTEES
DESCRIPTION OF NEW CREDIT FACILITIES
On May 3, 2002, Broadband and AT&T Comcast, as co-borrowers, entered into
definitive credit agreements with a syndicate of lenders led by JPMorgan Chase
Bank, as administrative agent, for an aggregate of approximately $12.8 billion
in order to obtain the financing necessary to complete the AT&T Comcast
transaction. The following summary of the new credit facilities is qualified in
its entirety by reference to the complete texts of the new credit facilities,
which are incorporated by reference and attached as exhibits to the registration
statement in which this prospectus is included.
The new credit facilities include (1) a term loan facility of approximately
$3.18 billion, (2) a revolving loan facility of approximately $2.645 billion
which provides for revolving credit loans and swing line loans and under which
letters of credit may be issued and (3) a bridge loan facility of $7.0 billion.
Availability of borrowings and letters of credit under the new credit facilities
will be subject to satisfaction of conditions precedent on or before March 31,
2003, including, among other customary conditions, (1) the AT&T Comcast
transaction shall occur substantially simultaneously and (2) AT&T Comcast holds
investment-grade credit ratings from both the Standard & Poor's and Moody's
credit reporting agencies at the time of the closing. The term loan will mature
two years after the effective date of the new credit facilities, the revolving
loan will mature five years after the effective date of the new credit
facilities and the bridge loan will mature one year after the effective date of
the new credit facilities.
Loans under the new credit facilities will bear interest per year, at the
option of AT&T Comcast, at:
- the base rate plus a margin ranging from 0% to 0.875% based upon AT&T
Comcast's credit rating or the alternate eurodollar rate plus a margin
ranging from 0.475% to 1.875% based upon AT&T Comcast's credit rating, in
either case for borrowings under the term loan;
- the base rate plus a margin ranging from 0% to 0.625% based upon AT&T
Comcast's credit rating or the alternate eurodollar rate plus a margin
ranging from 0.225% to 1.625% based upon AT&T Comcast's credit rating, in
either case for borrowings under the revolving loan; and
- the base rate plus a margin ranging from 0% to 0.875% based upon AT&T
Comcast's credit rating or the alternate eurodollar rate plus a margin
ranging from 0.475% to 1.875% based upon AT&T Comcast's credit rating, in
either case for borrowings under the bridge loan.
Prior to the effective date of the new credit facilities (or the date of
termination of the commitments under the facilities, if earlier), AT&T Comcast
will pay commitment fees at a rate equal to 0.125% per year on each lender's
commitments under each facility. The fees will accrue from April 26, 2002 and
will be payable on the effective date of the new credit facilities (or the date
of termination of the commitments under the facilities, if earlier).
After the effective date of the new credit facilities, AT&T Comcast will
pay commitment fees at a rate per year ranging from 0.085% to 0.25% based upon
AT&T Comcast's credit rating on the daily average unused portion of the
revolving credit facility. These fees are payable quarterly in arrears.
AT&T Comcast will pay utilization fees at a rate equal to (1) for each day
that the outstanding revolving loans exceed 33% of the combined revolving
commitments on such day, 0.125% or (2) for each day that the outstanding
revolving loans exceed 66% of the combined revolving commitments on such day,
0.25%. These fees are payable quarterly in arrears.
The term loan is repayable during the second year after the effective date
of the new credit facilities in four consecutive quarterly installments of $500
million, $750 million, $750 million and approximately $1.18 billion.
Each of Comcast Cable, MediaOne, TCI, AT&T Comcast, Broadband and each
restricted subsidiary that becomes a party to the guarantee agreement will be a
guarantor of the new credit facilities.
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The new credit facilities contain customary covenants and restrictions on
AT&T Comcast and its restricted subsidiaries' ability to engage in specified
activities, including, but not limited to (1) limitations on subsidiary
indebtedness, (2) limitations on liens, (3) limitations on fundamental changes,
(4) limitations on upstreaming and (5) so long as the bridge facility remains in
effect, limitations on prepayments of other material long-term indebtedness.
After the effective date of the new credit facilities, availability of
borrowings and letters of credit under the revolving loan facility will be
subject to satisfaction of customary conditions.
The new credit facilities also contain financial covenants requiring AT&T
Comcast to maintain (1) a minimum coverage of interest expense and (2) a maximum
leverage ratio.
As noted above, under the terms of the new credit facilities, the
obligations of the lenders to provide the financing upon completion of the AT&T
Comcast transaction are subject to a number of conditions, including the
condition that AT&T Comcast holds investment-grade credit ratings from both the
Standard & Poor's and Moody's credit reporting agencies at the time of the
closing. Accordingly, there can be no assurance that Broadband and AT&T Comcast
will be able to obtain the financing necessary to complete the AT&T Comcast
transaction. See "Risk Factors -- Risks Relating to the AT&T Comcast
Transaction -- AT&T Comcast and its subsidiaries may not be able to obtain the
necessary financing at all or on terms acceptable to it."
OTHER INDEBTEDNESS AND THE PROPOSED CROSS-GUARANTEES
Although Comcast continues to analyze the appropriate capital structure
AT&T Comcast and its subsidiaries should have after completion of the AT&T
Comcast transaction, it currently believes that existing and future investors
will be confused by the multiplicity of present debt obligors and the potential
for different creditworthiness among these obligors. To simplify AT&T Comcast's
capital structure and to insure that the traded debt securities of AT&T Comcast,
Comcast Cable, Broadband, MediaOne and TCI are treated equally, Comcast
currently expects that immediately after completion of the AT&T Comcast
transaction, AT&T Comcast, Comcast Cable, Broadband, MediaOne and TCI will each
fully and unconditionally guarantee each other's traded debt securities.
Comcast does not currently expect that Comcast itself would be a guarantor,
nor would its debt securities be guaranteed, because it believes future
investors will be interested in "pure play" debt securities of AT&T Comcast's
cable communications operations and not Comcast's content assets, such as QVC,
E! Entertainment and Comcast Spectacor.
Comcast also does not currently expect that MediaOne of Delaware, Inc.,
formerly known as Continental Cablevision, Inc. and one of AT&T's cable
subsidiaries to be transferred to Broadband, and which we refer to as
Continental in this prospectus, would be a guarantor, nor would its debt
securities be guaranteed. Continental's indentures contain covenants that
effectively prohibit Continental from guaranteeing its affiliates' debt
obligations. If these indentures were amended to permit guarantees of affiliate
debt obligations, Continental might become a guarantor and its debt securities
might be cross-guaranteed as well.
The following table presents as of June 30, 2002 for each of Comcast Cable,
Broadband, MediaOne, TCI and Continental, their payment obligations for
principal, excluding obligations of their subsidiaries and excluding interest
but including principal accreted under discount obligations, under (a) debt
securities that will be subject, or in the case of Continental, might be
subject, to the cross-guarantees, (b) other contractual liabilities, including
capital leases, none of which will be subject to the cross-guarantees, and (c)
operating leases, none of which will be subject to the cross-guarantees. For
purposes of the table, amounts set forth opposite "guaranteed debt securities"
only include amounts with respect to the person who is the primary obligor and
not with respect to amounts for which that person may be secondarily liable as
guarantor. The table presents for AT&T Comcast the pro forma effect of the New
Credit
154
Facilities, for which all amounts are shown for AT&T Comcast although Broadband
is a co-obligor on those amounts.
PAYMENTS DUE BY PERIOD
-------------------------------------------------
PAYMENT REMAINDER
CONTRACTUAL OBLIGATION TOTAL OF 2002 1-2 YEARS 3-5 YEARS AFTER 5 YEARS
---------------------- --------- --------- --------- --------- -------------
(IN MILLIONS, UNAUDITED)
AT&T Comcast:
New Credit Facility................. $12,825.0 $ -- $10,180.0 $2,645.0 $ --
Other liabilities, including capital
leases........................... -- -- -- -- --
Operating leases.................... -- -- -- -- --
--------- ------ --------- -------- --------
Total AT&T Comcast............... 12,825.0 -- 10,180.0 2,645.0 --
Comcast Cable:
Guaranteed debt securities.......... 8,165.6 1.5 321.3 3,221.1 4,621.7
Other liabilities, including capital
leases........................... -- -- -- -- --
Operating leases.................... -- -- -- -- --
--------- ------ --------- -------- --------
Total Comcast Cable.............. 8,165.6 1.5 321.3 3,221.1 4,621.7
Broadband:
New Broadband Notes(a).............. (a) -- -- -- (a)
Other liabilities, including capital
leases........................... -- -- -- -- --
Operating leases.................... -- -- -- -- --
--------- ------ --------- -------- --------
Total Broadband.................. (a) -- -- -- (a)
MediaOne:
Guaranteed debt securities.......... 302.8 10.4 7.2 82.3 202.9
Other liabilities, including capital
leases........................... -- -- -- -- --
Operating leases.................... 4.8 1.0 3.8 -- --
--------- ------ --------- -------- --------
Total MediaOne................... 307.6 11.4 11.0 82.3 202.9
TCI:
Guaranteed debt securities.......... 5,883.9 30.0 1,748.7 1,165.5 2,939.7
Other liabilities, including capital
leases........................... -- -- -- -- --
Operating leases.................... 55.8 7.2 25.8 15.9 6.9
--------- ------ --------- -------- --------
Total TCI........................ 5,939.7 37.2 1,774.5 1,181.4 2,946.6
--------- ------ --------- -------- --------
Total................................. $27,237.9 $ 50.1 $12,286.8 $7,129.8 $7,771.2
========= ====== ========= ======== ========
Continental:
Potentially guaranteed debt
securities....................... $ 1,800.0 $ -- $ 100.0 $ 875.0 $ 825.0
Other liabilities, including capital
leases........................... 4.2 1.1 3.1 -- --
Operating leases.................... 1.2 0.3 0.9 -- --
--------- ------ --------- -------- --------
Total Continental................ $ 1,805.4 $ 1.4 $ 104.0 $ 875.0 $ 825.0
========= ====== ========= ======== ========
(a) The principal amount of New Broadband Notes to be issued is not presently
determinable.
155
LEGAL MATTERS
The validity of the New AT&T Notes and Broadband Exchange Notes offered
hereby will be passed upon for AT&T by Robert S. Feit, Vice President -- Law and
Secretary, of AT&T Corp. The validity of the New Broadband Notes offered hereby
will be passed upon for Broadband and the cable guarantors by Davis Polk &
Wardwell. Certain legal matters relating to the offering will be passed upon for
the dealer managers by Simpson Thacher & Bartlett.
EXPERTS
AT&T
The audited consolidated financial statements of AT&T Corp. as of December
31, 2001 and 2000, and for each of the three years in the period ended December
31, 2001, incorporated by reference in this prospectus/registration statement,
have been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report thereon appears herein and, insofar as they relate to Liberty Media Group
as of December 31, 2000 and 1999, and for the two years in the period ended
December 31, 2000, by KPMG LLP, independent certified public accountants. Such
financial statements have been so incorporated in reliance on the reports of
such independent accountants given on the authority of such firms as experts in
auditing and accounting.
The consolidated balance sheets of Liberty Media Corporation and
subsidiaries ("New Liberty or Successor") as of December 31, 2001 and 2000, and
the related consolidated statements of operations, comprehensive earnings,
stockholders' equity, and cash flows for the years ended December 31, 2001 and
2000 and the period from March 1, 1999 to December 31, 1999 (Successor periods)
and from January 1, 1999 to February 28, 1999 (Predecessor period) which appear
as an exhibit to the Annual Report on Form 10-K/A of AT&T Corp., have been
incorporated by reference herein in reliance upon the report, dated March 8,
2002, of KPMG LLP, independent certified public accountants, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing.
The KPMG LLP report states that Liberty Media Corporation changed its
method of accounting for derivative instruments and hedging activities in 2001.
In addition, the KPMG LLP report contains an explanatory paragraph that
states that, effective March 9, 1999, AT&T Corp., the former parent company of
New Liberty, acquired Tele-Communications, Inc., the former parent company of
Liberty Media Corporation, in a business combination accounted for as a
purchase. As a result of the acquisition, the consolidated financial information
for the periods after the acquisition is presented on a different basis than
that for the periods before the acquisition and, therefore, is not comparable.
The consolidated financial statements of AT&T Canada Inc. as of December
31, 2001 and 2000, and for each of the years in the three year period ended
December 31, 2001, incorporated in this document by reference to the Annual
Report on Form 10-K/A of AT&T Corp. for the year ended December 31, 2001, have
been so incorporated in reliance on the report of KPMG LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The KPMG LLP report dated February 1, 2002, except as to note 2, which is
as of March 14, 2002, as to note 5, which is as of February 20, 2002 and as to
note 9(h), which is as of May 1, 2002, contains Comments by the Auditors for
U.S. Readers on Canada -- U.S. Reporting Differences which states that in the
United States, reporting standards for auditors require the addition of an
explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
AT&T Canada Inc.'s ability to continue as a going concern such as those
described in note 2 to the consolidated financial statements. The KPMG LLP
report to the shareholders is expressed in accordance with Canadian reporting
standards, which do not permit a reference to such conditions and events in the
auditors' report when these are adequately disclosed in the financial
statements.
156
The consolidated financial statements of Concert, B.V., incorporated in
this prospectus/registration statement by reference to the Annual Report on Form
10-K/A of AT&T Corp. for the year ended December 31, 2001 have been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
AT&T BROADBAND GROUP
The combined financial statements of AT&T Broadband Group as of December
31, 2001 and 2000, and for each of the two years in the period ended December
31, 2001 and for the ten-month period ended December 31, 1999, included in this
prospectus/registration statement, have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
BROADBAND
The balance sheet of AT&T Broadband Corp. as of December 31, 2001, included
in this prospectus/registration statement, has been so included in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
AT&T COMCAST
The balance sheet of AT&T Comcast as of December 31, 2001 included in this
prospectus has been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report, appearing herein, and is so included in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
COMCAST CABLE
The financial statements and the related financial statement schedule of
Comcast Cable, a wholly owned subsidiary of Comcast, and subsidiaries
incorporated in this prospectus by reference from Comcast Cable's Annual Report
on Form 10-K for the year ended December 31, 2001 have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports (which report on
the financial statements expresses an unqualified opinion and includes an
explanatory paragraph related to the adoption of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, effective January 1, 2001), which are incorporated
herein by reference, and have been so incorporated in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
COMCAST
The financial statements of Comcast as of December 31, 2001 and 2000 and
for each of the three years ended December 31, 2001 included in this prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report (which report expresses an unqualified opinion and includes an
explanatory paragraph related to the adoption of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, effective January 1, 2001), which is included herein
and has been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements may be
made directly in this prospectus referring to AT&T, Broadband, AT&T Comcast,
Comcast Cable, MediaOne, or TCI, and they may also be made a part of this
prospectus by reference to other documents filed with the SEC, which is known as
157
"incorporation by reference." These statements may include statements regarding
the period leading up to and following completion of the AT&T Comcast
transaction.
Words such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe" and words and terms of similar substance used in connection
with any discussion of future operating or financial performance, or the AT&T
Comcast transaction, identify forward-looking statements. All forward-looking
statements are management's present estimates of future events and are subject
to a number of factors and uncertainties, including without limitation the risks
associated with the lack of complete data and the potential inaccuracy of data
relied upon in making such forward-looking statements, that could cause actual
results to differ materially from those described in the forward-looking
statements. In addition, the risks related to the businesses of AT&T, Broadband,
AT&T Comcast, Comcast Cable, MediaOne and TCI and the factors relating to the
AT&T Comcast transaction discussed under "Risk Factors," among others, could
cause actual results to differ materially from those described in the
forward-looking statements. Noteholders are cautioned not to place undue
reliance on the forward-looking statements, which speak only as of the date of
this prospectus or as of the date of any document incorporated by reference in
this prospectus, as applicable. None of AT&T, Broadband, AT&T Comcast, Comcast
Cable, MediaOne or TCI is under any obligation, and each expressly disclaims any
obligation, to update or alter any forward-looking statements, whether as a
result of new information, future events or otherwise.
For additional information about factors that could cause actual results to
differ materially from those described in the forward-looking statements, please
see the annual reports on Form 10-K and the quarterly reports on Form 10-Q that
AT&T and Comcast Cable have filed with the SEC.
All subsequent forward-looking statements attributable to AT&T, Broadband,
AT&T Comcast, Comcast Cable, MediaOne or TCI, or any person acting on their
behalf are expressly qualified in their entirety by the cautionary statements
contained or referred to in this section.
WHERE YOU CAN FIND MORE INFORMATION
Broadband, TCI and MediaOne do not currently file information with the SEC.
AT&T, Comcast, AT&T Comcast and Comcast Cable file annual, quarterly and special
reports, prospectuses and other information with the SEC. You may read and copy
any reports, statements or other information AT&T, Comcast or Comcast Cable file
at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room. The SEC filings of AT&T, Comcast, AT&T Comcast and
Comcast Cable are also available to the public from commercial document
retrieval services and at the website maintained by the SEC at www.sec.gov.
The SEC allows us to "incorporate by reference" information into this
prospectus, which means that we can disclose important information to you by
referring you to another document we have filed separately with the SEC. The
information incorporated by reference is deemed to be part of this prospectus,
except for any information superseded by information contained directly in this
prospectus.
This prospectus incorporates by reference the documents set forth below
that AT&T, AT&T Comcast and Comcast Cable have previously filed with the SEC.
These documents contain important information about the financial condition of
AT&T, AT&T Comcast and Comcast Cable.
AT&T SEC Filings (File No. 1-1105)
- Annual Report on Form 10-K for the year ended December 31, 2001, filed on
April 1, 2002, as amended on May 3, 2002 and May 13, 2002
- Quarterly Reports on Form 10-Q for the quarters ended March 31, 2002,
filed on May 15, 2002 and June 30, 2002, filed on August 14, 2002
- Current Reports on Form 8-K filed on January 4, 2002, February 5, 2002,
February 21, 2002, April 16, 2002, April 25, 2002, May 13, 2002, May 29,
2002, June 5, 2002, June 11, 2002, July 3,
158
2002, July 11, 2002, July 22, 2002, July 29, 2002, July 30, 2002, August 12,
2002, August 13, 2002, August 14, 2002 and August 23, 2002
Comcast Cable SEC Filings (File No. 333-30745)
- Annual Report on Form 10-K for the year ended December 31, 2001, filed on
March 29, 2002
- Quarterly Reports on Form 10-Q for the quarters ended March 31, 2002,
filed on May 15, 2002 and June 30, 2002, filed on August 14, 2002
We also incorporate by reference into this prospectus additional documents
that may be filed by AT&T, AT&T Broadband, or Comcast Cable with the SEC
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act from the date
of this prospectus before the termination of this offering. These include
periodic reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q and Current Reports on Form 8-K, as well as prospectuses. Any statements
contained in a previously filed document incorporated by reference into this
prospectus is deemed to be modified or superseded for purposes of this
prospectus to the extent that a statement contained in this prospectus, or in a
subsequently filed document also incorporated by reference herein, modifies or
supersedes that statement.
You may obtain copies of any documents incorporated by reference in this
prospectus through us, the SEC or the SEC's website as described above.
Documents incorporated by reference are available from us without charge,
excluding exhibits thereto unless we have specifically incorporated by reference
such exhibits in this prospectus. Any person, including any beneficial owner, to
whom this prospectus is delivered may obtain documents incorporated by reference
in, but not delivered with, this prospectus by requesting them from the
information agent in writing or by telephone at the address set forth on the
back cover of this prospectus. Any request should be made not later than five
business days prior to the end of the exchange offer.
AT&T, Broadband, AT&T Comcast, Comcast Cable, MediaOne and TCI have
together filed a registration statement on Form S-4 under the Securities Act
with the SEC with respect to the exchange offer. This prospectus does not
contain all of the information included in the registration statement and the
exhibits and schedules to the registration statement. You will find additional
information about the new notes and the companies involved in the exchange offer
in the registration statement. Certain items are omitted in accordance with the
rules and regulations of the SEC. For further information with respect to the
companies and the new notes, reference is made to the registration statement and
the exhibits and any schedules filed therewith. All documents incorporated by
reference and all future annual and quarterly reports of the registrants will,
so long as the eligible notes are listed on the Luxembourg Stock Exchange, be
available free of charge during normal business hours at the specified office of
the Luxembourg exchange agent and the Luxembourg paying agent.
If for any reason we are not required to comply with the reporting
requirements of the Securities Exchange Act of 1934, as amended, we are still
required under the AT&T Indenture and the New Broadband Indenture to furnish the
holders of the new notes with the information, documents and other reports
specified in Sections 13 and 15(d) of the Exchange Act.
159
IMPORTANT INFORMATION FOR NON-U.S HOLDERS
BELGIUM
AT&T has not authorized the exchange offer to the public in Belgium within
the meaning of the Belgian Royal Decree N(LOGO) 185 of July 9, 1935 on the
supervision of banks and the framework governing the issue of securities (as
amended), the Belgian Royal Decree of July 7, 1999 on the public nature of
financial transactions and the regulations enacted thereunder. The exchange
offer may be offered to and accepted by persons in Belgium, and this prospectus
and any other information in connection with the foregoing may be distributed or
published in Belgium, only under circumstances which do not constitute an offer
of the exchange to the public in Belgium in accordance with the aforementioned
rules and regulations. This prospectus and the proposed transaction have not
been submitted to, and have not been approved or disapproved by, the Belgian
Banking and Finance Commission (Commissie voor het Bank- en
Financiewezen/Commission Bancaire et Financiere) in accordance with Article
29ter of Belgian Royal Decree N(LOGO) 185.
CANADA
OFFERING RESTRICTIONS
The Broadband Exchange Notes and the New AT&T Notes are being offered in
the provinces of Ontario and Quebec only and therein only to investors who make
the representations under "Representations of Purchasers" below. No securities
commission or similar authority in Canada has reviewed or in any way passed upon
the information made available herein or the merits of the securities described
herein and any representation to the contrary is an offence.
RESALE RESTRICTIONS
Any distribution of the Broadband Exchange Notes and the New AT&T Notes
(and, if applicable, any securities for which they may be exchanged) in Canada
is being made only on a private placement basis and is exempt from the
requirement that the issuer of such securities prepare and file a prospectus
with the relevant Canadian securities regulatory authorities. Any resale of the
Broadband Exchange Notes and/or the New AT&T Notes (and, if applicable, any
securities for which they may be exchanged) must be made in accordance with
applicable securities laws which may require resales to be made in accordance
with exemptions from registration and prospectus requirements. Purchasers are
advised to seek legal advice prior to any resale of the Broadband Exchange Notes
and the New AT&T Notes (and, if applicable, any securities for which they may be
exchanged).
REPRESENTATIONS OF PURCHASERS
Each Canadian investor who tenders Broadband Eligible Notes and/or AT&T
Eligible Notes and, as the case may be, acquires Broadband Exchange Notes and/or
New AT&T Notes will be deemed to have represented to the issuer and the Dealer
Managers that: (a) the offer and sale of the Broadband Exchange Notes and/or the
New AT&T Notes to that investor was made exclusively through this Prospectus and
any other applicable supplement or amendment and was not made through an
advertisement of the Broadband Exchange Notes and the New AT&T Notes in any
printed media of general and regular paid circulation, radio, television or any
other form of advertising; (b) any resale of the Broadband Exchange Notes and/or
the New AT&T Notes (and, if applicable, any securities for which they may be
exchanged) will be made in accordance with applicable securities laws; (c) where
required by law, such purchaser is purchasing as principal and not as agent; (d)
such investor or any ultimate purchaser for which such investor is acting as
agent is not an individual and is entitled under applicable Canadian securities
laws to acquire such Broadband Exchange Notes and/or New AT&T Notes without the
benefit of a prospectus qualified under such securities laws; (e) in the case of
a purchaser located in Ontario, such purchaser is a person to which a dealer
registered as an international dealer in Ontario may offer and sell Broadband
160
Exchange Notes and/or New AT&T Notes; and (f) in the case of a purchaser located
in Quebec, such purchaser is a "sophisticated purchaser" within the meaning of
the Securities Act (Quebec).
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian investors who acquire Broadband Exchange Notes and/or New AT&T
Notes should consult their own legal and tax advisers with respect to the tax
consequences of an investment in such securities (and, if applicable, securities
for which they may be exchanged) in their particular circumstances and with
respect to the eligibility of the said securities for investment by the
purchaser under relevant Canadian legislation.
STATUTORY RIGHTS OF ACTION FOR RESCISSION OR DAMAGES (ONTARIO ONLY)
Pursuant to Ontario securities legislation, where an offering memorandum
has been furnished to a prospective purchaser in connection with a distribution
of securities in reliance upon the accredited investor exemption, the rights of
action referred to in Section 130.1 of the Securities Act (Ontario) (the "OSA")
must be described in the offering memorandum. These rights and the applicable
notice with respect thereto, must be exercised or delivered, as the case may be,
by the purchaser within the time limits prescribed by applicable Ontario
securities legislation. Where used herein, "Misrepresentation" means an untrue
statement of a material fact or an omission to state a material fact that is
required to be stated or that is necessary to make any statement not misleading
in light of the circumstances in which it was made. A "material fact", where
used in relation to securities issued or proposed to be issued, means a fact
that significantly affects, or would reasonably be expected to have a
significant effect on, the market price or value of such securities. These
rights of action are described below.
In the event that this Prospectus (including any amendment or supplement
thereto), which constitutes an offering memorandum under the OSA, contains a
Misrepresentation, an Ontario purchaser who purchases Broadband Exchange Notes
and/or New AT&T Notes offered by this Prospectus during the period of
distribution shall be deemed to have relied upon the Misrepresentation if it was
a Misrepresentation at the time of purchase, and has a right of action for
damages or alternatively for rescission against the issuer of such securities
(the "Issuer"), provided that:
- if the purchaser exercises its right of rescission, it shall not have a
right of action for damages against the Issuer;
- the Issuer will not be liable if it proves that the purchaser purchased
the Broadband Exchange Notes and/or New AT&T Notes with knowledge of the
Misrepresentation;
- in an action for damages, the Issuer will not be liable for all or any
portion of the damages that it proves do not represent the depreciation
in value of the Broadband Exchange Notes and/or New AT&T Notes as a
result of the Misrepresentation relied upon; and
- in no case shall the amount recoverable exceed the price at which the
Broadband Exchange Notes and/or the New AT&T Notes were offered.
Section 138 of the OSA provides that no action shall be commenced to
enforce these rights more than:
- in the case of an action for rescission, 180 days after the date of the
transaction that gave rise to the cause of action; or
- in the case of any action, other than an action for rescission, the
earlier of:
- 180 days after the purchaser first had knowledge of the facts giving
rise to the cause of action; or
- three years after the date of the transaction that gave rise to the
cause of action.
The rights of action described above are in addition to and without
derogation from any right or remedy available at law to the purchaser and are
intended to correspond to the relevant provisions of
161
Ontario securities legislation and are subject to the defences contained
therein. Such provisions may contain limitations and statutory defences on which
the Issuer and other applicable parties may rely.
LANGUAGE OF DOCUMENTS
You hereby confirm that you have expressly requested that all documents
evidencing or relating in any way to the offer or sale of the securities offered
hereby (including for greater certainty any information, offering document,
purchase confirmation or notice) be drawn up in the English language only. Vous
confirmez par les presentes que vous avez expressement exige que tous les
documents faisant foi ou se rapportant de quelque maniere que ce soit a l'offre
ou la vente des valeurs mobilieres decrites aux presentes (incluant, pour plus
de certitude, toute information, document d'offre, confirmation d'achat ou avis)
soient rediges en anglais seulement.
DENMARK
A prospectus has not been published in Denmark in respect of the exchange
offer as it is offered as a direct consequence of the AT&T Comcast transaction
and, accordingly, falls within the scope of the exception in section 2,
subsection 9 of executive order no. 1207 of December 15, 2000 issued by the
Danish Security Council pursuant to section 43 of the Danish Securities Trading
Act, Consolidated Act no. 587 of July 9, 2002.
FRANCE
This prospectus has not been submitted to the clearance procedures of the
French Commission des Operations de Bourse and may not be used in connection
with any offer to the public to purchase or sell any of the debt securities to
be issued in connection with the exchange offer. Offers and sales of such
securities will be made in accordance with Article L. 411-2 of the Code
Monetaire et Financier and Decree no. 98-880 dated October 1, 1998, relating to
offers to qualified institutional investors and a limited number of individual
investors.
FEDERAL REPUBLIC OF GERMANY
In the territory of the Federal Republic of Germany the offer to exchange
Broadband Eligible Notes and AT&T Eligible Notes for Broadband Exchange Notes
and New AT&T Notes is only made to and can only be accepted by (i) persons who,
in the course of their professional or commercial activities, purchase or sell
securities for their own account or the account of others and (ii) investors who
exchange Broadband Eligible Notes or AT&T Eligible Notes in the principal amount
of at least Euro 40,000 for a like principal amount of Broadband Exchange Notes
and New AT&T Notes. Because the Broadband Exchange Notes and New AT&T Notes have
not been and will not be registered under the securities laws of Germany and
this prospectus has not been and will not be submitted for approval to the
German Financial Supervisory Authority (BAFin), the circulation of any exchange
offer material to an unlimited number of investors or the offer to exchange or
the exchange of Broadband Eligible Notes and AT&T Eligible Notes for Broadband
Exchange Notes and New AT&T Notes of note holders who are not eligible under (i)
or (ii) may constitute a violation of the German Securities Sales Prospectus Act
(Verkaufsprospektgesetz).
HONG KONG
This document has not been registered with the Registrar of Companies in
Hong Kong. Accordingly, this document may not be circulated or distributed in
Hong Kong to any persons who do not qualify as professional investors. In
addition, any securities offered in Hong Kong by means of this document or any
other document may only be offered in circumstances that do not constitute an
offer to the public in Hong Kong. This document is confidential. No person to
whom a copy of this document is issued may issue, circulate or distribute this
document in Hong Kong or make or give a copy of this document to any other
162
person, other than their legal, financial, tax or other appropriate advisers who
are subject to a duty of confidentiality to such person.
REPUBLIC OF IRELAND
The exchange offer is being made in or into the Republic of Ireland only to
professional investors in the context of their trades, professions or
occupations and the exchange offer is being made to and is capable of acceptance
in or from the Republic of Ireland only to those recipients who represent,
warrant and undertake to the issuer that: (i) it is in the ordinary and usual
and customary course of the recipient's trade, profession or occupation to
receive and, as appropriate, accept offers of securities similar or comparable
to the exchange offer; (ii) the recipient's ordinary business is the buying and
selling of shares or instruments of indebtedness; and (iii) the recipient is
accepting the exchange offer for its own account and is not accepting the notes
with the intention of offering such notes for sale in whole or in part to any
third parties and the recipient will not, in any event, offer or sell the notes
in any manner which is in breach of any provision of the Companies Acts, 1963 to
2001 or the Investment Intermediaries Act, 1995 (as amended) of the Republic of
Ireland. By accepting the exchange offer, you will be making the foregoing
representations and warranties and will represent, warrant and confirm you fall
within the restricted class of professional investors eligible to accept.
ITALY
The exchange offer has not been filed with the Italian Securities
Commission, as it is offered to no more than 200 investors in Italy. The
exchange offer may not be offered to nor accepted by any persons in Italy nor
may this document be distributed or published in Italy under any circumstances
that would constitute a public offer.
THE NETHERLANDS
In order to comply with the Netherlands Securities Market Supervision Act
1995 (Wet toezicht effectenverkeer 1995), the Broadband Exchange Notes, the New
Broadband Notes and the New AT&T Notes are and will only be offered to
individuals or legal entities situated in The Netherlands who or which trade or
invest in securities in the conduct of a business or profession (which includes
banks, securities firms, insurance companies, pension funds, investment
institutions, central governments, large international and supranational
organisations, other institutional investors and other parties, including
treasury departments of commercial enterprises, which are regularly active in
the financial market in a professional manner).
NORWAY
This exchange offer is directed only to investors in Norway who are
registered as professional investors with the Oslo Stock Exchange.
SINGAPORE
This document has not been and will not be registered as a prospectus with
the Monetary Authority of Singapore. The notes that are the subject of this
document are being offered for exchange in Singapore pursuant to the exemptions
from prospectus requirements under Section 274 of the Securities and Futures Act
2001 (the "Securities and Futures Act"). This document is made available to the
recipient on the basis that such recipient is a person set out or defined in the
aforesaid provisions of the Securities and Futures Act and the recipient's
attention is drawn to the restrictions set out in Section 276 of the Securities
and Futures Act. Accordingly, the notes being offered hereby may not be offered
or sold nor may this document or any other offering document or material
relating to such notes be circulated or distributed, directly or indirectly, to
the public or any member of the public in Singapore other than pursuant to, and
in accordance with the conditions of, Section 274 of the Securities and Futures
Act and to persons to whom such notes may be offered or sold under those
provisions. The notes being offered
163
hereby may not be offered or sold nor may this document or any other offering
document or material relating to such notes be circulated or distributed,
directly or indirectly, to the public or any member of the public in Singapore.
SWEDEN
The offer to exchange Broadband Eligible Notes and AT&T Eligible Notes for
Broadband Exchange Notes and New AT&T Notes is only made to and can only be
accepted by investors if they exchange Broadband Eligible Notes or AT&T Eligible
Notes in the principal amount of at least 300,000 SEK for a like principal
amount of Broadband Exchange Notes and New AT&T Notes.
UNITED KINGDOM
This offering circular is confidential and being furnished by AT&T to
prospective investors in connection with the exchange offer solely for such
investors' confidential use with the express understanding that, without the
prior written permission of AT&T, such person will not release this document or
discuss the information contained herein or reproduce or use this offering
circular for any purpose other than an evaluation of whether to accept the
exchange offer. This document, any accompanying letter, and any other
communication made in connection with the exchange offer is made or distributed
only to the following kinds of persons: (1) investment professionals as defined
in Article 19 of the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2001; and/or (2) high net worth companies, unincorporated
associations, partnerships and other specified persons pursuant to Article 49 of
Financial Services and Markets Act 2000 (Financial Promotion) Order 2001.
Neither this offering circular nor any accompanying letter has been
delivered for registration to any Registrar of Companies in the United Kingdom
and no prospectus, within the meaning of the Public Offers of Securities
Regulations 1995 as amended (the "Regulations"), has been published or is
intended to be published in respect of the exchange offer. AT&T has not
authorized any offer to the public in the United Kingdom with the meaning of the
Regulations with respect to the exchange offer. The exchange offer is only made
in the United Kingdom to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or agent)
for the purposes of their business.
By accepting the exchange offer, you will represent, warrant and confirm
that you:
- are persons of a kind described in Article 19 or Article 49 of the
Financial Services and Markets Act 2000 (Financial Promotion) Order 2001;
- are persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the
purposes of their business; and
- expressly invite AT&T Corporation to provide information to you and to
discuss with you the exchange offer.
164
INDEX TO FINANCIAL STATEMENTS
AT&T
PRO FORMA FINANCIAL STATEMENTS TO GIVE EFFECT TO THE AT&T
COMCAST TRANSACTION
Unaudited Pro Forma Combined Condensed Balance Sheet at
June 30, 2002......................................... F-4
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Six Months ended June 30, 2002..... F-5
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Six Months Ended June 30, 2001..... F-6
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Year Ended December 31, 2001....... F-7
Unaudited Pro Forma Combined Condensed Statement of
Income for the Year Ended December 31, 2000........... F-8
Unaudited Pro Forma Combined Condensed Statement of
Income for the Year Ended December 31, 1999........... F-9
Notes to Unaudited Pro Forma Combined Condensed
Financial Statements.................................. F-10
AT&T BROADBAND GROUP
HISTORICAL FINANCIAL STATEMENTS
Unaudited Combined Statements of Operations for the
Three and Six Months ended June 30, 2002 and June 30,
2001.................................................. F-13
Unaudited Combined Balance Sheets at June 30, 2002 and
December 31, 2001..................................... F-14
Unaudited Combined Statements of Changes in Combined
Attributed Net Assets for the Six Months ended June
30, 2002 and June 30, 2001............................ F-15
Unaudited Combined Statements of Cash Flows for the Six
Months ended June 30, 2002 and June 30, 2001.......... F-16
Notes to Unaudited Combined Financial Statements....... F-17
Report of Independent Accountants...................... F-29
Combined Statements of Operations for the Years Ended
December 31, 2001, December 31, 2000 and the Ten
Months Ended December 31, 1999........................ F-30
Combined Balance Sheets at December 31, 2001 and
2000.................................................. F-31
Combined Statements of Changes in Combined Attributed
Net Assets for the Years Ended December 31, 2001,
December 31, 2000 and the Ten Months Ended December
31, 1999.............................................. F-32
Combined Statements of Cash Flows for the Years Ended
December 31, 2001, December 31, 2000 and the Ten
Months Ended December 31, 1999........................ F-33
Notes to Combined Financial Statements................. F-34
AT&T BROADBAND CORP.
HISTORICAL FINANCIAL STATEMENTS
Unaudited Balance Sheet at June 30, 2002............... F-78
Note to Unaudited Balance Sheet........................ F-79
Report of Independent Accountants...................... F-80
Balance Sheet at December 31, 2001..................... F-81
Note to Balance Sheet.................................. F-82
AT&T COMCAST CORPORATION
HISTORICAL FINANCIAL STATEMENTS
Balance Sheet as of June 30, 2002 (Unaudited).......... F-83
Note to Balance Sheet (Unaudited)...................... F-84
Independent Auditors' Report........................... F-85
Balance Sheet as of December 31, 2001.................. F-86
Note to Balance Sheet.................................. F-87
F-1
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS
Unaudited Pro Forma Combined Condensed Balance Sheet as
of June 30, 2002...................................... 27
Notes to Unaudited Pro Forma Combined Condensed Balance
Sheet................................................. 28
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Year Ended December 31, 2001....... 30
Unaudited Pro Forma Combined Condensed Statement of
Operations for the Quarter Ended June 30, 2002........ 31
Notes to Unaudited Pro Forma Combined Condensed
Statement of Operations............................... 32
COMCAST CORPORATION
HISTORICAL FINANCIAL STATEMENTS
Independent Auditors' Report........................... F-88
Consolidated Balance Sheet as of December 31, 2001 and
2000.................................................. F-89
Consolidated Statement of Operations for the Years
Ended December 31, 2001, 2000 and 1999................ F-90
Consolidated Statement of Cash Flows for the Years
Ended December 31, 2001, 2000 and 1999................ F-91
Consolidated Statement of Stockholders' Equity for the
Years Ended December 31, 2001, 2000 and 1999.......... F-92
Notes to Consolidated Financial Statements............. F-93
Condensed Consolidated Balance Sheet as of June 30,
2002 and December 31, 2001 (Unaudited)................ F-127
Condensed Consolidated Statement of Operations and
Retained Earnings for the Three and Six Months Ended
June 30, 2002 and 2001 (Unaudited).................... F-128
Condensed Consolidated Statement of Cash Flows for the
Six Months Ended June 30, 2002 and 2001 (Unaudited)... F-130
Notes to Condensed Consolidated Financial Statements
(Unaudited)........................................... F-131
F-2
AT&T
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma combined condensed financial statements set forth
below for AT&T give effect to
- the Liberty Media Group distribution
- the AT&T Broadband Group distribution
(collectively, the AT&T restructuring events), as if such events had been
completed on January 1, 1999 for income statement purposes, and at June 30, 2002
for balance sheet purposes, subject to the assumptions and adjustments in the
accompanying notes to the pro forma financial statements. Upon the distribution
of AT&T Broadband Group, AT&T will report AT&T Broadband Group as a Discontinued
Operation, in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." For accounting purposes, the spin-off (the
distribution) of AT&T Broadband Group is considered a non pro-rata distribution
and is expected to be recorded at fair value resulting in the recognition of a
gain or loss by the remaining AT&T entity upon the distribution date. The
split-off of Liberty Media Group, which was completed on August 10, 2001, was a
pro-rata distribution and was therefore recorded at historical cost. Since
Liberty Media Group was split-off from AT&T on August 10, 2001, no balance sheet
or 2002 income statement pro forma adjustments were made for Liberty Media
Group. See the Notes to the Unaudited Pro Forma Combined Condensed Financial
Statements for additional disclosure of potential material nonrecurring charges
and credits directly attributable to the events as noted above which are not
reflected in the pro forma financial statements. Note (i) to the AT&T Unaudited
Pro Forma Combined Condensed Financial Statements includes the impacts to
earnings per share of the proposed one-for-five reverse stock split of AT&T
common stock.
The pro forma adjustments included herein are based on available
information and certain assumptions that management believes are reasonable and
are described in the accompanying notes to the pro forma financial statements.
The Unaudited Pro Forma Combined Condensed Financial Statements do not
necessarily represent what AT&T's financial position or results of operations
would have been had the AT&T Broadband distribution or the Liberty Media Group
distribution occurred on such dates or to project AT&T's financial position or
results of operations at or for any future date or period. In the opinion of
management, all adjustments necessary to present fairly the unaudited pro forma
financial information have been made. The Unaudited Pro Forma Combined Condensed
Financial Statements should be read in conjunction with the historical financial
statements of AT&T.
AT&T may dividend AT&T Consumer Services Group tracking stock to current
AT&T shareholders representing some or all of the financial performance and
economic value of AT&T Consumer Services Group at such time as AT&T determines
that there is sufficient market receptivity and support for such a distribution.
Due to the accumulated deficit that exists at AT&T Corp., the dividend will be
reflected as a reduction of additional paid-in capital for the fair value of
AT&T Consumer Services with a corresponding increase in par value of AT&T
Consumer Services Group tracking stock and additional paid-in capital. The
issuance of the AT&T Consumer Services Group tracking stock has no impact on the
pro forma balance sheet or pro forma income statements other than to result in
the attribution of net income to AT&T Consumer Services Group and therefore to
reduce income and earnings attributable to AT&T Common Stock Group. For purposes
of these pro forma financial statements we have assumed distribution of all of
the AT&T Consumer Services Group tracking stock.
F-3
AT&T
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AT JUNE 30, 2002
AT&T
BROADBAND
HISTORICAL GROUP OTHER PRO FORMA
AT&T(A) DISTRIBUTION(E) ADJUSTMENTS(G) AT&T
---------- --------------- -------------- ---------
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents............................. $ 5,606 $ -- $ 43 $ 5,649
6,486(f)
(6,486)(f)
Receivables -- net.................................... 7,565 (750) 4 6,819
Investments........................................... 414 (414) -- --
Deferred income taxes................................. 1,981 -- 484 2,465
Other current assets.................................. 978 (262) -- 716
6,486(f)
(6,486)(f)
Property, plant and equipment -- net.................. 41,460 (14,861) -- 26,599
Franchise costs -- net................................ 29,083 (29,083) -- --
Goodwill -- net....................................... 20,526 (15,134) (46) 5,346
Other purchased intangibles -- net.................... 2,064 (1,465) -- 599
Investments and related advances...................... 18,676 (17,896) -- 780
Prepaid pension costs................................. 3,466 -- -- 3,466
Other assets.......................................... 6,076 (1,975) 78 4,179
(5,867)(c)
5,867(c)
-------- --------- ----- --------
Total Assets...................................... 137,895 (81,840) 563 56,618
======== ========= ===== ========
LIABILITIES
Accounts payable...................................... 4,330 (712) 47 3,665
Payroll and benefit-related liabilities............... 1,551 (369) -- 1,182
Debt maturing within one year......................... 5,889 (8,536) -- --
6,486(f)
(3,839)(f)
AT&T Canada obligation................................ 3,664 -- -- 3,664
Other current liabilities............................. 4,779 (2,363) 490 2,906
Long-term debt........................................ 37,271 (13,406) -- 21,218
(2,647)(f)
Long-term benefit-related liabilities................. 3,632 -- (137) 3,495
Deferred income taxes................................. 23,911 (19,906) 80 4,085
Other long-term liabilities and deferred credits...... 3,991 (836) 215 3,549
179(d)
-------- --------- ----- --------
Total Liabilities................................. 89,018 (45,949) 695 43,764
Minority interest..................................... 1,397 (1,210) -- 187
Company-obligated convertible quarterly income
preferred securities of subsidiary trust holding
solely subordinated debt securities of AT&T......... 4,725 (4,725) -- --
SHAREOWNERS' EQUITY
Common Stock:
AT&T common stock, $1 par value, authorized
6,000,000,000 shares; issued and outstanding
3,845,223,065 shares................................ 3,845 --(d) -- 3,845
Additional paid-in capital............................ 56,312 (29,879) (203) 31,918
5,867(c)
(179)(d)
Accumulated deficit................................... (17,288) (5,867)(c) 71 (23,084)
Accumulated other comprehensive loss.................. (114) 102 -- (12)
-------- --------- ----- --------
Total shareowners' equity......................... 42,755 (29,956) (132) 12,667
Total Liabilities & Shareowners' Equity........... $137,895 $ (81,840) $ 563 $ 56,618
======== ========= ===== ========
See Notes To AT&T Unaudited Pro Forma Combined Condensed Financial Statements
F-4
AT&T
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
AT&T BROADBAND
HISTORICAL GROUP OTHER PRO FORMA
AT&T(A) DISTRIBUTION(E) ADJUSTMENTS(G) AT&T
---------- --------------- -------------- ---------
(DOLLARS IN MILLIONS)
Revenue................................... $ 24,088 $ (4,965) $175 $19,298
OPERATING EXPENSES
Costs of services and products............ 6,629 (2,591) 210 4,248
Access and other connection............... 5,571 -- (35) 5,536
Selling, general and administrative....... 5,190 (1,342) -- 3,848
Depreciation and amortization............. 3,854 (1,466) -- 2,388
Net restructuring and other charges....... 56 (56) -- --
Goodwill and franchise impairment
charges................................. 16,479 (16,525) 46 --
-------- -------- ---- -------
Total operating expenses.................. 37,779 (21,980) 221 16,020
Operating income.......................... (13,691) 17,015 (46) 3,278
Other (expense) income.................... (991) 886 -- (105)
Interest expense.......................... 1,483 (732) -- 751
(Loss) income from continuing operations
before income taxes, minority interest
and (losses) earnings related to equity
investments............................. (16,165) 18,633 (46) 2,422
(Benefit) provision for income taxes...... (4,365) 5,506 (49) 1,092
Minority interest (expense) income........ (88) 140 -- 52
Net losses related to other equity
investments............................. (1,021) 617 -- (404)
-------- -------- ---- -------
Net (loss) earnings from continuing
operations attributable to common
shareowners............................. $(12,909) $ 13,884 $ 3 $ 978
======== ======== ==== =======
AT&T COMMON STOCK GROUP:
Loss from continuing operations........... $(12,909) $ (6)(h)(j)
Weighted average shares
outstanding -- (basic & diluted)........ 3,598 3,598
Basic and diluted loss per share.......... (3.59) 0.00(i)
See Notes To AT&T Unaudited Pro Forma Combined Condensed Financial Statements
F-5
AT&T
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
LIBERTY MEDIA AT&T BROADBAND
HISTORICAL GROUP GROUP OTHER PRO FORMA
AT&T(A) DISTRIBUTION(B) DISTRIBUTION(E) ADJUSTMENTS(G) AT&T
---------- --------------- --------------- -------------- ---------
(DOLLARS IN MILLIONS)
Revenue................................ $26,738 $ -- $(5,256) $120 $21,602
OPERATING EXPENSES
Costs of services and products......... 6,982 -- (2,920) 142 4,204
Access and other connection............ 6,256 -- -- (22) 6,234
Selling, general and administrative.... 5,465 -- (1,343) -- 4,122
Depreciation and amortization.......... 4,762 -- (2,492) -- 2,270
Net restructuring and other charges.... 1,095 -- (1,095) -- --
------- ------ ------- ---- -------
Total operating expenses............... 24,560 -- (7,850) 120 16,830
Operating income....................... 2,178 -- 2,594 -- 4,772
Other (expense) income................. (1,091) -- 1,904 -- 813
Interest expense....................... 1,640 -- (961) -- 679
(Loss) income from continuing
operations before income taxes,
minority interest and (losses)
earnings related to equity
investments.......................... (553) -- 5,459 -- 4,906
(Benefit) provision for income taxes... (218) -- 2,178 (12) 1,948
Minority interest income............... 838 -- (736) -- 102
Equity losses from Liberty Media
Group................................ (2,822) 2,822 -- -- --
Net losses related to other equity
investments.......................... (1,037) -- (16) -- (1,053)
(Loss) income from continuing
operations........................... (3,356) 2,822 2,529 12 2,007
Dividend requirements of preferred
stock................................ 417 -- -- -- 417
Premium on exchange of AT&T Wireless
tracking stock....................... 80 -- -- -- 80
------- ------ ------- ---- -------
Net (loss) earnings from continuing
operations attributable to common
shareowners.......................... $(3,853) $2,822 $ 2,529 $ 12 $ 1,510
======= ====== ======= ==== =======
AT&T COMMON STOCK GROUP:
(Loss) earnings from continuing
operations........................... $(1,031) $ 30(h)(j)
Weighted average shares
outstanding -- basic................. 3,749 3,789
Basic (loss) earnings per share........ (0.28) 0.01(i)
(Loss) earnings from continuing
operations........................... (1,031) 30(h)(j)
Weighted average shares
outstanding -- diluted............... 3,749 3,796
Diluted (loss) earnings per share...... (0.28) 0.01(i)
LIBERTY MEDIA GROUP:
Basic and diluted loss per share....... $ (1.09)
See Notes To AT&T Unaudited Pro Forma Combined Condensed Financial Statements
F-6
AT&T
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
AT&T
LIBERTY MEDIA BROADBAND
HISTORICAL GROUP GROUP OTHER PRO FORMA
AT&T(A) DISTRIBUTION(B) DISTRIBUTION(E) ADJUSTMENTS(G) AT&T
---------- --------------- --------------- -------------- ---------
(DOLLARS IN MILLIONS)
Revenue........................ $52,550 $ -- $(10,132) $247 $42,665
OPERATING EXPENSES
Costs of services and
products..................... 13,960 -- (5,459) 298 8,799
Access and other connection.... 12,136 -- -- (51) 12,085
Selling, general and
administrative............... 10,832 -- (2,582) -- 8,250
Depreciation and
amortization................. 9,338 -- (4,780) -- 4,558
Net restructuring and other
charges...................... 2,530 -- (1,494) -- 1,036
------- ------ -------- ---- -------
Total operating expenses....... 48,796 -- (14,315) 247 34,728
Operating income............... 3,754 -- 4,183 -- 7,937
Other (expense) income......... (1,547) -- 2,874 -- 1,327
Interest expense............... 3,242 -- (1,735) -- 1,507
(Loss) income from continuing
operations before income
taxes, minority interest and
(losses) earnings related to
equity investments........... (1,035) -- 8,792 -- 7,757
(Benefit) provision for income
taxes........................ (791) -- 3,857 (90) 2,976
Minority interest income....... 963 -- (833) -- 130
Equity losses from Liberty
Media Group.................. (2,711) 2,711 -- -- --
Net losses related to other
equity investments........... (4,850) -- 69 -- (4,781)
(Loss) income from continuing
operations................... (6,842) 2,711 4,171 90 130
Dividend requirements of
preferred stock.............. 652 -- -- -- 652
Premium on exchange of AT&T
Wireless tracking stock...... 80 -- -- -- 80
------- ------ -------- ---- -------
Net loss from continuing
operations attributable to
common shareowners........... $(7,574) $2,711 $ 4,171 $ 90 $ (602)
======= ====== ======== ==== =======
AT&T COMMON STOCK GROUP:
Loss from continuing
operations................... $(4,863) $(3,475)(h)(j)
Weighted average shares
outstanding (basic &
diluted)..................... 3,643 3,695
Basic and diluted loss per
share........................ (1.33) (0.94)(i)
LIBERTY MEDIA GROUP:
Basic and diluted loss per
share........................ $ (1.05)
See Notes To AT&T Unaudited Pro Forma Combined Condensed Financial Statements
F-7
AT&T
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2000
AT&T
LIBERTY MEDIA BROADBAND
HISTORICAL GROUP GROUP OTHER PRO FORMA
AT&T(A) DISTRIBUTION(B) DISTRIBUTION(E) ADJUSTMENTS(G) AT&T
---------- --------------- --------------- -------------- ---------
(DOLLARS IN MILLIONS)
Revenue........................ $55,533 $ -- $(8,445) $116 $47,204
OPERATING EXPENSES
Costs of services and
products..................... 12,795 -- (4,600) 117 8,312
Access and other connection.... 13,140 -- -- (1) 13,139
Selling, general and
administrative............... 9,752 -- (2,180) -- 7,572
Depreciation and
amortization................. 8,589 -- (4,051) -- 4,538
Net restructuring and other
charges...................... 7,029 -- (6,270) -- 759
------- ------- ------- ---- -------
Total operating expenses....... 51,305 -- (17,101) 116 34,320
Operating income............... 4,228 -- 8,656 -- 12,884
Other income................... 1,150 -- 39 -- 1,189
Interest expense............... 2,964 -- (1,323) -- 1,641
Income from continuing
operations before income
taxes, minority interest and
(losses) earnings related to
equity investments........... 2,414 -- 10,018 -- 12,432
Provision for income taxes..... 3,284 -- 1,183 -- 4,467
Minority interest income....... 4,103 -- (4,062) -- 41
Equity earnings from Liberty
Media Group.................. 1,488 (1,488) -- -- --
Net (losses) earnings related
to other equity
investments.................. (588) -- 597 -- 9
------- ------- ------- ---- -------
Net income from continuing
operations attributable to
common shareowners........... $ 4,133 $(1,488) $ 5,370 $ -- $ 8,015
======= ======= ======= ==== =======
AT&T COMMON STOCK GROUP:
Earnings from continuing
operations................... $ 2,645 $ 3,903(h)(j)
Weighted average shares
outstanding -- basic......... 3,486 3,526
Basic earnings per share....... 0.76 1.11
Earnings from continuing
operations................... 2,677 3,903(h)(j)
Weighted average shares
outstanding -- diluted....... 3,545 3,545
Diluted earnings per share..... 0.75 1.10(i)
LIBERTY MEDIA GROUP:
Basic and diluted earnings per
share........................ $ 0.58
See Notes To AT&T Unaudited Pro Forma Combined Condensed Financial Statements
F-8
AT&T
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1999
AT&T
LIBERTY MEDIA BROADBAND
HISTORICAL GROUP GROUP OTHER PRO FORMA
AT&T(A) DISTRIBUTION(B) DISTRIBUTION(E) ADJUSTMENTS(G) AT&T
---------- --------------- --------------- -------------- ---------
(DOLLARS IN MILLIONS)
Revenue........................ $54,973 $ -- $(5,080) $32 $49,925
OPERATING EXPENSES
Costs of services and
products..................... 11,013 -- (2,686) 32 8,359
Access and other connection.... 14,439 -- -- -- 14,439
Selling, general and
administrative............... 10,894 -- (1,253) -- 9,641
Depreciation and
amortization................. 6,194 -- (1,674) -- 4,520
Net restructuring and other
charges...................... 975 -- (644) -- 331
------- ------ ------- --- -------
Total operating expenses....... 43,515 -- (6,257) 32 37,290
Operating income............... 11,458 -- 1,177 -- 12,635
Other income................... 826 -- (50) -- 776
Interest expense............... 1,503 -- (705) -- 798
Income from continuing
operations before income
taxes, minority interest and
(losses) earnings related to
equity investments........... 10,781 -- 1,832 -- 12,613
Provision for income taxes..... 4,016 -- 465 -- 4,481
Minority interest expense...... (126) -- 126 -- --
Equity losses from Liberty
Media Group.................. (2,022) 2,022 -- -- --
Net losses related to other
equity investments........... (756) -- 707 -- (49)
------- ------ ------- --- -------
Net income from continuing
operations attributable to
common shareowners........... $ 3,861 $2,022 $ 2,200 $-- $ 8,083
======= ====== ======= === =======
AT&T COMMON STOCK GROUP:
Earnings from continuing
operations................... $ 5,883 $ 3,450(h)(j)
Weighted average shares
outstanding -- basic......... 3,082 3,115
Basic earnings per share....... 1.91 1.11
Earnings from continuing
operations................... 5,909 3,450(h)(j)
Weighted average shares
outstanding -- diluted....... 3,152 3,152
Diluted earnings per share..... 1.87 1.09(i)
LIBERTY MEDIA GROUP:
Basic and diluted loss per
share........................ $ (0.80)
See Notes To AT&T Unaudited Pro Forma Combined Condensed Financial Statements
F-9
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
(a) These columns reflect the historical results of operations and
financial position of AT&T Corp.
(b) These adjustments deduct the historical results of operations of
Liberty Media Group to reflect the split-off of Liberty Media Group from AT&T.
(c) This entry reflects the fair value adjustment for accounting purposes
which would have been recorded had the distribution of AT&T Broadband Group
occurred on June 30, 2002. Comcast currently owns shares of AT&T common stock
("T"). In the event Comcast retains these shares at the time of the AT&T
Broadband Group distribution, pursuant to certain provisions of the merger
agreement, these shares will be converted into exchangeable preferred stock of
AT&T and Comcast will not participate in the AT&T Broadband Group distribution.
Therefore the distribution would be a non pro-rata transaction among the "T"
shareholders accounted for at fair value.
Additionally, the timing of the issuance of the AT&T Consumer Services
Group tracking stock is uncertain. However, in the event the AT&T Consumer
Services Group tracking stock is created and distributed prior to the
distribution of AT&T Broadband Group, shareowners of the AT&T Consumer Services
Group tracking stock would not receive shares of AT&T Broadband Group, therefore
the distribution of AT&T Broadband Group would also be a non pro-rata
transaction in these circumstances.
The distribution has been reflected in the pro forma balance sheet at fair
value, resulting in a nonrecurring loss or gain upon distribution equal to the
deficiency or excess of the fair value of AT&T Broadband Group over AT&T's
carrying value of the net assets of AT&T Broadband Group to be distributed. The
actual loss or gain will be determined upon distribution based on the stock
price of the Comcast shares received pursuant to the merger agreement. Based on
the closing share price of Comcast Corp. on October 3, 2002, the distribution
results in a loss. Due to the fact that the loss is a one-time event, its
effects have not been included as a pro forma adjustment to the income
statement; however it has been included as a pro forma adjustment to retained
earnings on the pro forma balance sheet. The estimated loss is calculated as
follows (dollars in millions):
Fair value of Comcast Corp. shares to be received in the
transaction (1,235,000,000 shares at a closing stock price
of $19.45 per share on October 3, 2002)................... $24,021
Carrying value of AT&T Broadband Group net assets to be
distributed............................................... 29,888
-------
Loss on distribution........................................ $(5,867)
=======
During the second quarter of 2002, AT&T noted significant changes in the
general business climate, including the cable industry, as evidenced by
significant volatility in the stock market and corporate bankruptcies. These
factors indicated a trigger event, which necessitated the testing of goodwill
and franchise costs for impairment under the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets." Such testing resulted in the recognition
of $16.5 billion of pretax goodwill and franchise impairment charges. AT&T
Broadband Group's combined attributed net assets at June 30, 2002, reflect this
charge.
In the event Comcast does not hold any AT&T shares at the time of the AT&T
Broadband Group distribution and if the AT&T Consumer Services Group tracking
stock is not issued prior to the distribution of AT&T Broadband Group, the
distribution would be a pro-rata transaction. This treatment would still result
in the recognition of a loss in the event the carrying value of AT&T Broadband
Group exceeded the fair value of the Comcast shares received in the transaction
pursuant to the provisions of SFAS No. 144, paragraph 29, however, in the event
the fair value of the Comcast shares received in the transaction exceeded the
carrying value of AT&T Broadband Group, no gain would be recorded in a pro-rata
transaction.
(d) These entries represent adjustments to AT&T Broadband Group combined
attributed net assets pursuant to the Merger Agreement. The Merger Agreement
stipulates that AT&T will retain certain
F-10
liabilities currently reflected in the AT&T Broadband Group financial
statements. Accordingly, these liabilities were transferred to AT&T along with
the related deferred income taxes.
(e) These adjustments deduct the historical results of operations and the
historical financial position of AT&T Broadband Group to reflect the spin-off of
AT&T Broadband from AT&T. The distribution is being accounted for as a fair
value transaction and as such the fair value of the net assets of AT&T Broadband
Group have been recorded as a reduction to additional paid-in capital, given the
deficit that exists in retained earnings.
(f) These adjustments reflect the repayment of the intercompany loan
balance from AT&T Broadband Group. The repayment of intercompany indebtedness is
contained in the Separation and Distribution Agreement between AT&T and AT&T
Broadband Corp.
(g) Reflects certain Inter-Group transactions appropriately reflected in
the separate financial statements of AT&T after excluding the AT&T Broadband
Group on a pro forma basis that were eliminated in the AT&T consolidated
financial statements and were therefore not reflected in AT&T's historical
results and financial position. These transactions include adjustments to
properly reflect the stand-alone tax rates of AT&T subsequent to the
distribution of the AT&T Broadband Group. These entries also reflect the
reclassification of certain items appropriately reflected on the separate
financial statements of AT&T Broadband Group.
(h) Income attributable to the AT&T Common Stock Group shareholders has
been reduced by $984 and $1,480 for the six months ended June 30, 2002 and 2001,
respectively, and by $2,873, $4,112 and $4,633 for the years ended December 31,
2001, 2000 and 1999, respectively, to reflect the income attributable to the
AT&T Consumer Services Group tracking stock shareholders.
(i) Adjusted for the proposed one-for-five reverse stock split of AT&T
common stock, (loss) earnings per basic share would have been $(0.01) and $0.04
for the six months ended June 30, 2002 and 2001, respectively, and $(4.70),
$5.53 and $5.54 for the years ended December 31, 2001, 2000 and 1999,
respectively. (Loss) earnings per diluted share on the same basis would have
been $(0.01) and $0.04 for the six months ended June 30, 2002 and 2001,
respectively, and $(4.70), $5.50 and $5.47 for the years ended December 31,
2001, 2000 and 1999, respectively.
Additionally, pursuant to the Merger Agreement, prior to the AT&T Broadband
spin-off, shares of AT&T common stock held by Comcast (currently 41.5 million
shares) will be exchanged on a one-for-one basis into a newly created series of
AT&T exchangeable preferred stock. The AT&T exchangeable preferred stock will be
mandatorily exchangeable after the closing of the Comcast merger into shares of
AT&T common stock utilizing a conversion formula. The conversion formula will
provide Comcast with an interest in AT&T that is equal in value to the interest
Comcast held in AT&T prior to the Comcast merger, subject to a maximum share
issuance of 10% of the outstanding shares of AT&T common stock. The conversion
formula is computed as the combination of average post closing AT&T Comcast
Class A common stock and AT&T common stock trading values divided by average
AT&T common stock trading values utilizing ten randomly selected trading days
after the closing of the Comcast merger. At June 30, 2002, assuming a
one-for-five reverse stock split of AT&T common stock, the maximum additional
shares that Comcast could receive would be approximately 69 million shares,
resulting in (loss) earnings per basic share of $(0.01) and $0.04 for the six
months ended June 30, 2002 and 2001, respectively, and $(4.30), $5.04 and $4.99
for the years ended December 31, 2001, 2000 and 1999, respectively. (Loss)
earnings per diluted share on the same basis would be $(0.01) and $0.04 for the
six months ended June 30, 2002 and 2001, respectively, and $(4.30), $5.02 and
$4.94 for the years ended December 31, 2001, 2000 and 1999, respectively.
At June 30, 2002, assuming no reverse stock split of AT&T common stock, the
maximum additional shares that Comcast could receive would be approximately 343
million shares, resulting in (loss) earnings per basic share of $0.00 and $0.01
for the six months ended June 30, 2002 and 2001, respectively, and $(0.86),
$1.01 and $1.00 for the years ended December 31, 2001, 2000 and 1999,
respectively. (Loss) earnings per diluted share on the same basis would be $0.00
and $0.01 for the six months ended June 30,
F-11
2002 and 2001, respectively, and $(0.86), $1.00 and $0.99 for the years ended
December 31, 2001, 2000 and 1999, respectively.
(j) Pursuant to the pending AT&T Comcast transaction, AT&T has filed a
registration statement whereby AT&T is offering to exchange certain Eligible
AT&T notes (as defined) for New AT&T notes (as defined) that contain an interest
rate adjustment in exchange for the consent of holders of those notes to an
amendment of the related note agreements. The note amendment would clarify that
the AT&T Comcast transaction would not necessitate the notes being assumed by
AT&T Comcast as a successor entity and the New notes would remain obligations of
AT&T after completion of the AT&T Comcast transaction. The income figures
currently reflected do not contemplate the impact of the proposed exchange
offer. For every $1 billion in principal amount of debt exchanged, a 0.25%
increase in the interest rate would decrease annual net income by approximately
$1.5 million. If all Eligible AT&T notes were exchanged and received the
interest rate adjustment, a 0.25% increase in the interest rate would decrease
annual net income by approximately $8.5 million.
F-12
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2002 2001 2002 2001
-------- ------- -------- -------
Revenue.............................................. $ 2,526 $ 2,669 $ 4,965 $ 5,256
Operating expenses:
Cost of services (excluding depreciation of $541,
$459, $1,065 and $921, included below).......... 1,283 1,455 2,591 2,920
Selling, general and administrative................ 717 645 1,342 1,343
Depreciation and amortization...................... 746 1,209 1,466 2,492
Goodwill and franchise impairment charges.......... 16,525 -- 16,525 --
Asset impairment, restructuring and other
charges......................................... -- 287 56 1,095
-------- ------- -------- -------
Total operating expenses............................. 19,271 3,596 21,980 7,850
-------- ------- -------- -------
Operating loss....................................... (16,745) (927) (17,015) (2,594)
Investment expense, net............................ (1,116) (914) (1,217) (845)
Other income (expense), net........................ 332 (37) 331 (1,059)
Interest expense................................... (366) (482) (732) (961)
-------- ------- -------- -------
Loss before income taxes, net (losses) earnings
related to equity investments, minority interest
and dividends on subsidiary preferred stock,
extraordinary gain and cumulative effect of
accounting changes................................. (17,895) (2,360) (18,633) (5,459)
Benefit for income taxes............................. 5,277 1,434 5,506 2,178
Net (losses) earnings related to equity
investments........................................ (597) (33) (617) 16
Minority interest and dividends on subsidiary
preferred stock.................................... (63) 187 (140) 736
-------- ------- -------- -------
Loss before extraordinary gain and cumulative effect
of accounting changes.............................. (13,278) (772) (13,884) (2,529)
Extraordinary gain (net of income taxes of $5 and
$30)............................................... 7 -- 48 --
Cumulative effect of accounting changes (net of
income taxes of ($530) and $142)................... -- -- (856) 229
-------- ------- -------- -------
Net loss............................................. $(13,271) $ (772) $(14,692) $(2,300)
======== ======= ======== =======
See Accompanying Notes to Combined Financial Statements.
F-13
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
COMBINED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
Assets
Cash and cash equivalents................................... $ -- $ --
Accounts receivable less allowances of $82 and $73.......... 592 584
Other receivables........................................... 158 214
Investments................................................. 414 668
Other current assets........................................ 262 184
------- --------
Total current assets...................................... 1,426 1,650
------- --------
Property, plant and equipment, net of accumulated
depreciation of $4,107 and $2,958......................... 14,861 14,519
Franchise costs, net of accumulated amortization of $2,501
in 2001................................................... 29,083 42,819
Goodwill, net of accumulated amortization of $741 in 2001... 15,134 19,361
Other purchased intangible assets, net of accumulated
amortization of $554 and $458............................. 1,465 1,561
Investments................................................. 17,896 21,913
Other assets................................................ 1,975 1,364
------- --------
Total assets.............................................. $81,840 $103,187
======= ========
Liabilities and Combined Attributed Net Assets
Accounts payable............................................ $ 712 $ 678
Payroll and benefit-related liabilities..................... 369 478
Debt maturing within one year............................... 2,050 2,824
Short-term debt due to AT&T................................. 6,486 3,959
Other current liabilities................................... 2,363 1,691
------- --------
Total current liabilities................................. 11,980 9,630
Long-term debt.............................................. 13,406 16,502
Deferred income taxes....................................... 19,906 25,810
Other long-term liabilities and deferred credits............ 836 1,059
------- --------
Total liabilities...................................... 46,128 53,001
------- --------
Minority interest........................................... 1,210 3,302
Company-Obligated Convertible Quarterly Income Preferred
Securities of Subsidiary Trust Holding Solely Subordinated
Debt Securities of AT&T................................... 4,725 4,720
Combined attributed net assets.............................. 29,777 42,164
------- --------
Total liabilities and combined attributed net assets........ $81,840 $103,187
======= ========
See Accompanying Notes to Combined Financial Statements.
F-14
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
COMBINED STATEMENTS OF CHANGES IN COMBINED ATTRIBUTED NET ASSETS
(UNAUDITED)
(DOLLARS IN MILLIONS)
SIX MONTHS ENDED
JUNE 30,
------------------
2002 2001
-------- -------
Combined attributed net assets:
Balance at beginning of period............................ $ 42,164 $43,317
Net loss.................................................. (14,692) (2,300)
Contributions from AT&T, net.............................. 2,048 2,235
Issuance of common stock by affiliates.................... -- 39
Net revaluation of financial instruments.................. (514) (4)
Recognition of previously unrealized losses............... 777 748
Other comprehensive (loss) income......................... (6) 29
-------- -------
Balance at end of period.................................. $ 29,777 $44,064
======== =======
Summary of total comprehensive loss:
Net loss.................................................. $(14,692) $(2,300)
Net revaluation of financial instruments (net of income
taxes of $323 and $3).................................. (514) (4)
Recognition of previously unrealized net losses (net of
income taxes of $488 and $471)......................... 777 748
Other comprehensive (loss) income (net of income taxes of
$(4) and $7)........................................... (6) 29
-------- -------
Total comprehensive loss.................................. $(14,435) $(1,527)
======== =======
See Accompanying Notes to Combined Financial Statements.
F-15
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN MILLIONS)
SIX MONTHS
ENDED
JUNE 30,
------------------
2002 2001
-------- -------
Operating activities:
Net loss.................................................. $(14,692) $(2,300)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Cumulative effect of accounting change, net of income
taxes................................................. 856 (229)
Extraordinary gain, net of income taxes................ (48) --
Net losses on sales of businesses and investments...... -- 11
Goodwill and franchise impairment charges.............. 16,525 --
Asset impairment, restructuring and other charges, net
of cash payments...................................... 39 1,009
Depreciation and amortization.......................... 1,466 2,492
Provision for uncollectible receivables................ 129 95
Net losses (earnings) related to equity investments.... 1,004 (37)
Deferred income taxes.................................. (5,089) (1,031)
Investment impairment charges, net..................... 1,276 65
Put option mark-to-market charge....................... -- 838
Minority interest and dividends on subsidiary preferred
stock................................................. 132 (757)
Net revaluation of certain financial instruments....... (290) 1,065
(Increase) decrease in accounts receivable............. (57) 145
Increase (decrease) in accounts payable................ 91 (210)
Net change in other operating assets and liabilities... (149) (1,465)
Other adjustments, net................................. 81 39
-------- -------
Net cash provided by (used in) operating
activities.......................................... 1,274 (270)
-------- -------
Investing activities:
Capital expended for property and equipment, net of
proceeds from disposal................................. (1,687) (1,775)
Sales of marketable securities............................ -- 94
Investment distributions and sales........................ 16 167
Investment contributions and purchases.................... (18) (268)
Net cash (paid) received for acquisitions and dispositions
of businesses.......................................... (1) 3,105
Other investing activities, net........................... (128) (114)
-------- -------
Net cash (used in) provided by investing
activities.......................................... (1,818) 1,209
-------- -------
Financing activities:
Proceeds from long-term debt issuances.................... 49 98
Retirement of long-term debt.............................. (1,959) (135)
Dividends paid on preferred securities.................... (108) (105)
Change in short-term debt due to AT&T..................... 2,519 (480)
Transfers from (to) AT&T, net............................. 43 (58)
-------- -------
Net cash provided by (used in) financing
activities.......................................... 544 (680)
-------- -------
Net change in cash and cash equivalents..................... -- 259
Cash and cash equivalents at beginning of period............ -- 61
-------- -------
Cash and cash equivalents at end of period.................. $ -- $ 320
======== =======
See Accompanying Notes to Combined Financial Statements.
F-16
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS AND UNLESS OTHERWISE NOTED)
(1) BASIS OF PRESENTATION
AT&T Broadband Group is an integrated business of AT&T Corp. ("AT&T") and
not a stand-alone entity. AT&T Broadband Group consists primarily of the assets,
liabilities and business of AT&T Broadband, LLC (formerly Tele-Communications,
Inc. ("TCI")), and MediaOne Group, Inc. ("MediaOne"). AT&T Broadband, LLC
("ATTBLLC") and MediaOne are both separate subsidiaries of AT&T. AT&T Broadband
Group is one of the nation's largest broadband communications providers,
providing cable television, high-speed cable Internet and broadband telephone
services. AT&T intends to assign and transfer substantially all of the assets,
liabilities and business of AT&T Broadband Group to AT&T Broadband Corp., a
newly formed company for AT&T's broadband business, which will be subsequently
merged with Comcast Corporation ("Comcast") as discussed below.
Comcast and AT&T have agreed to a combination of Comcast and AT&T Broadband
Corp. (the "AT&T Comcast Merger"). The AT&T Comcast Merger is pursuant to, and
subject to the terms and conditions set forth in the Agreement and Plan of
Merger, dated as of December 19, 2001 (the "Merger Agreement"). The AT&T Comcast
Merger will occur in several steps, which are expected to occur on the closing
date of the AT&T Comcast Merger. First, AT&T will assign and transfer to AT&T
Broadband Corp., substantially all of the assets and liabilities of AT&T's
broadband business. Following the transfer, AT&T will spin off AT&T Broadband
Corp. to AT&T shareholders by distributing one share of AT&T Broadband Corp.
common stock to each holder of record of a share of AT&T common stock, NYSE
symbol "T," as of the close of business on the record date for the AT&T
Broadband Corp. spin-off ("AT&T Broadband Spin-off"). Immediately following the
AT&T Broadband spin-off, AT&T Broadband Corp. will merge with AT&T Broadband
Acquisition Corp., a newly formed, wholly owned shell subsidiary of AT&T Comcast
Corporation ("AT&T Comcast"), with AT&T Broadband Corp. continuing as the
surviving corporation. At approximately the same time, Comcast will merge with
Comcast Acquisition Corp., a newly formed, wholly owned shell subsidiary of AT&T
Comcast, with Comcast continuing as the surviving entity. As a result of these
mergers, AT&T Comcast will become the parent company of both AT&T Broadband
Corp. and Comcast.
AT&T Comcast will issue shares of AT&T Comcast common stock to the AT&T
shareholders who received shares of AT&T Broadband Corp. common stock in the
AT&T Broadband Spin-off. AT&T Broadband Corp. shareholders will receive
approximately 0.32 of a share of AT&T Comcast for each share they own of AT&T
Broadband Corp., based on calculations as of June 30, 2002. 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.
On May 3, 2002, AT&T Broadband Corp. and AT&T Comcast, as co-borrowers,
entered into definitive credit agreements with a syndicate of lenders for an
aggregate of approximately $12.8 billion in order to obtain the financing
necessary to complete the AT&T Comcast Merger. Under the terms of the new credit
facilities, the obligations of the lenders to provide the financing upon
completion of the AT&T Comcast Merger are subject to a number of conditions,
including the condition that AT&T Comcast obtain an investment-grade credit
rating. Accordingly, there can be no assurance that AT&T Broadband Corp. and
AT&T Comcast will be able to obtain the financing necessary to complete the AT&T
Comcast transaction.
F-17
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS AND UNLESS OTHERWISE NOTED)
On July 10, 2002, shareholders of AT&T and Comcast approved the AT&T
Comcast Merger. The AT&T Comcast Merger still remains subject to certain
governmental reviews and certain other conditions. As a result, there can be no
assurance that the AT&T Comcast Merger will be consummated, or if the AT&T
Comcast Merger is consummated, as to the date of such consummation.
The combined financial statements of AT&T Broadband Group are prepared in
accordance with generally accepted accounting principles and in management's
opinion, include all adjustments necessary for a fair presentation of combined
operations, financial position and statement of cash flows for the periods
presented. The combined financial statements of AT&T Broadband Group reflect the
assets, liabilities, revenue and expenses directly attributable to AT&T
Broadband Group, as well as allocations deemed reasonable by management, to
present the results of operations, financial position, and cash flows of AT&T
Broadband Group on a stand-alone basis. The allocation methodologies have been
described within the notes to the combined financial statements where
appropriate, and management considers the allocations to be reasonable. All
significant intercompany accounts and transactions within the AT&T Broadband
Group have been eliminated. The financial information included herein may not
necessarily reflect the combined results of operations, financial position,
changes in combined attributed net assets and cash flows of AT&T Broadband Group
in the future or what they would have been had AT&T Broadband Group been a
separate, stand-alone entity during the periods presented. In addition, the
combined results for interim periods presented are not necessarily indicative of
results for the full year. Earnings per share disclosure has not been presented
as AT&T Broadband Group is a business unit of AT&T and earnings per share data
is not considered meaningful. The combined financial statements of AT&T
Broadband Group should be read in conjunction with AT&T's Form 10-K/A for the
year ended December 31, 2001, AT&T's Form 10-Q for the quarter ended June 30,
2002, and AT&T Broadband Group combined financial statements for the year ended
December 31, 2001.
AT&T Broadband Group's operations have been dependent on cash infusions
from AT&T in order for AT&T Broadband Group to operate and execute on its
business and growth strategies. If, for any reason, AT&T is unwilling or cannot
provide the level of financing necessary to fund future operations, AT&T
Broadband Group will need to seek additional financing from third parties.
Debt attributed to AT&T Broadband Group includes the third party
obligations of ATTBLLC 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 and dispositions
of 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, proceeds, if any, that may result from the
restructuring of AT&T Broadband Group's investment in Time Warner Entertainment
("TWE") and continued evaluation and sale of non-strategic cable systems. See
Note 11.
As a result of the above methodology, from time to time AT&T Broadband
Group may advance funds to AT&T. These advances will be accounted for as
borrowings between entities and bear interest at a market rate that is
substantially equal to the rate at which AT&T would be able to borrow from third
parties on debt with similar maturities.
F-18
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS AND UNLESS OTHERWISE NOTED)
AT&T performs cash management functions on behalf of the 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
transfers to or from AT&T are assumed to be settled in cash. AT&T's capital
contributions for purchase business combinations and initial investments in
joint ventures and partnerships which AT&T attributed to AT&T Broadband Group
have been treated as noncash transactions. In addition, certain transactions in
which AT&T has issued AT&T common stock in exchange for net assets and
obligations attributed to AT&T Broadband Group have been treated as noncash
transactions.
General corporate overhead related to AT&T's corporate headquarters and
common support divisions has been allocated to AT&T Broadband Group as it was
not deemed practicable to specifically identify such common costs to AT&T
Broadband Group. The allocation of corporate overhead is divided into an
allocation of shared services and other corporate overhead. Costs of shared
services are allocated to AT&T Broadband Group based on transaction based
prices. Other corporate overhead is allocated to AT&T Broadband Group based on
the ratio of AT&T Broadband Group's external costs and expenses adjusted for any
functions AT&T Broadband Group performs on its own. The costs of these services
charged to AT&T Broadband Group are not necessarily indicative of the costs that
would have been incurred if AT&T Broadband Group had performed these functions
entirely as a stand-alone entity, nor are they indicative of costs that will be
charged or incurred in the future. However, management believes such allocations
are reasonable.
Consolidated income tax provisions or benefits, related tax payments or
refunds, and deferred tax balances of AT&T have been allocated to AT&T Broadband
Group based principally on the taxable income and tax credits directly
attributable to AT&T Broadband Group, resulting in essentially a stand-alone
presentation. AT&T and AT&T Broadband Corp. entered into a tax sharing agreement
effective as of January 1, 2002, which, consistent with the principles described
in the preceding sentence, provides for tax sharing payments based on the tax
expense or tax benefits of a hypothetical affiliated group consisting of AT&T
Broadband Group and AT&T. Based on this agreement, the consolidated tax
liability before credits are allocated between the groups, based on each group's
contribution to the consolidated taxable income of the hypothetical group.
Consolidated tax credits of the hypothetical group are allocated between groups
based on each group's contribution to such tax credit.
(2)SIGNIFICANT ACCOUNTING POLICIES
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") NO. 142, "GOODWILL AND
OTHER INTANGIBLE ASSETS"
Effective January 1, 2002, AT&T Broadband Group adopted SFAS No. 142
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 requires that
goodwill and indefinite-lived intangible assets no longer be amortized, but
instead be tested for impairment at least annually. Intangible assets that have
finite useful lives will continue to be amortized over their useful lives. In
addition, the amortization period of intangible assets with finite lives will no
longer be limited to 40 years. AT&T Broadband Group has determined that
franchise costs are indefinite-lived assets, as defined in SFAS 142, and
therefore are not subject to amortization beginning in 2002. In accordance with
SFAS 142, goodwill was tested for impairment by comparing the fair value of the
reporting units to its carrying value. As of January 1, 2002, the fair value of
the reporting unit's goodwill exceeded its carrying value, and therefore no
impairment loss was recognized upon adoption. Franchise costs were tested for
impairment as of January 1, 2002, by
F-19
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS AND UNLESS OTHERWISE NOTED)
comparing the fair value to the carrying value (at the market level). An
impairment loss of $856, net of taxes of $530, was recorded in the first quarter
of 2002 and included in the cumulative effect of accounting changes in the
accompanying combined statement of operations. (See Note 4 for interim testing
of goodwill and franchise costs.)
The following table presents the impact of amortization under SFAS 142 on
net loss had the standard been in effect for the three and six months ended June
30, 2001.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2002 2001 2002 2001
--------- ------ -------- -------
Reported loss before extraordinary gain and
cumulative effect of accounting changes..... $(13,278) $(772) $(13,884) $(2,529)
Add back amortization, net of tax:
Goodwill*................................... -- 148 -- 318
Equity method excess basis.................. -- 29 -- 62
Franchise costs............................. -- 192 -- 391
-------- ----- -------- -------
Adjusted reported loss before extraordinary
gain and cumulative effect of accounting
changes..................................... (13,278) (403) (13,884) (1,758)
Extraordinary gain, net of income taxes..... 7 -- 48 --
Cumulative effect of accounting changes, net
of income taxes.......................... -- -- (856) 229
-------- ----- -------- -------
Adjusted net loss............................. $(13,271) $(403) $(14,692) $(1,529)
-------- ----- -------- -------
---------------
* Goodwill amortization is net of the At Home Corporation ("Excite@Home")
minority interest impact on goodwill.
As of June 30, 2002, goodwill was $15.1 billion representing a decline of
$4.2 billion compared with December 31, 2001 primarily as a result of impairment
losses recorded in the second quarter of 2002 (see Note 4).
Other purchased intangible assets consist primarily of customer lists. The
amortization expense associated with other purchased intangible assets for the
three and six months ended June 30, 2002 was $50 and $99, respectively. Annual
amortization expense for other purchased intangible assets is estimated to be
$196 for the years 2002 through 2006.
SFAS NO. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS"
On January 1, 2002, AT&T Broadband Group adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 144 applies to all
long-lived assets, including discontinued operations, and consequently amends
Accounting Principles Board ("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 121, SFAS 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 144 requires that long-lived assets that are to be
disposed of by sale be
F-20
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS AND UNLESS OTHERWISE NOTED)
measured at the lower of book value or fair value less cost to sell.
Additionally, SFAS 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 144 also amends Accounting Research
Bulletin No. 51, "Consolidated Financial Statements" to eliminate the exception
to consolidation for a subsidiary for which control is likely to be temporary.
The adoption of SFAS 144 had no impact on AT&T Broadband Group's results of
operations, financial position or cash flows.
For a detailed discussion of significant accounting policies, please refer
to AT&T Broadband's Group's combined financial statements for the year ended
December 31, 2001.
(3) SUMMARY OF RECOGNITION OF PREVIOUSLY UNREALIZED LOSSES
AT&T Broadband Group has investment holdings classified as
"available-for-sale" under the scope of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). These securities are
carried at fair value with any unrealized gains or losses, net of income taxes,
included within other comprehensive income as a component of combined attributed
net assets. Under SFAS 115, when the "available-for-sale" securities are sold or
when management of AT&T Broadband Group believes a decline in the investment
value is other-than-temporary, the previously unrealized gains or losses shall
be recognized in earnings. AT&T Broadband Group recognizes such gains or losses
through investment expense in the accompanying combined statement of operations.
In addition, upon the adoption in January 2001, of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS 133") AT&T Broadband
Group reclassified certain securities to "trading", resulting in the recognition
in earnings of previously unrealized losses through other income (expense).
Following is a summary of the recognition of previously unrealized losses on
"available-for-sale" securities:
SIX MONTHS
ENDED JUNE 30,
---------------
2002 2001
------ ------
Other than temporary investment impairments, net (net of
income taxes of $488 and $25)............................. $777 $ 40
Reclassification of securities to "trading" in conjunction
with the adoption of SFAS 133 (net of income taxes of
$446)..................................................... -- 708
---- ----
Total recognition of previously unrealized losses...... $777 $748
==== ====
(4) IMPAIRMENT CHARGES
GOODWILL AND FRANCHISE IMPAIRMENT CHARGES
SFAS 142 requires that intangible assets not subject to amortization and
goodwill shall be tested for impairment annually, or more frequently if events
or changes in circumstances indicate that the asset might be impaired. The
impairment test shall consist of a comparison of the fair value of the
intangible asset/goodwill with its carrying amount.
In the second quarter of 2002, AT&T Broadband Group noted significant
changes in the general business climate as evidenced by the severe downward
movement in the U.S. stock market (including the decline in values of publicly
traded cable industry stocks). At June 30, 2002, five cable competitors as a
F-21
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS AND UNLESS OTHERWISE NOTED)
group experienced an average decline in total market capitalization of over 20%
since January 1, 2002. AT&T Broadband Group has also witnessed corporate
bankruptcies. AT&T Broadband Group believes these factors coupled with the
pending AT&T Comcast Merger (which was approved by Comcast and AT&T shareholders
on July 10, 2002) created a "trigger event" which necessitated the testing of
goodwill and franchise costs for impairment as of the end of the second quarter.
AT&T Broadband Group assessed impairment on the same principles employed
during the initial adoption of SFAS 142. Such testing resulted in the
recognition of a $12,298 franchise cost impairment charge and a $4,227 goodwill
impairment charge (aggregating to $11,781 after-tax) recorded in goodwill and
franchise impairment charges in the accompanying combined statement of
operations.
INVESTMENT IMPAIRMENT CHARGES
In accordance with SFAS 115 and APB Opinion No. 18 "The Equity Method of
Accounting for Investments in Common Stock," ("APB 18"), AT&T Broadband Group
evaluated its portfolio of investments as of June 30, 2002 for potential
impairments. SFAS 115 and APB 18 both require the recognition in earnings of
declines in value of cost and equity method securities which are other than
temporary.
Given the significant decline in stock prices in the last six months, the
length of time these investments have been below market and industry specific
issues, AT&T Broadband Group believes that certain investments would not recover
their cost basis in the foreseeable future. Accordingly, AT&T Broadband Group
believes the declines in value are other than temporary and, as a result, AT&T
Broadband Group recorded total net investment impairments of $2,129 pretax
($1,308 after tax). The following is a breakout of the investment impairment
charges recorded in the second quarter by type of investment.
COST METHOD INVESTMENTS
In the second quarter of 2002, AT&T Broadband Group recorded net investment
impairment charges on cost method investments of $1,140 pretax ($700 after tax),
within investment expense, net in the accompanying combined statement of
operations. These charges primarily relate to securities that are classified as
"available-for-sale" and were marked-to-market through other comprehensive
income as a component of combined attributed net assets. These charges primarily
consisted of impairments on investments in Cablevision Systems Corporation
("Cablevision") ($608 pretax, $374 after-tax), Comcast ($278 pretax, $171
after-tax) and Microsoft Corporation ($158 pretax, $97 after-tax). In the first
half of 2002, AT&T Broadband Group recorded impairment charges on cost method
investments of $1,276 on a pretax basis.
AT&T Broadband Group's investment in Cablevision stock is monetized by debt
which is indexed to the value of Cablevision shares. The debt contains an
embedded derivative which is designated as a cash-flow hedge under the
provisions of SFAS 133 and is marked-to-market through other comprehensive
income. At the time AT&T Broadband Group recognized the other than temporary
decline in the value of the Cablevision stock as an expense, AT&T Broadband
Group also recognized, in investment expense, net in the accompanying combined
statement of operations, the unrealized gain on the embedded derivative that was
previously recorded in other comprehensive income, resulting in the $608 pretax
impairment discussed above, as permitted by SFAS 133.
F-22
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS AND UNLESS OTHERWISE NOTED)
EQUITY METHOD INVESTMENTS
In the second quarter of 2002, AT&T Broadband Group recorded investment
impairment charges on equity method investments of $989 pretax ($608 after-tax)
within net (losses) earnings related to equity investments in the accompanying
combined statement of operations. These charges consisted of impairments of
cable partnerships, primarily Texas Cable Partners, LP ($398 pretax, $245
after-tax), Insight Midwest LP ($162 pretax, $99 after-tax), Kansas City Cable
Partners ($157 pretax, $96 after-tax), Parnassos Communications, LP ($132
pretax, $81 after-tax) and Century-TCI California Communications, LP ($101
pretax, $62 after-tax). Parnassos Communications, LP and Century-TCI California
Communications, LP represent the only partnership investments AT&T Broadband
Group has with Adelphia Communications Corporation. Adelphia Communications
Corporation and subsidiaries (including Parnassos Communications, LP and
Century-TCI California Communications, LP) filed for Chapter 11 bankruptcy on
June 25, 2002.
(5) ASSET IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES
For the three months ended June 30, 2002, AT&T Broadband Group had no asset
impairment, restructuring and other charges. For the six months ended June 30,
2002, AT&T Broadband Group recorded $56 of asset impairment, restructuring and
other charges associated with efforts to reorganize and streamline certain
centralized and field functions. The $56 includes headcount reductions of $42
associated with employee separation costs resulting from this exit plan, $27 in
connection with facility closings and $4 for other charges. These charges were
partially offset by the reversal of $17 related to the business restructuring
plan from the second quarter of 2001 which was due to the redeployment of
certain employees to different functions within AT&T Broadband Group.
Approximately 900 employees will be involuntarily separated in conjunction with
this exit plan. Approximately 75% of the affected employees are management
employees and 25% are non-management employees. Approximately 75% of the
affected employees have left their positions as of June 30, 2002 with the
remaining reductions expected to occur throughout the remainder of 2002. More
than $32 of termination benefits were paid to employees during the first half of
2002 related to this exit plan.
The following table displays the activity and balances of the restructuring
reserve account from January 1, 2002 to June 30, 2002.
JANUARY 1, JUNE 30,
2002 2002
TYPE OF COST BALANCE ADDITIONS DEDUCTIONS BALANCE
------------ ---------- --------- ---------- --------
Employee separations.......................... $22 $42 $54 $10
Facility closings and lease terminations...... 12 27 9 30
Other......................................... -- 4 4 --
--- --- --- ---
Total......................................... $34 $73 $67 $40
=== === === ===
Total deductions included cash payments of $50 related to employee
separations and facility closings and a reversal of $17 related to the second
quarter 2001 business restructuring plan.
During the second quarter of 2001, AT&T Broadband Group recorded $287 of
asset impairment, restructuring and other charges, including $187 of charges
from Excite@Home. The charge included $56 of asset impairment charges related to
Excite@Home and $231 for restructuring and exit costs, which
F-23
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS AND UNLESS OTHERWISE NOTED)
consisted of $88 for severance costs and $136 for facility closings and $7 for
termination costs of contractual obligations.
The severance cost, for approximately 4,500 employees, primarily resulted
from Excite@Home and synergies created by the MediaOne merger. Approximately 27%
of the affected employees were management and 73% were non-management employees.
The business restructuring plan was substantially complete by March 31, 2002.
For the six months ended June 30, 2001, AT&T Broadband recorded $1,095 of
asset impairment, restructuring and other charges, including $939 of charges
from Excite@Home. The charge included $795 of asset impairment charges related
to Excite@Home and $300 for restructuring and exit costs, which consisted of
$147 for severance costs, $142 for facility closings and $11 primarily related
to the termination of contractual obligations.
The asset impairment charges included $656 recorded by Excite@Home
associated with the write-down of goodwill and other intangible assets, warrants
granted in connection with distributing the @Home service, and property, plant
and equipment of Excite@Home. These charges were due to continued deterioration
in the business climate of, and reduced levels of venture capital funding
activity for, Internet advertising and other Internet-related companies,
continued significant declines in the market values of Excite@Home's competitors
in the Internet advertising industry and changes in their operating and cash
flow forecasts for the remainder of 2001. These charges were also impacted by
Excite@Home's decision to sell or shut down narrowband operations. In addition,
AT&T Broadband Group, recorded a related goodwill impairment charge of $139
associated with its acquisition goodwill of Excite@Home. Since AT&T Broadband
Group, through ATTBLLC, consolidated Excite@Home but only owned approximately
23% of Excite@Home, 77% of the charge recorded by Excite@Home is not included as
an increase in AT&T Broadband Group's net loss, but rather is eliminated in the
statement of operations as a component of minority interest and dividends on
subsidiary preferred stock.
The severance costs, for approximately 6,900 employees, resulted primarily
from Excite@Home and synergies created by the MediaOne merger. Approximately 21%
of the affected employees were management employees and 79% were non-management
employees. This business restructuring plan was substantially completed by March
31, 2002.
(6) DEBT OBLIGATIONS
During the first half of 2002, AT&T Broadband Group called $1,516 of TCI
Communications Financing I, II and IV, MediaOne Financing Trust A and B and
MediaOne Finance II Trust Preferred Securities for early redemption. This
redemption resulted in a gain on early extinguishment of debt recorded as an
extraordinary gain of $7, net of tax ($12 pretax) and $48, net of tax ($78
pretax) for the three and six months ended June 30, 2002, respectively. The gain
represents the difference between the carrying value of the debt and the cash
paid to extinguish the debt.
(7) MINORITY INTEREST
Pursuant to the AT&T Comcast Merger agreement, AT&T was required to redeem
the outstanding TCI Pacific Communications, Inc. 5% Class A Senior Cumulative
Exchangeable Preferred Stock ("TCI Pacific Preferred Stock") for AT&T common
stock. Each share of TCI Pacific Preferred Stock was exchangeable at the option
of the holder for 8.365 shares of AT&T common stock. As of June 30, 2002, all
outstanding (approximately 6.2 million) shares of TCI Pacific preferred Stock
with a carrying value of
F-24
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS AND UNLESS OTHERWISE NOTED)
$2.1 billion had either been exchanged or redeemed for approximately 51.8
million shares of AT&T common stock. The value of these shares of AT&T common
stock were contributed to AT&T Broadband Group by AT&T and are reflected in
combined attributed net assets. The TCI Pacific Preferred Stock was reflected in
minority interest in the accompanying combined balance sheets prior to its
exchange. No gain or loss was recorded on the exchange/redemption of the TCI
Pacific Preferred Stock.
(8) RELATED PARTY TRANSACTIONS
As discussed in Note 1, AT&T provides necessary working capital
requirements through intercompany debt and capital contributions to AT&T
Broadband Group. These amounts are reflected in the accompanying combined
balance sheets as short-term debt due to AT&T or a component of combined
attributed net assets. Short-term debt due to AT&T and interest was assumed
based upon the methodology outlined in Note 1. Intercompany debt was $6,486 and
$3,959 at June 30, 2002 and December 31, 2001, respectively. Intercompany
interest expense was $91 and $99 for the three months ended June 30, 2002 and
2001, respectively, and $155 and $204 for the six months ended June 30, 2002 and
2001, respectively.
AT&T Consumer Services Group provides AT&T Broadband Group with sales
support and customer care services at cost based prices. For the three months
ended June 30, 2002 and 2001, such amounts totaled $40 and $49, respectively,
and for the six months ended June 30, 2002 and 2001, such amounts totaled $83
and $96, respectively, and are included in selling, general and administrative
expenses in the accompanying combined statements of operations.
In addition, AT&T Business Services Group provides AT&T Broadband Group
with wireline communication and other services. For the three months ended June
30, 2002 and 2001, such amounts totaled $89 and $53, respectively, and for the
six months ended June 30, 2002 and 2001, charges for such services totaled $171
and $110, respectively, and are included in costs of services in the
accompanying combined statements of operations.
AT&T allocates general corporate overhead expenses, including finance,
legal, marketing, use of the AT&T brand, planning and strategy and human
resources to AT&T Broadband Group, as well as costs for AT&T employees who
directly support the activities of the AT&T Broadband Group. Charges for such
services amounted to $29 and $46 for the three months ended June 30, 2002 and
2001, respectively and $62 and $86 for the six months ended June 30, 2002 and
2001, respectively. These amounts are included in selling, general and
administrative expenses in the accompanying combined statements of operations
and were determined based on the methodology described in note 1.
During 2001, AT&T Broadband Group had related party transactions with a
Liberty Media Group ("LMG") subsidiary. Included in cost of services in the
accompanying combined statement of operations were programming expenses related
to such LMG subsidiary of $91 and $172 for the three and six months ended June
30, 2001, respectively.
AT&T Broadband Group transferred $628 of marketable securities and equity
investments and $180 of related deferred tax liabilities to AT&T through
combined attributed net assets during the first quarter of 2001. No gain or loss
was recorded in this transaction.
F-25
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS AND UNLESS OTHERWISE NOTED)
(9) NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). 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 future 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 143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. For AT&T Broadband Group, this means that 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.
On April 30, 2002 the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections" ("SFAS 145"). SFAS 145 eliminates the requirement that gains and
losses from the extinguishments of debt be aggregated and classified as an
extraordinary item, net of the related income tax. An entity is not prohibited
from classifying such gains and losses as extraordinary items, as long as they
meet the criteria in paragraph 20 of APB 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." In
addition, SFAS 145 requires that capital leases that are modified so that the
resulting lease agreement is classified as an operating lease be accounted for
in the same manner as sale-leaseback transactions. The rescission of SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt" is effective for fiscal
years beginning after May 15, 2002, which for AT&T Broadband Group means January
1, 2003. Earlier application is encouraged. Any gain or loss on extinguishment
of debt that was previously classified as an extraordinary item would be
reclassified to other income (expense). The remainder of the statement is
generally effective for transactions occurring after May 15, 2002. AT&T
Broadband Group does not expect that the adoption of SFAS No. 145 will have a
material impact on AT&T Broadband Group's results of operations, financial
position or cash flows.
On June 28, 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities ("SFAS 146"). This statement addresses the recognition,
measurement and reporting of costs that are associated with exit and disposal
activities. This statement includes the restructuring activities that are
currently accounted for pursuant to the guidance set forth in Emerging Issues
Task Force ("EITF") 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to exit an Activity (including Certain
Costs incurred in a Restructuring)" ("EITF 94-3"), costs related to terminating
a contract that is not a capital lease and one-time benefit arrangements
received by employees who are involuntarily terminated -- nullifying the
guidance under EITF 94-3. Under SFAS 146 the cost associated with an exit or
disposal activity is recognized in the periods in which it is incurred rather
than at the date the company committed to the exit plan. This statement is
effective for exit or disposal activities initiated after December 31, 2002 with
earlier application encouraged. Previously issued financial statements will not
be restated. The provisions of EITF 94-3 shall continue to apply for exit plans
initiated prior to the adoption of SFAS 146. Accordingly, the initial adoption
of SFAS 146 will not have an effect on AT&T Broadband Group's results of
operations, financial position or cash flows. However, liabilities associated
with future exit and disposal activities will not be recognized until actually
incurred.
F-26
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS AND UNLESS OTHERWISE NOTED)
(10) COMMITMENT AND CONTINGENCIES
In the normal course of business AT&T Broadband Group is subject to
proceedings, lawsuits and other claims, including proceedings under laws and
regulations related to environmental and other matters. Such matters are subject
to many uncertainties, and outcomes are not predictable with assurance.
Consequently, AT&T Broadband Group is unable to ascertain the ultimate aggregate
amount of monetary liability or financial impact with respect to these matters
at June 30, 2002. These matters could affect the operating results of any one
quarter when resolved in future periods. However, management believes after
final disposition, any monetary liability or financial impact to AT&T Broadband
Group beyond that provided for at June 30, 2002 would not be material to AT&T
Broadband Group's annual combined financial statements.
AT&T Broadband Group is party to an agreement under which it purchases
certain customer care and billing services from CSG Systems, Inc. ("CSG"). On
May 10, 2002, AT&T Broadband Group filed a demand for arbitration against CSG
before the American Arbitration Association. On May 30, 2002, CSG answered AT&T
Broadband Group's arbitration demand and asserted various counterclaims against
AT&T Broadband Group. On June 21, 2002, CSG filed a lawsuit against Comcast
Corporation in federal court located in Denver, Colorado asserting claims
related to the agreement with CSG and the pending arbitration. In the event that
this process results in the termination of our agreement with CSG, AT&T
Broadband Group may incur significant costs in connection with its replacement
of these customer care and billing services and may experience temporary
disruption to its operations.
On June 7, 2002, AT&T Broadband Group announced that Motorola, Inc.
("Motorola") had notified AT&T Broadband of a potential safety hazard,
discovered by its factory quality control tests, in a limited number of DCT-2000
digital cable set top boxes installed after April 1, 2002. In response to the
notice from Motorola, AT&T Broadband Group has further reviewed the number of
potentially affected set-top boxes either installed in customers' homes or in
inventory. Based on the information currently available, AT&T Broadband Group
does not expect any material financial impact or short-term provisioning delays
resulting from this situation.
(11) SUBSEQUENT EVENTS
On August 11, 2002, US Airways Group Inc. ("US Airways") filed for Chapter
11 bankruptcy protection. AT&T Broadband Group leases airplanes under leveraged
leases to US Airways. Under a leveraged lease, the assets are secured with debt,
which is non-recourse to AT&T Broadband Group. In connection with the bankruptcy
filing, US Airways can reject or reaffirm its leases. AT&T Broadband Group does
not know if the leases will be rejected or affirmed. If the leases are rejected
and the non-recourse debtholder forecloses on the assets, AT&T Broadband Group
could incur an after-tax loss of approximately $35 to $45 (based on June 30,
2002 balances).
On August 12, 2002, in connection with the proposed AT&T Comcast Merger,
AT&T filed a preliminary prospectus contemplating a potential offer to exchange
an aggregate of $11.8 billion of AT&T's existing debt securities. The exchange
offer involves two types of transactions. The first, which is expected to be
subject to proration, involves an exchange of certain series of AT&T notes for
new notes that would ultimately become obligations of AT&T Broadband Corp. AT&T
Comcast and certain of its subsidiaries would guarantee these obligations upon
completion of the AT&T Comcast Merger. The second, which is not expected to be
subject to proration, involves an exchange of other series of AT&T notes for new
notes that would remain obligations of AT&T.
F-27
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS AND UNLESS OTHERWISE NOTED)
Neither AT&T, AT&T Broadband Group, nor any other entity would receive any
proceeds from the issuance of the new notes in the exchange offer. The new notes
would represent a new offering with respect to those notes that ultimately
become obligations of AT&T Broadband Corp. and would reduce the amount that AT&T
Broadband Group would otherwise be required to pay to AT&T upon completion of
the AT&T Comcast Merger. The new notes would represent a refinancing with
respect to those notes that remain obligations of AT&T after the merger.
The exchange offer would be subject to various conditions as described in
the prospectus. A decision to proceed with the exchange offer will be based on
market and business conditions over the next several months, finalization of the
exchange offer on terms that are mutually acceptable to AT&T and Comcast, and
other factors. Terms of the exchange offer have not yet been determined and will
be announced upon launch.
On August 21, 2002, AT&T, Comcast and AOL Time Warner ("AOL") announced
that they had reached an agreement to restructure the TWE partnership. Under the
agreement, in exchange for AT&T Broadband Group's 27.64% interest in TWE, AT&T
Broadband Group will receive $2.1 billion in cash, $1.5 billion in common stock
of AOL, valued as of the time of closing, and a 21% percent equity interest
(with less than five percent voting power in the election of directors) in a new
cable company serving approximately 10.8 million subscribers. The restructuring
agreement is subject to certain regulatory approvals and is expected to close in
2003.
Additionally, AT&T Broadband, Comcast and AOL have reached a three year
non-exclusive agreement under which AOL's high speed broadband service would be
made available on AT&T Comcast cable systems which pass approximately 10 million
homes.
F-28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of AT&T Corp.:
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations and changes in combined attributed net assets
and of cash flows present fairly, in all material respects, the financial
position of AT&T Broadband Group at December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the two years in the period
ended December 31, 2001 and for the ten-month period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of AT&T Broadband
Group's management; our responsibility is to express our opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
AT&T Broadband Group is a fully integrated business unit of AT&T Corp.;
consequently, as indicated in Note 1, these combined financial statements have
been derived from the consolidated financial statements and accounting records
of AT&T Corp. and reflect certain assumptions and allocations. Moreover, as
indicated in Note 1, AT&T Broadband Group relies on AT&T Corp. for
administrative, management and other services. The financial position, results
of operations and cash flows of AT&T Broadband Group could differ from those
that would have resulted had AT&T Broadband Group operated autonomously or as an
entity independent of AT&T Corp. As more fully discussed in Note 1, the combined
financial statements of AT&T Broadband Group should be read in conjunction with
the audited consolidated financial statements of AT&T Corp.
As discussed in the notes to the financial statements, AT&T Broadband Group
was required to adopt Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities, effective January
1, 2001.
PricewaterhouseCoopers LLP
New York, New York
March 25, 2002
F-29
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
---------------------- DECEMBER 31,
2001 2000 1999
------------ ------- ------------
(DOLLARS IN MILLIONS)
Revenue.................................................... $10,132 $ 8,445 $5,080
Operating expenses:
Cost of services (excluding depreciation of $1,881,
$1,291 and $663 for 2001, 2000 and 1999, respectively,
included below)....................................... 5,459 4,600 2,686
Selling, general and administrative...................... 2,582 2,180 1,253
Depreciation and other amortization...................... 2,626 1,674 805
Amortization of goodwill, franchise costs and other
purchased intangibles................................. 2,154 2,377 869
Asset impairment, restructuring and other charges........ 1,494 6,270 644
------- ------- ------
Total operating expenses................................... 14,315 17,101 6,257
------- ------- ------
Operating loss............................................. 4,183 8,656 1,177
Investment (expense) income.............................. (1,947) (84) 47
Other (expense) income................................... (927) 45 3
Interest expense......................................... 1,735 1,323 705
------- ------- ------
Loss before income taxes, net losses from equity
investments, minority interest and cumulative effect of
accounting change........................................ 8,792 10,018 1,832
Benefit for income taxes................................... 3,857 1,183 465
Net losses from equity investments......................... 69 597 707
Minority interest income (expense)......................... 833 4,062 (126)
------- ------- ------
Loss before cumulative effect of accounting change......... 4,171 5,370 2,200
Cumulative effect of accounting change (net of income taxes
of $142)................................................. 229 -- --
------- ------- ------
Net loss................................................... $ 3,942 $ 5,370 $2,200
======= ======= ======
The notes are an integral part of the combined financial statements.
F-30
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
COMBINED BALANCE SHEETS
DECEMBER 31,
---------------------
2001 2000
--------- ---------
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents................................... $ -- $ 61
Accounts receivable, less allowances of $73 and $74......... 584 774
Other receivables........................................... 214 267
Investments................................................. 668 2,204
Other current assets........................................ 184 200
-------- --------
Total current assets................................... 1,650 3,506
Property, plant and equipment, net.......................... 14,519 15,187
Franchise costs, net of accumulated amortization of $2,501
and $1,664................................................ 42,819 48,218
Goodwill, net of accumulated amortization of $741 and
$240...................................................... 19,361 21,139
Investments................................................. 21,913 25,045
Other assets, net of accumulated amortization of $563 and
$578...................................................... 2,925 4,439
-------- --------
Total assets........................................... $103,187 $117,534
======== ========
LIABILITIES AND COMBINED ATTRIBUTED NET ASSETS
Accounts payable............................................ $ 678 $ 1,250
Payroll and benefit-related liabilities..................... 478 570
Debt maturing within one year............................... 2,824 3,073
Short-term debt due to AT&T................................. 3,959 5,830
Deferred income tax liability............................... -- 486
Liability under put options................................. -- 2,564
Other current liabilities................................... 1,691 2,177
-------- --------
Total current liabilities.............................. 9,630 15,950
Long-term debt.............................................. 16,502 19,517
Deferred income taxes....................................... 25,810 28,550
Other long-term liabilities and deferred credits............ 1,059 1,069
-------- --------
Total liabilities...................................... 53,001 65,086
Minority interest........................................... 3,302 4,421
Company-Obligated Convertible Quarterly Income Preferred
Securities of Subsidiary Trust Holding Solely Subordinated
Debt Securities of AT&T................................... 4,720 4,710
Combined attributed net assets.............................. 42,164 43,317
-------- --------
Total liabilities and combined attributed net assets........ $103,187 $117,534
======== ========
The notes are an integral part of the combined financial statements.
F-31
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
COMBINED STATEMENTS OF CHANGES IN COMBINED ATTRIBUTED NET ASSETS
YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
----------------- DECEMBER 31,
2001 2000 1999
------- ------- ------------
(DOLLARS IN MILLIONS)
COMBINED ATTRIBUTED NET ASSETS:
Balance at beginning of period............................ $43,317 $14,889 $14,377
Net loss.................................................. 3,942 5,370 2,200
Contributions from AT&T, net.............................. 1,928 35,101 2,128
Issuance of common stock by affiliates.................... 39 (54) 515
Net revaluation of financial instruments.................. (599) (1,402) 69
Reclassification of previously unrealized losses.......... 1,414 146 --
Net minimum pension liability adjustment.................. (22) -- --
Other comprehensive income................................ 29 7 --
------- ------- -------
Balance at end of period.................................. $42,164 $43,317 $14,889
======= ======= =======
SUMMARY OF TOTAL COMPREHENSIVE LOSS:
Loss before cumulative effect of accounting change........ $ 4,171 $ 5,370 $ 2,200
Cumulative effect of accounting change.................... 229 -- --
------- ------- -------
Net loss.................................................. 3,942 $ 5,370 $ 2,200
Net revaluation of financial instruments (net of income
tax (provision) benefit of $375, $778 and $(36))....... (599) (1,402) 69
Recognition of previously unrealized losses (net of income
tax benefit of $891, $29 and $0)....................... 1,414 146 --
Net minimum pension liability adjustment (net of income
taxes of $16, $0 and $0)............................... (22) -- --
Other comprehensive income (net of income taxes of $7, $0
and $0)................................................ 29 7 --
------- ------- -------
Total comprehensive loss............................... $ 3,120 $ 6,619 $ 2,131
======= ======= =======
The notes are an integral part of the combined financial statements.
F-32
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
----------------- DECEMBER 31,
2001 2000 1999
------- ------- ------------
(DOLLARS IN MILLIONS)
OPERATING ACTIVITIES:
Net loss.................................................. $(3,942) $(5,370) $(2,200)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Cumulative effect of accounting change, net of income
taxes................................................. (229) -- --
Net losses (gains) on sales of businesses and
investments........................................... 710 (616) (39)
Asset impairment, restructuring and other charges, net
of cash payments...................................... 1,370 6,216 594
Depreciation and amortization........................... 4,780 4,051 1,674
Provision for uncollectible receivables................. 246 154 75
Net losses from equity investments...................... 106 967 1,145
Deferred income taxes................................... (3,579) (880) (422)
Impairment of investments............................... 539 240 --
Put option settlement and mark-to-market charge......... 838 537 --
Minority interest (income) expense...................... (872) (4,039) 180
Net revaluation of certain financial instruments........ 959 -- --
Decrease (increase) in receivables...................... 57 (263) (116)
(Decrease) increase in accounts payable................. (515) (90) 447
Net change in other operating assets and liabilities.... (635) (298) 143
Other adjustments, net.................................. 64 193 (101)
------- ------- -------
Net cash (used in) provided by operating activities... (103) 802 1,380
------- ------- -------
INVESTING ACTIVITIES:
Capital expended for property and equipment, net of
proceeds from disposal.................................. (3,413) (4,426) (3,161)
Sales of marketable securities............................ 102 96 --
Purchase of marketable securities......................... (18) (14) --
Investment distributions and sales........................ 1,429 578 817
Investment contributions and purchases.................... (276) (593) (1,308)
Net cash received (paid) for acquisitions and dispositions
of businesses........................................... 4,898 (71) 740
Other investing activities, net........................... (179) (81) (3)
------- ------- -------
Net cash provided by (used in) investing activities... 2,543 (4,511) (2,915)
------- ------- -------
FINANCING ACTIVITIES:
Proceeds from long-term debt issuances.................... 1,025 3,862 --
Issuance of convertible securities........................ -- -- 4,638
Retirements of long-term debt............................. (938) (1,429) (2,031)
Retirements of redeemable securities...................... -- (152) --
Dividends paid on preferred securities.................... (336) (294) (135)
Change in short-term debt due to AT&T..................... (2,252) 1,533 4,297
Transfers from (to) AT&T, net............................. -- 765 (5,234)
Other financing activities, net........................... -- (515) --
------- ------- -------
Net cash (used in) provided by financing activities... (2,501) 3,770 1,535
------- ------- -------
Net change in cash and cash equivalents..................... (61) 61 --
Cash and cash equivalents at beginning of period............ 61 -- --
------- ------- -------
Cash and cash equivalents at end of period.................. $ -- $ 61 $ --
======= ======= =======
The notes are an integral part of the combined financial statements.
F-33
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND UNLESS OTHERWISE NOTED)
(1) BASIS OF PRESENTATION
AT&T Broadband Group is an integrated business of AT&T Corp. ("AT&T") and
not a stand-alone entity. AT&T Broadband Group consists primarily of the assets,
liabilities and business of AT&T Broadband, LLC (formerly Tele-Communications,
Inc. ("TCI")), acquired by AT&T on March 9, 1999 in the TCI merger, and MediaOne
Group, Inc. ("MediaOne"), acquired by AT&T on June 15, 2000 in the MediaOne
merger. AT&T Broadband, LLC ("ATTBLLC") and MediaOne are both separate
subsidiaries of AT&T. AT&T Broadband Group is one of the nation's largest
broadband communications providers, providing cable television, high-speed cable
Internet and broadband telephone services. AT&T intends to 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 Corporation
("Comcast") as discussed below.
Comcast and AT&T have agreed to a merger of Comcast and AT&T Broadband
Corp. (the "AT&T Comcast Merger"). The AT&T Comcast Merger is pursuant to, and
subject to the terms and conditions set forth in the Agreement and Plan of
Merger, dated as of December 19, 2001 (the "Merger Agreement"). The AT&T Comcast
Merger will occur in several steps, which are expected to occur on the closing
date of the AT&T Comcast Merger. First, AT&T will assign and transfer to AT&T
Broadband Corp., substantially all of the assets and liabilities of AT&T's
broadband business. Following the transfer, AT&T will spin off AT&T Broadband
Corp. to AT&T shareholders by distributing one share of AT&T Broadband Corp.
common stock to each holder of record of a share of AT&T common stock, NYSE
symbol "T," as of the close of business on the record date for the AT&T
Broadband Corp. spin-off ("AT&T Broadband Spin-off"). Immediately following the
AT&T Broadband spin-off, AT&T Broadband Corp. will merge with AT&T Broadband
Acquisition Corp., a newly formed, wholly owned shell subsidiary of AT&T Comcast
Corporation ("AT&T Comcast"), with AT&T Broadband Corp. continuing as the
surviving corporation. At approximately the same time, Comcast will merge with
Comcast Acquisition Corp., a newly formed, wholly owned shell subsidiary of AT&T
Comcast, with Comcast continuing as the surviving entity. As a result of these
mergers, AT&T Comcast will become the parent company of both AT&T Broadband
Corp. and Comcast.
AT&T Comcast will issue shares of AT&T Comcast common stock to the AT&T
shareholders who received shares of AT&T Broadband Corp. common stock in the
AT&T Broadband Spin-off. As of the date of execution of the Merger Agreement, it
was estimated that each holder of AT&T Broadband Corp. common stock would have
received 0.34 of a share of AT&T Comcast common stock for each of such holder's
shares of AT&T Broadband Corp. common stock. 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. The exchange ratio is dependent on a number of factors that may change
between the date of execution of the Merger Agreement and the date of completion
of the AT&T Comcast transaction, including the number of outstanding shares of
AT&T common stock, the value of options and stock appreciation rights and the
price of Comcast Class A common stock.
AT&T will pay Comcast a termination fee in the amount of $1.5 billion in
cash if the Merger Agreement is terminated because (i) the AT&T Board withdraws
or modifies, in a manner adverse to Comcast, its recommendation of the AT&T
Comcast transaction, (ii) AT&T willfully and materially breaches certain terms
of the Merger Agreement and (iii) if the AT&T shareholders fail to approve the
AT&T Comcast Merger because a competing acquisition proposal made by a third
party is pending at the time of the AT&T shareholder meeting and within one year
of the AT&T meeting, AT&T enters into an agreement relating to an alternative
material transaction. Comcast will pay to AT&T a sum of $1.5 billion
F-34
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
termination fee in cash if the Merger Agreement is terminated because the
Comcast shareholders fail to approve the AT&T Comcast Merger.
Consummation of the AT&T Comcast Merger is subject to the satisfaction or
waiver of several conditions, including but not limited to, approval by the
shareholders of AT&T and Comcast and receipt of all necessary governmental
consents and approvals. As a result, there can be no assurance that the AT&T
Comcast Merger will be consummated, or if the AT&T Comcast Merger is
consummated, as to the date of such consummation.
On March 9, 1999, AT&T acquired TCI in a merger (the "TCI Merger") which
was attributed to AT&T Broadband Group. The results of operations, financial
position, changes in combined attributed net assets and cash flows of the
business of AT&T Broadband, LLC which are included in AT&T Broadband Group have
been included since March 1, 1999, the deemed effective date of the TCI Merger
for accounting purposes. The impact of the results from March 1 through March 9,
1999 were deemed immaterial to the combined results. On June 15, 2000, AT&T
acquired MediaOne which was attributed to AT&T Broadband Group. The results of
operations, financial position, changes in combined attributed net assets and
cash flows of the businesses of MediaOne which are included in AT&T Broadband
Group have been included since June 15, 2000. See note 4.
The combined financial statements of AT&T Broadband Group are prepared in
accordance with generally accepted accounting principles. The combined financial
statements of AT&T Broadband Group reflect the assets, liabilities, revenue and
expenses directly attributable to AT&T Broadband Group, as well as allocations
deemed reasonable by management, to present the results of operations, financial
position, changes in combined attributed net assets and cash flows of AT&T
Broadband Group on a stand-alone basis. The allocation methodologies have been
described within the notes to the combined financial statements where
appropriate, and management considers the allocations to be reasonable. All
significant intercompany accounts and transactions within the AT&T Broadband
Group have been eliminated. The financial information included herein may not
necessarily reflect the combined results of operations, financial position,
changes in combined attributed net assets and cash flows of AT&T Broadband Group
in the future or what they would have been had AT&T Broadband Group been a
separate, stand-alone entity during the periods presented. Earnings per share
disclosure has not been presented as AT&T Broadband Group is a business unit of
AT&T and earnings per share data is not considered meaningful. The combined
financial statements of AT&T Broadband Group should be read in conjunction with
AT&T's Form 10-K for the year ended December 31, 2001.
AT&T Broadband Group's operations have been dependent on cash infusions
from AT&T in order for AT&T Broadband Group to operate and execute on its
business and growth strategies. If, for any reason, AT&T is unwilling or cannot
provide the level of financing necessary to fund future operations, AT&T
Broadband Group will need to seek additional financing from third parties.
Debt attributed to AT&T Broadband Group includes the third party
obligations of ATTBLLC 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 and dispositions
of 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
F-35
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
not be limited to, proceeds that may result from the exercise of AT&T's
registration rights in Time Warner Entertainment ("TWE") and continued
evaluation and sale of non-strategic cable systems.
As a result of the above methodology, from time to time AT&T Broadband
Group may advance funds to AT&T. These advances will be accounted for as
borrowings between entities and bear interest at a market rate that is
substantially equal to the rate at which AT&T would be able to borrow from third
parties on debt with similar maturities.
AT&T performs cash management functions on behalf of the AT&T Broadband
Group. Substantially all of the AT&T Broadband Group's cash balances are swept
to AT&T on a daily basis, where they are managed and invested by AT&T. Transfers
of cash to and from AT&T, after giving consideration to the debt allocation
methodology, are reflected as a component of combined attributed net assets. Net
transfers to or from AT&T are assumed to be settled in cash. AT&T's capital
contributions for purchase business combinations and initial investments in
joint ventures and partnerships which AT&T attributed to AT&T Broadband Group
have been treated as noncash transactions.
General corporate overhead related to AT&T's corporate headquarters and
common support divisions has been allocated to AT&T Broadband Group as it was
not deemed practical to specifically identify such common costs to AT&T
Broadband Group. The allocation of corporate overhead is divided into an
allocation of shared services (e.g., payroll and finance) and other corporate
overhead. Costs of shared services are allocated to AT&T Broadband Group based
on transaction based prices. Other corporate overhead is allocated to AT&T
Broadband Group based on the ratio of AT&T Broadband Group's external costs and
expenses adjusted for any functions AT&T Broadband Group performs on its own.
The costs of these services charged to AT&T Broadband Group are not necessarily
indicative of the costs that would have been incurred if AT&T Broadband Group
had performed these functions entirely as a stand-alone entity, nor are they
indicative of costs that will be charged or incurred in the future. However,
management believes such allocations are reasonable.
Consolidated income tax provisions or benefits, related tax payments or
refunds, and deferred tax balances of AT&T have been allocated to AT&T Broadband
Group based principally on the taxable income and tax credits directly
attributable to AT&T Broadband Group, resulting in essentially a stand-alone
presentation. AT&T and AT&T Broadband Corp. entered into a tax sharing agreement
effective as of January 1, 2002, which, consistent with the principles described
in the preceding sentence, provides for tax sharing payments based on the tax
expense or tax benefits of a hypothetical affiliated group consisting of AT&T
Broadband Group and AT&T. Based on this agreement, the consolidated tax
liability before credits are allocated between the groups, based on each group's
contribution to the consolidated taxable income of the hypothetical group.
Consolidated tax credits of the hypothetical group are allocated between groups
based on each group's contribution to such tax credit.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Video, voice and data services revenue is recognized based upon monthly
service fees, fees per event or minutes of traffic processed. Revenue for
customer fees, equipment rental, advertising, and pay-per-view programming is
recognized in the period the services are delivered. Video and nonvideo
installation revenue is recognized in the period the installation services are
provided to the extent of direct selling costs. Any remaining amount is deferred
and recognized over the estimated average period customers are expected to
remain connected to the cable distribution system.
F-36
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING AND PROMOTIONAL COSTS
Advertising and promotional costs are expensed as incurred. Advertising and
promotional expenses were $439, $325 and $138 for the years ended December 31,
2001 and 2000 and the ten months ended December 31, 1999, respectively.
INCOME TAXES
AT&T Broadband Group is not a separate taxable entity for federal and state
income tax purposes and its results of operations are included in the
consolidated federal and state income tax returns of AT&T and its affiliates.
The provision for income taxes is based on AT&T Broadband Group's contribution
to the overall income tax liability or benefit of AT&T and its affiliates. Under
the balance sheet method, AT&T Broadband Group recognizes deferred tax assets
and liabilities at enacted income tax rates for the temporary differences
between the financial reporting basis and the tax basis of its assets and
liabilities. Any effects of changes in income tax rates or tax laws are included
in the provision for income taxes in the period of enactment. When it is more
likely than not that a portion or all of a deferred tax asset will not be
realized in the future, AT&T Broadband Group provides a corresponding valuation
allowance against the deferred tax asset.
STOCK-BASED COMPENSATION
Stock-based compensation is accounted for in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
AT&T Broadband Group follows the disclosure-only provisions of Statement of
Financial Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").
CASH EQUIVALENTS
All highly liquid investments with original maturities of three months or
less are considered to be cash equivalents.
INVESTMENTS
Investments in which AT&T Broadband Group exercises significant influence,
but does not control, are accounted for under the equity method of accounting.
Under the equity method, investments are stated at cost and are adjusted for
AT&T Broadband Group's subsequent contributions and share of earnings, losses
and distributions. The excess of the investment over the underlying book value
of the investee's net assets is being amortized over periods ranging from 25 to
40 years. Effective January 1, 2002, in accordance with SFAS No. 142 "Goodwill
and Other Intangible Assets" ("SFAS 142"), such excess costs will no longer be
amortized. Investments in which AT&T Broadband Group has no significant
influence over the investee are accounted for under the cost method of
accounting. Under the cost method, investments are stated at cost and earnings
are recognized to the extent distributions are received from the accumulated
earnings of the investee. Distributions in excess of accumulated earnings are
recognized as a reduction of the investment balance.
Marketable equity securities classified as "trading" securities are carried
at fair value with any unrealized gain or loss being recorded within investment
(expense) income in the combined statement of operations. Marketable equity
securities classified as "available-for-sale" are carried at fair market value
with unrealized gains and losses, net of tax, included in combined attributed
net assets as a component of other comprehensive income. The fair market value
of these securities is based on quoted market prices.
F-37
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T Broadband Group recognizes impairment charges on investment holdings
in the combined statement of operations when management believes the decline in
the investment value is other-than-temporary.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Construction costs, labor
and applicable overhead related to installations and interest during
construction are capitalized. Costs of additions and substantial improvements to
property, plant and equipment are capitalized. The cost of repairs and
maintenance of property, plant and equipment is charged to operations.
Depreciation is computed on a straight-line basis based upon the assets'
estimated useful lives using either the group or unit method. The useful lives
of distribution systems ranges from three to 15 years. The useful lives of
support equipment and buildings ranges from three to 40 years. The group method
is used for most depreciable assets, including distribution systems. Under the
group method, a specific asset group has an average life. The depreciation rate
is developed based on the average useful life for the specified asset group.
This method requires the periodic revision of depreciation rates.
Under the group method, at the time of ordinary retirements, sales or other
dispositions of assets, the original cost of such asset is deducted from
property, plant and equipment and charged to accumulated depreciation, without
recognition of a gain or loss. Gains and losses are only recognized in
connection with the sales of properties in their entirety.
FRANCHISE COSTS
Franchise costs include the value attributed to agreements with local
authorities that allow access to homes in cable service areas acquired in
connection with a business combination. Such amounts are generally amortized on
a straight-line basis over 25 or 40 years. Costs incurred by AT&T Broadband
Group in negotiating and renewing franchise agreements are amortized on a
straight-line basis over the life of the franchise, generally 10 to 20 years.
Beginning in 2002, in accordance with SFAS 142, franchise costs associated with
a business combination will no longer be amortized, but will continue to be
tested for impairment (see note 16).
GOODWILL
Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for as purchases. Goodwill is
amortized on a straight-line basis over seven to 40 years. Beginning in 2002, in
accordance with SFAS 142, such goodwill will no longer be amortized, but will
continue to be tested for impairment (see note 16).
SOFTWARE CAPITALIZATION
Certain direct development costs associated with internal-use software are
capitalized, including external direct costs of material and services, and
payroll costs for employees devoting time to the software projects. Such costs
are included within other assets and are amortized over a period not to exceed
five years beginning when the asset is substantially ready for use. Costs
incurred during the preliminary project stage, as well as maintenance and
training costs, are expensed as incurred. Initial operating-system software
costs are capitalized and amortized over the life of the associated hardware.
F-38
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
VALUATION OF LONG-LIVED ASSETS
Long-lived assets such as property, plant and equipment, franchise costs,
goodwill, investments and software are reviewed for impairment annually or
whenever events or changes in circumstances indicate the carrying amount may not
be recoverable. If the total of the expected future undiscounted cash flows is
less than the carrying amount of the asset, a loss is recognized for the
difference between the fair value and carrying value of the asset. Assets to be
disposed of are carried at the lower of their financial statement carrying value
or fair value less cost to sell.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, AT&T Broadband Group adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), and
its corresponding amendments under SFAS No. 138. AT&T Broadband Group uses
derivative financial instruments to mitigate market risk from changes in
interest rates and equity prices. Derivative financial instruments may be
exchange-traded or contracted in the over-the-counter market and include swaps,
options, warrants and forward contracts. AT&T Broadband Group does not use
derivative financial instruments for speculative purposes.
All derivatives are recognized on the balance sheet at fair value. To
qualify for hedge accounting treatment, derivatives, at inception, must be
designated as hedges and evaluated for effectiveness throughout the hedge
period. AT&T Broadband Group designates certain derivative contracts, at the
date entered into, as either (i) a hedge of the fair value of a recognized asset
or liability or of an unrecognized firm commitment ("fair value" hedge) or (ii)
a hedge of a forecasted transaction or of the variability of cash flows to be
received or paid related to a recognized asset or liability ("cash flow" hedge).
Other derivatives ("undesignated") are not formally designated for accounting
purposes. These derivatives, except for warrants, although undesignated for
accounting purposes are entered into to hedge economic risks.
AT&T Broadband Group records changes in the fair value of fair-value
hedges, along with the changes in fair value of the hedged asset or liability
that is attributable to the hedged risk (including losses or gains on firm
commitments), in other (expense) income in the combined statement of operations.
AT&T Broadband Group records changes in the fair value of cash-flow hedges
that are highly effective in other comprehensive income, as a component of
combined attributed net assets, until earnings are affected by the variability
of cash flows of the hedged transaction.
The changes in fair value of undesignated hedges are recorded in other
(expense) income in the combined statements of operations along with the change
in fair value of the related asset or liability.
AT&T Broadband Group currently does not have any net investment hedges in a
foreign operation.
AT&T Broadband Group assesses embedded derivatives to determine whether the
economic characteristics of the embedded instruments are not clearly and closely
related to the economic characteristics of the remaining component of the
financial instrument (the host instrument) and whether a separate instrument
with the same terms as the embedded instrument would meet the definition of a
derivative instrument. When it is determined that both conditions exist, AT&T
Broadband Group designates the derivative as described above and recognizes the
derivative at fair value.
AT&T Broadband Group formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair value or cash flow hedges to
specific assets and liabilities on the balance sheet or to specific firm
commitments or forecasted transactions.
F-39
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T Broadband Group discontinues hedge accounting prospectively when: (i)
it is determined that the derivative is no longer effective in offsetting
changes in the fair value of cash flows of a hedged item; (ii) the derivative
expires or is sold, terminated, or exercised; (iii) it is determined that the
forecasted hedged transaction will no longer occur; (iv) a hedged firm
commitment no longer meets the definition of a firm commitment; or (v)
management determines that designation of the derivative as a hedge instrument
is no longer appropriate.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair value hedge, the derivative
will continue to be adjusted for changes in fair value through other (expense)
income, and the hedged asset or liability will no longer be adjusted for changes
in fair value. When hedge accounting is discontinued because the hedged item no
longer meets the definition of a firm commitment, the derivative will continue
to be adjusted for changes in the fair value through other (expense) income, and
any asset or liability that was recorded pursuant to recognition of the firm
commitment will be removed from the balance sheet and recorded in current period
earnings. When hedge accounting is discontinued because it is probable that a
forecasted transaction will not occur, the derivative will then be adjusted for
changes in the fair value through other (expense) income and gains and losses
that were accumulated in other comprehensive income will be recognized
immediately in other (expense) income. In all other situations in which hedge
accounting is discontinued, the derivative will be carried at its fair value on
the balance sheet, with changes in its fair value recognized in other (expense)
income.
CASH FLOWS
For purposes of the combined statements of cash flows, all transactions
between AT&T Broadband Group and AT&T, except for purchase business combinations
and initial investments in joint ventures and partnerships which were funded by
AT&T and contributed by AT&T to AT&T Broadband Group, have been accounted for as
having been settled in cash at the time the transaction was recorded by AT&T
Broadband Group.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenue and expenses during the period reported. Actual results
could differ from those estimates. Estimates are used when accounting for
certain items such as allowances for doubtful accounts, depreciation and
amortization, employee benefit plans, income taxes, restructuring reserves,
impairments and contingencies.
CONCENTRATIONS
As of December 31, 2001, except as disclosed below, AT&T Broadband Group
does not have any significant concentration of business transacted with a
particular customer, supplier or lender that could, if suddenly eliminated,
severely impact its operations. AT&T Broadband Group does not have a
concentration of available sources of labor, services, franchises or other
rights that could, if suddenly eliminated, severely impact its operations.
All video and high-speed data billing services are provided by a single
vendor (see note 14). In addition, all broadband telephone billing services are
provided by a separate single vendor. AT&T Broadband Group also purchases its
digital set-top devices from one source (see note 14).
F-40
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ISSUANCE OF COMMON STOCK BY AFFILIATES
Changes in AT&T Broadband Group's proportionate share of the underlying
equity of an attributed entity or equity method investee, which result from the
issuance of additional equity securities by such entity, are recognized as
increases or decreases to combined attributed net assets.
RECOGNITION OF GAINS ON ASSET DISPOSITIONS
From time to time, AT&T Broadband Group contributes cable television
systems to joint ventures and partnerships in exchange for a non-controlling
interest in such entity. In connection with such contributions, AT&T Broadband
Group may guarantee the debt of the joint venture or partnership. AT&T Broadband
Group defers any gain associated with such transactions until such time as AT&T
Broadband Group has no remaining financial obligation to the joint venture or
partnership.
RECLASSIFICATIONS
Certain amounts in previous years have been reclassified to conform to the
2001 presentation.
(3) SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION
YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
-------------- DECEMBER 31,
2001 2000 1999
------- ---- ------------
INVESTMENT (EXPENSE) INCOME, NET
Net (losses) gains on sales of businesses and
investments........................................ $ (318) $616 $39
Investment impairment charges......................... (539) (240) --
Interest and dividend income.......................... 140 77 8
Settlement loss and mark-to-market charge on put
options............................................ (838) (537) --
Loss on settlement of exchangeable notes.............. (392) -- --
------- ---- ---
Investment (expense) income, net................... $(1,947) $(84) $47
======= ==== ===
OTHER (EXPENSE) INCOME, NET
Reclassification of securities to "trading" in
connection with the adoption of SFAS 133........... $(1,154) $ -- $--
Fair value adjustments of derivatives and "trading"
securities......................................... 195 -- --
Other................................................. 32 45 3
------- ---- ---
Other (expense) income............................. $ (927) $ 45 $ 3
======= ==== ===
F-41
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTARY BALANCE SHEET INFORMATION
DECEMBER 31,
-----------------
2001 2000
------- -------
PROPERTY, PLANT AND EQUIPMENT
Land and improvements..................................... $ 115 $ 135
Distribution systems...................................... 14,186 13,187
Support equipment and buildings........................... 2,382 2,526
Construction in progress.................................. 794 1,417
Accumulated depreciation.................................. (2,958) (2,078)
------- -------
Property, plant and equipment, net..................... $14,519 $15,187
======= =======
LEVERAGED LEASES
AT&T Broadband Group leases airplanes and energy-producing facilities under
leveraged leases having original terms of 10 to 30 years, expiring in various
years from 2004 through 2017. The investment in leveraged leases is primarily
included in other assets in the accompanying combined balance sheets. Following
is a summary of AT&T Broadband Group's investment in leveraged leases:
DECEMBER 31,
-------------
2001 2000
----- -----
Rentals receivable (net of nonrecourse debt*)............... $ 606 $ 616
Estimated unguaranteed residual values...................... 244 244
Unearned income............................................. (656) (685)
Allowance for credit losses................................. (3) (3)
----- -----
Investment in leveraged leases (included in other assets)... 191 172
Deferred taxes.............................................. 41 19
----- -----
Net investment in leveraged leases.......................... $ 150 $ 153
===== =====
---------------
* The rentals receivable are net of nonrecourse debt of $1.2 billion and $1.3
billion at December 31, 2001 and 2000, respectively.
F-42
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTARY STATEMENT OF CHANGES IN COMBINED ATTRIBUTED NET ASSETS
INFORMATION
YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
------------- DECEMBER 31,
2001 2000 1999
------ ---- ------------
Reclassification of securities to "trading" in
conjunction with the adoption of SFAS 133 (net of
income taxes of $446)(a)............................... $ 708 $ -- $ --
Settlement of exchangeable notes (net of income taxes of
$152)(b)............................................... 240 -- --
Sale of various securities (net of income tax benefit
(provision) of $63 and $(16)).......................... 100 (27) --
Other than temporary investment impairments (net of
income taxes of $197 and $45).......................... 314 173 --
Revaluation of derivatives (net of income taxes of
$33)................................................... 52 -- --
------ ---- -----
Total recognition of previously unrealized losses........ $1,414 $146 $ --
====== ==== =====
---------------
(a) See note 10 for further discussion.
(b) See note 7 for further discussion.
SUPPLEMENTARY CASH FLOW INFORMATION
YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
--------------- DECEMBER 31,
2001 2000 1999
------ ------ ------------
Interest payments, net of amounts capitalized.......... $1,555 $1,016 $488
====== ====== ====
Income tax (refunds) payments.......................... $ (442) $ 62 $ 8
====== ====== ====
(4) MERGERS, ACQUISITIONS, VENTURES, DISPOSITIONS AND EXCHANGES
MERGER WITH TELE-COMMUNICATIONS, INC.
AT&T Broadband Group was created upon the merger of TCI with a subsidiary
of AT&T. The TCI Merger was completed on March 9, 1999, in an all-stock
transaction valued at approximately $52 billion. TCI simultaneously combined its
Liberty Media Group programming business with its TCI Ventures Group technology
investments business, forming Liberty Media Group ("LMG"). In connection with
the TCI Merger, AT&T issued a separate tracking stock in exchange for the TCI
Liberty Media Group and TCI Ventures Group tracking shares previously
outstanding. LMG is excluded from AT&T Broadband Group.
The TCI Merger was accounted for under the purchase method of accounting,
accordingly, AT&T recorded the assets and liabilities of TCI at their fair
values and TCI results have been included since March 1, 1999, the deemed
effective date of the merger. Approximately $20 billion of the purchase price of
$52 billion was attributed to franchise costs and is being amortized on a
straight-line basis over 40 years. Pursuant to SFAS No. 109, "Accounting for
Income Taxes," AT&T recorded an approximate $13 billion deferred tax liability
in connection with this franchise intangible, which is also included in
franchise costs. AT&T does not expect that this deferred tax liability will ever
be paid. This deferred tax liability is being amortized on a straight-line basis
over 40 years and is included in the provision for income taxes. Also included
in the $52 billion purchase price was approximately $11 billion related to
F-43
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
nonconsolidated investments, approximately $5 billion related to property, plant
and equipment, approximately $11 billion of TCI long-term debt, and $7 billion
related to other net liabilities. In addition, $34 billion was attributed to the
investment in LMG which is excluded from the AT&T Broadband Group.
MERGER WITH MEDIAONE
On June 15, 2000, AT&T completed a merger with MediaOne in a cash and stock
transaction valued at approximately $45 billion (the "MediaOne Merger"). The
AT&T shares had an aggregate market value of approximately $21 billion and cash
payments totaled approximately $24 billion.
The MediaOne Merger was accounted for under the purchase method of
accounting, accordingly the results of MediaOne have been included in the
accompanying combined financial statements since the date of acquisition.
Approximately $17 billion of the $45 billion purchase price has been attributed
to franchise costs and is being amortized on a straight-line basis over 40
years. Also included in the purchase price was approximately $22 billion related
to nonconsolidated investments, including investments in TWE and Vodafone Group
plc ("Vodafone"), approximately $5 billion related to property, plant and
equipment, and $5 billion related to other net assets. In addition, included was
approximately $13 billion in deferred income tax liabilities, approximately $10
billion of MediaOne debt and approximately $1 billion of minority interest in
Centaur Funding Corporation, a subsidiary of MediaOne. AT&T did not attribute $7
billion of cash acquired in the MediaOne Merger to AT&T Broadband Group. The
purchase price resulted in goodwill of $20 billion, which is being amortized on
a straight-line basis over 40 years.
In accordance with the provisions of SFAS 142, AT&T Broadband Group will no
longer amortize goodwill, franchise costs associated with a business combination
or the deferred tax liability associated with franchise costs related to the
mergers discussed above (see note 16 for further discussions of the impacts of
SFAS 142).
PRO FORMA RESULTS
Following is a summary of the pro forma results of AT&T Broadband Group as
if the MediaOne Merger had closed effective March 1, 1999:
TEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
Revenue..................................................... $ 9,770 $7,326
Operating loss.............................................. $ 9,089 $1,832
Net (loss) income........................................... $(4,422) $1,047
Pro forma data may not be indicative of the results that would have been
obtained had the events actually occurred at the beginning of the periods
presented, nor does it intend to be a projection of future results.
CABLEVISION SYSTEMS CORPORATION ("CABLEVISION") AND RAINBOW MEDIA GROUP
On January 8, 2001, a subsidiary of AT&T and Cablevision completed the
transfer of cable systems in which AT&T received cable systems serving 358,000
customers in Boston and Eastern Massachusetts. In exchange, Cablevision received
cable systems serving approximately 130,000 customers in northern New York
suburbs, 44 million shares of AT&T common stock valued at approximately $871,
and approximately
F-44
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
$204 in cash. Cablevision recorded a gain as a result of the transaction. AT&T
Broadband Group did not record any gain or loss on the transaction, however, due
to ATTBLLC's ownership interest in Cablevision, $143, net of taxes, of
Cablevision's gain is included in "net losses from equity investments."
On October 23, 2001, AT&T Broadband Group, through ATTBLLC, sold
approximately 19.2 million shares of Cablevision NY Group Class A common stock
and, monetized through a trust, 26.9 million shares of a mandatorily
exchangeable trust security that is exchangeable into up to 26.9 million shares
of Cablevision NY Group Class A common stock at maturity in approximately three
years. The offering price was $36.05 per share for both the common shares and
the exchangeable securities. The offerings generated approximately $1,422 of
pretax proceeds, net of underwriting fees. The sale resulted in a pretax loss of
approximately $271 recorded in investment (expense) income.
On December 12, 2001, AT&T Broadband Group sold approximately 14.7 million
shares of Cablevision's Rainbow Media Group Class A tracking stock and,
monetized through a trust, 9.8 million shares of mandatorily exchangeable trust
security that was exchangeable into up to 9.8 million shares of Rainbow Media
Group Class A tracking stock at maturity in approximately three years. The
offering price was $22.50 per share for both the tracking stock shares and the
exchangeable securities. The offering generated approximately $487 of pretax
proceeds, net of underwriting fees. The sale resulted in a pretax gain of
approximately $63 recorded in investment (expense) income.
AT HOME CORPORATION
On August 28, 2000, AT&T and At Home Corporation ("Excite@Home") announced
shareholder approval of a new board of directors and governance structure for
Excite@Home. AT&T was given the right to designate six of the 11 Excite@Home
board members. In addition, Excite@Home converted approximately 50 million of
ATTBLLC's Excite@Home Series A shares into Series B shares, each of which has 10
votes. As a result of these governance changes, AT&T Broadband Group, through
ATTBLLC, gained a controlling interest and began consolidating Excite@Home's
results upon the closing of the transaction on September 1, 2000. As of December
31, 2000, AT&T Broadband Group had, on a fully diluted basis, approximately 23%
of the economic interest and 74% of the voting interest in Excite@Home. The
consolidation of Excite@Home in September 2000 resulted in minority interest of
approximately $2,200, goodwill of approximately $2,400, short-term liabilities
of approximately $2,400 (including an initial put option liability), other net
assets of approximately $1,200 and the removal of the investment in Excite@Home
of approximately $1,900.
On September 28, 2001, Excite@Home filed for bankruptcy protection under
Chapter 11 in the U.S. Bankruptcy Court, for the Northern District of
California. As a result of the bankruptcy filing and the removal by AT&T of four
of its six directors from the Excite@Home board of directors, AT&T Broadband
Group ceased consolidating Excite@Home as of September 30, 2001. Beginning
October 1, 2001, AT&T Broadband Group no longer records equity earnings or
losses related to Excite@Home since AT&T Broadband Group recognized losses in
excess of its investment in Excite@Home.
The noncash impacts of the deconsolidation of Excite@Home primarily
included a reduction to property, plant and equipment of approximately $320,
goodwill of approximately $326 and debt of approximately $988. The
deconsolidation of Excite@Home resulted in the recording of a liability which
was approximately $362 at December 31, 2001. The liability will continue to be
evaluated. In addition, other noncash items included a tax benefit of $673
reflecting changes to deferred tax liabilities.
F-45
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
COX AND COMCAST AGREEMENT
In August 2000, in exchange for Cox Communications, Inc. ("Cox") and
Comcast relinquishing their rights under the shareholder agreement in connection
with Excite@Home's governance change, AT&T granted put obligations to Cox and
Comcast. On May 18, 2001, AT&T, Cox and Comcast reached an agreement to revise
the terms of the put options. Under the new agreement, Cox and Comcast retained
their stakes in Excite@Home and AT&T issued 75 million AT&T common shares to Cox
and more than 80 million AT&T common shares to Comcast. The obligation under
these put obligations was recorded at fair value, with gains or losses resulting
from changes in fair value being recorded in investment (expense) income. AT&T
Broadband Group recorded an approximate $838 and $537 loss in investment
(expense) income related to the settlement and mark-to-market of the put option
in 2001 and 2000, respectively. The new agreement resulted in a tax benefit to
AT&T Broadband Group, which essentially offset this loss.
INSIGHT COMMUNICATIONS COMPANY LP
Effective January 1, 2001, entities attributed to AT&T Broadband Group sold
to Insight Communications Company LP ("Insight"), for net cash proceeds of $391,
several Illinois cable systems serving approximately 98,400 customers. Insight
subsequently contributed such cable systems and additional cable systems serving
approximately 177,000 customers to Insight Midwest L.P., an entity in which AT&T
Broadband Group, through its attributed entities, has a 50% interest. Entities
attributed to AT&T Broadband Group also contributed several Illinois systems
serving approximately 247,500 customers to Insight Midwest, L.P. The
transactions resulted in a pretax gain of $168, which was deferred due to a debt
support agreement with Insight Midwest, L.P.
KEARNS-TRIBUNE, LLC
On January 2, 2001, AT&T, through ATTBLLC, completed the sale of
Kearns-Tribune, LLC to MediaNews Group for $200 in cash. The transaction
resulted in a pretax gain of approximately $117 recorded in investment (expense)
income.
COMCAST
On April 30, 2001, a subsidiary of AT&T received 63.9 million shares of
AT&T stock held by Comcast which were valued at $1,423 in exchange for cable
systems attributed to AT&T Broadband Group serving approximately 590,000
customers in New Mexico, Maryland, New Jersey, Pennsylvania, Delaware and
Tennessee. The transaction resulted in a pretax loss of $297 recorded in
investment (expense) income.
Effective June 30, 2001, AT&T, together with certain subsidiaries
attributed to AT&T Broadband Group, transferred its 99.75% interest in an entity
owning the Baltimore, Maryland cable systems serving approximately 115,000
customers to Comcast for approximately $510 in net cash proceeds. The
transaction resulted in a pretax gain of $149 recorded in investment (expense)
income.
MEDIACOM COMMUNICATIONS
On June 29, 2001, a subsidiary of AT&T sold to MediaCom Communications
Corporation ("MediaCom") cable systems attributed to AT&T Broadband Group
serving approximately 94,000 customers in Missouri for approximately $295 in net
cash proceeds. The transaction resulted in a pretax gain of $5 recorded in
investment (expense) income.
F-46
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On July 18, 2001, subsidiaries of AT&T sold to MediaCom cable systems
attributed to AT&T Broadband Group serving approximately 710,000 customers
located primarily in Georgia, Iowa and Southern Illinois for approximately
$1,724 in net cash proceeds. The transaction resulted in a pretax loss of $93
recorded in investment (expense) income.
CHARTER COMMUNICATIONS
On June 30, 2001, a subsidiary of AT&T transferred to Charter
Communications, Inc. ("Charter") cable systems attributed to AT&T Broadband
Group serving approximately 563,000 customers in Alabama, California, Illinois,
Missouri and Nevada. AT&T Broadband Group, through its attributed entities,
received $1,497 in net proceeds, $222 in cash restricted for future acquisitions
of cable systems, and a cable system in Florida serving 9,000 customers. The
transaction resulted in a pretax loss of $42 recorded in investment (expense)
income.
LENFEST COMMUNICATIONS, INC.
On January 18, 2000, AT&T Broadband Group, through ATTBLLC, sold its
ownership interest in Lenfest Communications, Inc., to a subsidiary of Comcast.
In connection with the sale, AT&T Broadband Group received 47.3 million shares
of Comcast Class Special A common stock. The transaction resulted in a pretax
gain of $224 recorded in investment (expense) income.
COX COMMUNICATIONS, INC.
On March 15, 2000, AT&T Broadband Group, through ATTBLLC, received 50.3
million shares of AT&T common stock held by Cox in exchange for an entity owning
cable television systems serving approximately 312,000 customers and certain
other net assets. The AT&T common stock received in such transaction has been
included in combined attributed net assets. The transaction resulted in a pretax
gain of $189 recorded in investment (expense) income.
(5) ASSET IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES
During 2001, AT&T Broadband Group recorded $1,494 of asset impairment,
restructuring and other charges. The charge included $1,171 of asset impairment
charges related to Excite@Home and $323 for restructuring and exit costs, which
consisted of $151 for severance costs, $156 for facilities closing and $16 for
termination costs of contractual obligations.
The $1,171 of asset impairment charges recorded during 2001 consisted of
$1,032 related to Excite@Home associated with the write down of goodwill and
other intangible assets, warrants granted in connection with distributing the
@Home service, and property, plant and equipment. These charges were due to
continued deterioration in the business climate of, and reduced levels of
venture capital funding activity for, Internet advertising and other
Internet-related companies, continued significant declines in the market values
of Excite@Home's competitors in the Internet advertising industry, and changes
in their operating and cash flow forecasts for the remainder of 2001. These
charges were also impacted by Excite@Home's decision to sell or shut down
narrowband operations. As a result of the foregoing, and other factors,
Excite@Home entered into bankruptcy proceedings in September 2001. In addition,
AT&T Broadband Group, through ATTBLLC, recorded a related goodwill impairment
charge of $139 associated with its acquisition goodwill of Excite@Home. Since
AT&T Broadband Group, through ATTBLLC, consolidated Excite@Home but only owned
approximately 23% of Excite@Home, a portion of the charges recorded by
Excite@Home has been eliminated in the statement of operations as minority
interest income (expense).
F-47
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The severance costs of $151, for the involuntary separation of
approximately 7,700 employees, primarily resulted from continued cost reduction
efforts by AT&T Broadband Group and Excite@Home in addition to impacts of the
MediaOne Merger. Approximately 36% of the affected employees are management
employees and 64% are non-management employees. Nearly all of the affected
employees have left their positions as of December 31, 2001.
The following table displays the activity and balances of the restructuring
reserve account from January 1, 2000, to December 31, 2001. There was no
activity in the restructuring reserve account in 1999.
EMPLOYEE FACILITY
TYPE OF COST SEPARATIONS CLOSINGS OTHER TOTAL
------------ ----------- -------- ----- -----
January 1, 2000................................... $ -- $ -- $ -- $ --
Additions....................................... 61 30 -- 91
Deductions...................................... (45) (30) -- (75)
----- ----- ---- -----
December 31, 2000................................. 16 -- -- 16
Additions....................................... 151 156 16 323
Deductions...................................... (145) (144) (16) (305)
----- ----- ---- -----
December 31, 2001................................. $ 22 $ 12 $ -- $ 34
===== ===== ==== =====
Total deductions for the year ended December 31, 2000, included cash
payments of $45 related to employee separations and $30 noncash utilization for
the loss realized on disposition of facilities. Total deductions for the year
ended December 31, 2001, included $121 related to the deconsolidation of
Excite@Home and cash payments of $184 related to employee separations, facility
closings, litigation and contractual obligations.
During 2000, AT&T Broadband Group recorded $6,270 of asset impairment,
restructuring and other charges which included $6,179 of asset impairment
charges related to Excite@Home.
The charges related to Excite@Home include $4,609 in asset impairment
charges taken by Excite@Home associated with the goodwill impairment from
various acquisitions and a related goodwill impairment of $1,570 recorded by
AT&T Broadband Group associated with its acquisition goodwill of Excite@Home.
The impairments resulted from the deterioration of the market conditions
and market valuations of Internet-related companies during the fourth quarter of
2000, which caused Excite@Home to conclude that intangible assets related to
their acquisitions of Internet-related companies may not be recoverable. In
accordance with SFAS No. 121, "Accounting For the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121"), Excite@Home
conducted a detailed assessment of the recoverability of the carrying amounts of
acquired intangible assets. This assessment resulted in a determination that
certain acquired intangible assets, including goodwill, related to these
acquisitions were impaired as of December 31, 2000. As a result, Excite@Home
recorded impairment charges of $4,609 in December 2000, representing the excess
of the carrying amount of the impaired assets over their fair value.
The review for impairment included a review of publicly-traded Internet
companies that are comparable to the companies that Excite@Home acquired. These
companies experienced a substantial decline in stock price and market
capitalization during the fourth quarter of 2000.
Excite@Home also reviewed the business climate for Internet advertising and
web-based infrastructure companies as of December 31, 2000, and observed the
following: (i) investor and consumer enthusiasm for the Internet sector severely
deteriorated during the fourth quarter of 2000; (ii) many
F-48
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Internet companies, including those acquired by Excite@Home, experienced
significant decelerations in their growth both as a result of economic
conditions and due to Internet-sector specific issues such as competition and
the weakening of the Internet advertising market; and (iii) funding sources for
Internet-based consumer businesses, which require considerable amounts of
capital, had substantially evaporated as of December 31, 2000. As a result,
Excite@Home concluded that fundamental, permanent and significant adverse
changes had occurred during the fourth quarter of 2000 in the business climate
for companies providing Internet advertising and other web-based services.
In addition, Excite@Home reviewed operating and cash flow projections that
existed at the time Excite@Home made the acquisitions and that were used as a
basis upon which the decisions to complete acquisitions were made. These
operating and cash flow projections indicated that the acquired companies, over
their useful lives, would be profitable and generate positive cash flows. The
operating and cash flow projections were compared to operating results after the
date of the acquisitions through December 31, 2000, as well as to projected
operating results for 2001. These comparisons indicated that certain
acquisitions generated operating and cash flow losses through the end of 2000,
and were projected to continue generating operating and cash flow losses for the
foreseeable future.
As a result of these factors, Excite@Home determined that the intangible
assets related to the acquisitions might not be recoverable and conducted
impairment tests.
Generally, the impairment tests were performed at an asset group level
corresponding to the lowest level at which cash flows independent of other
assets could be identified. Each asset group consisted of the goodwill and
acquired identifiable intangible assets related to a specific acquisition.
Acquired intangible assets were combined for those acquisitions where separately
identifiable cash flows that are largely independent of the cash flows of other
groups of assets could not be identified.
For each of the asset groups to be tested for impairment, Excite@Home
projected undiscounted cash flows over a future projection period of five years,
based on Excite@Home's determination of the current remaining useful lives of
the asset groups, plus an undiscounted terminal period cash flow to reflect
disposition of the entities at the end of their useful lives. Undiscounted
future cash flows were estimated using projected net realizable value in a sales
transaction (undiscounted cash flows during the expected remaining holding
period until disposition were estimated as negligible). The undiscounted future
cash flows were compared to the carrying amount of each asset group and for
those asset groups where the carrying amount exceeded the undiscounted future
cash flows, Excite@Home concluded that the asset group was impaired.
Excite@Home measured the impairment loss related to impaired asset groups
based on the amount by which the carrying amount of the asset group exceeded the
fair value of the asset group. Measurement of fair value was based on an
analysis by Excite@Home, with assistance from independent valuation experts,
utilizing the best information available in the circumstances using reasonable
and supportable assumptions and projections, and including the discounted cash
flow and market comparison valuation techniques. The discounted cash flow
analysis considered the likelihood of possible outcomes and was based on
Excite@Home's best estimate of projected future cash flows, including terminal
value cash flows expected to result from the disposition of the asset at the end
of its useful life, discounted at Excite@Home's weighted average cost of
capital. Weighted average cost of capital was based on historical risk premiums
required by investors for companies of Excite@Home's size, industry and capital
structure and included risk factors specific to Excite@Home. The market
comparison model represented Excite@Home's estimate of the prices that a buyer
would be willing to pay currently for similar assets, based on comparable
products and services, customer base, risks, earnings capabilities and other
factors.
F-49
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Based on the foregoing, Excite@Home recorded an impairment write-down of
$4,609 in aggregate, which was allocated to each asset group based on a
comparison of carrying values and fair values. The impairment write-down within
each asset group was allocated first to goodwill, and if goodwill was reduced to
zero, to identifiable intangible assets in proportion to carrying values.
Also as a result of the foregoing, AT&T Broadband Group recorded a goodwill
and acquisition-related impairment charge of $1,570 associated with the
acquisition of ATTBLLC's investment in Excite@Home. The write-down of ATTBLLC's
investment to fair value was determined utilizing discounted expected future
cash flows.
Since AT&T Broadband Group, through ATTBLLC only owned approximately 23% of
Excite@Home, 77% of the charge recorded by Excite@Home was not included as an
increase in AT&T Broadband Group's net loss, but rather was eliminated in the
combined statement of operations as minority interest income (expense).
In 2000, a $91 charge for restructuring and exit costs was recorded
primarily as part of the integration of MediaOne, the centralization of certain
functions, and the consolidation of call center facilities. The charge for the
year ended December 31, 2000, included termination benefits of $61 associated
with the involuntary separation of about 1,060 employees. Approximately 25% of
the individuals were management employees and 75% were non-management employees.
The $91 charge included a loss of $30 recognized on the disposition of
facilities as a result of synergies created by the MediaOne Merger.
During 1999, AT&T Broadband Group recorded $644 of asset impairment,
restructuring and other charges. Such amount included a $594 in-process research
and development charge which reflected the estimated fair value of research and
development projects at AT&T Broadband Group, as of the date of the TCI Merger,
which had not yet reached technological feasibility or that had no alternative
future use. The projects identified related to TCI's efforts to offer voice over
Internet protocol, product integration efforts for advanced set-top devices that
would enable AT&T Broadband Group to offer next-generation digital services, and
cost-savings efforts for broadband telephone implementation. In addition,
Excite@Home had research and development efforts underway, including projects to
allow for self-provisioning of devices and the development of next-generation
client software, network and back-office infrastructure to enable a variety of
network devices, and improved design for the regional data center's
infrastructure.
The 1999 charge also included a $50 loss related to a contribution
agreement TCI entered into with Phoenixstar, Inc. that requires AT&T Broadband
Group to satisfy certain liabilities owed by Phoenixstar, Inc. and its
subsidiaries.
(6) INVESTMENTS
Subsidiaries of AT&T have investments in various companies and partnerships
accounted for under the equity method which have been attributed to AT&T
Broadband Group. At December 31, 2001 and 2000, equity investments of $4,286 and
$6,350, respectively, had been attributed to AT&T Broadband Group. The carrying
value of these investments exceeded AT&T Broadband Group's share of the
underlying reported net assets by approximately $2,969 and $5,455 at December
31, 2001 and 2000, respectively. The excess cost is being amortized over periods
ranging from 25 to 40 years. Pretax amortization of the excess cost of $148,
$485 and $476 for the years ended December 31, 2001 and 2000 and for the ten
months ended December 31, 1999, respectively, is reflected as a component of net
losses from equity investments in the accompanying combined statements of
operations. Effective January 1, 2002, in accordance with the provisions of SFAS
142, such excess costs will no longer be amortized (see note 16).
F-50
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Ownership of significant equity investments attributed to AT&T Broadband
Group was as follows:
AT DECEMBER 31,
-----------------
2001 2000
------ ------
Cablevision Systems Corporation............................. --%(a) 27.98%(a)
Texas Cable Partnerships.................................... 50.00% 50.00%
Insight Midwest LP.......................................... 50.00% 50.00%
Century-TCI California Communications, LP................... 25.00% 25.00%
Kansas City Cable Partners.................................. 50.00% 50.00%
Parnassos Communications, LP................................ 33.33% 33.33%
US Cable of Coastal-Texas, LP............................... 48.16% 37.06%(b)
Midcontinent Communications................................. 50.00% 50.00%
---------------
(a) In June 2001, as a result of AT&T no longer having representation on
Cablevision's board of directors, the accounting for the investment in
Cablevision was changed from equity method to cost method accounting. At
December 31, 2001, AT&T Broadband Group owned 29,790,887 shares, or a 16.8%
ownership interest, of Cablevision NY Class A common stock which had a
closing market price of $47.45 per share. At December 31, 2000, AT&T
Broadband Group, through ATTBLLC, owned 48,942,172, shares of Cablevision
Systems Corporation Class A common stock, which had a closing market price
of $84.94 per share.
(b) On April 1, 2001, AT&T Broadband Group contributed cable systems serving
approximately 18,000 customers to US Cable of Coastal-Texas, LP ("US Cable")
in exchange for an additional 11.10% ownership interest in US Cable.
Summarized combined financial information for investments accounted for
under the equity method was as follows:
FOR THE
FOR THE YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
------------------- DECEMBER 31,
2001 2000 1999
-------- -------- ------------
Revenue................................................ $4,337 $6,537 $ 6,148
Operating income (loss)................................ $ 1 $ 175 $(1,401)
Income (loss) from continuing operations before
extraordinary items and cumulative effect of
accounting change.................................... $ 747 $ (20) $(2,327)
Net income (loss)...................................... $ 736 $ (20) $(2,327)
DECEMBER 31,
-----------------
2001 2000
------- -------
Current assets.............................................. $ 483 $ 1,493
Noncurrent assets........................................... $10,538 $18,262
Current liabilities......................................... $ 1,009 $ 2,712
Noncurrent liabilities...................................... $ 6,420 $15,034
Redeemable preferred stock.................................. $ -- $ 1,544
Minority interests.......................................... $ 186 $ 588
At December 31, 2001, AT&T Broadband Group, through MediaOne, had a 25.51%
interest in TWE. This investment is accounted for as a cost investment since
AT&T Broadband Group does not have the
F-51
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
right to exercise significant influence. On February 28, 2001, AT&T Broadband
Group 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.
Other investments at December 31, 2001 for AT&T Broadband Group consisted
of the following:
COST UNREALIZED ESTIMATED
BASIS GAINS (LOSSES) FAIR VALUE
------- -------------- --------------
Trading securities............................... $ 4,388 $ -- $4,388
Available-for-sale securities.................... 3,246 (169) 3,077
Preferred stock.................................. 2,164 -- 2,164
Cost investments, warrants and other............. 269 -- 269
------- ----- ------
$10,067 $(169) $9,898
======= ===== ======
Other investments at December 31, 2000 for AT&T Broadband Group consisted
of the following:
COST UNREALIZED ESTIMATED
BASIS GAINS (LOSSES) FAIR VALUE
------- -------------- --------------
Available-for-sale securities.................... $12,927 $(3,620) $ 9,307
Preferred stock.................................. 1,467 105 1,572
Cost investments, warrants and other............. 1,109 14 1,123
------- ------- -------
$15,503 $(3,501) $12,002
======= ======= =======
At December 31, 2001 and 2000, $6,547 and $6,473, respectively, of
investments are indexed to certain long-term debt instruments (see note 7). In
addition, approximately $668 and $2,102 of such investments were classified as
current assets at December 31, 2001 and 2000, respectively, since they are
indexed to certain currently maturing debt instruments.
During 2001, AT&T Broadband Group recorded an impairment charge on
investments of $539, including $20 recorded by Excite@Home, consisting primarily
of charges related to Vodafone, plc, Quokka Sports, Inc. and Internet Pictures,
Inc. The impairment charge primarily resulted from management's conclusion that
declines in fair value were not temporary or the investment could not be held
for a period of time to allow for recoverability of fair value as in the case of
exchangeable notes due in late 2002 that can be settled with shares of Vodafone
ADRs. The fair value was based on quoted market prices.
During 2000, AT&T Broadband Group recorded an impairment charge on
investments of $111. Management determined the loss was not temporary due to the
downturn in market conditions and its inability to hold the investments as a
result of requirements related to the regulatory approval of the MediaOne
Merger. The fair value was based on quoted market prices.
During the fourth quarter of 2000, Excite@Home recognized a loss on
investments totaling $129 which included $107 loss on publicly held companies
and $22 on privately held investments. The loss recognized on the publicly held
investment was a result of Excite@Home's decision that the decline in market
value of certain investments was not temporary. The loss recognized on the
privately held companies was based on Excite@Home's determination that the
carrying value of certain investments was not recoverable, based on indicators
such as limited liquidity and poor prospects for additional funding. Since AT&T
Broadband Group, through ATTBLLC owns 23% of Excite@Home, 77% of the loss
recorded by Excite@Home is not included as an increase of AT&T Broadband Group's
net loss, but rather is eliminated in the statement of operations as minority
interest income (expense).
F-52
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(7) DEBT OBLIGATIONS
LONG-TERM DEBT
DEBENTURES, NOTES AND TRUST PREFERRED SECURITIES(A):
DECEMBER 31,
-----------------
INTEREST RATES(B) MATURITIES 2001 2000
----------------- ---------- ------- -------
4.00%-6.50% 2002-2008........................................ $ 2,855 $ 4,599
6.55%-7.49% 2002-2037........................................ 3,793 4,369
7.53%-8.50% 2002-2097........................................ 3,141 3,370
8.60%-10.75% 2002-2038........................................ 6,292 6,594
Variable rate 2002-2005........................................ 3,309 3,388
------- -------
Total debentures, notes and trust preferred securities................ 19,390 22,320
Other (see Note 14)................................................... 247 270
Unamortized discount, net............................................. (311) --
------- -------
Total long-term debt.................................................. 19,326 22,590
Less currently maturing long-term debt................................ 2,824 3,073
------- -------
Net long-term debt.................................................... $16,502 $19,517
======= =======
---------------
(a) At December 31, 2001 and 2000, these balances included $858 and $946,
respectively, representing the remaining excess of the fair value over the
recorded value of debt at the time of the TCI Merger and MediaOne Merger.
The excess is being amortized to interest expense over the remaining lives
of the underlying debt obligations.
(b) The actual interest paid on debt obligations may have differed from the
stated amount due to interest rate swap contracts entered into to manage
exposure to interest rate risk and other strategies used to reduce finance
costs (see Note 10).
Annual maturities at December 31, 2001, of the $19,326 in total long-term
obligations are as follows:
2002........................................................ $2,824
2003........................................................ 3,416
2004........................................................ 3,343
2005........................................................ 3,056
2006........................................................ 1,107
Later years................................................. 5,580
EXCHANGEABLE NOTES
During 2001, AT&T Broadband Group, through ATTBLLC, issued exchangeable
notes which are mandatorily redeemable at AT&T Broadband Group's option into
shares of Cablevision NY Group Class A ("Cablevision NY") common stock or its
cash equivalent (the "Cablevision NY Exchangeable Notes") and Rainbow Media
Group Class A ("Rainbow Media Group") tracking stock or its cash equivalent (the
"Rainbow Exchangeable Notes"). During 2000, AT&T Broadband Group, through
ATTBLLC and MediaOne, issued debt which is mandatorily redeemable at AT&T
Broadband Group's option into shares of Comcast common stock or its cash
equivalent (the "Comcast Exchangeable Notes")
F-53
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
and Microsoft Corporation ("Microsoft") common stock or its cash equivalent (the
"Microsoft Exchangeable Notes"). During 1999 and 1998, MediaOne issued
exchangeable notes which are mandatorily redeemable at AT&T Broadband Group's
option into (i) Vodafone ADRs held by MediaOne, (ii) the cash equivalent, or
(iii) a combination of cash and Vodafone ADRs (the "Vodafone Exchangeable
Notes"). The maturity value of the exchangeable notes varies based upon the fair
market value of the security it is indexed to.
Following is a summary of the Cablevision NY Exchangeable Notes outstanding
at December 31, 2001, which are indexed to 26.9 million shares of Cablevision NY
common stock:
Maturity Date............................................... 2004
Face value.................................................. $ 970
Interest rate............................................... 6.50%
Put price per share......................................... $36.05
Call price per share........................................ $43.98
Carrying value.............................................. $1,030
At maturity, the Cablevision NY Exchangeable Notes will be redeemed, at
AT&T Broadband Group's option, with (i) a number of shares of Cablevision NY
common stock equal to the underlying shares multiplied by the exchange ratio, or
(ii) its equivalent cash value. The exchange ratio will be calculated at
maturity in the following manner:
(a) If the fair market value of a share of Cablevision NY common stock
is greater than the call price, the exchange ratio will be 0.8197;
(b) If the fair market value of a share of Cablevision NY common stock
is less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Cablevision NY common stock
is less than or equal to the call price but greater than the put price, the
exchange ratio will be a fraction, the numerator of which is equal to the
put price, and the denominator of which is equal to the fair market value
of a share of Cablevision NY common stock.
Following is a summary of the Rainbow Exchangeable Notes outstanding at
December 31, 2001, which are indexed to 9.8 million shares of Rainbow Media
Group tracking stock:
Maturity Date............................................... 2005
Face value.................................................. $ 220
Interest rate............................................... 6.25%
Put price per share......................................... $22.50
Call price per share........................................ $27.45
Carrying value.............................................. $ 196
At maturity, the Rainbow Exchangeable Notes will be redeemed, at AT&T's
option, with (i) a number of shares of Rainbow Media Group tracking stock equal
to the underlying shares multiplied by the exchange ratio, or (ii) its
equivalent cash value. The exchange ratio will be calculated at maturity in the
following manner:
(a) If the fair market value of a share of Rainbow Media Group
tracking stock is greater than the call price, the exchange ratio will be
0.8197;
F-54
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(b) If the fair market value of a share of Rainbow Media Group
tracking stock is less than or equal to the put price, the exchange ratio
will be 1;
(c) If the fair market value of a share of Rainbow Media Group
tracking stock is less than or equal to the call price but greater than the
put price, the exchange ratio will be a fraction, the numerator of which is
equal to the put price, and the denominator of which is equal to the fair
market value of one share of Rainbow Media Group tracking stock.
Following is a summary of the Comcast Exchangeable Notes outstanding at
December 31, 2001 by year of maturity which are indexed to 25 million shares of
Comcast common stock:
MATURITY DATE 2003 2004 2005
------------- ------ ------ ------
Face value................................................. $ 371 $ 314 $ 329
Interest rate.............................................. 6.75% 5.50% 4.63%
Put price per share........................................ $41.50 $41.06 $39.13
Call price per share....................................... $49.80 $49.27 $46.96
Carrying value at:
December 31, 2001........................................ $ 320 $ 277 $ 286
December 31, 2000........................................ $ 371 $ 314 $ 329
At maturity, the Comcast Exchangeable Notes will be redeemed, at AT&T's
option, into (i) a number of shares of Comcast common stock equal to the
underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash
value. The exchange ratio will be calculated at maturity in the following
manner:
(a) If the fair market value of a share of Comcast common stock is
greater than the call price, the exchange ratio will be 0.8333;
(b) If the fair market value of a share of Comcast common stock is
less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Comcast common stock is
less than or equal to the call price but greater than the put price, the
exchange ratio will be a fraction, the numerator of which is equal to the
put price, and the denominator of which is equal to the fair market value
of one share of Comcast common stock.
Following is a summary of the Comcast Exchangeable Notes outstanding at
December 31, 2001, which are indexed to 22.3 million shares of Comcast common
stock:
MATURITY DATE 2003 2004 2005
------------- ------ ------ ------
Face value................................................. $ 267 $ 267 $ 267
Interest rate.............................................. 6.76% 6.80% 6.84%
Put price per share........................................ $35.89 $35.89 $35.89
Call price per share....................................... $50.64 $58.39 $67.97
Carrying value at:
December 31, 2001........................................ $ 244 $ 244 $ 245
December 31, 2000........................................ $ 267 $ 267 $ 267
At maturity, such Comcast Exchangeable Notes will be redeemed, at AT&T's
option, with (i) a number of shares of Comcast common stock equal to the
underlying shares multiplied by the exchange
F-55
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ratio, or (ii) its equivalent cash value. The exchange ratio will be calculated
at maturity in the following manner:
(a) If the fair market value of a share of Comcast common stock is
greater than or equal to the call price, the exchange ratio will be a
fraction the numerator of which is equal to the sum of (i) the put price,
plus (ii) the excess of the fair market value of one share of Comcast
common stock over the call price, and the denominator of which is equal to
the fair market value of one share of Comcast common stock;
(b) If the fair market value of a share of Comcast common stock is
less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Comcast common stock is
less than the call price but greater than the put price, the exchange ratio
will be a fraction of which the numerator is equal to the put price, and
the denominator of which is equal to the fair market value of one share of
Comcast common stock.
Following is a summary of the Microsoft Exchangeable Notes outstanding at
December 31, 2001, which are indexed to 10 million shares of Microsoft common
stock:
MATURITY DATE 2003 2004 2005
------------- ------ ------- -------
Face value............................................... $ 227 $ 226 $ 226
Interest rate............................................ 6.96% 7.00% 7.04%
Put price per share...................................... $67.87 $ 67.87 $ 67.87
Call price per share..................................... $97.39 $111.64 $128.60
Carrying value at:
December 31, 2001...................................... $ 201 $ 198 $ 196
December 31, 2000...................................... $ 145 $ 144 $ 144
At maturity, the Microsoft Exchangeable Notes will be redeemed, at AT&T's
option, with (i) a number of shares of Microsoft common stock equal to the
underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash
value. The exchange ratio will be calculated at maturity in the following
manner:
(a) If the fair market value of a share of Microsoft common stock is
greater than the call price, the exchange ratio will be a fraction the
numerator of which is equal to the sum of (i) the put price, plus (ii) the
excess of the fair market value of one share of Microsoft common stock over
the call price, and the denominator of which is equal to the fair market
value of one share of Microsoft common stock;
(b) If the fair market value of a share of Microsoft common stock is
less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Microsoft common stock is
less than or equal to the call price but greater than the put price, the
exchange ratio will be a fraction of which the numerator is equal to the
put price, and the denominator of which is equal to the fair market value
of one Microsoft common stock.
In the third quarter of 2001, exchangeable notes that were indexed to a
portion of holdings of Vodafone ADR securities matured. The carrying value of
the notes was $2,337 at December 31, 2000. Prior to the settlement, the carrying
value of the notes was $1,634. These notes were settled with approximately 70
million shares of Vodafone ADR's and $252 in cash. Approximately 57 million
shares of
F-56
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the Vodafone ADR's used in the settlement were accounted for as "trading"
securities and the remaining shares were accounted for as "available-for-sale"
securities under SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities ("SFAS 115")." The settlement resulted in a pretax loss of
approximately $392 which was reclassified from other comprehensive income to
investment (expense) income in the statement of operations.
Following is a summary of the Vodafone Exchangeable Notes outstanding at
December 31, 2001, which are indexed to Vodafone ADRs:
MATURITY DATE 2002
------------- ------
Face value.................................................. $1,129
Interest rate............................................... 7.0%
Put price................................................... $43.44
Call price.................................................. $51.26
Carrying value at:
December 31, 2001......................................... $ 715
December 31, 2000......................................... $1,012
The redemption formula for Vodafone Exchangeable Notes that mature in 2002,
which are indexed to 26 million shares of Vodafone ADRs, is as follows:
(a) If the fair market value of a Vodafone ADR is greater than or
equal to the call price, each Vodafone exchangeable Note is equivalent to
0.8475 of a Vodafone ADR;
(b) If the fair market value of a Vodafone ADR is less than or equal
to the put price, each Vodafone Exchangeable Note is equivalent to one
Vodafone ADR; or
(c) If the fair market value of a Vodafone ADR is less than the call
price but greater than the put price, each Vodafone Exchangeable Note is
equivalent to a fraction of a Vodafone ADR equal to (i) the put price
divided by (ii) the fair market value of one Vodafone ADR.
AT&T Broadband Group's exchangeable notes that are indexed to Cablevision
NY, Comcast and Microsoft common stock and Rainbow Media Group are secured by
AT&T Broadband Group's investments in Cablevision NY, Comcast, Microsoft and
Rainbow Media Group. AT&T Broadband Group's exchangeable notes which are indexed
to Vodafone ADRs are unsecured obligations, ranking equally in right of payment
with all other unsecured and unsubordinated obligations of AT&T Broadband Group.
These exchangeable notes are being accounted for as indexed debt
instruments since the maturity value of the debt is dependent upon the fair
market value of the underlying securities. These exchangeable notes contain
embedded derivatives that require separate accounting as the maturity value of
the debt is dependent upon the fair market value of the underlying Cablevision
NY, Rainbow Media Group, Comcast, Microsoft and Vodafone ADR securities, as
applicable. The economic characteristics of the embedded derivatives (i.e.,
equity like features) are not clearly and closely related to that of the host
instruments (a debt security). As a result, the embedded derivatives are
separated from the host debt instrument for valuation purposes and are carried
at fair value within the host debt instrument. The embedded derivatives for
Cablevision NY and Rainbow Media Group exchangeable notes are designated as cash
flow hedges. These designated options are carried at fair value with changes in
fair value recorded, net of income taxes, within other comprehensive income as a
component of combined attributed net assets. There was no ineffectiveness
recognized on the cash flow hedges. The Comcast, Microsoft, Vodafone and certain
of the
F-57
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Cablevision NY and Rainbow Media Group options are undesignated and are carried
at fair value with changes in fair value recorded in other (expense) income in
the combined statement of operations.
The options hedge the market risk of a decline in value of Cablevision NY,
Rainbow Media Group, Comcast, Microsoft and Vodafone securities. The market risk
of a decline in these securities, below the respective put prices has been
eliminated. In addition, any market gains AT&T Broadband Group may earn have
been limited to the call prices, with the exception of certain debt indexed to
Comcast stock, the Cablevision NY stock, Rainbow Media Group and Vodafone ADRs,
which provide for participation in a portion of the market gains above the call
price.
Since all the Cablevision NY and Rainbow Media Group securities and a
portion of the Comcast, Microsoft and Vodafone securities are cost method
investments being accounted for as "available-for-sale" securities under SFAS
115, changes in the maturity value of the options and the underlying securities
are being recorded as unrealized gains or losses, net of income taxes, within
other comprehensive income as a component of combined attributed net assets. The
remaining portion of the Comcast, Microsoft and Vodafone securities are cost
method investments being accounted for as "trading" securities and changes in
the fair value of the options and the underlying securities are being recorded
as net revaluation of securities within other (expense) income.
OTHER EXCHANGEABLE NOTES
During 2000, AT&T Broadband Group, through MediaOne, also entered into a
series of purchased and written options to monetize its holdings of 21.9 million
shares of Microsoft common stock and issued floating rate debt, which is
attributed to AT&T Broadband Group. The carrying value of the debt outstanding
at both December 31, 2001 and 2000 was $1,369, which pays interest at the three
month London Inter-Bank Offered Rate ("LIBOR") plus 0.4%. The debt matures
annually with $458 maturing in 2003 and 2004, and $453 maturing in 2005, and is
repayable at AT&T's option in either Microsoft common stock or cash. (See note
10 for discussion of the purchased and written options.)
In addition, during 1999 two subsidiaries of MediaOne, MediaOne SPC IV and
MediaOne SPC VI, entered into a series of purchased and written options on
Vodafone ADRs contributed to them by MediaOne and issued floating rate debt. The
carrying value of the debt outstanding at both December 31, 2001 and 2000 was
$1,739, which pays interest at a three-month LIBOR plus 0.5%. This debt has been
attributed to AT&T Broadband Group and matures in equal quarterly installments
beginning in 2003 and ending in 2005. The assets of MediaOne SPC IV, which are
primarily 29.1 million Vodafone ADRs, are only available to pay the creditors of
MediaOne SPC IV. Likewise, the assets of MediaOne SPC VI, which are primarily
18.0 million Vodafone ADRs, are only available to pay the creditors of MediaOne
SPC VI. MediaOne SPC IV and VI will generate cash to settle these notes by
selling their Vodafone ADRs to the market (or to AT&T, at AT&T's option) and
cash settle the option. (See note 10 for discussions of the purchased and
written options.)
F-58
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY SUBORDINATED DEBT SECURITIES
Certain subsidiary trusts (the "Trusts") of AT&T Broadband Group, through
ATTBLLC and MediaOne, had preferred securities ("Trust Preferred Securities")
outstanding at December 31, 2001 and 2000 as follows:
CARRYING AMOUNT
INTEREST MATURITY ---------------
SUBSIDIARY TRUST RATE DATE 2001 2000
---------------- -------- -------- ------ ------
TCI Communications Financing I.................... 8.72% 2045 $ 527 $ 528
TCI Communications Financing II................... 10.00% 2045 513 514
TCI Communications Financing III.................. 9.65% 2027 380 357
TCI Communications Financing IV................... 9.72% 2036 204 204
MediaOne Financing A.............................. 7.96% 2025 30 30
MediaOne Financing B.............................. 8.25% 2036 28 28
MediaOne Finance II............................... 9.50% 2036 214 214
MediaOne Finance III.............................. 9.04% 2038 504 504
------ ------
$2,400 $2,379
====== ======
The Trusts were created for the exclusive purpose of issuing the Trust
Preferred Securities and investing the proceeds thereof into Subordinated
Deferrable Interest Notes (the "Subordinated Debt Securities") of TCI and
MediaOne. The Subordinated Debt Securities have interest rates equal to the
interest rate of the corresponding Trust Preferred Securities. The TCI
Communications Financing I and II Trust Preferred Securities were redeemable at
face value beginning January and May 2001, respectively. The TCI Communications
Financing III Trust Preferred Securities are callable at 104.825% of face value
beginning in March 2007. TCI Communications Financing IV Trust Preferred
Securities were callable at face value beginning in March 2002. Upon redemption
of the Subordinated Debt Securities, the Trust Preferred Securities will be
mandatorily redeemable. All of the MediaOne Subordinated Debt Securities are
redeemable at a redemption price of $25.00 per security, plus accrued and unpaid
interest. Upon redemption of the MediaOne Subordinated Debt Securities, the
MediaOne Trust Preferred Securities are mandatorily redeemable at a price of
$25.00 per share, plus accrued and unpaid distributions. The 7.96% MediaOne
Subordinated Debt Securities became redeemable after September 11, 2000. The
9.50% and 8.25% MediaOne Subordinated Debt Securities became redeemable after
October 29, 2001. The 9.04% MediaOne Subordinated Debt Securities are redeemable
after October 28, 2003. The Trust Preferred Securities are recorded within
short-term and long-term debt in the accompanying combined balance sheet. AT&T
Broadband, LLC effectively provides a full and unconditional guarantee of all
the TCI Trusts' obligations under the Trust Preferred Securities. In 2000, AT&T
provided a full and unconditional guarantee on the outstanding securities issued
by TCI Communications Financing I, II and IV. MediaOne has effectively provided
a full and unconditional guarantee of the MediaOne trust obligations under the
Trust Preferred Securities. In 2000, AT&T provided a full and unconditional
guarantee of the MediaOne Trust Preferred Securities. Dividends accrued and paid
on the Trust Preferred Securities aggregated $208, $182 and $114 for the years
ended December 31, 2001 and 2000 and the ten months ended December 31, 1999,
respectively, and are included in interest expense in the accompanying combined
statement of operations. AT&T has the right to defer interest payments up to 20
consecutive quarters; as a consequence, dividend payments on the Trust Preferred
Securities can be deferred by the trusts during any such interest-payment
period.
F-59
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On February 26, 2002, AT&T announced that it was notifying holders that it
will call TCI Communications Financing IV Trust Preferred Securities for early
redemption on April 1, 2002. On February 28, 2002, AT&T called for early
redemption the TCI Communications Financing I and II Trust Preferred Securities.
On March 4, 2002, AT&T called for early redemption the MediaOne Financing A,
Financing B and Financing II Trust Preferred Securities. At December 31, 2001,
the TCI Communications Financing I, II and IV and MediaOne A, B and II Trust
Preferred Securities were reclassed from long-term debt to short-term debt.
(8) MINORITY INTEREST
PREFERRED STOCK OF SUBSIDIARIES
Prior to the TCI Merger, TCI Pacific Communications Inc. ("Pacific"), an
attributed entity of AT&T Broadband Group, issued 5% Class A Senior Cumulative
Exchangeable preferred stock. Each share is exchangeable, from and after August
1, 2001, for 8.365 shares of AT&T common stock (as adjusted for the July 2001
split-off of AT&T Wireless Services, Inc. from AT&T), subject to certain
antidilution adjustments. Additionally, Pacific may elect to make any dividend,
redemption or liquidation payment in cash, shares of AT&T common stock or a
combination of the foregoing. Dividends on the Pacific preferred stock were $31
for both the years ended December 31, 2001 and 2000 and $26 for the ten months
ended December 31, 1999 and are reflected in minority interest income (expense)
in the accompanying combined statements of operations. The Pacific preferred
stock is reflected within minority interest in the accompanying combined balance
sheets and aggregated $2.1 billion at December 31, 2001 and 2000.
As of December 31, 2001, 59,187 shares of the Pacific preferred stock had
been exchanged for 494,808 shares of AT&T common stock. At December 31, 2001 and
2000 there were 6.2 million and 6.3 million shares outstanding, respectively,
out of 6.3 million shares authorized. Pacific has elected to exercise its right
to redeem all outstanding shares of the Pacific preferred stock that have not
been exchanged as of April 26, 2002, at a price of $102.50 per share plus
accrued dividends of $0.96 per share. The redemption price will be paid in AT&T
common stock, up to a maximum of the 52.3 million shares which were registered
with the Securities and Exchange Commission in February of 2002, with any
shortfall paid in cash.
CENTAUR FUNDING CORPORATION
Prior to the MediaOne Merger, Centaur Funding Corporation ("Centaur"), a
subsidiary of MediaOne, issued three series of preferred shares, the Auction
Market Preference Shares, Series A ("Series A Shares"), the 9.08% Cumulative
Preference Shares, Series B (the "Series B Shares"), and the Preference Shares,
Series C (the "Series C Shares"). Centaur was created for the principal purpose
of raising capital through the issuance of preferred shares and investing those
proceeds into notes issued by MediaOne SPC II, a subsidiary of MediaOne.
Principal and interest payments from the notes are expected to be Centaur's
principal source of funds to make dividend and redemption payments on the
preferred shares. In addition, the dividend and redemption payments on the
preferred shares will be determined by reference to the dividend and redemption
activity of the preferred stock of AirTouch Communications, Inc. ("ATI shares")
held by MediaOne SPC II. AirTouch Communications, Inc. is a subsidiary of
Vodafone. Payments on the preferred shares are neither guaranteed nor secured by
MediaOne or AT&T. The assets of MediaOne SPC II, which include the ATI shares,
are only available to pay creditors of MediaOne SPC II. Centaur and MediaOne SPC
II are attributed entities of AT&T Broadband Group.
F-60
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2001 and 2000, the following Centaur preferred securities,
which have been attributed to AT&T Broadband Group, were outstanding:
CARRYING AMOUNT
SHARES ---------------
DIVIDEND RATE MATURITY DATE OUTSTANDING 2001 2000
------------- ------------- ----------- ------ ------
Series A Shares................ Variable None 400 $ 100 $ 100
Series B Shares................ 9.08% April 2020 934,500 927 927
Series C Shares................ None April 2020 715,500 127 118
------ ------
$1,154 $1,145
====== ======
The Series A Shares have a liquidation value of $250 thousand per share and
dividends are payable quarterly when declared by Centaur's Board of Directors
out of funds legally available. The Series B Shares have a liquidation value of
$1 thousand per share and dividends are payable quarterly in arrears when
declared by Centaur's Board of Directors out of funds legally available. In
addition, dividends may be declared and paid only to the extent dividends have
been declared and paid on the ATI shares. The Series C Shares have a liquidation
value of $1 thousand per share at maturity. The value of the Series C Shares
will be accreted to its liquidation value upon maturity. The Series B Shares
rank equally with the Series C Shares as to the redemption payments and upon
liquidation. The Series B and Series C Shares rank senior to the Series A Shares
and the common stock shares of Centaur as to the redemption payments and upon
liquidation. The Series B Shares rank senior to the Series A Shares and the
common shares with respect to dividend payments. The preferred shares issued by
Centaur are recorded within minority interest in the accompanying combined
balance sheets at December 31, 2001 and 2000.
Dividends on the preferred shares were $99 and $55 for the years ended
December 31, 2001 and 2000 and were included within minority interest income
(expense) in the accompanying combined statements of operations.
(9) COMPANY-OBLIGATED CONVERTIBLE QUARTERLY INCOME PREFERRED SECURITIES
On June 16, 1999, AT&T Finance Trust I (the "AT&T Trust"), a wholly owned
subsidiary of AT&T completed the private sale of 100 million shares of 5.0%
cumulative quarterly income preferred securities ("Quarterly Preferred
Securities") to Microsoft. Proceeds from the issuance were invested by the AT&T
Trust in junior subordinated debentures ("Debentures") issued by AT&T due 2029,
which represent the sole asset of the AT&T Trust. The Quarterly Preferred
Securities have been attributed to AT&T Broadband Group.
The Quarterly Preferred Securities pay dividends at an annual rate of 5.0%
of the liquidation preference of $50 per security, and are convertible at any
time prior to maturity into 88.016 million shares of AT&T common stock (as
adjusted for the July 2001 split-off of AT&T Wireless, Services, Inc. from
AT&T). The Quarterly Preferred Securities are subject to mandatory redemption
upon repayment of the Debentures at maturity or their earlier redemption. The
conversion feature can be terminated, under certain conditions, after three
years.
The Debentures make a quarterly payment in arrears of 62.5 cents per
security on the last day of March, June, September and December of each year.
AT&T has the right to defer such interest payments up to 20 consecutive
quarters. As a consequence, quarterly dividend payments on the Quarterly
Preferred Securities can be deferred by the AT&T Trust during any such
interest-payment period. If AT&T defers any interest payments, AT&T may not,
among other things, pay any dividends on AT&T common stock until all interest in
arrears is paid to the AT&T Trust.
F-61
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Dividends on the Quarterly Preferred Securities were $250, $250 and $135
for the years ended December 31, 2001 and 2000 and the ten months ended December
31, 1999, respectively, and are reported within minority interest income
(expense) in the accompanying combined statements of operations.
On June 16, 1999, AT&T also issued to Microsoft 53 million warrants, each
to purchase one share of AT&T common stock at a price of $57 per share at the
end of three years (as adjusted for the July 2001 split-off of AT&T Wireless
Services, Inc. from AT&T). Alternatively, the warrants are exercisable on a
cashless basis. If the warrants are not exercised on the three-year anniversary
of the closing date, the warrants expire.
A discount on the Quarterly Preferred Securities equal to the value of the
warrants of $306 was recognized at the issuance date and is being amortized over
the 30-year life of the Quarterly Preferred Securities as a component of
minority interest income (expense) in the accompanying combined statements of
operations.
In connection with the AT&T Comcast Merger (see note 1), AT&T Comcast will
assume the Quarterly Preferred Securities. In conjunction with the AT&T Comcast
Merger, Microsoft has agreed to convert the Quarterly Preferred Securities into
115 million shares of AT&T Comcast common stock.
(10) FINANCIAL INSTRUMENTS
ADOPTION OF SFAS 133
Effective January 1, 2001, AT&T Broadband Group adopted SFAS 133 and its
corresponding amendments under SFAS No. 138. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are required to
be recorded on the balance sheet at fair value. The adoption of SFAS 133 on
January 1, 2001, resulted in a pretax cumulative effect decrease to net loss of
$371 ($229 net-of-tax).
AT&T Broadband Group's cumulative effect decrease to net loss of $229 was
attributable primarily to equity based derivative instruments related to indexed
debt instruments and warrants held in both public and private companies.
Included in the after tax cumulative effect benefit of $229 was a $185 benefit
for the changes in valuations of both embedded and non-embedded net purchased
options related to indexed debt instruments and $44 benefit for recording the
fair value of warrants.
Upon adoption, as permitted by SFAS 133, AT&T Broadband Group reclassified
$9.3 billion of securities from "available-for-sale" to "trading". This
reclassification resulted in the recognition, in the statement of operations, of
losses previously recorded within accumulated other comprehensive income. A
portion of the loss ($1,638 pretax; $1,005 net-of-tax) was recorded as part of
the cumulative effect of adoption. This loss completely offset a gain for
amounts also previously recorded within accumulated other comprehensive income
on the indexed debt obligation that had been considered a hedge of Comcast,
Microsoft and Vodafone "available-for-sale" securities. The reclassification of
securities also resulted in a pretax charge of $1,154 ($708 net-of-tax) recorded
in other (expense) income.
FINANCIAL INSTRUMENTS
In the normal course of business, AT&T Broadband Group uses various
financial instruments, including derivative financial instruments, for purposes
other than trading. AT&T Broadband Group does not use derivative financial
instruments for speculative purposes. Financial instruments used by AT&T
Broadband Group include guarantees of debt, letters of credit, option contracts,
equity hedges, warrants and interest rate swap agreements. Collateral is
generally not required for these types of instruments.
F-62
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
By their nature, all such instruments involve risk, including the credit
risk of nonperformance by counterparties. The maximum potential loss associated
with such risk may exceed the amount recognized in the balance sheet. However,
at December 31, 2001 and 2000, in management's opinion there was no significant
risk of loss in the event of nonperformance of the counterparties to these
financial instruments. AT&T Broadband Group controls its exposure to credit risk
through credit approvals, credit limits and monitoring procedures. AT&T
Broadband Group does not have any significant exposure to any individual
customer or counterparty, or any major concentration of credit risk related to
any financial instruments.
GUARANTEES OF DEBT
From time to time, ATTBLLC and MediaOne may guarantee the debt of their
subsidiaries and certain unconsolidated joint ventures. ATTBLLC has taken
certain steps to support debt compliance with respect to obligations aggregating
$1,461 at December 31, 2001 and 2000 of certain cable television partnerships in
which ATTBLLC has a non-controlling ownership interest and which have been
attributed to AT&T Broadband Group. Although there can be no assurance,
management believes that it will not be required to meet its obligations under
such guarantees. Total notional amounts of guarantees for ATTBLLC and MediaOne
were $1,463 and $1,486 at December 31, 2001 and 2000, respectively. At December
31, 2001 and 2000, there were no quoted market prices for similar agreements.
LETTERS OF CREDIT
Letters of credit are purchased guarantees that ensure performance or
payment to third parties in accordance with specified terms and conditions.
Management has determined that letters of credit do not create additional risk
to AT&T Broadband Group. Outstanding letters of credit at December 31, 2001 and
2000 were $288 and $263, respectively. The fair values of letters of credit,
based on fees paid to obtain the obligations, were immaterial at December 31,
2001 and 2000.
INTEREST RATE SWAP AGREEMENTS
Interest rate swaps which are usually designated as either cash flow or
fair value hedges, are entered into to manage exposure to changes in interest
rates. AT&T enters into swap agreements to manage the fixed/floating mix of the
debt portfolio in order to reduce aggregate risk to interest rate movements.
Interest rate swaps also allow funds to be raised at floating rates and
effectively swap them into fixed rates that are generally lower than those
available if fixed-rate borrowings were made directly. These agreements involve
the exchange of fixed-rate for floating-rate payments without the exchange of
the underlying principal amount. These floating-rate payments are based on rates
tied to the LIBOR.
The following table indicates the type of swaps in use at December 31, 2001
and 2000, the notional amounts, and their weighted average interest rates. Their
average variable rates are those in effect at the reporting date and may change
significantly over the lives of the contracts.
2001 2000
---- ----
Fixed rate to variable rate swaps
Notional amount........................................... $500 $500
Average receive rate...................................... 9.68% 9.68%
Average pay rate.......................................... 4.02% 8.92%
At December 31, 2001 the fair value and carrying value of the swaps was a
liability of $25. Such swaps were valued using current market quotes that were
obtained from dealers.
F-63
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY COLLARS
In 2000, AT&T Broadband Group entered into three series of option
agreements (the "Microsoft Collars") with a single bank counterparty to hedge
exposure to 21.9 million shares of Microsoft common stock. The Microsoft
Collars, combined with the underlying shares, secure a floating-rate borrowing
from the counterparty, the face value of which is equal to the product of (i)
the underlying shares multiplied by (ii) the put price. (See note 7 for
discussion of the debt.)
The Microsoft Collars are a series of purchased and written options that
hedge a portion of AT&T Broadband Group's holdings in Microsoft common stock.
The Microsoft Collars are undesignated for accounting purposes in accordance
with SFAS 133 and are carried in the balance sheet at fair value, with
unrealized gains or losses being recorded in other (expense) income. These
unrealized gains or losses are largely offset by the changes in the fair value
of a certain number of shares of Microsoft common stock that are classified as
"trading". The carrying value of the Microsoft Collars was $6 and $419 at
December 31, 2001 and 2000, respectively. The fluctuation of the carrying value
of the Microsoft Collars was primarily due to the change in the market prices of
the underlying shares, which were $66.25 per share and $43.375 per share at
December 31, 2001 and 2000, respectively, and the adoption of SFAS 133 which
required the instruments to be valued at fair value rather than intrinsic value.
The following is a summary of the Microsoft Collars outstanding at December
31, 2001:
MATURITY DATE 2003 2004 2005
------------- ------ ------- -------
Put price per share...................................... $62.48 $ 62.48 $ 62.48
Call price per share..................................... $86.26 $100.44 $118.36
Since the Microsoft Collars and related debt are contracted with the same
counterparty, the treatment is similar to a debt instrument with an embedded
instrument and will be net settled as follows:
At the expiration of the Microsoft Collars, AT&T Broadband Group will
satisfy the debt and the net obligations of the Microsoft Collars under the
floating-rate debt by delivering (i) a number of Microsoft shares equal to the
underlying share amount multiplied by the exchange ratio, or (ii) its equivalent
cash value. The exchange ratio will be calculated at expiration in the following
manner:
(a) If the fair market value of a share of Microsoft common stock is
greater than the call price, the exchange ratio will be a fraction, the
numerator of which is equal to the sum of (i) the put price, plus (ii) the
excess of the fair market value of a share of Microsoft common stock over
the call price, and the denominator of which is equal to the fair market
value of a share of Microsoft common stock;
(b) If the fair market value of a share of Microsoft common stock is
less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Microsoft common stock is
less than or equal to the call price but greater than the put price, the
exchange ratio will be a fraction, the numerator of which is equal to the
put price, and the denominator of which is equal to the fair market value
of a share of Microsoft common stock.
Prior to the MediaOne Merger, two subsidiaries of MediaOne, MediaOne SPC IV
and MediaOne SPC VI, each entered into a series of option agreements (the
"Vodafone Collars") with a single bank counterparty to hedge their exposure to
47.2 million Vodafone ADRs. In conjunction with the Vodafone Collars, MediaOne
SPC IV and MediaOne SPC VI also issued floating-rate debt in a series of private
placements, the face value of which is equal to the product of (i) the
underlying shares multiplied by (ii) the put price. Simultaneous with the
execution of the Vodafone Collars, MediaOne SPC IV and MediaOne SPC VI each
entered into floating-to-fixed interest rate swaps in which future fixed
payments
F-64
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
were prepaid by each of MediaOne SPC IV and MediaOne SPC VI at inception.
Therefore, the on-going interest payments on the floating-rate notes are paid by
the counterparty with no recourse to AT&T Broadband Group. These prepaid
interest rate swaps are designated as cash flow hedges in accordance with SFAS
133.
The Vodafone Collars are a series of purchased and written options that
hedge a portion of AT&T Broadband Group's holdings in Vodafone ADRs. The
Vodafone Collars are undesignated for accounting purposes in accordance with
SFAS 133 and are carried in the balance sheet at fair value, with unrealized
gains or losses being recorded to other (expense) income. These unrealized gains
or losses are largely offset by the changes in the fair value of a certain
number of Vodafone ADRs that are classified as "trading" in accordance with SFAS
115. The carrying value of the Vodafone Collars was $462 and $(453) at December
31, 2001 and 2000 respectively. The fluctuation of the carrying value of the
Vodafone Collars is primarily due to the change in the per share market price of
the underlying ADRs, which was $25.68 per share and $35.81 per share at December
31, 2001 and 2000, respectively, and the adoption of SFAS 133, which required
the instruments to be valued at fair value rather than intrinsic value.
The following is a summary of the Vodafone Collars outstanding at December
31, 2001:
MATURITY DATE 2003 2004 2005
------------- ------ ------ ------
MEDIAONE SPC IV VODAFONE COLLARS
Average put price per share................................ $34.06 $33.78 $33.53
Average call price per share............................... $49.13 $48.85 $48.60
MEDIAONE SPC VI VODAFONE COLLARS
Average put price per share................................ $39.85 $39.86 $39.86
Average call price per share............................... $57.72 $57.72 $57.73
Since the Vodafone Collars and related debt are contracted with different
counterparties, the instruments will be settled independently. MediaOne SPC IV
and MediaOne SPC VI will satisfy its obligations to the floating-rate debt
holders by delivering cash equal to the face value of the debt (see note 7). At
the expiration of the Vodaphone Collars, MediaOne SPC IV and MediaOne SPC VI
will cash settle its Vodaphone Collars with the counterparty. Cash settlement of
the Vodafone Collars will be completed in the following manner:
(a) If the fair market value of a Vodafone ADR is greater than the
call price, MediaOne SPC IV or MediaOne SPC VI (as appropriate) will pay a
sum of cash equal to the excess of the fair market value of a Vodafone ADR
over the call price;
(b) If the fair market value of a Vodafone ADR is less than the put
price, the counterparty will pay to MediaOne SPC IV or MediaOne SPC VI (as
appropriate) a sum of cash equal to the excess of the put price over the
fair market price of a Vodafone ADR;
(c) If the fair market value of a Vodafone ADR is less than or equal
to the call price but greater than or equal to the put price, the Vodafone
Collars will expire worthless and no cash payment will be made or received
by MediaOne SPC IV or MediaOne SPC VI (as appropriate).
The net value of (i) the sale of all Vodafone ADRs and (ii) the cash
settlement of the Vodafone Collars will always be equal to or greater than the
face value of the floating-rate notes. Any remaining cash will be retained by
MediaOne SPC IV and MediaOne SPC VI and would become available to AT&T Broadband
Group for general corporate purposes.
F-65
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY HEDGES
Equity hedges are used to manage exposure to changes in equity prices
associated with stock appreciation rights of previously affiliated companies and
are undesignated in accordance with SFAS 133. The notional amount outstanding on
these contracts at December 31, 2001 and 2000 was $340 and $370, respectively.
These instruments are recorded at fair value based on market quotes and were
liabilities of $71 and $87 at December 31, 2001 and 2000, respectively.
WARRANTS
AT&T Broadband Group may obtain warrants to purchase equity securities in
other private and public companies as a result of certain transactions. Private
warrants and public warrants that provide for net share settlement (i.e. allow
for cashless exercise) are considered to be derivative instruments and
recognized in the balance sheet at fair value in accordance with SFAS 133.
Warrants are not eligible to be designated as hedging instruments because there
is no underlying exposure. Instead, warrants are effectively investments in
private and public companies. The fair value of warrants held by AT&T Broadband
Group was $15 at December 31, 2001.
DEBT AND PREFERRED SECURITIES
The carrying value of debt maturing within one year approximates market
value. The table below summarizes the carrying and fair values of long-term
debt, excluding capital leases, and certain preferred securities. The market
values of long-term debt were obtained based on quotes or rates available for
debt with similar terms and maturities, and the market value of the preferred
securities was based on market quotes. It is not practicable to estimate the
fair market value of the Centaur Series A Shares, Series B Shares, Series C
Shares and the Quarterly Preferred Securities that aggregated $5,874 and $5,855
at December 31, 2001 and 2000, respectively, as there are no current markets
quotes available on these private placements.
2001 2000
------------------ ------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------- -------- -------
Debt, excluding capital leases................. $19,079 $17,237 $22,182 $20,275
Pacific preferred stock........................ $ 2,100 $ 948 $ 2,121 $ 595
DERIVATIVE IMPACTS
For the year ended December 31, 2001, accumulated other comprehensive
income, as a component of combined attributed net assets, net of taxes, included
net unrealized losses of $224 relating to derivatives that are designated as
cash flow hedges. This amount included net losses of $143 related to the ongoing
fair value adjustments of equity based derivative instruments embedded in
certain debt instruments and net losses of $81 related to certain swap
transactions.
For the year ended December 31, 2001, other (expense) income included net
gains of $1,178, relating to ongoing fair value adjustments of undesignated
derivatives. The fair value adjustments included net gains of $1,247 for
derivatives instruments related to certain debt instruments and net losses of
$69 for changes in the fair value of warrants. These gains were offset by net
losses of $983 from the ongoing mark-to-market adjustments of the "trading"
securities underlying the monetizations.
F-66
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(11) PENSION, POSTRETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS
As a result of the MediaOne Merger, AT&T sponsors a pension plan covering
substantially all former MediaOne employees, and beginning in 2001, AT&T
sponsors a pension plan covering substantially all AT&T Broadband Group
employees. Pension benefits are principally based on pay and service. In
addition, AT&T sponsors retiree benefit plans for certain former MediaOne
employees.
The following table shows the components of the net periodic benefit costs
included in the accompanying combined statements of operations of AT&T Broadband
Group:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
----------- ---------------
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
2001 2000 2001 2000
---- ---- ------ ------
Service cost-benefits earned during the period............. $ 31 $9 $1 $1
Interest cost on benefit obligations....................... 13 8 2 1
Credit for expected return on plan assets.................. (13) (9) (1) --
Amortization of gains...................................... 1 -- -- --
Net curtailment gains...................................... (1) -- (1) --
---- -- -- --
Net periodic benefit cost.................................. $ 31 $8 $1 $2
==== == == ==
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets, and a statement of the funded
status:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
----------- ---------------
2001 2000 2001 2000
---- ---- ------ ------
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligation, beginning of year.................... $165 $ -- $ 35 $ --
Acquisition of MediaOne.................................. -- 204 -- 38
Service cost............................................. 31 9 1 1
Interest cost............................................ 13 8 2 1
Plan amendments.......................................... -- (5) -- --
Actuarial losses (gains)................................. -- 17 3 (5)
Benefit payments......................................... (46) (68) (1) --
Curtailments............................................. (6) 0 (1) --
---- ---- ---- ----
Benefit obligation, end of year.......................... $157 $165 $ 39 $ 35
==== ==== ==== ====
CHANGE IN FAIR VALUE OF PLAN ASSETS:
Fair value of plan assets, beginning of year............. $148 $ -- $ 5 $ --
Acquisition of MediaOne.................................. 0 205 -- 5
Actual return on plan assets............................. (12) (12) -- --
Employer contributions................................... 8 23 -- --
Benefit payments......................................... (46) (68) (1) --
---- ---- ---- ----
Fair value of plan assets, end of year................... $ 98 $148 $ 4 $ 5
==== ==== ==== ====
F-67
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION POSTRETIREMENT
BENEFITS BENEFITS
----------- ---------------
AT DECEMBER 31,
-----------------------------
2001 2000 2001 2000
---- ---- ------ ------
Unfunded benefit obligation.............................. $(59) $(17) $(35) $(30)
Unrecognized net loss (gain)............................. 56 38 (1) (5)
Unrecognized prior service cost.......................... (4) (5) -- --
---- ---- ---- ----
Net amount recorded...................................... $ (7) $ 16 $(36) $(35)
==== ==== ==== ====
The following table provides the amounts recorded in AT&T Broadband Group's
combined balance sheet:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
----------- ---------------
AT DECEMBER 31,
-----------------------------
2001 2000 2001 2000
---- ---- ------ ------
Prepaid pension cost..................................... $ 8 $ 36 $ -- $ --
Benefit related liabilities.............................. (53) (21) (36) (35)
Accumulated other comprehensive income................... 38 1 -- --
---- ---- ---- ----
Net amount recorded...................................... $ (7) $ 16 $(36) $(35)
==== ==== ==== ====
The nonqualified pension plan had an unfunded accumulated benefit
obligation of $19 at December 31, 2001.
The assumptions in the following table were used in the measurement of the
pension and postretirement benefit obligations and the net periodic benefit
costs as applicable.
2001 2000
---- ----
Weighted-average assumptions at December 31:
Discount rate............................................. 7.25% 7.50%
Expected return on plan assets............................ 9.50% 9.50%
Rate of compensation increase............................. 4.00% 4.00%
A 9.5% rate of increase in the per capita cost of covered health-care
benefits (the health-care cost trend rate) was assumed. This rate was assumed to
gradually decline after 2001 to 5% by the year 2011 and then remain level.
Assumed health-care cost trend rates have a significant effect on the amounts
reported for the health-care plans. A one percentage point increase or decrease
in the assumed health-care cost trend rate would increase or decrease the
health-care component of the accumulated postretirement benefit obligation by $4
and $4, respectively. A one percentage point increase or decrease in the assumed
health-care cost trend rate would not have a material impact on the service and
interest-cost components of net periodic postretirement health-care benefit
costs.
AT&T also sponsors savings plans for the majority of its employees. The
plans allow employees to contribute a portion of their pretax and/or after-tax
income in accordance with specified guidelines. Employee contributions are
matched up to certain limits. AT&T Broadband Group contributions amounted to
$54, $70 and $38 for the years ended December 31, 2001 and 2000 and the ten
months ended December 31, 1999.
F-68
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(12) STOCK-BASED COMPENSATION PLANS
Under AT&T's 1997 Long-term Incentive Program (the "Program"), AT&T grants
stock options, performance shares, restricted stock and other awards on AT&T
common stock as well as stock options or AT&T Wireless Group tracking stock
prior to the split-off of AT&T Wireless Group. The exercise price of any stock
option is equal to the stock price when the option is granted. Generally, the
options vest over two to three years and are exercisable up to 10 years from the
date of grant.
Under the Program, performance share units are awarded to key employees in
the form of either common stock or cash at the end of a three-year period, based
on AT&T's total shareholder return and/or certain financial-performance targets.
On July 9, 2001, AT&T completed the split-off of AT&T Wireless Group as a
separate, independently-traded company. The AT&T Wireless common stock held by
AT&T was distributed to AT&T common shareowners on a basis of 0.3218 of a share
of AT&T Wireless for each AT&T share outstanding. All outstanding AT&T common
stock options granted prior to January 1, 2001 were treated in a similar manner.
AT&T modified the terms and conditions of all outstanding stock option grants to
allow the AT&T Wireless Group common stock options held by AT&T employees to
immediately vest and become exercisable for their remaining contractual term.
Under the AT&T 1996 Employee Stock Purchase Plan (the "Plan"), which was
effective July 1, 1996, and amended on May 23, 2001, AT&T is authorized to sell
up to 105 million shares of AT&T common stock to its eligible employees through
June 30, 2006. Under the terms of the Plan, employees may have up to 10% of
their earnings withheld to purchase AT&T's common stock. The purchase price of
the stock on the date of exercise is 85% of the average high and low sale prices
of shares on the New York Stock Exchange for that day. Under the Plan, AT&T sold
approximately 705 thousand, 506 thousand and 102 thousand shares to AT&T
Broadband Group employees in 2001, 2000 and 1999, respectively.
AT&T Broadband Group applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for stock-based compensation plans other than for performance-based
and restricted stock awards and stock appreciation rights ("SARs"). Stock
based-compensation (expense) income for AT&T Broadband Group was $(4), $268 and
$(366) for the years ended December 31, 2001 and 2000 and the ten months ended
December 31, 1999, respectively. These amounts included (expense) income of
$(3), $269 and $(382) for the years ended December 31, 2001 and 2000 and the ten
months ended December 31, 1999, respectively, related to grants of SARs of
affiliated companies held by certain employees subsequent to the TCI Merger.
AT&T entered into an equity hedge in 1999 to offset potential future
compensation costs associated with such SARs. (Expense) income related to this
hedge was $(16), $(324) and $227 for the years ended December 31, 2001 and 2000
and the ten months ended December 31, 1999, respectively.
At December 31, 2001, there were 4.5 million AT&T stock options with 2.2
million tandem SARs outstanding that were originally assumed in connection with
the MediaOne Merger. All of the SARs were exercisable at a price of $19.33.
There were no SARs exercised during 2001 or 2000.
AT&T Broadband Group has adopted the disclosure-only provisions of SFAS
123. If AT&T Broadband Group had elected to recognize compensation costs based
on the fair value at the date of grant for AT&T awards granted to AT&T Broadband
Group employees, consistent with the provisions of
F-69
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS 123, AT&T Broadband Group's net loss would have been adjusted to reflect
additional compensation expense resulting in the following pro forma amounts:
YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
--------------- DECEMBER 31,
2001 2000 1999
------ ------ ------------
Net loss............................................... $4,011 $5,390 $2,203
The pro forma effect on net loss for 2001 includes $10 due to the
conversion of AT&T common stock options in connection with the split-off of AT&T
Wireless Group, and also includes $12 due to the accelerated vesting of AT&T
Wireless Group stock options held by AT&T Broadband Group employees after the
split-off.
AT&T granted approximately 13.8 million, 13.4 million and 1.0 million stock
options to AT&T Broadband Group employees during 2001, 2000 and 1999,
respectively. At the date of grant, the weighted average exercise prices for
AT&T stock options granted to AT&T Broadband Group employees during 2001, 2000
and 1999 were $22.46, $34.17 and $56.56, respectively. The weighted-average fair
values at date of grant for AT&T stock options granted to AT&T Broadband Group
employees during 2001, 2000 and 1999 were $7.13, $10.28 and $17.45,
respectively, and were estimated using the Black-Scholes option-pricing model.
The weighted-average risk-free interest rates applied for 2001, 2000 and 1999
were 4.71%, 6.24% and 5.26%, respectively. The following weighted-average
assumptions were applied for 2001, 2000 and 1999, respectively: (i) expected
dividend yields of 0.85%, 1.7% and 1.7% (ii) expected volatility rates of 36.5%,
33.9% and 28.6%, and (iii) expected lives of 3.8, 3.7 years and 5.7 years.
In January 2002, AT&T modified its outstanding stock option agreements for
AT&T stock options and other equity awards held by current AT&T Broadband
employees to provide that upon the change in control of AT&T Broadband their
stock options and other equity awards granted prior to January 1, 2002 will be
immediately vested and exercisable through their remaining contractual terms.
The potential compensation cost associated with this modification for current
AT&T Broadband employees has been measured as of the modification date is
approximately $50 pre-tax. The actual charge will be finalized and recorded by
AT&T Broadband at the time of the change in control in connection with the
anticipated merger with Comcast.
(13) INCOME TAXES
AT&T Broadband Group is not a separate taxable entity for federal and state
income tax purposes and its results of operations are included in the
consolidated federal and state income tax returns of AT&T and its affiliates, as
described in note 1.
F-70
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the provision (benefit) for income taxes are as follows:
YEAR ENDED
DECEMBER 31, TEN MONTHS ENDED
----------------- DECEMBER 31,
2001 2000 1999
------- ------- -----------------
Federal:
Current........................................ $ (245) $ (786) $(469)
Deferred ...................................... (3,104) (215) 64
------- ------- -----
(3,349) (1,001) (405)
------- ------- -----
State and local:
Current........................................ (34) (136) 22
Deferred ...................................... (477) (47) (82)
------- ------- -----
(511) (183) (60)
------- ------- -----
Foreign:
Current........................................ 3 1 --
------- ------- -----
Benefit for income taxes......................... $(3,857) $(1,183) $(465)
======= ======= =====
AT&T Broadband Group also recorded current and deferred income tax benefits
related to minority interest and net equity losses on other equity investments
in the amounts of $100 and $37 for the years ended December 31, 2001, $100 and
$370 for the years ended December 31, 2000 and $54 and $438 for the ten months
ended December 31, 1999, respectively.
The following table shows the principal reasons for the difference between
the effective income tax rate and the United States federal statutory income tax
rate:
YEAR ENDED
DECEMBER 31, TEN MONTHS ENDED
---------------- DECEMBER 31,
2001 2000 1999
------ ------- ----------------
U.S. federal statutory income tax rate............ 35% 35% 35%
Federal income tax benefit at statutory rate...... $3,077 $ 3,507 $ 642
Operating losses and charges relating to
Excite@Home..................................... (649) (2,758) --
Investment dispositions, acquisitions and legal
entity restructuring............................ 238 374 --
Deconsolidation of and put obligation settlement
related to Excite@Home.......................... 1,045 -- --
In-process research and development write-off..... -- -- (208)
State and local income taxes, net of federal
income tax benefit.............................. 333 119 39
Amortization of intangibles....................... (177) (81) (12)
Foreign rate differential......................... (3) -- --
Taxes on repatriated and accumulated foreign
income, net of tax credits...................... 3 -- --
Other............................................. (10) 22 4
------ ------- -----
Benefit for income taxes.......................... $3,857 $ 1,183 465
====== ======= =====
Effective tax rate................................ 43.9% 11.8% 25.3%
====== ======= =====
F-71
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax liabilities are taxes AT&T Broadband Group expects to
pay in future periods. Similarly, deferred income tax assets are recorded for
expected reductions in taxes payable in future periods. Deferred income taxes
arise because of differences in the book and tax bases of certain assets and
liabilities. Deferred income tax liabilities and assets consist of the
following:
DECEMBER 31,
-----------------
2001 2000
------- -------
LONG-TERM DEFERRED INCOME TAX LIABILITIES:
Property, plant and equipment............................... $ 1,335 $ 1,319
Investments................................................. 8,130 9,148
Franchises.................................................. 16,939 18,571
Other....................................................... 1,519 2,087
------- -------
Total long-term deferred income tax liabilities............. 27,923 31,125
------- -------
LONG-TERM DEFERRED INCOME TAX ASSETS:
Business restructuring...................................... 13 3
Net operating loss/credit carryforwards..................... 80 509
Employee pensions and other benefits, net................... 330 520
Reserves and allowances..................................... 12 65
Valuation allowances........................................ (23) (726)
Other....................................................... 1,701 2,204
------- -------
Total long-term deferred income tax assets.................. 2,113 2,575
------- -------
Net long-term deferred income tax liabilities............... 25,810 28,550
------- -------
CURRENT DEFERRED INCOME TAX LIABILITIES:
Investments................................................. 11 670
Other....................................................... 1 6
------- -------
Total current deferred income tax liabilities............... 12 676
------- -------
CURRENT DEFERRED INCOME TAX ASSETS:
Employee pensions and other benefits........................ 4 22
Reserves and allowances..................................... 10 10
Valuation allowances........................................ -- (39)
Other....................................................... 36 197
------- -------
Total current deferred income tax assets.................... 50 190
------- -------
Net current deferred income tax (liabilities) assets........ 38 (486)
------- -------
Total deferred income tax liabilities....................... $25,772 $29,036
======= =======
The valuation allowance for deferred tax assets as of December 31, 2001 and
2000 was $23 and $765, respectively. The realization of AT&T Broadband Group's
deferred tax assets is not dependent upon the consolidated tax group of AT&T. On
a stand alone basis, AT&T Broadband Group has sufficient reversing taxable
temporary differences to warrant recognition of its deferred tax assets without
the need for any additional valuation allowance.
F-72
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2001, AT&T Broadband Group had federal net operating loss
carryforwards of $4, expiring through 2013 and state net operating loss
carryforwards of $60, expiring through 2016. AT&T Broadband Group also has
federal tax credit carryforwards of $16 expiring through 2004. In connection
with the TCI Merger, certain federal and state net operating loss carryforwards
were subject to a valuation allowance of $23 at December 31, 2001. If, in the
future, the realization of these acquired deferred tax assets becomes more
likely than not, any reduction of the associated valuation allowance will be
allocated to reduce franchise costs and other purchased intangibles.
On September 30, 2001, the assets and liabilities of Excite@Home were
deconsolidated from AT&T Broadband Group's consolidated balance sheet.
Accordingly, AT&T Broadband Group's deferred income tax assets and liabilities
at December 31, 2001, presented above, exclude any amounts related to
Excite@Home.
(14) COMMITMENTS AND CONTINGENCIES
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") imposed certain rate regulations on the cable television
industry. Under the 1992 Cable Act, all cable systems are subject to rate
regulation, unless they face "effective competition," as defined by the 1992
Cable Act and expanded in the Telecommunications Act of 1996 (the "1996 Act"),
in their local franchise area.
Management of AT&T Broadband Group believes that they have complied in all
material respects with the provisions of the 1992 Cable Act and the 1996 Act,
including its rate setting provisions. If, as a result of the review process, a
system cannot substantiate its rates, it could be required to retroactively
reduce its rates to the appropriate benchmark and refund the excess portion of
rates received.
In the normal course of business AT&T Broadband Group is subject to
proceedings, lawsuits and other claims, including proceedings under laws and
regulations related to environmental and other matters. Such matters are subject
to many uncertainties, and outcomes are not predictable with assurance.
Consequently, AT&T Broadband Group is unable to ascertain the ultimate aggregate
amount of monetary liability or financial impact with respect to these matters
at December 31, 2001. These matters could affect the operating results of any
one quarter when resolved in future periods. However, management believes after
final disposition, any monetary liability or financial impact to AT&T Broadband
Group beyond that provided for at year-end would not be material to AT&T
Broadband Group's annual combined financial statements.
F-73
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T Broadband Group leases land, buildings and equipment through contracts
that expire in various years through 2050. Rental expense under operating leases
was $144, $122 and $68 for the years ended December 31, 2001 and 2000, and the
ten months ended December 31, 1999, respectively. The following table shows the
future minimum lease payments due under noncancelable operating and capital
leases at December 31, 2001:
OPERATING CAPITAL
LEASES LEASES
--------- -------
2002........................................................ $135 $ 58
2003........................................................ 129 56
2004........................................................ 117 52
2005........................................................ 95 51
2006........................................................ 77 36
Later years................................................. 270 36
---- ----
Total minimum lease payments................................ $823 289
==== ====
Less amount representing interest........................... 42
----
Present value of net minimum lease payments................. $247
====
In addition, under certain real estate operating leases, AT&T Broadband
Group could be required to make payments to the lessor up to $155 at the end of
the lease term (lease terms range from 2002 through 2006). The actual amount
paid, if any, would be reduced by amounts received by the lessor upon
remarketing the property.
In July 1997, ATTBLLC's predecessor, TCI, and ATTBLLC's subsidiary,
Satellite Services, Inc., entered into a 25 year affiliation term sheet with
Starz Encore Group (formerly Encore Media Group) 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 LMG, a former subsidiary of AT&T. The commitment, which is based
on a fixed number of subscribers, increases annually from $306 in 2002 to $315
in 2003, and will increase annually through 2022 with inflation, subject to
certain adjustments, including increases in the number of subscribers. 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. Excess
programming costs that may be payable by AT&T Broadband Group in future years
are not presently estimable, and could be significant. 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 December 31, 2001, an entity attributed to AT&T Broadband Group has an
agreement with Motorola, Inc. to purchase a minimum of 1.6 million digital
set-top devices at an average price of $234
F-74
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
per unit in 2002. During 2001, AT&T Broadband Group satisfied its obligation
under a previous agreement with Motorola, Inc. to purchase set-top devices.
AT&T Broadband Group is party to an agreement under which it purchases
certain billing services from CSG Systems, Inc. ("CSG"). Unless terminated by
either party pursuant to terms of the agreement, the agreement expires on
December 31, 2012. The agreement calls for monthly payments which are subject to
adjustments and conditions pursuant to the terms of the underlying agreements.
The annual commitment under the agreement is $130 for 2002 and will increase
annually with inflation.
(15) RELATED PARTY TRANSACTIONS
As discussed in Note 1, AT&T provides necessary working capital
requirements through intercompany debt and capital contributions to AT&T
Broadband Group. These amounts are reflected in the accompanying combined
balance sheets as short-term debt due to AT&T or a component of attributed net
assets. Short-term debt due to AT&T and interest was assumed based upon the
methodology outlined in Note 1. Intercompany debt was $3,959 and $5,830 at
December 31, 2001 and 2000, respectively. Intercompany interest expense was
$320, $323 and $91 for the years ended December 31, 2001 and 2000 and for the
ten months ended December 31, 1999, respectively.
AT&T Consumer Services Group provides AT&T Broadband Group with sales
support and customer care services at cost based prices. For the years ended
December 31, 2001 and 2000 and the ten months ended December 31, 1999, such
amounts totaled $190, $89 and $121, respectively, and are included in selling,
general and administrative expenses in the accompanying combined statements of
operations.
In addition, AT&T Business Services Group provides AT&T Broadband Group
with wireline communication and other services. For the years ended December 31,
2001 and 2000 and the ten months ended December 31, 1999, charges for such
services totaled $232, $104 and $31, respectively, and are included in costs of
services in the accompanying combined statements of operations.
Included in current liabilities at December 31, 2001 and 2000, was $2 and
$98, respectively, related to amounts due AT&T Consumer Services Group and AT&T
Business Services Group for the above described services.
AT&T allocates general corporate overhead expenses, including finance,
legal, marketing, use of the AT&T brand, planning and strategy and human
resources to AT&T Broadband Group, as well as costs for AT&T employees who
directly support the activities of the AT&T Broadband Group. Charges for such
services amounted to $146, $159 and $120 for the years ended December 31, 2001
and 2000 and for the ten months ended December 31, 1999, respectively. These
amounts are included in selling, general and administrative expenses in the
accompanying combined statements of operations and were determined based on
methodology described in note 1.
AT&T Broadband Group transferred $628 of marketable securities and equity
investments and $180 of related deferred tax liabilities to AT&T through
combined attributed net assets during the first quarter of 2001. No gain or loss
was recorded on this transaction.
In addition, AT&T Broadband Group had various related party transactions
with LMG. Included in cost of services were programming expenses related to
services from LMG. These expenses amounted to $199, $239 and $184 for the seven
months ended July 31, 2001, the deemed effective date of the LMG spin-off from
AT&T for accounting purposes, the year ended December 31, 2000 and the ten
months ended December 31, 1999, respectively.
On October 2, 2000, AT&T Broadband Group, through MediaOne, completed the
sale of several equity interests in international ventures acquired as a result
of the MediaOne Merger to the AT&T
F-75
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Wireless Group. Such interests were sold for approximately $1 billion, which was
based upon a third party valuation. AT&T Broadband Group received 120,335,081 of
AT&T common shares for sale of such equity interests. The AT&T Common stock
received in such transaction has been included in combined attributed net
assets. In connection with such sale, $196 of related deferred tax liabilities
were transferred to AT&T Wireless Group. No gain or loss was recognized on the
sale of such equity interests.
(16) NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations ("SFAS 141")," which supersedes Accounting
Principles Board ("APB") Opinion No. 16. SFAS 141 requires all business
combinations initiated after June 30, 2001 be accounted for under the purchase
method. In addition, SFAS 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. The adoption of SFAS 141 will not 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 ("SFAS 142")," which supercedes APB Opinion No. 17. Under SFAS
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 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
and excess basis related to goodwill of equity method investments will no longer
be amortized, but will continue to be tested for impairment. In addition, AT&T
Broadband Group has determined that franchise costs are indefinite lived assets
and therefore, as of January 1, 2002 will no longer be subject to amortization,
but will continue to be tested for impairment. The adoption of SFAS 142 will
have a significant impact on future operating results due to the cessation of
goodwill and franchise cost amortization. The goodwill balance as of December
31, 2001 was $19.3 billion with related amortization expense for the year ended
December 31, 2001, of $659. The excess basis related to AT&T Broadband Group's
equity method investments as of December 31, 2001 was $3.0 billion with related
amortization of $148. AT&T Broadband Group performed an impairment test on the
goodwill balance as of January 1, 2002. In accordance with SFAS 142, the
impairment test was performed by comparing the fair value of the reporting unit
to its carrying value. As of January 1, 2002, the fair value of the reporting
unit exceeded its carrying value, and therefore no impairment loss will be
recognized upon adoption. The franchise cost balance as of December 31, 2001 was
$42.8 billion with related amortization expense for the year ended December 31,
2001 of $1,224. In accordance with SFAS 142, franchise costs were tested for
impairment as of January 1, 2002, by comparing the fair values to the carrying
values (at a market level). As a result of such tests, an impairment loss of
$856, net of taxes of $530, will be recognized as a change in accounting
principle in the first quarter of 2002.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations ("SFAS 143")." 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 143 is effective
for financial statements issued for fiscal years beginning after June 15, 2002,
which for AT&T Broadband Group means
F-76
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 ("SFAS 144")," which supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of ("SFAS 121")." SFAS 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 121, SFAS 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 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 144 expands the
scope of discontinued operations to include all components of an entity with
operations that (i) can be distinguished from the rest of the entity and (ii)
will be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS 144 also amends Accounting Research Bulletin ("ARB") No. 51,
"Consolidating Financial Statements" to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. SFAS 144 is
effective for AT&T Broadband Group as of January 1, 2002. The adoption of SFAS
144 will not have a material impact on AT&T Broadband Group's results of
operations, financial position or cash flows.
F-77
AT&T BROADBAND CORP.
BALANCE SHEET
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
Assets...................................................... $ -- $ --
======= =======
Stockholder's Equity
Common stock, $0.01 par value, 1,000 shares authorized,
issued and outstanding................................. $ 10 $ 10
Additional paid-in capital................................ 990 990
Stock subscription receivable............................. (1,000) (1,000)
------- -------
$ -- $ --
======= =======
See note to balance sheet.
F-78
AT&T BROADBAND CORP.
NOTE TO BALANCE SHEET
JUNE 30, 2002
(UNAUDITED)
1. ORGANIZATION
On December 14, 2001, AT&T Broadband Corp. (the "Company") was incorporated
under the laws of the State of Delaware and was authorized to issue 1,000 shares
of $0.01 par value common stock. On December 19, 2001, the Company issued 1,000
shares of its $0.01 par value common stock to AT&T Corp. ("AT&T") for $1 per
share. The Company was organized to conduct the business currently conducted by
AT&T's broadband business ("AT&T Broadband"), subsequent to the combination of
Comcast Corporation ("Comcast") and AT&T Broadband.
On December 19, 2001, AT&T and Comcast entered into an Agreement and Plan
of Merger that will result in the combination of AT&T Broadband and Comcast (the
"Merger"). AT&T intends to assign and transfer the assets, liabilities and
business of AT&T Broadband to the Company. AT&T will spin-off the Company to its
stockholders immediately prior to the Merger. On July 10, 2002, shareholders of
AT&T and Comcast approved the Merger. The Merger still remains subject to
certain governmental reviews and certain other conditions and is expected to
close by the end of 2002. Upon the completion of the Merger, the Company and
Comcast will be wholly owned subsidiaries of AT&T Comcast Corporation ("AT&T
Comcast").
On May 3, 2002, the Company and AT&T Comcast, as co-borrowers, entered into
definitive credit agreements with a syndicate of lenders for an aggregate of
approximately $12.8 billion in order to obtain the financing necessary to
complete the Merger and for AT&T Comcast's needs after the merger. Under the
terms of the new credit facilities, the obligations of the lenders to provide
the financing upon the completion of the Merger are subject to a number of
conditions, including the condition that AT&T Comcast holds investment-grade
credit ratings from both Standard & Poor's Ratings Group and Moody's Investors
Service rating agencies at the time of closing. Accordingly, there can be no
assurance that the Company and AT&T Comcast will be able to obtain the financing
necessary to complete the Merger.
From the date of inception on December 14, 2001 through June 30, 2002, the
Company had no operations.
F-79
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of AT&T Broadband Corp.:
In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of AT&T Broadband Corp. at December
31, 2001 in conformity with accounting principles generally accepted in the
United States of America. This financial statement is the responsibility of the
Company's management; our responsibility is to express an opinion on this
financial statement based on our audit. We conducted our audit of this statement
in accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall balance
sheet presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
July 29, 2002
F-80
AT&T BROADBAND CORP.
BALANCE SHEET
DECEMBER 31, 2001
Assets...................................................... $ --
=======
Stockholder's Equity
Common stock, $0.01 par value, 1,000 shares authorized,
issued and outstanding................................. $ 10
Additional paid-in capital................................ 990
Stock subscription receivable............................. (1,000)
-------
$ --
=======
See note to balance sheet.
F-81
AT&T BROADBAND CORP.
NOTE TO BALANCE SHEET
DECEMBER 31, 2001
1. ORGANIZATION
On December 14, 2001, AT&T Broadband Corp. (the "Company") was incorporated
under the laws of the State of Delaware and was authorized to issue 1,000 shares
of $0.01 par value common stock. On December 19, 2001, the Company issued 1,000
shares of its $0.01 par value common stock to AT&T Corp. ("AT&T") for $1 per
share. The Company was organized to conduct the business currently conducted by
AT&T's broadband business ("AT&T Broadband"), subsequent to the combination of
Comcast Corporation ("Comcast") and AT&T Broadband.
On December 19, 2001, AT&T and Comcast entered into an Agreement and Plan
of Merger that will result in the combination of AT&T Broadband and Comcast (the
"Merger"). AT&T intends to assign and transfer the assets, liabilities and
business of AT&T Broadband to the Company. AT&T will spin-off the Company to its
stockholders immediately prior to the Merger. On July 10, 2002, shareholders of
AT&T and Comcast approved the Merger. The Merger still remains subject to
certain governmental reviews and certain other conditions and is expected to
close by the end of 2002. Upon the completion of the Merger, the Company and
Comcast will be wholly owned subsidiaries of AT&T Comcast Corporation ("AT&T
Comcast").
On May 3, 2002, the Company and AT&T Comcast, as co-borrowers, entered into
definitive credit agreements with a syndicate of lenders for an aggregate of
approximately $12.8 billion in order to obtain the financing necessary to
complete the Merger and for AT&T Comcast's needs after the Merger. Under the
terms of the new credit facilities, the obligations of the lenders to provide
the financing upon the completion of the Merger are subject to a number of
conditions, including the condition that AT&T Comcast holds investment-grade
credit ratings from both Standard & Poor's Ratings Group and Moody's Investors
Service rating agencies at the time of closing. Accordingly, there can be no
assurance that the Company and AT&T Comcast will be able to obtain the financing
necessary to complete the Merger.
From the date of inception on December 14, 2001 through December 31, 2001,
the Company had no operations.
F-82
AT&T COMCAST CORPORATION
BALANCE SHEET (UNAUDITED)
JUNE 30, 2002
Assets...................................................... $--
Stockholders' Equity
Stock subscription receivable............................. $(2)
Common stock, $.01 par value, authorized 100 shares; 2
shares issued and outstanding.......................... $--
Additional capital........................................ $ 2
---
$--
===
See note to balance sheet.
F-83
AT&T COMCAST CORPORATION
NOTE TO BALANCE SHEET (UNAUDITED)
JUNE 30, 2002
1. ORGANIZATION
On December 7, 2001, CAB Holdings Corp. was incorporated under the laws of
the State of Pennsylvania and was authorized to issue 100 shares of $.01 par
value common stock. At that date of incorporation, CAB Holdings Corp.'s name was
changed to AT&T Comcast Corporation ("the Company") and the Company issued one
share of its $.01 par value common stock to each of Comcast Corporation
("Comcast") and AT&T Corp. ("AT&T") for $1 per share. The Company was organized
to conduct, subsequent to the combination of Comcast and AT&T's Broadband
division ("AT&T Broadband"), the businesses currently conducted by Comcast and
AT&T Broadband.
On December 19, 2001, Comcast and AT&T entered into an Agreement and Plan
of Merger that will result in the combination of Comcast and AT&T Broadband.
AT&T will spin off AT&T Broadband to its stockholders immediately prior to the
combination. The combined company will also hold AT&T's approximate 25.5%
interest in Time Warner Entertainment. On July 10, 2002, shareholders of both
Comcast and AT&T approved the transaction. The transaction is subject to
customary closing conditions and regulatory approvals and is expected to close
by the end of 2002.
Upon completion of the combination of Comcast and AT&T Broadband (the
"Merger"), Comcast and an entity which will then own AT&T Broadband will be
wholly-owned subsidiaries of the Company.
On May 3, 2002, the Company and AT&T Broadband Corp. entered into
definitive credit agreements with a syndicate of lenders for an aggregate of
$12.825 billion of new indebtedness in order to obtain the financing necessary
to complete the Merger and for the combined company's financing needs after the
transaction. This financing requires subsidiary guarantees, including guarantees
by certain of Comcast's wholly owned subsidiaries and by subsidiaries of AT&T
Broadband. Under the terms of the new credit facilities, the obligations of the
lenders to provide the financing upon the completion of the Merger are subject
to a number of conditions, including the condition that the combined company
holds investment-grade credit ratings from both the Standard & Poor's and
Moody's rating agencies at the time of closing. Accordingly, there can be no
assurance that the Company and AT&T Broadband Corp. will be able to obtain the
financing necessary to complete the Merger.
From the date of inception on December 7, 2001 through June 30, 2002, the
Company had no operations.
F-84
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
AT&T Comcast Corporation
Philadelphia, Pennsylvania
We have audited the accompanying balance sheet of AT&T Comcast Corporation as of
December 31, 2001. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the balance sheet
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such balance sheet presents fairly, in all material respects,
the financial position of AT&T Comcast Corporation as of December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
April 29, 2002
F-85
AT&T COMCAST CORPORATION
BALANCE SHEET
DECEMBER 31, 2001
Assets...................................................... $--
Stockholders' Equity
Stock subscription receivable............................. $(2)
Common stock, $.01 par value, authorized 100 shares; 2
shares issued and outstanding.......................... $--
Additional capital........................................ $ 2
---
$--
===
See note to balance sheet.
F-86
AT&T COMCAST CORPORATION
NOTE TO BALANCE SHEET
DECEMBER 31, 2001
1. ORGANIZATION
On December 7, 2001, CAB Holdings Corp. was incorporated under the laws of
the State of Pennsylvania and was authorized to issue 100 shares of $.01 par
value common stock. At that date of incorporation, CAB Holdings Corp.'s name was
changed to AT&T Comcast Corporation ("the Company") and the Company issued one
share of its $.01 par value common stock to each of Comcast Corporation
("Comcast") and AT&T Corp. ("AT&T") for $1 per share. The Company was organized
to conduct, subsequent to the combination of Comcast and AT&T's Broadband
division ("AT&T Broadband"), the businesses currently conducted by Comcast and
AT&T Broadband.
On December 19, 2001, Comcast and AT&T entered into an Agreement and Plan
of Merger that will result in the combination of Comcast and AT&T Broadband.
AT&T will spin off AT&T Broadband to its stockholders immediately prior to the
combination. The combined company will also hold AT&T's approximate 25.5%
interest in Time Warner Entertainment. The transaction is subject to customary
closing conditions and shareholder and regulatory approvals and is expected to
close by the end of 2002.
Upon completion of the combination of Comcast and AT&T Broadband, Comcast
and an entity which will then own AT&T Broadband will be wholly-owned
subsidiaries of the Company.
From the date of inception on December 7, 2001 through December 31, 2001,
the Company had no operations.
F-87
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Comcast Corporation
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheet of Comcast
Corporation and its subsidiaries (the "Company") as of December 31, 2001 and
2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Comcast Corporation and its
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Notes 2 and 3 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended, effective
January 1, 2001.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 5, 2002 (July 30, 2002 as to Note 14)
F-88
COMCAST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
---------------------
2001 2000
--------- ---------
(DOLLARS IN MILLIONS,
EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 350.0 $ 651.5
Investments............................................... 2,623.2 3,059.7
Accounts receivable, less allowance for doubtful accounts
of $153.9 and $141.7................................... 967.4 891.9
Inventories, net.......................................... 454.5 438.5
Other current assets...................................... 153.7 102.8
--------- ---------
Total current assets................................... 4,548.8 5,144.4
--------- ---------
INVESTMENTS................................................. 1,679.2 2,661.9
--------- ---------
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$2,725.7 and $1,873.1..................................... 7,011.1 5,519.9
--------- ---------
INTANGIBLE ASSETS
Goodwill.................................................. 7,507.3 6,945.1
Cable franchise operating rights.......................... 20,167.8 17,545.5
Other intangible assets................................... 2,833.4 1,485.6
--------- ---------
30,508.5 25,976.2
Accumulated amortization.................................. (5,999.2) (3,908.7)
--------- ---------
24,509.3 22,067.5
--------- ---------
OTHER NONCURRENT ASSETS, net................................ 383.4 350.8
--------- ---------
$38,131.8 $35,744.5
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 698.2 $ 813.2
Accrued expenses and other current liabilities............ 1,695.5 1,576.5
Deferred income taxes..................................... 275.4 789.9
Current portion of long-term debt......................... 460.2 293.9
--------- ---------
Total current liabilities.............................. 3,129.3 3,473.5
--------- ---------
LONG-TERM DEBT, less current portion........................ 11,741.6 10,517.4
--------- ---------
DEFERRED INCOME TAXES....................................... 6,375.7 5,786.7
--------- ---------
OTHER NONCURRENT LIABILITIES................................ 1,532.0 1,108.6
--------- ---------
MINORITY INTEREST........................................... 880.2 717.3
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
COMMON EQUITY PUT OPTIONS................................... 54.6
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock -- authorized, 20,000,000 shares 5.25%
series B mandatorily redeemable convertible, $1,000 par
value; issued, zero and 59,450 at redemption value..... 59.5
Class A special common stock, $1 par value -- authorized,
2,500,000,000 shares; issued, 937,256,465 and
931,340,103; outstanding, 913,931,554 and 908,015,192.. 913.9 908.0
Class A common stock, $1 par value -- authorized,
200,000,000 shares; issued, 21,829,422 and
21,832,250............................................. 21.8 21.8
Class B common stock, $1 par value -- authorized,
50,000,000 shares; issued, 9,444,375................... 9.4 9.4
Additional capital........................................ 11,752.0 11,598.8
Retained earnings......................................... 1,631.5 1,056.5
Accumulated other comprehensive income.................... 144.4 432.4
--------- ---------
Total stockholders' equity............................. 14,473.0 14,086.4
--------- ---------
$38,131.8 $35,744.5
========= =========
See notes to consolidated financial statements.
F-89
COMCAST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
--------- --------- --------
(AMOUNTS IN MILLIONS,
EXCEPT PER SHARE DATA)
REVENUES
Service revenues.......................................... $ 5,756.9 $ 4,682.7 $3,361.8
Net sales from electronic retailing....................... 3,917.3 3,535.9 3,167.4
--------- --------- --------
9,674.2 8,218.6 6,529.2
--------- --------- --------
COSTS AND EXPENSES
Operating (excluding depreciation)........................ 2,905.8 2,212.5 1,663.1
Cost of goods sold from electronic retailing (excluding
depreciation)........................................... 2,514.0 2,284.9 2,060.0
Selling, general and administrative....................... 1,552.6 1,250.9 926.1
Depreciation.............................................. 1,141.8 837.3 572.0
Amortization.............................................. 2,306.2 1,794.0 644.0
--------- --------- --------
10,420.4 8,379.6 5,865.2
--------- --------- --------
OPERATING INCOME (LOSS)..................................... (746.2) (161.0) 664.0
OTHER INCOME (EXPENSE)
Interest expense.......................................... (731.8) (691.4) (538.3)
Investment income......................................... 1,061.7 983.9 629.5
Income (expense) related to indexed debt.................. 666.0 (666.0)
Equity in net income (losses) of affiliates............... (28.5) (21.3) 1.4
Other income.............................................. 1,301.0 2,825.5 1,409.4
--------- --------- --------
1,602.4 3,762.7 836.0
--------- --------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES,
MINORITY INTEREST, EXTRAORDINARY ITEMS AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE............................... 856.2 3,601.7 1,500.0
INCOME TAX EXPENSE.......................................... (470.2) (1,441.3) (723.7)
--------- --------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST,
EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGE.................................................... 386.0 2,160.4 776.3
MINORITY INTEREST........................................... (160.4) (115.3) 4.6
--------- --------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEMS
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE................ 225.6 2,045.1 780.9
GAIN FROM DISCONTINUED OPERATIONS, net of income tax expense
of $166.1................................................. 335.8
--------- --------- --------
INCOME BEFORE EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE......................................... 225.6 2,045.1 1,116.7
EXTRAORDINARY ITEMS......................................... (1.5) (23.6) (51.0)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE...................... 384.5
--------- --------- --------
NET INCOME.................................................. 608.6 2,021.5 1,065.7
PREFERRED DIVIDENDS......................................... (23.5) (29.7)
--------- --------- --------
NET INCOME FOR COMMON STOCKHOLDERS.......................... $ 608.6 $ 1,998.0 $1,036.0
========= ========= ========
BASIC EARNINGS (LOSS) FOR COMMON STOCKHOLDERS PER COMMON
SHARE
Income from continuing operations before extraordinary
items and cumulative effect of accounting change........ $ 0.24 $ 2.27 $ 1.00
Discontinued operations................................... 0.45
Extraordinary items....................................... (0.03) (0.07)
Cumulative effect of accounting change.................... 0.40
--------- --------- --------
Net income................................................ $ 0.64 $ 2.24 $ 1.38
========= ========= ========
BASIC WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING............................................... 949.7 890.7 749.1
========= ========= ========
DILUTED EARNINGS (LOSS) FOR COMMON STOCKHOLDERS PER COMMON
SHARE
Income from continuing operations before extraordinary
items and cumulative effect of accounting change........ $ 0.23 $ 2.16 $ 0.95
Discontinued operations................................... 0.41
Extraordinary items....................................... (0.03) (0.06)
Cumulative effect of accounting change.................... 0.40
--------- --------- --------
Net income................................................ $ 0.63 $ 2.13 $ 1.30
========= ========= ========
DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING............................................... 964.5 948.7 819.9
========= ========= ========
See notes to consolidated financial statements.
F-90
COMCAST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
(DOLLARS IN MILLIONS)
OPERATING ACTIVITIES
Net income................................................ $ 608.6 $ 2,021.5 $ 1,065.7
Adjustments to reconcile net income to net cash provided
by operating activities from continuing operations:
Depreciation........................................... 1,141.8 837.3 572.0
Amortization........................................... 2,306.2 1,794.0 644.0
Non-cash interest (income) expense, net................ 40.2 (22.6) (27.8)
Non-cash (income) expense related to indexed debt...... (666.0) 666.0
Equity in net (income) losses of affiliates............ 28.5 21.3 (1.4)
Gains on investments and other income, net............. (2,303.3) (3,679.3) (1,917.0)
Minority interest...................................... 160.4 115.3 (4.6)
Discontinued operations................................ (335.8)
Extraordinary items.................................... 1.5 23.6 51.0
Cumulative effect of accounting change................. (384.5)
Deferred income taxes.................................. (240.7) 1,074.6 (73.4)
Other.................................................. 23.6 51.2 41.5
--------- --------- ---------
1,382.3 1,570.9 680.2
Changes in working capital, net of effects of
acquisitions and divestitures
Increase in accounts receivable, net................. (15.8) (195.8) (89.5)
Increase in inventories, net......................... (16.0) (35.7) (91.9)
(Increase) decrease in other current assets.......... (27.1) 13.7 30.7
(Decrease) increase in accounts payable, accrued
expenses and other current liabilities............ (93.9) (133.8) 719.9
--------- --------- ---------
(152.8) (351.6) 569.2
Net cash provided by operating activities from
continuing operations........................... 1,229.5 1,219.3 1,249.4
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from borrowings.................................. 5,686.4 5,435.3 2,786.6
Retirements and repayments of debt........................ (4,187.7) (5,356.5) (1,368.2)
Issuances of common stock and sales of put options on
common stock........................................... 27.2 30.5 17.1
Repurchases of common stock............................... (27.1) (324.9) (30.7)
Dividends................................................. (9.4)
Deferred financing costs.................................. (22.5) (55.8) (51.0)
Other..................................................... (3.0)
--------- --------- ---------
Net cash provided by (used in) financing
activities from continuing operations........... 1,476.3 (271.4) 1,341.4
--------- --------- ---------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired........................ (1,329.0) (187.3) (755.2)
Proceeds from liquidated damages, net..................... 1,460.0
Proceeds from sales of (purchases of) short-term
investments, net....................................... (6.2) 1,028.1 (1,035.5)
Capital contributions to and purchases of investments..... (317.0) (1,010.7) (2,012.2)
Proceeds from sales of investments........................ 1,172.8 997.3 599.8
Capital expenditures...................................... (2,181.7) (1,636.8) (893.8)
Sale of subsidiary, net of cash sold...................... 361.1
Additions to intangible and other noncurrent assets....... (346.2) (409.2) (263.5)
--------- --------- ---------
Net cash used in investing activities from
continuing operations........................... (3,007.3) (1,218.6) (2,539.3)
--------- --------- ---------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS -- CONTINUING OPERATIONS...................... (301.5) (270.7) 51.5
CASH AND CASH EQUIVALENTS, beginning of year................ 651.5 922.2 870.7
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year...................... $ 350.0 $ 651.5 $ 922.2
========= ========= =========
See notes to consolidated financial statements.
F-91
COMCAST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK RETAINED
--------------- --------------------------- EARNINGS
SERIES SERIES CLASS A ADDITIONAL (ACCUMULATED
A B SPECIAL CLASS A CLASS B CAPITAL DEFICIT)
------ ------ ------- ------- ------- ---------- ------------
(DOLLARS IN MILLIONS)
BALANCE, JANUARY 1, 1999..................... $31.9 $540.7 $698.4 $31.7 $9.4 $ 2,941.7 $(1,488.2)
Comprehensive income:
Net income................................. 1,065.7
Unrealized gains on marketable securities,
net of deferred taxes of $2,891.9........
Reclassification adjustments for gains
included in net income, net of deferred
taxes of $161.7..........................
Cumulative translation adjustments.........
Total comprehensive income...................
Acquisition................................ 8.5 283.2
Exercise of options........................ 2.2 23.7
Conversion of Series A preferred........... (31.9) 2.7 29.2
Retirement of common stock................. (0.8) (4.6) (25.3)
Cash dividends, Series A preferred......... (0.8)
Series B preferred dividends............... 28.9 (28.9)
Share exchange............................. 4.6 (4.9) 172.3 (172.0)
Temporary equity related to put options.... 111.2
----- ------ ------ ----- ---- --------- ---------
BALANCE, DECEMBER 31, 1999................... 569.6 716.4 26.0 9.4 3,527.0 (619.8)
Comprehensive income:
Net income................................. 2,021.5
Unrealized losses on marketable securities,
net of deferred taxes of $2,789.3........
Reclassification adjustments for gains
included in net income, net of deferred
taxes of $266.0..........................
Cumulative translation adjustments.........
Total comprehensive loss.....................
Acquisitions............................... 155.7 7,585.2
Exercise of options........................ 2.6 53.9 (27.7)
Retirement of common stock................. (6.0) (3.1) (42.3) (273.5)
Conversion of Series B preferred........... (533.6) 38.3 495.3
Series B preferred dividends............... 23.5 (23.5)
Share exchange............................. 1.0 (1.1) 44.1 (44.0)
Temporary equity related to put options.... (40.9)
----- ------ ------ ----- ---- --------- ---------
BALANCE, DECEMBER 31, 2000................... 59.5 908.0 21.8 9.4 11,598.8 1,056.5
Comprehensive income:
Net income................................. 608.6
Unrealized gains on marketable securities,
net of deferred taxes of $114.4..........
Reclassification adjustments for gains
included in net income, net of deferred
taxes of $264.4..........................
Unrealized losses on effective portion of
cash flow hedges, net of deferred taxes
of $0.3..................................
Cumulative translation adjustments.........
Total comprehensive income...................
Exercise of options........................ 2.5 53.3 (17.3)
Retirement of common stock................. (0.8) (10.0) (16.3)
Conversion of Series B preferred........... (59.5) 4.2 55.3
Temporary equity related to put options.... 54.6
----- ------ ------ ----- ---- --------- ---------
BALANCE, DECEMBER 31, 2001................... $ $ $913.9 $21.8 $9.4 $11,752.0 $ 1,631.5
===== ====== ====== ===== ==== ========= =========
ACCUMULATED OTHER
COMPREHENSIVE
INCOME (LOSS)
------------------------
UNREALIZED CUMULATIVE
GAINS TRANSLATION
(LOSSES) ADJUSTMENTS TOTAL
---------- ----------- ---------
(DOLLARS IN MILLIONS)
BALANCE, JANUARY 1, 1999..................... $1,049.5 $ 0.2 $ 3,815.3
Comprehensive income:
Net income.................................
Unrealized gains on marketable securities,
net of deferred taxes of $2,891.9........ 5,370.6
Reclassification adjustments for gains
included in net income, net of deferred
taxes of $161.7.......................... (300.3)
Cumulative translation adjustments......... (7.3)
Total comprehensive income................... 6,128.7
Acquisition................................ 291.7
Exercise of options........................ 25.9
Conversion of Series A preferred...........
Retirement of common stock................. (30.7)
Cash dividends, Series A preferred......... (0.8)
Series B preferred dividends...............
Share exchange.............................
Temporary equity related to put options.... 111.2
-------- ------ ---------
BALANCE, DECEMBER 31, 1999................... 6,119.8 (7.1) 10,341.3
Comprehensive income:
Net income.................................
Unrealized losses on marketable securities,
net of deferred taxes of $2,789.3........ (5,180.1)
Reclassification adjustments for gains
included in net income, net of deferred
taxes of $266.0.......................... (494.0)
Cumulative translation adjustments......... (6.2)
Total comprehensive loss..................... (3,658.8)
Acquisitions............................... 7,740.9
Exercise of options........................ 28.8
Retirement of common stock................. (324.9)
Conversion of Series B preferred...........
Series B preferred dividends...............
Share exchange.............................
Temporary equity related to put options.... (40.9)
-------- ------ ---------
BALANCE, DECEMBER 31, 2000................... 445.7 (13.3) 14,086.4
Comprehensive income:
Net income.................................
Unrealized gains on marketable securities,
net of deferred taxes of $114.4.......... 212.5
Reclassification adjustments for gains
included in net income, net of deferred
taxes of $264.4.......................... (491.1)
Unrealized losses on effective portion of
cash flow hedges, net of deferred taxes
of $0.3.................................. (0.6)
Cumulative translation adjustments......... (8.8)
Total comprehensive income................... 320.6
Exercise of options........................ 38.5
Retirement of common stock................. (27.1)
Conversion of Series B preferred...........
Temporary equity related to put options.... 54.6
-------- ------ ---------
BALANCE, DECEMBER 31, 2001................... $ 166.5 $(22.1) $14,473.0
======== ====== =========
See notes to consolidated financial statements.
F-92
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
1. BUSINESS
Comcast Corporation and its subsidiaries (the "Company") is involved in
three principal lines of business: cable, commerce and content.
The Company's cable business is principally involved in the development,
management and operation of broadband communications networks in the United
States ("US"). The Company's consolidated cable operations served approximately
8.5 million subscribers and passed approximately 13.9 million homes as of
December 31, 2001.
The Company's commerce operations consist of the Company's consolidated
subsidiary, QVC, Inc. and subsidiaries ("QVC"). Through QVC, an electronic
retailer, the Company markets a wide variety of products directly to consumers
primarily on merchandise-focused television programs. QVC was available, on a
full and part-time basis, to approximately 82.1 million homes in the US,
approximately 9.5 million homes in the United Kingdom ("UK"), approximately 23.6
million homes in Germany and approximately 3.6 million homes in Japan as of
December 31, 2001.
Content is provided through the Company's consolidated subsidiaries
including Comcast Spectacor, Comcast SportsNet ("CSN"), Comcast SportsNet
Mid-Atlantic ("CSN Mid-Atlantic"), Comcast Sports Southeast ("CSS"), E!
Entertainment Television, Inc. ("E! Entertainment"), The Golf Channel ("TGC"),
Outdoor Life Network ("OLN") and G4 Media, LLC ("G4 Media"), and through other
programming investments (see Note 5).
The Company's cable and commerce operations represent the Company's two
reportable segments under accounting principles generally accepted in the United
States. The Company's three 24-hour regional sports programming networks, which
consist of CSN, CSN Mid-Atlantic and CSS, derive a substantial portion of their
revenues from the Company's cable operations. In 2001, as a result of a change
in its internal reporting structure, the Company's regional sports programming
networks are included in the Company's cable segment for all periods presented.
See Note 12 for a summary of the Company's financial data by business segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all entities that the Company directly or indirectly controls. All
significant intercompany accounts and transactions among consolidated entities
have been eliminated.
MANAGEMENT'S USE OF ESTIMATES
The Company prepares its financial statements in conformity with accounting
principles generally accepted in the United States which require management to
make estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates. Estimates are used when
accounting for certain items such as sales returns and allowances, allowances
for doubtful accounts, reserves for inventory obsolescence, investments and
derivative financial instruments, depreciation and amortization, asset
impairment, non-monetary transactions and contingencies.
FAIR VALUES
The Company has determined the estimated fair value amounts presented in
these consolidated financial statements using available market information and
appropriate methodologies. However, considerable judgment is required in
interpreting market data to develop the estimates of fair value. The
F-93
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
estimates presented in these consolidated financial statements are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts. The Company based these fair value estimates on pertinent information
available to management as of December 31, 2001 and 2000. The Company has not
comprehensively updated these fair value estimates for purposes of these
consolidated financial statements since such dates.
CASH EQUIVALENTS
Cash equivalents consist principally of commercial paper, money market
funds, US Government obligations and certificates of deposit with maturities of
three months or less when purchased. The carrying amounts of the Company's cash
equivalents approximate their fair values.
INVENTORIES -- ELECTRONIC RETAILING
Inventories are stated at the lower of cost or market. Cost is determined
by the average cost method, which approximates the first-in, first-out method.
INVESTMENTS
Investments consist principally of equity securities.
Investments in entities in which the Company has the ability to exercise
significant influence over the operating and financial policies of the investee
are accounted for under the equity method. Equity method investments are
recorded at original cost and adjusted periodically to recognize the Company's
proportionate share of the investees' net income or losses after the date of
investment, additional contributions made and dividends received. The
differences between the Company's recorded investments and its proportionate
interests in the book value of the investees' net assets are being amortized to
equity in net income or loss, primarily over a period of 20 years, which is
consistent with the estimated lives of the underlying assets.
Unrestricted publicly traded investments are classified as available for
sale or trading securities and recorded at their fair value. Unrealized gains or
losses resulting from changes in fair value between measurement dates for
available for sale securities are recorded as a component of other comprehensive
income. Unrealized gains or losses resulting from changes in fair value between
measurement dates for trading securities are recorded as a component of
investment income.
Restricted publicly traded investments and investments in privately held
companies are stated at cost, adjusted for any known diminution in value (see
Note 6).
PROPERTY AND EQUIPMENT
The Company records property and equipment at cost. Depreciation is
provided by the straight-line method over estimated useful lives as follows:
Buildings and improvements.................................. 4 - 40 years
Operating facilities........................................ 2 - 12 years
Other equipment............................................. 2 - 15 years
The Company capitalizes improvements that extend asset lives and expenses
other repairs and maintenance charges as incurred. The cost and related
accumulated depreciation applicable to assets sold
F-94
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
or retired are removed from the accounts and the gain or loss on disposition is
recognized as a component of depreciation expense.
The Company capitalizes the costs associated with the construction of cable
transmission and distribution facilities and new cable service installations.
Costs include all direct labor and materials, as well as certain indirect costs.
INTANGIBLE ASSETS
Goodwill is the excess of the acquisition cost of an acquired entity over
the fair value of the identifiable net assets acquired. The Company amortizes
goodwill over estimated useful lives ranging principally from 20 to 30 years.
Cable franchise operating rights represent the value attributed to
agreements with local authorities that allow access to homes in cable service
areas acquired in connection with a business combination. The Company
capitalizes these contractual rights and amortizes them over the term of the
related franchise agreements. Costs incurred by the Company in negotiating and
renewing franchise agreements are included in other intangible assets and are
amortized on a straight-line basis over the term of the franchise renewal
period, generally 10 to 15 years.
Other intangible assets consist principally of cable and satellite
television distribution rights, cable system franchise renewal costs,
contractual operating rights, computer software, programming costs and rights,
license acquisition costs and non-competition agreements. The Company
capitalizes these costs and amortizes them on a straight-line basis over the
term of the related agreements or estimated useful life.
Certain of the Company's content subsidiaries and QVC have entered into
multi-year affiliation agreements with various cable and satellite system
operators for carriage of their respective programming. The Company capitalizes
cable or satellite distribution rights and amortizes them on a straight-line
basis over the term of the related distribution agreements of 5 to 15 years.
See Note 3 for a discussion of the expected impact of adoption of Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations"
("SFAS No. 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS
No. 142").
VALUATION OF LONG-LIVED ASSETS
The Company periodically evaluates the recoverability of its long-lived
assets, including property and equipment and intangible assets, whenever events
or changes in circumstances indicate that the carrying amount may not be
recoverable. Such evaluations include analyses based on the cash flows generated
by the underlying assets, profitability information, including estimated future
operating results, trends or other determinants of fair value. If the total of
the expected future undiscounted cash flows is less than the carrying amount of
the asset, a loss is recognized for the difference between the fair value and
the carrying value of the asset. Unless presented separately, the loss is
included as a component of either depreciation expense or amortization expense,
as appropriate.
FOREIGN CURRENCY TRANSLATION
The Company translates assets and liabilities of its foreign subsidiaries,
where the functional currency is the local currency, into US dollars at the
December 31 exchange rate and records the related translation adjustments as a
component of other comprehensive income. The Company translates revenues and
expenses using average exchange rates prevailing during the year. Foreign
currency transaction gains and losses are included in other income (expense).
F-95
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
REVENUE RECOGNITION
The Company recognizes video, high-speed Internet, and programming revenues
as service is provided. The Company manages credit risk by disconnecting
services to cable and high-speed Internet customers who are delinquent. The
Company recognizes advertising sales revenue at estimated realizable values when
the advertising is aired. Revenues derived from other sources are recognized
when services are provided or events occur.
The Company recognizes net sales from electronic retailing at the time of
shipment to customers. The Company classifies all amounts billed to a customer
for shipping and handling within net sales from electronic retailing. The
Company's policy is to allow customers to return merchandise for up to thirty
days after date of shipment. An allowance for returned merchandise is provided
as a percentage of sales based on historical experience.
See Note 3 for a discussion of the expected impact of adoption of Emerging
Issues Task Force ("EITF") 01-9, "Accounting for Consideration Given to a
Customer (Including a Reseller of the Vendor's Products)" ("EITF 01-9") and EITF
01-14, "Income Statement Characterization of Reimbursements Received for
'Out-of-Pocket' Expenses Incurred" ("EITF 01-14").
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations, as permitted by SFAS No. 123,
"Accounting for Stock-Based Compensation." Compensation expense for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock. The Company records compensation expense for restricted stock
awards based on the quoted market price of the Company's stock at the date of
the grant and the vesting period. The Company records compensation expense for
stock appreciation rights based on the changes in quoted market prices of the
Company's stock or other determinants of fair value at the end of the year (see
Note 8).
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company charges to operations the estimated costs of retiree benefits
and benefits for former or inactive employees, after employment but before
retirement, during the years the employees provide services.
INVESTMENT INCOME
Investment income includes interest income, dividend income and gains, net
of losses, on the sales and exchanges of marketable securities and long-term
investments. The Company recognizes gross realized gains and losses using the
specific identification method. Investment income also includes unrealized gains
or losses on trading securities, mark to market adjustments on derivatives and
hedged items, and impairment losses resulting from adjustments to the net
realizable value of certain of the Company's investments (see Note 6).
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities and expected benefits of utilizing net
operating loss carryforwards. The impact on deferred taxes of changes in tax
rates and laws, if
F-96
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
any, applied to the years during which temporary differences are expected to be
settled, are reflected in the consolidated financial statements in the period of
enactment (see Note 9).
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments for a number of purposes.
The Company manages its exposure to fluctuations in interest rates by entering
into interest rate exchange agreements ("Swaps"), interest rate cap agreements
("Caps") and interest rate collar agreements ("Collars"). The Company manages
the cost of its share repurchases through the sale of equity put option
contracts ("Comcast Put Options"). The Company manages its exposure to
fluctuations in the value of certain of its investments by entering into equity
collar agreements ("Equity Collars") and equity put option agreements ("Equity
Put Options"). The Company makes investments in businesses, to some degree,
through the purchase of equity call option or call warrant agreements ("Equity
Warrants"). The Company has issued indexed debt instruments and entered into
prepaid forward sale agreements ("Prepaid Forward Sales") whose value, in part,
is derived from the market value of Sprint PCS common stock, and has also sold
call options on certain of its investments in equity securities ("Covered Call
Options") in order to monetize a portion of those investments.
Prior to the adoption on January 1, 2001 of SFAS No. 133, "Accounting for
Derivatives and Hedging Activities," as amended ("SFAS No. 133"), Swaps, Caps
and Collars were matched with either fixed or variable rate debt and periodic
cash payments were accrued on a settlement basis as an adjustment to interest
expense. Any premiums associated with these instruments were amortized over
their term and realized gains or losses as a result of the termination of the
instruments were deferred and amortized over the remaining term of the
underlying debt. Unrealized gains and losses as a result of these instruments
were recognized when the underlying hedged item was extinguished or otherwise
terminated.
Equity Collars, Equity Put Options and Equity Warrants were marked to
market on a current basis with the result included in accumulated other
comprehensive income in the Company's consolidated balance sheet. Covered Call
Options are marked to market on a current basis with the result included in
investment income in the Company's consolidated statement of operations.
On January 1, 2001, the Company adopted SFAS No. 133. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and hedging
activities. SFAS No. 133 requires that all derivative instruments, whether
designated in hedging relationships or not, be recorded on the balance sheet at
their fair values.
For derivative instruments designated and effective as fair value hedges,
such as the Company's Equity Collars, Equity Put Options and Fixed to Variable
Swaps, changes in the fair value of the derivative instrument are substantially
offset in the consolidated statement of operations by changes in the fair value
of the hedged item. For derivative instruments designated as cash flow hedges,
such as the Company's Variable to Fixed Swaps, the effective portion of any
hedge is reported in other comprehensive income until it is recognized in
earnings during the same period in which the hedged item affects earnings. The
ineffective portion of all hedges is recognized in current earnings each period.
Changes in the fair value of derivative instruments that are not designated as a
hedge are recorded each period in current earnings.
When a fair value hedge is terminated, sold, exercised or has expired, the
adjustment in the carrying amount of the fair value hedged item is deferred and
recognized into earnings when the hedged item is recognized in earnings. When a
hedged item is extinguished or sold, the adjustment in the carrying amount of
the hedged item is recognized in earnings. When hedged variable rate debt is
extinguished, the previously deferred effective portion of the hedge is written
off similar to debt extinguishment costs.
F-97
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
Subsequent to the adoption of SFAS No. 133, Equity Warrants are marked to
market on a current basis with the result included in investment income in the
Company's consolidated statement of operations.
Subsequent to the adoption of SFAS No. 133, derivative instruments embedded
in other contracts, such as the Company's indexed debt instruments and Prepaid
Forward Sale, are bifurcated into their host and derivative financial instrument
components. The derivative component is recorded at its estimated fair value in
the Company's consolidated balance sheet with changes in estimated fair value
recorded in investment income.
Proceeds from sales of Comcast Put Options are recorded in stockholders'
equity and an amount equal to the redemption price of the common stock is
reclassified from permanent equity to temporary equity. Subsequent changes in
the market value of Comcast Put Options are not recorded.
The Company periodically examines those instruments that have been entered
into by the Company to hedge exposure to interest rate and equity price risks to
ensure that the instruments are matched with underlying assets or liabilities,
reduce the Company's risks relating to interest rates or equity prices and,
through market value and sensitivity analysis, maintain a high correlation to
the risk inherent in the hedged item. For those instruments that do not meet the
above criteria, variations in their fair value are marked-to-market on a current
basis in the Company's consolidated statement of operations.
The Company does not hold or issue any derivative financial instruments for
trading purposes and is not a party to leveraged instruments (see Note 7). The
Company manages the credit risks associated with its derivative financial
instruments through the evaluation and monitoring of the creditworthiness of the
counterparties. Although the Company may be exposed to losses in the event of
nonperformance by the counterparties, the Company does not expect such losses,
if any, to be significant.
See Note 3 for a discussion of the impact of adoption of SFAS No. 133.
SALE OF STOCK BY A SUBSIDIARY OR EQUITY METHOD INVESTEE
Changes in the Company's proportionate share of the underlying equity of a
consolidated subsidiary or equity method investee which result from the issuance
of additional securities by such subsidiary or investee are recognized as gains
or losses in the Company's consolidated statement of operations unless gain
realization is not assured in the circumstances. Gains for which realization is
not assured are credited directly to additional capital.
SECURITIES LENDING TRANSACTIONS
The Company may enter into securities lending transactions pursuant to
which the Company requires the borrower to provide cash collateral equal to the
value of the loaned securities, as adjusted for any changes in the value of the
underlying loaned securities. Loaned securities for which the Company maintains
effective control are included in investments in the Company's consolidated
balance sheet.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to those classifications used in 2001.
F-98
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
3. RECENT ACCOUNTING PRONOUNCEMENTS
SFAS NO. 133, AS AMENDED
On January 1, 2001, the Company adopted SFAS No. 133. SFAS No. 133
establishes accounting and reporting standards for derivatives and hedging
activities. SFAS No. 133 requires that all derivative instruments be reported on
the balance sheet at their fair values.
Upon adoption of SFAS No. 133, the Company recognized as income a
cumulative effect of accounting change, net of related income taxes, of $384.5
million and a cumulative decrease in other comprehensive income, net of related
income taxes, of $127.0 million.
The increase in income consisted of a $400.2 million adjustment to record
the debt component of indexed debt at a discount from its value at maturity (see
Note 7) and $191.3 million principally related to the reclassification of gains
previously recognized as a component of accumulated other comprehensive income
on the Company's equity derivative instruments, net of related deferred income
taxes of $207.0 million (see Note 9).
The decrease in other comprehensive income consisted principally of the
reclassification of the gains noted above.
SFAS NO'S. 141 AND 142
The Financial Accounting Standards Board ("FASB") issued SFAS No. 141 and
SFAS No. 142 in June 2001. These statements address how intangible assets that
are acquired individually, with a group of other assets or in connection with a
business combination should be accounted for in financial statements upon and
subsequent to their acquisition. The new statements require that all business
combinations initiated after June 30, 2001 be accounted for using the purchase
method and establish specific criteria for the recognition of intangible assets
separately from goodwill.
The Company adopted SFAS No. 141 on July 1, 2001, as required by the new
statement. The adoption of SFAS No. 141 did not have a material impact on the
Company's financial condition or results of operations.
The Company adopted SFAS No. 142 on January 1, 2002, as required by the new
statement. Upon adoption, the Company will no longer amortize goodwill and other
indefinite lived intangible assets, which consist primarily of cable franchise
operating rights. The Company will be required to test its goodwill and
intangible assets that are determined to have an indefinite life for impairment
at least annually. Other than in the period of adoption or in those periods in
which the Company may record an asset impairment, the Company expects that the
adoption of SFAS No. 142 will result in increased income as a result of reduced
amortization expense.
The EITF of the FASB is expected to provide further guidance on certain
implementation issues related to the adoption of SFAS No. 142 as it relates to
identifiable intangible assets other than goodwill. Subject to further guidance
to be provided, based upon the Company's interpretation of SFAS No. 142, the
Company may record a charge as a cumulative effect of accounting change, net of
related deferred income taxes, in an amount not expected to exceed $1.5 billion
upon adoption of SFAS No. 142 on January 1, 2002.
Based on the Company's preliminary evaluation, the estimated effect of
adoption of SFAS No. 142 would have been to decrease amortization expense by
approximately $2.0 billion and to increase deferred income tax expense by
approximately $600 million for the year ended December 31, 2001 (See Note 14).
F-99
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
SFAS NO. 143
The FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," in June 2001. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. While the Company is currently
evaluating the impact the adoption of SFAS No. 143 will have on its financial
condition and results of operations, it does not expect such impact to be
material.
SFAS NO. 144
The FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," in August 2001. SFAS No. 144, which addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of, supercedes SFAS No. 121 and is effective
for fiscal years beginning after December 15, 2001. While the Company is
currently evaluating the impact the adoption of SFAS No. 144 will have on its
financial condition and results of operations, it does not expect such impact to
be material.
EITF 01-9
In November 2001, the EITF reached a consensus on EITF 01-9. EITF 01-9
requires, among other things, that consideration paid to customers should be
classified as a reduction of revenue unless certain criteria are met. Certain of
the Company's content subsidiaries have paid or may pay distribution fees to
cable television and satellite broadcast systems for carriage of their
programming. The Company currently classifies the amortization of these
distribution fees as expense in its consolidated statement of operations. Upon
adoption of EITF 01-9 on January 1, 2002, the Company will reclassify certain of
these distribution fees from expense to a revenue reduction for all periods
presented in its consolidated statement of operations. The change in
classification will have no impact on the Company's reported operating loss or
financial condition. The effect of the reclassification of cable television and
satellite broadcast distribution fees from expense to a reduction of revenue is
to decrease the amounts reported in the Company's consolidated statement of
operations as follows (in millions):
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999
------ ------ -----
Service revenues............................................ $35.8 $17.3 $4.6
Selling, general and administrative expense................. $ 4.7 $ 5.3 $4.2
Amortization expense........................................ $31.1 $12.0 $0.4
EITF 01-14
In November 2001, the FASB staff announced EITF Topic D-103, "Income
Statement Characterization of Reimbursements Received for 'Out-of-Pocket'
Expenses Incurred," which has subsequently been recharacterized as EITF 01-14.
EITF 01-14 requires that reimbursements received for out-of-pocket expenses
incurred be characterized as revenue in the statement of operations.
Under the terms of its franchise agreements, the Company is required to pay
up to 5% of its gross revenues derived from providing cable services to the
local franchising authority. The Company normally passes these fees through to
its cable subscribers. The Company currently classifies cable franchise fees
collected from its cable subscribers as a reduction of the related franchise fee
expense included within selling, general and administrative expenses in its
consolidated statement of operations.
F-100
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
EITF 01-14, by analogy, applies to franchise fees. Upon adoption of EITF
01-14 on January 1, 2002, the Company will reclassify franchise fees collected
from cable subscribers from a reduction of selling, general and administrative
expenses to a component of service revenues in its consolidated statement of
operations. The change in classification will have no impact on the Company's
reported operating income (loss) or financial condition. The effect of the
reclassification of cable franchise fees is to increase the amounts reported in
the Company's consolidated statement of operations as follows (in millions):
YEAR ENDED DECEMBER 31,
------------------------
2001 2000 1999
------ ------ ------
Service revenues........................................... $192.3 $152.3 $105.6
Selling, general and administrative expense................ $192.3 $152.3 $105.6
4. EARNINGS PER SHARE
Earnings for common stockholders per common share is computed by dividing
net income, after deduction of preferred stock dividends, when applicable, by
the weighted average number of common shares outstanding during the period on a
basic and diluted basis.
The following table reconciles the numerator and denominator of the
computations of diluted earnings for common stockholders per common share
("Diluted EPS") for the years presented.
YEAR ENDED DECEMBER 31,
----------------------------
2001 2000 1999
------ -------- --------
(AMOUNTS IN MILLIONS,
EXCEPT PER SHARE DATA)
Net income for common stockholders...................... $608.6 $1,998.0 $1,036.0
Preferred dividends..................................... 23.5 29.7
------ -------- --------
Net income for common stockholders used for Diluted
EPS................................................... $608.6 $2,021.5 $1,065.7
====== ======== ========
Basic weighted average number of common shares
outstanding........................................... 949.7 890.7 749.1
Dilutive securities:
Series A and B convertible preferred stock............ 1.0 42.5 44.0
Stock option and restricted stock plans............... 13.8 15.4 26.8
Put options on Class A Special Common Stock........... 0.1
------ -------- --------
Diluted weighted average number of common shares
outstanding........................................... 964.5 948.7 819.9
====== ======== ========
Diluted earnings for common stockholders per common
share................................................. $ 0.63 $ 2.13 $ 1.30
====== ======== ========
Comcast Put Options on a weighted average 0.2 million shares, 1.5 million
shares and 2.7 million shares of its Class A Special Common Stock (see Note 8)
were outstanding during the years ended December 31, 2001, 2000 and 1999,
respectively. Comcast Put Options outstanding during the years ended December
31, 2001 and 1999 were not included in the computation of Diluted EPS as the
Comcast Put Options' exercise price was less than the average market price of
the Company's Class A Special Common Stock during the periods.
In December 2000 and January 2001, the Company issued $1.478 billion
principal amount at maturity of Zero Coupon Convertible Debentures due 2020 (the
"Zero Coupon Debentures" -- see Note 7). The Zero Coupon Debentures may be
converted at any time prior to maturity if the closing sale price of the
Company's Class A Special Common Stock is greater than 110% of the accreted
conversion price (as defined). The Zero Coupon Debentures were excluded from the
computation of Diluted EPS in 2001 and
F-101
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
2000 as the weighted average closing sale price of the Company's Class A Special
Common Stock was not greater than 110% of the accreted conversion price.
5. ACQUISITIONS AND OTHER SIGNIFICANT EVENTS
AGREEMENT AND PLAN OF MERGER WITH AT&T BROADBAND
On December 19, 2001, the Company entered into an Agreement and Plan of
Merger with AT&T Corp. ("AT&T") pursuant to which the Company agreed to a
transaction which will result in the combination of the Company and a holding
company of AT&T's broadband business ("AT&T Broadband") that AT&T will spin off
to its shareholders immediately prior to the combination. As of December 31,
2001, AT&T Broadband served approximately 13.6 million subscribers. Under the
terms of the transaction, the combined company will issue approximately 1.235
billion shares of its voting common stock to AT&T Broadband shareholders in
exchange for all of AT&T's interests in AT&T Broadband, and approximately 115
million shares of its common stock to Microsoft Corporation ("Microsoft") in
exchange for AT&T Broadband shares that Microsoft will receive immediately prior
to the completion of the transaction for settlement of their $5 billion
aggregate principal amount in quarterly income preferred securities. The
combined company will also assume or incur approximately $20 billion of AT&T
Broadband debt. For each share of a class of common stock of Comcast that they
hold at the time of the merger, each Comcast shareholder will receive one share
of a corresponding class of stock of the combined company. The Company expects
that the transaction will qualify as tax-free to both the Company and to AT&T.
The Company will account for the transaction as an acquisition under the
purchase method of accounting, with the Company as the acquiring entity. The
identification of the Company as the acquiring entity was made after careful
consideration of all facts and circumstances, as follows:
Voting Rights in the New Combined Company. Former AT&T shareholders
will own approximately 53.7% of the combined company's economic interest
and approximately 60.6% of the combined company's voting interest following
the merger. Microsoft will own shares representing approximately 5.2% of
the combined company's economic interest and 4.95% of the combined
company's voting interest following the merger. No individual former AT&T
shareholder will have any significant ownership or voting interest
following the merger. Brian L. Roberts, the Company's controlling
shareholder and President ("Mr. Roberts"), either directly or through his
control of a family holding company, will own an approximately 33.34%
voting interest in the combined company following the merger (including a
33.33% non-dilutable voting interest through ownership of the Class B
common stock of the combined company), and an approximately .8% economic
interest. Mr. Roberts will hold the largest minority voting interest in the
combined company. The next largest voting interest held by an individual
shareholder will be 4.95%, held by Microsoft. Under the governing documents
of the combined company, as a result of his ownership of the Class B stock,
Mr. Roberts will have the right to approve any merger involving the
combined company or any other transaction in which any other person would
own more than 10 percent of the stock of the combined company, the right to
approve any issuances of Class B stock, and any charter amendments or other
actions that would limit the rights of the Class B stock.
Governance Arrangements Relating to the Board of Directors. The
initial Board of the combined company will have twelve members, five of
whom will be designated by the Company from its existing Board, five of
whom will be designated by AT&T from its existing Board, and two of whom
will be jointly designated by the Company and AT&T and will be independent
persons. Except for pre-approved designees, the individuals designated by
each of the Company and AT&T will be mutually agreed upon by the Company
and AT&T. Pursuant to the terms of the merger agreement,
F-102
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
existing Company directors Ralph J. Roberts, Mr. Roberts, Sheldon M.
Bonovitz, Julian A. Brodsky and Decker Anstrom have been pre-approved as
Company director designees of the combined company and existing AT&T
director and Chairman C. Michael Armstrong ("Mr. Armstrong") is the sole
pre-approved AT&T director designee. The remaining four AT&T designees are
subject to the approval of the Company. All of the initial director
designees will hold office until the 2004 annual meeting of the combined
company shareholders. After this initial term, the entire Board will be
elected annually. During the period before the 2004 annual meeting, Mr.
Roberts will be the chairman of the Board committee that nominates the
slate of directors for the combined company (the "Directors Nominating
Committee") if he is the Chairman or the CEO of the combined company. The
remaining four members of the Directors Nominating Committee will consist
of one director designee who is an independent director selected by the
Company's director designees, and three independent directors selected by
the Company's director designees from the AT&T director designees and the
Company/AT&T joint director designees. Since the initial director designees
will hold office until the 2004 annual meeting, the Directors Nominating
Committee would be expected to act only in order to fill vacancies that may
occur in director positions prior to that meeting. After the 2004 annual
meeting of shareholders, Mr. Roberts will continue to be the chairman of
the Directors Nominating Committee of the combined company. The remaining
four members of the Directors Nominating Committee will be selected by Mr.
Roberts from among the combined company's independent directors.
Nominations of the Directors Nominating Committee will be submitted
directly to the shareholders without any requirement of Board approval or
ratification.
Governance Arrangements Relating to Management. The combined company
will have an Office of the Chairman, comprised of the Chairman of the Board
and the CEO, from the closing of the merger until the earlier to occur of:
(i) the 2005 annual meeting of the shareholders, and (ii) the date on which
Mr. Armstrong ceases to be Chairman of the Board. The Office of the
Chairman will be the combined company'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. Mr. Armstrong,
AT&T's Chairman of the Board, will be Chairman of the Board of the combined
company. Mr. Armstrong will serve as Chairman of the Board until the 2005
annual meeting of shareholders, but he will serve as non-executive Chairman
of the Board after April 1, 2004 and until the 2005 annual meeting of AT&T
Comcast shareholders. After the 2005 annual meeting of shareholders, or if
Mr. Armstrong ceases to serve as Chairman of the Board prior to that date,
Mr. Roberts will become the Chairman of the Board of the combined company.
Removal of the Chairman of the Board will require the vote of at least 75%
of the entire Board until the earlier to occur of: (i) the date on which
neither Mr. Armstrong nor Mr. Roberts is Chairman of the Board, and (ii)
the sixth anniversary of the 2004 annual meeting of shareholders. Mr.
Roberts will be the CEO of the combined company. Mr. Roberts will also be
President of the combined company for as long as he is the CEO. The CEO's
powers and responsibilities will include: (i) the supervision and
management of the combined company's business and operations, (ii) all
matters related to officers and employees, including hiring and
termination, (iii) all rights and powers typically exercised by the chief
executive officer and president of a corporation, and (iv) the authority to
call special meetings of the combined company Board. Removal of Mr. Roberts
as CEO will require the vote of at least 75% of the entire Board until the
earlier to occur of: (i) the date on which Mr. Roberts ceases to be CEO,
and (ii) the sixth anniversary of the 2004 annual meeting of the combined
company shareholders. Under the terms of the merger agreement, Mr. Roberts
has the right to fill all senior management positions of the combined
company after consultation with Mr. Armstrong.
F-103
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
Other Factors. The Company made an unsolicited offer to purchase all
of AT&T Broadband. Subsequent to the Company's offer, AT&T solicited bids
from other potential purchasers.
The headquarters of the combined company will be in Philadelphia,
Pennsylvania, the current headquarters of the Company. An executive office will
be maintained in the New York City metropolitan area until at least April 2005.
The Company's current investment in shares of AT&T common stock, to the
extent still held by the Company at the time of the AT&T Broadband spin-off and
merger, will be exchanged into AT&T shares (representing its Consumer Services
and Business Services Groups). Therefore, the Company will continue to have an
investment in the "selling company." Conversely, AT&T Broadband's current
investment in the Company will either be retired to treasury after the merger or
used to settle related debt.
* * * * *
Notwithstanding that the former AT&T Broadband shareholders will, in the
aggregate, receive the majority of the voting common stock of the combined
company, the Company believes that this fact is outweighed by the totality of
the other facts and circumstances described above, with the most significance
being given to Mr. Roberts' non-dilutable minority voting interest, Mr. Roberts'
role on the Nominating Committee of the Board of Directors, Mr. Roberts position
as CEO and President, and Mr. Roberts' right to appoint other members of senior
management.
The transaction is subject to customary closing conditions and shareholder,
regulatory and other approvals. The Company expects to close the transaction by
the end of 2002.
AT HOME SERVICES
On September 28, 2001, At Home Corporation ("At Home"), the Company's
provider of high-speed Internet services, filed for protection under Chapter 11
of the U.S. Bankruptcy Code. In October 2001, the Company amended its agreement
with At Home to continue service to the Company's existing and new subscribers
during October and November 2001. The Company agreed to be charged a higher rate
than it had incurred under its previous agreement. On December 3, 2001, the
Company and At Home reached a definitive agreement, approved by the Bankruptcy
Court, pursuant to which the Company paid $160 million to At Home and At Home
agreed to continue to provide high-speed Internet services to existing and new
subscribers through February 28, 2002. In December 2001, the Company began to
transfer its high-speed Internet subscribers from the At Home network to the
Company's new Company-owned and managed network. The Company completed this
transition in February 2002.
In the fourth quarter of 2001, the Company recognized $139.5 million of net
incremental expenses incurred in the continuation of service to and transition
of the Company's high-speed Internet subscribers from At Home's network to the
Company's own network. This charge is included in operating expenses in the
Company's consolidated statement of operations.
ACQUISITION OF OUTDOOR LIFE NETWORK
On October 30, 2001, the Company acquired from Fox Entertainment Group,
Inc. ("Fox Entertainment"), a subsidiary of The News Corporation Limited ("News
Corp.") the approximate 83.2% interest in OLN not previously owned by the
Company. OLN is a 24-hour network devoted exclusively to adventure and the
outdoor lifestyle with distribution to approximately 41 million subscribers. The
Company made the acquisition to increase its investment in programming content.
The estimated fair value of the additional interest of OLN acquired by the
Company as of the closing date of the transaction was approximately $512
million, substantially all of which was allocated to affiliation agreements and
goodwill in connection with the preliminary purchase price allocation. Upon
closing of the acquisition, the Company
F-104
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
exchanged its 14.5% interest in the Speedvision Network ("SVN"), together with a
previously made loan, for Fox Entertainment's interest in OLN. In connection
with the exchange of its interest in SVN, the Company recorded to other income a
pre-tax gain of $106.7 million, representing the difference between the
estimated fair value of the Company's interest in SVN as of the closing date of
the transaction and the Company's cost basis in SVN. The Company no longer owns
any interest in SVN and now owns 100% of OLN.
BALTIMORE, MARYLAND SYSTEM ACQUISITION
On June 30, 2001, the Company acquired the cable system serving
approximately 112,000 subscribers in Baltimore City, Maryland from AT&T for
$518.7 million in cash. The purchase price is subject to adjustment.
ACQUISITION OF CONTROLLING INTEREST IN THE GOLF CHANNEL
On June 8, 2001, the Company acquired the approximate 30.8% interest in TGC
held by Fox Entertainment. In addition, Fox Entertainment and News Corp. agreed
to a five-year non-competition agreement. The Company paid aggregate
consideration of $364.9 million in cash. The Company previously accounted for
TGC under the equity method. The Company now owns approximately 91.0% of TGC and
consolidates TGC.
AT&T CABLE SYSTEMS ACQUISITION
On April 30, 2001, the Company acquired cable systems serving approximately
585,000 subscribers from AT&T in exchange for approximately 63.9 million shares
of AT&T common stock then held by the Company. The market value of the AT&T
shares was approximately $1.423 billion, based on the price of the AT&T common
stock on the closing date of the transaction. The transaction is expected to
qualify as tax free to both the Company and to AT&T.
HOME TEAM SPORTS ACQUISITION
On February 14, 2001, the Company acquired Home Team Sports (now known as
CSN Mid-Atlantic), a regional sports programming network with distribution to
approximately 4.8 million homes in the Mid-Atlantic region, from Viacom, Inc.
("Viacom") and Affiliated Regional Communications, Ltd. (an affiliate of Fox
Cable Network Services, LLC ("Fox")). The Company also agreed to increase the
distribution of certain of Viacom's and Fox's programming networks on certain of
the Company's cable systems. The estimated fair value of Home Team Sports as of
the closing date of the acquisition was $240.0 million.
ADELPHIA CABLE SYSTEMS EXCHANGE
On January 1, 2001, the Company completed its cable systems exchange with
Adelphia Communications Corporation ("Adelphia"). The Company received cable
systems serving approximately 445,000 subscribers from Adelphia and Adelphia
received certain of the Company's cable systems serving approximately 441,000
subscribers. The Company recorded to other income a pre-tax gain of $1.199
billion, representing the difference between the estimated fair value of $1.799
billion as of the closing date of the transaction and the Company's cost basis
in the systems exchanged.
AT&T CABLE SYSTEMS EXCHANGE
On December 31, 2000, the Company completed its cable systems exchange with
AT&T. The Company received cable systems serving approximately 770,000
subscribers from AT&T and AT&T received certain of the Company's cable systems
serving approximately 700,000 subscribers. The Company
F-105
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
recorded to other income a pre-tax gain of $1.711 billion, representing the
difference between the estimated fair value of $2.840 billion as of the closing
date of the transaction and the Company's cost basis in the systems exchanged.
ACQUISITION OF PRIME COMMUNICATIONS LLC
In December 1998, the Company agreed to invest in Prime Communications LLC
("Prime"), a cable communications company serving approximately 406,000
subscribers. Pursuant to the terms of this agreement, in December 1998 the
Company acquired from Prime a $50.0 million 12.75% subordinated note due 2008
issued by Prime. In July 1999, the Company made a loan to Prime in the form of a
$733.5 million 6% ten year note, convertible into 90% of the equity of Prime.
The Company made an additional $70.0 million in loans to Prime (on the same
terms as the original loan). In August 2000, the note, plus accrued interest of
$51.7 million on the note and the loans, was converted and the owners of Prime
sold their remaining 10% equity interest in Prime to the Company for $87.7
million. As a result, the Company owns 100% of Prime and has assumed management
control of Prime's operations. Upon closing, the Company assumed and immediately
repaid $532.0 million of Prime's debt with proceeds from borrowings under
existing credit facilities.
ACQUISITION OF JONES INTERCABLE, INC.
In April 1999, the Company acquired a controlling interest in Jones
Intercable, Inc. ("Jones Intercable"), a cable communications company serving
approximately 1.1 million subscribers, for aggregate consideration of $706.3
million in cash. In June 1999, the Company purchased an additional 1.0 million
shares of Jones Intercable Class A Common Stock for $50.0 million in cash in a
private transaction. The Company contributed its interest in Jones Intercable to
Comcast Cable Communications, Inc. ("Comcast Cable"), an indirect wholly owned
subsidiary of the Company.
In March 2000, the Jones Intercable shareholders approved a merger
agreement pursuant to which the Jones Intercable shareholders, including Comcast
Cable, received 1.4 shares of the Company's Class A Special Common Stock in
exchange for each share of Jones Intercable Class A Common Stock and Common
Stock (the "Jones Merger") and Jones Intercable was merged with and into a
wholly owned subsidiary of the Company. In connection with the closing of the
Jones Merger, the Company issued approximately 58.9 million shares of its Class
A Special Common Stock to the Jones Intercable shareholders, including
approximately 23.3 million shares to a subsidiary of the Company and 35.6
million shares with a value of $1.727 billion to the public shareholders. As
required under accounting principles generally accepted in the United States,
the shares held by the subsidiary of the Company are presented as issued but not
outstanding (held in treasury) in the Company's December 31, 2001 and 2000
consolidated balance sheet.
ACQUISITION OF CALPERS' INTEREST IN JOINTLY OWNED CABLE PROPERTIES
In February 2000, the Company acquired the California Public Employees
Retirement System's ("CalPERS") 45% interest in Comcast MHCP Holdings, L.L.C.
("Comcast MHCP"), formerly a 55% owned consolidated subsidiary of the Company
which serves subscribers in Michigan, New Jersey and Florida. As a result, the
Company owns 100% of Comcast MHCP. The consideration was $750.0 million in cash.
ACQUISITION OF LENFEST COMMUNICATIONS, INC.
In January 2000, the Company acquired Lenfest Communications, Inc.
("Lenfest"), a cable communications company serving approximately 1.1 million
subscribers primarily in the Philadelphia area
F-106
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
from AT&T and the other Lenfest stockholders for approximately 120.1 million
shares of the Company's Class A Special Common Stock with a value of $6.014
billion (the "Lenfest Acquisition"). In connection with the Lenfest Acquisition,
the Company assumed approximately $1.326 billion of debt.
CONSOLIDATION OF COMCAST CABLEVISION OF GARDEN STATE, L.P.
Comcast Cablevision of Garden State, L.P. ("Garden State Cable") (formerly
Garden State Cablevision L.P.), a cable communications company serving
approximately 216,000 subscribers in New Jersey, is a partnership which was
owned 50% by Lenfest and 50% by the Company. The Company had accounted for its
interest in Garden State Cable under the equity method. As a result of the
Lenfest Acquisition, the Company owns 100% of Garden State Cable. As such, the
operating results of Garden State Cable have been included in the Company's
consolidated statement of operations from the date of the Lenfest Acquisition.
ACQUISITION OF GREATER PHILADELPHIA CABLEVISION, INC.
In June 1999, the Company acquired Greater Philadelphia Cablevision, Inc.
("Greater Philadelphia"), a cable communications company serving approximately
79,000 subscribers in Philadelphia from Greater Media, Inc. for approximately
8.5 million shares of the Company's Class A Special Common Stock with a value of
$291.7 million.
The acquisitions completed by the Company during the three years in the
period ended December 31, 2001 were accounted for under the purchase method of
accounting. As such, the Company's results include the operating results of the
acquired businesses from the dates of acquisition. During the fourth quarter of
2001, the Company recorded the final purchase price allocation related to the
Company's cable systems exchange with AT&T and related to the Company's
acquisitions of Home Team Sports and TGC. The allocation of the purchase price
for the other 2001 acquisitions and the cable systems exchange with Adelphia
made by the Company is preliminary pending completion of final appraisals. The
Company's cable systems exchanges with Adelphia and AT&T and certain of the
Company's acquisitions had no significant impact on the Company's consolidated
statement of cash flows due to their noncash nature (see Note 10).
UNAUDITED PRO FORMA INFORMATION
The following unaudited pro forma information has been presented as if the
acquisitions and cable systems exchanges made by the Company in 2001 each
occurred on January 1, 2000, the acquisitions and cable systems exchanges made
by the Company in 2000 each occurred on January 1, 1999, and the acquisitions
made by the Company in 1999 each occurred on January 1, 1998. This information
is based on historical results of operations, adjusted for acquisition costs,
and, in the opinion of management, is not necessarily indicative of what the
results would have been had the Company operated the entities acquired since
such dates.
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(AMOUNTS IN MILLIONS,
EXCEPT PER SHARE DATA)
Revenues............................................... $9,926.9 $9,012.2 $7,566.5
Income before extraordinary items and cumulative effect
of accounting change................................. $ 150.2 $1,652.3 $ 252.2
Net income............................................. $ 533.2 $1,628.7 $ 201.2
Diluted EPS............................................ $ 0.55 $ 1.68 $ 0.21
F-107
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
SALE OF COMCAST CELLULAR CORPORATION
In July 1999, the Company sold Comcast Cellular Corporation ("Comcast
Cellular") to SBC Communications, Inc. for $361.1 million in cash and the
assumption of $1.315 billion of Comcast Cellular debt, and recognized a gain on
the sale of $355.9 million, net of income tax expense. The results of operations
of Comcast Cellular have been presented as a discontinued operation in
accordance with APB Opinion No. 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
During the year ended December 31, 1999, the Company recognized losses from
discontinued operations of $20.1 million.
OTHER INCOME
In August 2000, the Company obtained the right to exchange its At Home
Series A Common Stock with AT&T and waived certain of its At Home Board level
and shareholder rights under a stockholders agreement (the "Share Exchange
Agreement" -- see Note 6). The Company also agreed to cause its existing
appointee to the At Home Board of Directors to resign. In connection with the
transaction, the Company recorded to other income a pre-tax gain of $1.045
billion, representing the estimated fair value of the investment as of the
closing date.
In August 2000, the Company exchanged all of the capital stock of a wholly
owned subsidiary which held certain wireless licenses for approximately 3.2
million shares of AT&T common stock. In connection with the exchange, the
Company recorded to other income a pre-tax gain of $98.1 million, representing
the difference between the fair value of the AT&T shares received of $100.0
million and the Company's cost basis in the subsidiary.
In May 1999, the Company received a $1.5 billion termination fee as
liquidated damages from MediaOne Group, Inc. ("MediaOne") as a result of
MediaOne's termination of its Agreement and Plan of Merger with the Company
dated March 1999. The termination fee, net of transaction costs, was recorded to
other income in the Company's consolidated statement of operations.
6. INVESTMENTS
DECEMBER 31,
---------------------
2001 2000
--------- ---------
(DOLLARS IN MILLIONS)
Fair value method
AT&T Corp................................................. $1,514.9 $1,174.3
Sprint Corp. PCS Group.................................... 2,109.5 2,149.8
Other..................................................... 136.1 1,873.0
-------- --------
3,760.5 5,197.1
Cost method................................................. 155.2 128.4
Equity method............................................... 386.7 396.1
-------- --------
Total investments...................................... 4,302.4 5,721.6
Less, current investments................................... 2,623.2 3,059.7
-------- --------
Non-current investments..................................... $1,679.2 $2,661.9
======== ========
F-108
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
FAIR VALUE METHOD
The Company holds unrestricted equity investments in certain publicly
traded companies, which it accounts for as available for sale or trading
securities. The unrealized pre-tax gains on these investments as of December 31,
2001 and 2000 of $280.3 million and $707.1 million, respectively, have been
reported in the Company's consolidated balance sheet principally as a component
of other comprehensive income, net of related deferred income taxes of $95.3
million and $240.0 million, respectively.
The cost, fair value and gross unrealized gains and losses related to the
Company's available for sale securities are as follows:
DECEMBER 31,
---------------------
2001 2000
--------- ---------
(DOLLARS IN MILLIONS)
Cost........................................................ $1,355.0 $4,490.0
Gross unrealized gains...................................... 283.2 1,887.6
Gross unrealized losses..................................... (2.9) (1,180.5)
-------- --------
Fair value.................................................. $1,635.3 $5,197.1
======== ========
In June 2001, the Company and AT&T entered into an Amended and Restated
Share Issuance Agreement (the "Share Issuance Agreement"). AT&T issued to the
Company approximately 80.3 million unregistered shares of AT&T common stock and
the Company agreed to settle its right under the Share Exchange Agreement (see
Note 5 -- Other Income) to exchange an aggregate 31.2 million At Home shares and
warrants held by the Company for shares of AT&T common stock. The Company has
registration rights, subject to customary restrictions, which allow the Company
to require AT&T to register the AT&T shares received. Under the terms of the
Share Issuance Agreement, the Company retained the At Home shares and warrants
held by it. The Company recorded to investment income a pre-tax gain of $296.3
million, representing the fair value of the increased consideration received by
the Company to settle its right under the Share Exchange Agreement.
In August 2001, the Company entered into a ten year Prepaid Forward Sale of
4.0 million shares of Sprint PCS common stock held by the Company with a fair
value of approximately $98 million and the Company received $78.3 million in
cash. At maturity, the counterparty is entitled to receive between 2.5 million
and 4.0 million shares of Sprint PCS common stock, or an equivalent amount of
cash at the Company's option, based upon the market value of Sprint PCS common
stock at that time. The Company split the Prepaid Forward Sale into its
liability and derivative components and recorded both components of the Prepaid
Forward Sale obligation in other long-term liabilities. The Company records the
change in the fair value of the derivative component and the accretion of the
liability component to investment income.
F-109
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
INVESTMENT INCOME
Investment income includes the following (in millions):
YEAR ENDED DECEMBER 31,
--------------------------
2001 2000 1999
-------- ------ ------
Interest and dividend income.............................. $ 76.5 $171.6 $172.5
Gains on sales and exchanges of investments, net.......... 485.2 886.7 510.6
Investment impairment losses.............................. (972.4) (74.4) (35.5)
Reclassification of unrealized gains...................... 1,330.3
Unrealized gain on Sprint PCS common stock................ 284.4
Mark to market adjustments on derivatives related to
Sprint PCS common stock................................. (184.6)
Mark to market adjustments on derivatives and hedged
items................................................... 42.3
Settlement of call options................................ (18.1)
-------- ------ ------
Investment income.................................... $1,061.7 $983.9 $629.5
======== ====== ======
The investment impairment loss for the year ended December 31, 2001 relates
principally to an other than temporary decline in the Company's investment in
AT&T, a portion of which was exchanged on April 30, 2001 (see Note 5 -- AT&T
Cable Systems Acquisition).
During the year ended December 31, 2001, the Company wrote-off its
investment in At Home common stock based upon a decline in the investment that
was considered other than temporary. In connection with the realization of this
impairment loss, the Company reclassified to investment income the accumulated
unrealized gain of $237.9 million on the Company's investment in At Home common
stock which was previously recorded as a component of accumulated other
comprehensive income. The Company recorded this accumulated unrealized gain
prior to the Company's designation of its right under the Share Exchange
Agreement as a hedge of the Company's investment in the At Home common stock
(see Note 5 -- Other Income).
The Company reclassified its investment in Sprint PCS from an available for
sale security to a trading security in connection with the adoption of SFAS No.
133. As a result, the Company reclassified to investment income the accumulated
unrealized gain of $1.092 billion on the Company's investment in Sprint PCS
which was previously recorded as a component of accumulated other comprehensive
income.
EQUITY PRICE RISK
During 1999, the Company entered into Equity Collars covering $1.365
billion notional amount of the Company's Sprint PCS common stock, which are
accounted for at fair value. The Equity Collars limit the Company's exposure to
and benefits from price fluctuations in the underlying Sprint PCS common stock.
During 2001, $483.7 million notional amount of Equity Collars matured and the
Company sold or entered into Prepaid Forward Sales of the related Sprint PCS
common stock. The remaining $881.0 million notional amount of Equity Collars
mature between 2002 and 2003. As the Company had accounted for the Equity
Collars as a hedge, changes in the value of the Equity Collars were
substantially offset by changes in the value of the Sprint PCS common stock
which was also marked-to-market through accumulated other comprehensive income
in the Company's consolidated balance sheet through December 31, 2000.
F-110
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
EQUITY METHOD
The Company records its proportionate interests in the net income (loss) of
certain of its equity method investees in arrears. The Company's recorded
investments exceed its proportionate interests in the book value of the
investees' net assets by $188.7 million as of December 31, 2001 (principally
related to the Company's investment in Susquehanna Cable). Such excess is being
amortized to equity in net income or loss, over a period of twenty years, which
is consistent with the estimated lives of the underlying assets. The original
cost of investments accounted for under the equity method totaled $479.8 million
and $506.5 million as of December 31, 2001 and 2000, respectively. Upon adoption
of SFAS No. 142, the Company will no longer amortize this excess but rather will
continue to test such excess for impairment in accordance with APB Opinion 18,
"The Equity Method of Accounting for Investments in Common Stock."
The Company does not have any additional significant contractual
commitments with respect to any of its investments. However, to the extent the
Company does not fund its investees' capital calls, it exposes itself to
dilution of its ownership interests.
COST METHOD
It is not practicable to estimate the fair value of the Company's
investments in privately held companies, accounted for under the cost method,
due to a lack of quoted market prices.
7. LONG-TERM DEBT
DECEMBER 31,
---------------------
2001 2000
--------- ---------
(IN MILLIONS)
Commercial Paper............................................ $ 397.3 $ 1,323.5
Notes payable to banks due in installments through 2009..... 1,222.7 1,751.4
9 5/8% Senior notes, due 2002............................... 200.0 200.0
8 1/8% Senior notes, due 2004............................... 320.4 299.9
8 3/8% Senior notes, due 2005............................... 697.0 696.3
6 3/8% Senior notes, due 2006............................... 511.3
8 3/8% Senior notes, due 2007............................... 597.5 597.2
8 7/8% Senior notes, due 2007............................... 249.1 249.0
6.20% Senior notes, due 2008................................ 798.4 798.2
7 5/8% Senior notes, due 2008............................... 206.1 197.1
7 5/8% Senior notes, due 2008............................... 147.7 147.4
6 7/8% Senior notes, due 2009............................... 751.5
6 3/4% Senior notes, due 2011............................... 993.1
7 1/8% Senior notes, due 2013............................... 748.4
8 7/8% Senior notes, due 2017............................... 545.9 545.8
8 1/2% Senior notes, due 2027............................... 249.6 249.6
10 1/4% Senior subordinated debentures, due 2001............ 100.4
10 1/2% Senior subordinated debentures, due 2006............ 133.0 123.8
8 1/4% Senior subordinated debentures, due 2008............. 154.3 149.1
10 5/8% Senior subordinated debentures, due 2012............ 247.8 257.0
F-111
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
DECEMBER 31,
---------------------
2001 2000
--------- ---------
(IN MILLIONS)
Zero Coupon Convertible Debentures, due 2020................ 1,096.4 1,002.0
7% Disney Notes, due 2007................................... 132.8 132.8
ZONES at principal amount, due 2029......................... 1,612.6 1,806.8
Other, including capital lease obligations.................. 188.9 184.0
--------- ---------
12,201.8 10,811.3
Less current portion........................................ 460.2 293.9
--------- ---------
$11,741.6 $10,517.4
========= =========
Maturities of long-term debt outstanding as of December 31, 2001 for the
four years after 2002 are as follows (in millions):
2003....................................................... $ 73.2
2004....................................................... 331.0
2005....................................................... 2,026.2
2006....................................................... 653.2
SENIOR NOTES OFFERINGS
During 2001, Comcast Cable sold an aggregate of $3.0 billion of public
debt. The Company used substantially all of the net proceeds from the offerings
to repay a portion of the amounts outstanding under Comcast Cable's commercial
paper program and revolving credit facility, and to fund acquisitions.
ZERO COUPON CONVERTIBLE DEBENTURES
In December 2000, the Company issued $1.285 billion principal amount at
maturity of Zero Coupon Debentures for proceeds of $1.002 billion. In January
2001, the Company issued an additional $192.8 million principal amount at
maturity of Zero Coupon Debentures for proceeds of $150.3 million. The Company
used substantially all of the net proceeds from the offering to repay a portion
of the amounts outstanding under Comcast Cable's commercial paper program and
revolving credit facility.
The Zero Coupon Debentures have a yield to maturity of 1.25%, computed on a
semi-annual bond equivalent basis. The Zero Coupon Debentures may be converted,
subject to certain restrictions, into shares of the Company's Class A Special
Common Stock at the option of the holder at a conversion rate of 14.2566 shares
per $1,000 principal amount at maturity, representing an initial conversion
price of $54.67 per share. The Zero Coupon Debentures are senior unsecured
obligations. The Company may redeem for cash all or part of the Zero Coupon
Debentures on or after December 19, 2005.
On December 17, 2001, the Company amended the terms of the Zero Coupon
Debentures to permit holders of the Zero Coupon Debentures to require the
Company to repurchase the Zero Coupon Debentures on December 19, 2002.
Holders may require the Company to repurchase the Zero Coupon Debentures on
December 19, 2001, 2002, 2003, 2005, 2010 and 2015. The Company may choose to
pay the repurchase price for 2001, 2002, 2003 and 2005 repurchases in cash or
shares of its Class A Special Common Stock or a combination of cash and shares
of its Class A Special Common Stock. The Company may pay the repurchase price
for the 2010 and 2015 repurchases in cash only.
F-112
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
On December 19, 2001, holders of an aggregate of $70.3 million accreted
value of Zero Coupon Debentures exercised their right to have the Company
repurchase their Zero Coupon Debentures for cash. The Company financed the
redemption with available cash.
Holders may surrender the Zero Coupon Debentures for conversion at any time
prior to maturity if the closing price of the Company's Class A Special Common
Stock is greater than 110% of the accreted conversion price for at least 20
trading days of the 30 trading days prior to conversion.
Amounts outstanding under the Zero Coupon Debentures are classified as
long-term in the Company's consolidated balance sheet as of December 31, 2001
and 2000 as the Company has both the ability and the intent to refinance the
Zero Coupon Debentures on a long-term basis with amounts available under the
Comcast Cable Revolver (see "Commercial Paper" below) in the event holders of
the Zero Coupon Debentures exercise their rights to require the Company to
repurchase the Zero Coupon Debentures in December 2002.
COMMERCIAL PAPER
The Company's senior bank credit facility consists of a $2.25 billion,
five-year revolving credit facility and a $2.25 billion, 364-day revolving
credit facility (together, the "Comcast Cable Revolver"). The 364-day revolving
credit facility supports Comcast Cable's commercial paper program. Amounts
outstanding under the commercial paper program are classified as long-term in
the Company's consolidated balance sheet as of December 31, 2001 and 2000 as the
Company has both the ability and the intent to refinance these obligations, if
necessary, on a long-term basis with amounts available under the Comcast Cable
Revolver.
ZONES
At maturity, holders of the Company's 2.0% Exchangeable Subordinated
Debentures due 2029 (the "ZONES") are entitled to receive in cash an amount
equal to the higher of the principal amount of the ZONES or the market value of
Sprint PCS Stock. Prior to maturity, each ZONES is exchangeable at the holder's
option for an amount of cash equal to 95% of the market value of Sprint PCS
Stock.
Prior to the adoption of SFAS No. 133 on January 1, 2001, the Company
accounted for the ZONES as an indexed debt instrument since the maturity value
is dependent upon the fair value of Sprint PCS Stock. Therefore, the carrying
value of the ZONES was adjusted each balance sheet date to reflect the fair
value of the underlying Sprint PCS Stock with the change included in income
(expense) related to indexed debt in the Company's consolidated statement of
operations. As of December 31, 2001, the number of Sprint PCS shares held by the
Company exceeded the number of ZONES outstanding.
Upon adoption of SFAS No. 133, the Company split the ZONES into their
derivative and debt components. In connection with the adoption of SFAS No. 133,
the Company recorded the debt component of the ZONES at a discount from its
value at maturity resulting in a reduction in the outstanding balance of the
ZONES of $400.2 million (see Note 3).
The Company recorded the increase in the fair value of the ZONES (see Note
6) and the increase in the carrying value of the debt component of the ZONES as
follows (in millions):
YEAR ENDED
DECEMBER 31,
2001
------------
Increase in derivative component to investment expense...... $183.8
Increase in debt component to interest expense.............. $ 22.2
F-113
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
EXTRAORDINARY ITEMS
Extraordinary items consist of unamortized debt issue costs and debt
extinguishment costs, net of related tax benefits, expensed principally in
connection with the redemptions and refinancings of certain indebtedness.
INTEREST RATES
Bank debt interest rates vary based upon one or more of the following rates
at the option of the Company:
Prime rate to prime plus .75%;
Federal Funds rate plus .5% to 1.25%; and
LIBOR plus .19% to 1.875%.
As of December 31, 2001 and 2000, the Company's effective weighted average
interest rate on its variable rate debt outstanding was 2.70% and 7.34%,
respectively.
INTEREST RATE RISK MANAGEMENT
The Company is exposed to the market risk of adverse changes in interest
rates. To manage the volatility relating to these exposures, the Company's
policy is to maintain a mix of fixed and variable rate debt and to enter into
various interest rate derivative transactions as described below.
Using Swaps, the Company agrees to exchange, at specified intervals, the
difference between fixed and variable interest amounts calculated by reference
to an agreed-upon notional principal amount. Caps are used to lock in a maximum
interest rate should variable rates rise, but enable the Company to otherwise
pay lower market rates. Collars limit the Company's exposure to and benefits
from interest rate fluctuations on variable rate debt to within a certain range
of rates.
All derivative transactions must comply with a board-approved derivatives
policy. In addition to prohibiting the use of derivatives for trading purposes
or that increase risk, this policy requires quarterly monitoring of the
portfolio, including portfolio valuation, measuring counterparty exposure and
performing sensitivity analyses.
The following table summarizes the terms of the Company's existing Swaps
(dollars in millions):
NOTIONAL AVERAGE ESTIMATED
AMOUNT MATURITIES INTEREST RATE FAIR VALUE
-------- ----------- ------------- ----------
As of December 31, 2001
Variable to Fixed Swaps............... $250.3 2002 - 2003 4.9% $(5.5)
Fixed to Variable Swaps............... $950.0 2004 - 2008 7.5% $46.8
As of December 31, 2000
Variable to Fixed Swaps............... $377.7 2001 - 2003 5.2% $ 3.7
Fixed to Variable Swaps............... $450.0 2004 - 2008 7.7% $ 3.2
The notional amounts of interest rate instruments, as presented in the
above table, are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The estimated fair value
approximates the proceeds (costs) to settle the outstanding contracts. While
Swaps, Caps and Collars represent an integral part of the Company's interest
rate risk management program, their incremental effect on interest expense for
the years ended December 31, 2001, 2000 and 1999 was not significant.
F-114
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
During January and February 2002, the Company settled all $950.0 million
notional amount of its Fixed to Variable Swaps and received proceeds of $56.8
million.
ESTIMATED FAIR VALUE
The Company's long-term debt had estimated fair values of $12.559 billion
and $10.251 billion as of December 31, 2001 and 2000, respectively. The
estimated fair value of the Company's publicly traded debt is based on quoted
market prices for that debt. Interest rates that are currently available to the
Company for issuance of debt with similar terms and remaining maturities are
used to estimate fair value for debt issues for which quoted market prices are
not available.
DEBT COVENANTS
Certain of the Company's subsidiaries' loan agreements contain restrictive
covenants which, for example, limit the subsidiaries' ability to enter into
arrangements for the acquisition of property and equipment, investments, mergers
and the incurrence of additional debt. Certain of these agreements contain
financial covenants which require that certain ratios and cash flow levels be
maintained and contain certain restrictions on dividend payments and advances of
funds to the Company. The Company and its subsidiaries were in compliance with
all financial covenants for all periods presented.
As of December 31, 2001, $246.9 million of the Company's cash, cash
equivalents and short-term investments is restricted to use by subsidiaries of
the Company under contractual or other arrangements. Restricted net assets of
the Company's subsidiaries were approximately $1.233 billion as of December 31,
2001.
LINES AND LETTERS OF CREDIT
As of December 31, 2001, certain subsidiaries of the Company had unused
lines of credit of $3.460 billion under their respective credit facilities.
As of December 31, 2001, the Company and certain of its subsidiaries had
unused irrevocable standby letters of credit totaling $96.1 million to cover
potential fundings under various agreements.
8. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue, in one or more series, up to a maximum
of 20.0 million shares of preferred stock. The shares can be issued with such
designations, preferences, qualifications, privileges, limitations,
restrictions, options, conversion rights and other special or related rights as
the Company's board of directors shall from time to time fix by resolution.
The Company's Series B Preferred Stock had a 5.25% pay-in-kind annual
dividend. Dividends were paid quarterly through the issuance of additional
shares of Series B Preferred Stock (the "Additional Shares") and were cumulative
from the issuance date (except that dividends on the Additional Shares accrued
from the date such Additional Shares were issued). The Series B Preferred Stock,
including the Additional Shares, was convertible, at the option of the holder,
into approximately 42.5 million shares of the Company's Class A Special Common
Stock, subject to adjustment in certain limited circumstances, which equaled an
initial conversion price of $11.77 per share, increasing as a result of the
Additional Shares to $16.96 per share on June 30, 2004. The Series B Preferred
Stock was mandatorily redeemable on June 30, 2017, or, at the option of the
Company beginning on June 30, 2004 or at the option of the holder on June 30,
2004 or on June 30, 2012. Upon redemption, the Company, at its option, could
redeem
F-115
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
the Series B Preferred Stock with cash, Class A Special Common Stock or a
combination thereof. The Series B Preferred Stock was generally non-voting. In
December 2000, the Company issued approximately 38.3 million shares of its Class
A Special Common Stock to the holder in connection with the holder's election to
convert $533.6 million at redemption value of Series B Preferred Stock. In March
2001, the Company issued approximately 4.2 million shares of its Class A Special
Common Stock to the holder in connection with the holder's election to convert
the remaining $59.5 million at redemption value of Series B Preferred Stock.
COMMON STOCK
The Company's Class A Special Common Stock is generally nonvoting and each
share of the Company's Class A Common Stock is entitled to one vote. Each share
of the Company's Class B Common Stock is entitled to fifteen votes and is
convertible, share for share, into Class A or Class A Special Common Stock,
subject to certain restrictions.
BOARD-AUTHORIZED REPURCHASE PROGRAMS
The following table summarizes the Company's repurchases and sales of
Comcast Put Options under its Board-authorized share repurchase programs (shares
and dollars in millions):
YEAR ENDED DECEMBER 31,
-------------------------
2001 2000 1999
------ ------- ------
Shares repurchased.......................................... 0.8 9.1 1.0
Aggregate consideration..................................... $27.1 $324.9 $30.7
Comcast Put Options sold.................................... 2.0 5.5
As part of the Company's Board-authorized repurchase programs, the Company
sold Comcast Put Options on shares of its Class A Special Common Stock. The
Comcast Put Options give the holder the right to require the Company to
repurchase such shares at specified prices on specific dates. All Comcast Put
Options sold expired unexercised. The Company reclassified the amount it would
have been obligated to pay to repurchase such shares had the Comcast Put Options
been exercised, from common equity put options to additional capital upon
expiration of the Comcast Put Options. The difference between the proceeds from
the sale of the Comcast Put Options and their estimated fair value was not
significant as of December 31, 2000.
STOCK-BASED COMPENSATION PLANS
As of December 31, 2001, the Company and its subsidiaries have several
stock-based compensation plans for certain employees, officers, directors and
other persons designated by the applicable compensation committees of the boards
of directors of the Company and its subsidiaries. These plans are described
below.
Comcast Option Plans. The Company maintains qualified and nonqualified
stock option plans for certain employees, directors and other persons under
which fixed stock options are granted and the option price is generally not less
than the fair value of a share of the underlying stock at the date of grant
(collectively, the "Comcast Option Plans"). Under the Comcast Option Plans, 55.9
million shares of Class A Special Common Stock were reserved as of December 31,
2001. Option terms are generally from five to 10 1/2 years, with options
generally becoming exercisable between two and 9 1/2 years from the date of
grant.
F-116
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
The following table summarizes the activity of the Comcast Option Plans
(options in thousands):
2001 2000 1999
------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
CLASS A SPECIAL COMMON STOCK OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------------------------- ------- --------- ------- --------- ------- ---------
Outstanding at beginning of year..... 49,618 $23.69 40,416 $16.01 43,002 $11.09
Granted.............................. 10,084 37.52 15,300 39.43 7,403 34.16
Exercised............................ (3,360) 10.62 (4,805) 8.60 (7,527) 6.76
Canceled............................. (821) 30.69 (1,293) 25.98 (2,462) 12.90
------ ------ ------
Outstanding at end of year........... 55,521 26.89 49,618 23.69 40,416 16.01
====== ====== ======
Exercisable at end of year........... 16,892 15.57 13,267 11.35 10,947 8.19
====== ====== ======
The following table summarizes information about the Class A Special Common
Stock options outstanding under the Comcast Option Plans as of December 31, 2001
(options in thousands):
OPTIONS OUTSTANDING
------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- -----------------------
AVERAGE WEIGHTED- NUMBER WEIGHTED-
NUMBER REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE AT EXERCISE
EXERCISE PRICES AT 12/31/01 LIFE PRICE 12/31/01 PRICE
--------------- ----------- ----------- --------- ----------- ---------
$4.96 - $6.04.......................... 2,229 1 year $5.74 2,067 $5.71
$6.71 - $10.06......................... 7,095 3.3 years 8.70 4,829 8.95
$10.11 - $14.94........................ 4,267 4.9 years 13.13 2,428 13.04
$15.66 - $22.88........................ 10,490 6.4 years 17.01 4,809 17.01
$27.59 - $34.48........................ 6,112 7.4 years 32.29 2,042 31.96
$34.50 - $41.38........................ 21,745 8.9 years 37.78 490 38.52
$41.44 - $53.13........................ 3,583 8.3 years 46.05 227 45.71
------ ------
55,521 16,892
====== ======
The weighted-average fair value at date of grant of a Class A Special
Common Stock option granted under the Comcast Option Plans during 2001, 2000 and
1999 was $19.07, $21.20 and $20.41, respectively. The fair value of each option
granted during 2001, 2000 and 1999 was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999
----- ----- -----
Dividend yield.............................................. 0% 0% 0%
Expected volatility......................................... 35.7% 35.8% 36.1%
Risk-free interest rate..................................... 5.1% 6.3% 5.8%
Expected option lives (in years)............................ 8.0 8.0 9.9
Forfeiture rate............................................. 3.0% 3.0% 3.0%
Subsidiary Option Plans. Certain of the Company's subsidiaries maintain
qualified and nonqualified combination stock option/stock appreciation rights
("SAR") plans (collectively, the "Tandem Plans") for employees, officers,
directors and other designated persons. Under the Tandem Plans, the option price
is generally not less than the fair value, as determined by an independent
appraisal, of a share of the
F-117
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
underlying common stock at the date of grant. If the eligible participant elects
the SAR feature of the Tandem Plans, the participant receives 75% of the excess
of the fair value of a share of the underlying common stock over the exercise
price of the option to which it is attached at the exercise date. Option holders
have stated an intention not to exercise the SAR feature of the Tandem Plans.
Because the exercise of the option component is more likely than the exercise of
the SAR feature, compensation expense is measured based on the stock option
component. Under the Tandem Plans, option/SAR terms are ten years from the date
of grant, with options/SARs generally becoming exercisable over four to five
years from the date of grant.
The QVC Tandem Plan is the most significant of the Tandem Plans. The
following table summarizes information related to the QVC Tandem Plan
(options/SARs in thousands):
AT DECEMBER 31,
---------------------------
2001 2000 1999
------- ------- -------
Options/SARs outstanding at end of year................. 253 219 200
======= ======= =======
Weighted-average exercise price of options/SARs
outstanding at end of year............................ $913.88 $789.51 $618.02
======= ======= =======
Options/SARs exercisable at end of year................. 113 79 80
======= ======= =======
Weighted-average exercise price of options/SARs
exercisable at end of year............................ $706.51 $606.92 $505.86
======= ======= =======
As of the latest valuation date, the fair value of a share of QVC Common
Stock was $1,492.00.
Had compensation expense for the Company's aforementioned stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans under the provisions of SFAS No. 123, the Company's
net income and net income per share would have changed to the pro forma amounts
indicated below (dollars in millions, except per share data):
YEAR ENDED DECEMBER 31,
----------------------------
2001 2000 1999
------ -------- --------
Net income:
As reported........................................... $608.6 $2,021.5 $1,065.7
Pro forma............................................. $482.0 $1,918.1 $1,005.5
Net income for common stockholders:
As reported........................................... $608.6 $1,998.0 $1,036.0
Pro forma............................................. $482.0 $1,894.6 $ 975.8
Basic earnings for common stockholders per common share:
As reported........................................... $ 0.64 $ 2.24 $ 1.38
Pro forma............................................. $ 0.51 $ 2.13 $ 1.30
Diluted earnings for common stockholders per common
share:
As reported........................................... $ 0.63 $ 2.13 $ 1.30
Pro forma............................................. $ 0.50 $ 2.02 $ 1.23
The pro forma effect on net income and net income per share for the years
ended December 31, 2001, 2000 and 1999 by applying SFAS No. 123 may not be
indicative of the pro forma effect on net income or loss in future years since
SFAS No. 123 does not take into consideration pro forma
F-118
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
compensation expense related to awards made prior to January 1, 1995 and since
additional awards in future years are anticipated.
OTHER STOCK-BASED COMPENSATION PLANS
The Company maintains a restricted stock plan under which management
employees may be granted restricted shares of the Company's Class A Special
Common Stock (the "Restricted Stock Plan"). The shares awarded vest annually,
generally over a period not to exceed five years from the date of the award, and
do not have voting rights. At December 31, 2001, there were 714,000 unvested
shares granted under the Restricted Stock Plan, of which 158,000 vested in
January 2002.
The Company maintains a deferred stock option plan for certain employees,
officers and directors which provides the optionees with the opportunity to
defer the receipt of shares of the Company's Class A Special Common Stock which
would otherwise be deliverable upon exercise by the optionees of their stock
options. As of December 31, 2001 and 2000, 5.9 million and 5.0 million shares
were issuable under options exercised but the receipt of which was irrevocably
deferred by the optionees pursuant to the Company's deferred stock option plan.
Certain of the Company's subsidiaries have SAR plans for certain employees,
officers, directors and other persons (the "SAR Plans"). Under the SAR Plans,
eligible participants are entitled to receive a cash payment equal to 100% of
the excess, if any, of the fair value of a share of the underlying common stock
at the exercise date over the fair value of such a share at the grant date. The
SARs have a term of ten years from the date of grant and become exercisable over
four to five years from the date of grant.
The following table summarizes information related to the Company's
Restricted Stock Plan and subsidiary SAR Plans:
YEAR ENDED DECEMBER 31,
------------------------
2001 2000 1999
------ ------ ------
Restricted Stock Plan
Shares granted (in thousands)............................ 157 504 170
Weighted-average fair value per share at date of grant... $39.52 $37.80 $43.22
Compensation expense (in millions)....................... $ 8.9 $ 9.2 $ 4.7
SAR Plans
Compensation expense (in millions)....................... $ 3.5 $ 2.2 $ 6.4
F-119
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
9. INCOME TAXES
The Company joins with its 80% or more owned subsidiaries (the
"Consolidated Group") in filing consolidated federal income tax returns. QVC and
E! Entertainment, each file separate consolidated federal income tax returns.
Income tax expense consists of the following components (in millions):
YEAR ENDED DECEMBER 31,
---------------------------
2001 2000 1999
------- -------- ------
Current expense
Federal.................................................. $ 623.2 $ 321.4 $606.7
State.................................................... 84.8 42.8 188.4
Foreign.................................................. 2.9 2.5 2.0
------- -------- ------
710.9 366.7 797.1
------- -------- ------
Deferred expense (benefit)
Federal.................................................. (255.8) 998.6 (65.2)
State.................................................... 15.1 76.0 (8.2)
------- -------- ------
(240.7) 1,074.6 (73.4)
------- -------- ------
Income tax expense....................................... $ 470.2 $1,441.3 $723.7
======= ======== ======
The Company's effective income tax expense differs from the statutory
amount because of the effect of the following items (in millions):
YEAR ENDED DECEMBER 31,
--------------------------
2001 2000 1999
------ -------- ------
Federal tax at statutory rate............................... $299.7 $1,260.6 $525.0
Non-deductible depreciation and amortization................ 106.6 102.1 49.8
State income taxes, net of federal benefit.................. 64.9 77.2 117.1
Foreign (income) losses and equity in net losses of
affiliates................................................ 7.2 8.0 (2.0)
Other....................................................... (8.2) (6.6) 33.8
------ -------- ------
Income tax expense.......................................... $470.2 $1,441.3 $723.7
====== ======== ======
F-120
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
The Company's net deferred tax liability consists of the following
components (in millions):
DECEMBER 31,
-------------------
2001 2000
-------- --------
Deferred tax assets:
Net operating loss carryforwards.......................... $ 242.8 $ 289.8
Allowances for doubtful accounts and excess and obsolete
inventory.............................................. 108.7 109.0
Other..................................................... 167.0 163.5
-------- --------
518.5 562.3
-------- --------
Deferred tax liabilities:
Temporary differences, principally book and tax basis of
property and equipment and intangible assets........... 6,329.0 5,851.7
Differences between book and tax basis in investments..... 644.9 1,221.3
Differences between book and tax basis of indexed debt
securities............................................. 195.7 65.9
-------- --------
7,169.6 7,138.9
-------- --------
Net deferred tax liability.................................. $6,651.1 $6,576.6
======== ========
The Company recorded $212.3 million of deferred income tax liabilities in
2001 in connection with acquisitions principally related to basis differences in
property and equipment and intangible assets. The Company recorded a decrease of
($148.6) million and ($3.055) billion, and an increase of $2.730 billion to
deferred income tax liabilities in 2001, 2000 and 1999, respectively, in
connection with unrealized gains (losses) on marketable securities which are
included in other comprehensive income. The Company recorded $207.0 million of
deferred income tax liabilities in 2001 in connection with the cumulative effect
of accounting change related to the adoption of SFAS No. 133 (see Note 3).
The Company has recorded net deferred tax liabilities of $275.4 million and
$789.9 million, as of December 31, 2001 and 2000, respectively, which have been
included in current liabilities, related primarily to current investments. The
Company has net operating loss carryforwards of approximately $250.0 million
which expire primarily in periods through 2019.
10. STATEMENT OF CASH FLOWS -- SUPPLEMENTAL INFORMATION
The following table summarizes the fair values of the assets and
liabilities acquired by the Company through noncash transactions (see Note 5)
(in millions):
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- --------- -------
Current assets........................................ $ 56.6 $ 216.2 $ 6.4
Investments........................................... 437.3
Property, plant & equipment........................... 580.4 1,295.8 74.0
Intangible assets..................................... 3,042.7 15,399.4 337.0
Current liabilities................................... (37.0) (277.3) (11.1)
Long-term debt........................................ (2,146.5)
Deferred income taxes................................. (76.9) (3,308.0) (114.6)
-------- --------- -------
Net assets acquired.............................. $3,565.8 $11,616.9 $ 291.7
======== ========= =======
F-121
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
The following table summarizes the Company's cash payments for interest and
income taxes (in millions):
YEAR ENDED DECEMBER 31,
------------------------
2001 2000 1999
------ ------ ------
Interest................................................... $660.4 $705.8 $529.2
Income taxes............................................... $561.2 $708.9 $190.5
11. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company's programming networks have entered into license agreements for
programs and sporting events which will be available for telecast subsequent to
December 31, 2001. In addition, the Company, through Comcast-Spectacor, has
employment agreements with both players and coaches of its professional sports
teams. Certain of these employment agreements, which provide for payments that
are guaranteed regardless of employee injury or termination, are covered by
disability insurance if certain conditions are met. The following table
summarizes the Company's minimum annual programming commitments under these
license agreements, the Company's future commitments under long-term
professional sports contracts, and the Company's minimum annual rental
commitments for office space, equipment and transponder service agreements under
noncancellable operating leases as of December 31, 2001 (in millions):
PROFESSIONAL
PROGRAMMING SPORTS OPERATING
AGREEMENTS CONTRACTS LEASES TOTAL
----------- ------------ --------- ------
2002....................................... $ 95.4 $122.5 $ 98.6 $316.5
2003....................................... 82.6 108.8 78.0 269.4
2004....................................... 84.0 84.5 68.8 237.3
2005....................................... 82.6 50.8 54.3 187.7
2006....................................... 85.8 28.7 39.6 154.1
Thereafter................................. 413.6 8.0 148.6 570.2
The following table summarizes the Company's rental expense charged to
operations (in millions):
YEAR ENDED DECEMBER 31,
-------------------------
2001 2000 1999
------- ------ ------
Rental expense.............................................. $120.9 $97.6 $88.5
CONTINGENCIES
The Company and the owners of the 34% interest in Comcast Spectacor that
the Company does not own (the "Minority Group") each have the right to initiate
an "exit" process under which the fair market value of Comcast Spectacor would
be determined by appraisal. Following such determination, the Company would have
the option to acquire the interests in Comcast Spectacor owned by the Minority
Group based on the appraised fair market value. In the event the Company did not
exercise this option, the Company and the Minority Group would then be required
to use their best efforts to sell Comcast Spectacor.
The Walt Disney Company ("Disney"), in certain circumstances, is entitled
to cause Comcast Entertainment Holdings LLC ("Entertainment Holdings"), which is
owned 50.1% by the Company and 49.9% by Disney, to purchase Disney's entire
interest in Entertainment Holdings at its then fair market
F-122
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
value (as determined by an appraisal process). If Entertainment Holdings elects
not to purchase Disney's interests, Disney has the right, at its option, to
purchase either the Company's entire interest in Entertainment Holdings or all
of the shares of stock of E! Entertainment held by Entertainment Holdings in
each case at fair market value. In the event that Disney exercises its rights,
as described above, a portion or all of the Disney Notes (see Note 7) may be
replaced with a three year note due to Disney.
Liberty Media Group ("Liberty") may, at certain times, trigger the exercise
of certain exit rights with respect to its investment in QVC. If Liberty Media
triggers its exit rights, the Company has first right to purchase the stock in
QVC held by Liberty at Liberty's pro rata portion of the fair market value (on a
going concern or liquidation basis, whichever is higher, as determined by an
appraisal process) of QVC. The Company may pay Liberty for such stock, subject
to certain rights of Liberty to consummate the purchase in the most
tax-efficient method available, in cash, the Company's promissory note maturing
not more than three years after issuance, the Company's equity securities or any
combination thereof. If the Company elects not to purchase the stock of QVC held
by Liberty, then Liberty will have a similar right to purchase the stock of QVC
held by the Company. If Liberty elects not to purchase the stock of QVC held by
the Company, then Liberty and the Company will use their best efforts to sell
QVC.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to such actions is not expected to materially
affect the financial condition, results of operations or liquidity of the
Company.
In connection with a license awarded to an affiliate, the Company is
contingently liable in the event of nonperformance by the affiliate to reimburse
a bank which has provided a performance guarantee. The amount of the performance
guarantee is approximately $200 million; however the Company's current estimate
of the amount of expenditures (principally in the form of capital expenditures)
that will be made by the affiliate necessary to comply with the performance
requirements will not exceed $75 million.
12. FINANCIAL DATA BY BUSINESS SEGMENT
The following represents the Company's significant business segments,
"Cable" and "Commerce." The Company's regional sports programming networks,
which derive a substantial portion of their revenues from the Company's cable
operations, were previously included in "Other." In 2001, as a result of a
change in the Company's internal reporting structure, the Company's regional
sports programming networks are now included in the Company's Cable segment for
all periods presented (see Note 1). The components of net income (loss) below
operating income (loss) are not separately evaluated by the Company's management
on a segment basis (dollars in millions).
CORPORATE
CABLE COMMERCE AND OTHER(1) TOTAL
--------- -------- ------------ ---------
2001
Revenues(2)..................................... $ 5,130.7 $3,917.3 $ 626.2 $ 9,674.2
Operating income (loss) before depreciation and
amortization(3)............................... 2,054.1 722.3 (74.6) 2,701.8
Depreciation and amortization................... 3,043.6 143.3 261.1 3,448.0
Operating income (loss)......................... (989.5) 579.0 (335.7) (746.2)
Interest expense................................ 546.4 25.9 159.5 731.8
Assets.......................................... 29,084.6 2,680.5 6,366.7 38,131.8
Long-term debt.................................. 8,363.2 62.7 3,315.7 11,741.6
Capital expenditures............................ 1,855.3 142.9 183.5 2,181.7
F-123
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
CORPORATE
CABLE COMMERCE AND OTHER(1) TOTAL
--------- -------- ------------ ---------
2000
Revenues(2)..................................... $ 4,208.5 $3,535.9 $ 474.2 $ 8,218.6
Operating income (loss) before depreciation and
amortization(3)............................... 1,903.4 619.2 (52.3) 2,470.3
Depreciation and amortization................... 2,419.5 125.9 85.9 2,631.3
Operating income (loss)......................... (516.1) 493.3 (138.2) (161.0)
Interest expense................................ 515.9 34.9 140.6 691.4
Assets.......................................... 25,763.9 2,503.0 7,477.6 35,744.5
Long-term debt.................................. 6,711.0 302.0 3,504.4 10,517.4
Capital expenditures............................ 1,248.9 155.9 232.0 1,636.8
1999
Revenues(2)..................................... $ 2,969.9 $3,167.4 $ 391.9 $ 6,529.2
Operating income (loss) before depreciation and
amortization(3)............................... 1,358.0 538.8 (16.8) 1,880.0
Depreciation and amortization................... 1,028.3 117.2 70.5 1,216.0
Operating income (loss)......................... 329.7 421.6 (87.3) 664.0
Interest expense................................ 353.5 39.6 145.2 538.3
Assets.......................................... 10,863.6 2,243.6 15,578.4 28,685.6
Long-term debt.................................. 4,735.5 476.7 3,495.0 8,707.2
Capital expenditures............................ 739.9 80.1 73.8 893.8
---------------
(1) Other includes segments not meeting certain quantitative guidelines for
reporting including the Company's content (see Note 1) and business
communications operations, as well as elimination entries related to the
segments presented. Corporate and other assets consist primarily of the
Company's investments (see Note 6).
(2) Revenues include $508.1 million, $458.4 million and $448.2 million in 2001,
2000 and 1999, respectively, of non-US revenues, principally related to the
Company's Commerce segment. No single customer accounted for a significant
amount of the Company's revenues in any period.
(3) Operating income (loss) before depreciation and amortization is commonly
referred to in the Company's businesses as "operating cash flow (deficit)."
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 the Company'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 the Company's
industries, although the Company'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 the Company'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 such
measurements as an indicator of the Company's performance.
F-124
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
2001
Revenues................................... $2,196.1 $2,298.5 $2,355.5 $2,824.1 $9,674.2
Operating loss............................. (100.5) (133.3) (178.2) (334.2) (746.2)
Income (loss) before extraordinary items
and cumulative effect of accounting
change................................... 616.7 36.7 (106.8) (321.0) 225.6
Basic earnings (loss) for common
stockholders per common share
Income (loss) before extraordinary items
and cumulative effect of accounting
change................................ 0.65 0.04 (0.11) (0.34) 0.24
Net income (loss)........................ 1.06 0.04 (0.11) (0.34) 0.64
Diluted earnings (loss) for common
stockholders per common share
Income (loss) before extraordinary items
and cumulative effect of accounting
change................................ 0.64 0.04 (0.11) (0.34) 0.23
Net income (loss)........................ 1.04 0.04 (0.11) (0.34) 0.63
Operating income before depreciation and
amortization(1).......................... 640.9 700.4 705.8 654.7 2,701.8
2000
Revenues................................... $1,938.9 $1,912.1 $1,960.0 $2,407.6 $8,218.6
Operating income (loss).................... 41.2 (31.6) (56.4) (114.2) (161.0)
Income (loss) before extraordinary items... (186.4) 198.8 1,249.1 783.6 2,045.1
Basic earnings (loss) for common
stockholders per common share
Income (loss) before extraordinary
items................................. (0.23) 0.21 1.37 0.87 2.27
Net income (loss)........................ (0.24) 0.20 1.37 0.86 2.24
Diluted earnings (loss) for common
stockholders per common share
Income (loss) before extraordinary
items................................. (0.23) 0.20 1.29 0.81 2.16
Net income (loss)........................ (0.24) 0.19 1.29 0.80 2.13
Operating income before depreciation and
amortization(1).......................... 586.9 602.8 605.7 674.9 2,470.3
---------------
(1) See Note 12, note 3.
F-125
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONCLUDED)
14. TRANSITIONAL DISCLOSURE RELATING TO SFAS NO. 142
The following pro forma financial information for the years ended December
31, 2001, 2000 and 1999 is presented as if SFAS No. 142 was adopted as of
January 1, 1999 (amounts in millions, except per share data) (see Note 3):
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
Net Income
As reported............................................... $ 608.6 $2,021.5 $1,065.7
Amortization of goodwill............................... 334.8 303.5 128.5
Amortization of equity method goodwill................. 15.0 15.2 4.4
Amortization of franchise rights....................... 1,083.7 858.1 258.3
-------- -------- --------
As adjusted............................................... $2,042.1 $3,198.3 $1,456.9
======== ======== ========
Income before extraordinary items and cumulative effect of
accounting change, as adjusted......................... $1,659.1 $3,221.9 $1,507.9
======== ======== ========
Basic EPS
As reported............................................... $ 0.64 $ 2.24 $ 1.38
Amortization of goodwill............................... 0.35 0.34 0.17
Amortization of equity method goodwill................. 0.02 0.02 0.01
Amortization of franchise rights....................... 1.14 0.96 0.35
-------- -------- --------
As adjusted............................................... $ 2.15 $ 3.56 $ 1.91
======== ======== ========
Diluted EPS
As reported............................................... $ 0.63 $ 2.13 $ 1.30
Amortization of goodwill............................... 0.35 0.32 0.16
Amortization of equity method goodwill................. 0.02 0.02 0.01
Amortization of franchise rights....................... 1.12 0.90 0.31
-------- -------- --------
As adjusted............................................... $ 2.12 $ 3.37 $ 1.78
======== ======== ========
F-126
COMCAST CORPORATION AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2002
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
----------- --------------
(DOLLARS IN MILLIONS, EXCEPT
SHARE DATA)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. 557.8 $ 350.0
Investments............................................... 1,057.6 2,623.2
Accounts receivable, less allowance for doubtful accounts
of $166.9 and $153.9................................... 957.0 967.4
Inventories, net.......................................... 414.0 454.5
Deferred income taxes..................................... 135.9 128.7
Other current assets...................................... 337.7 153.7
--------- ---------
Total current assets................................... 3,460.0 4,677.5
--------- ---------
INVESTMENTS................................................. 727.6 1,679.2
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$3,238.2 and $2,725.7..................................... 7,023.1 7,011.1
GOODWILL.................................................... 6,446.3 6,289.4
FRANCHISE RIGHTS............................................ 16,599.4 16,533.0
OTHER INTANGIBLE ASSETS, net of accumulated amortization of
$803.3 and $664.6......................................... 1,471.7 1,686.9
OTHER NONCURRENT ASSETS, net................................ 390.7 383.4
--------- ---------
36,118.8 $38,260.5
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... 680.1 $ 698.2
Accrued expenses and other current liabilities............ 1,371.7 1,695.5
Deferred income taxes..................................... 121.8 404.1
Current portion of long-term debt......................... 206.9 460.2
--------- ---------
Total current liabilities.............................. 2,380.5 3,258.0
--------- ---------
LONG-TERM DEBT, less current portion........................ 10,543.5 11,741.6
--------- ---------
DEFERRED INCOME TAXES....................................... 6,755.2 6,375.7
--------- ---------
OTHER NONCURRENT LIABILITIES................................ 1,421.1 1,532.0
--------- ---------
MINORITY INTEREST........................................... 986.7 880.2
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY
Class A special common stock, $1 par value -- authorized,
2,500,000,000 shares; issued, 915,707,981 and
937,256,465; outstanding, 915,707,981 and
913,931,554............................................ 915.7 913.9
Class A common stock, $1 par value -- authorized,
200,000,000 shares; issued, 21,591,115 and
21,829,422............................................. 21.6 21.8
Class B common stock, $1 par value -- authorized,
50,000,000 shares; issued, 9,444,375................... 9.4 9.4
Additional capital........................................ 11,791.5 11,752.0
Retained earnings......................................... 1,317.3 1,631.5
Accumulated other comprehensive income (loss)............. (23.7) 144.4
--------- ---------
Total stockholders' equity............................. 14,031.8 14,473.0
--------- ---------
$36,118.8 $38,260.5
========= =========
See notes to condensed consolidated financial statements.
F-127
COMCAST CORPORATION AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2002
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND
RETAINED EARNINGS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
2002 2001 2002 2001
--------- --------- ---------- ---------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
REVENUES
Service revenues.................................. $1,714.4 $1,462.7 $3,393.4 $2,810.7
Net sales from electronic retailing............... 994.5 876.0 1,988.0 1,760.0
-------- -------- --------- --------
2,708.9 2,338.7 5,381.4 4,570.7
-------- -------- --------- --------
COSTS AND EXPENSES
Operating (excluding depreciation)................ 723.4 671.7 1,469.4 1,311.4
Cost of goods sold from electronic retailing
(excluding depreciation)....................... 628.8 555.2 1,260.0 1,111.8
Selling, general and administrative............... 490.1 418.9 977.2 820.4
Depreciation...................................... 342.8 273.9 676.6 514.7
Amortization...................................... 45.4 552.3 98.7 1,046.2
-------- -------- --------- --------
2,230.5 2,472.0 4,481.9 4,804.5
-------- -------- --------- --------
OPERATING INCOME (LOSS)............................. 478.4 (133.3) 899.5 (233.8)
OTHER INCOME (EXPENSE)
Interest expense.................................. (182.6) (178.5) (369.3) (360.8)
Investment income (expense)....................... (459.1) 502.7 (707.1) 717.4
Equity in net losses of affiliates................ (43.0) (9.5) (48.4) (6.6)
Other income (expense)............................ 9.6 (6.3) (14.0) 1,187.9
-------- -------- --------- --------
(675.1) 308.4 (1,138.8) 1,537.9
-------- -------- --------- --------
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE........ (196.7) 175.1 (239.3) 1,304.1
INCOME TAX BENEFIT (EXPENSE)........................ 32.9 (103.0) 30.2 (588.6)
-------- -------- --------- --------
INCOME (LOSS) BEFORE MINORITY INTEREST AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE............ (163.8) 72.1 (209.1) 715.5
MINORITY INTEREST................................... (45.8) (36.9) (89.4) (63.6)
-------- -------- --------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE............................................ (209.6) 35.2 (298.5) 651.9
CUMULATIVE EFFECT OF ACCOUNTING CHANGE.............. 384.5
-------- -------- --------- --------
NET INCOME (LOSS)................................... ($209.6) $35.2 ($298.5) $1,036.4
======== ======== ========= ========
RETAINED EARNINGS
Beginning of period............................... $1,541.4 $2,040.6 $1,631.5 $1,056.5
Net income (loss)................................. (209.6) 35.2 (298.5) 1,036.4
Retirement of common stock........................ (14.5) (15.7) (17.1)
-------- -------- --------- --------
End of period..................................... $1,317.3 $2,075.8 $1,317.3 $2,075.8
======== ======== ========= ========
F-128
COMCAST CORPORATION AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2002
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND
RETAINED EARNINGS -- (CONTINUED)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
2002 2001 2002 2001
--------- --------- ---------- ---------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
BASIC EARNINGS (LOSS) PER COMMON SHARE
Income (loss) before cumulative effect of
accounting change.............................. ($0.22) $0.04 ($0.31) $0.69
Cumulative effect of accounting change............ 0.40
-------- -------- --------- --------
Net income (loss).............................. ($0.22) $0.04 ($0.31) $1.09
======== ======== ========= ========
BASIC WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING....................................... 952.3 951.1 951.9 948.2
======== ======== ========= ========
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Income (loss) before cumulative effect of
accounting change.............................. ($0.22) $0.04 ($0.31) $0.67
Cumulative effect of accounting change............ 0.40
-------- -------- --------- --------
Net income (loss).............................. ($0.22) $0.04 ($0.31) $1.07
======== ======== ========= ========
DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING....................................... 952.3 965.6 951.9 965.3
======== ======== ========= ========
See notes to condensed consolidated financial statements.
F-129
COMCAST CORPORATION AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2002
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
---------------------
2002 2001
--------- ---------
(DOLLARS IN MILLIONS)
OPERATING ACTIVITIES
Net income (loss)......................................... $ (298.5) $ 1,036.4
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation........................................... 676.6 514.7
Amortization........................................... 98.7 1,046.2
Non-cash interest expense, net......................... 21.5 26.1
Equity in net losses of affiliates..................... 48.4 6.6
Losses (gains) on investments and other income
(expense), net........................................ 738.8 (1,875.5)
Minority interest...................................... 89.4 63.6
Cumulative effect of accounting change................. (384.5)
Deferred income taxes.................................. (4.2) (131.9)
Proceeds from sales of trading security................ 280.3
Other.................................................. (9.7) 19.3
--------- ---------
1,361.0 601.3
Changes in working capital, net of effects of
acquisitions and divestitures:
Decrease in accounts receivable, net................. 8.9 111.2
Decrease (increase) in inventories, net.............. 40.5 (33.3)
Increase in other current assets..................... (18.2) (65.3)
(Decrease) increase in accounts payable, accrued
expenses and other current liabilities.............. (341.7) 360.7
--------- ---------
(310.5) (373.3)
Net cash provided by operating activities......... 1,050.5 974.6
--------- ---------
FINANCING ACTIVITIES
Proceeds from borrowings.................................. 632.1 4,554.7
Retirements and repayments of debt........................ (1,169.3) (3,206.4)
Proceeds from settlement of interest rate exchange
agreements............................................. 56.8
Issuances of common stock................................. 11.2 20.2
Deferred financing costs.................................. (2.3) (22.5)
--------- ---------
Net cash (used in) provided by financing
activities...................................... (471.5) 1,346.0
--------- ---------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired........................ (16.1) (872.8)
Sales (purchases) of short-term investments, net.......... 3.0 (135.5)
Purchases of investments.................................. (31.6) (175.7)
Proceeds from sales of investments........................ 595.9 225.3
Capital expenditures...................................... (788.9) (1,143.7)
Additions to intangible and other noncurrent assets....... (133.5) (123.8)
--------- ---------
Net cash used in investing activities............. (371.2) (2,226.2)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 207.8 94.4
CASH AND CASH EQUIVALENTS, beginning of period.............. 350.0 651.5
--------- ---------
CASH AND CASH EQUIVALENTS, end of period.................... $ 557.8 $ 745.9
========= =========
See notes to condensed consolidated financial statements.
F-130
COMCAST CORPORATION AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2002
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
Comcast Corporation and its subsidiaries (the "Company") has prepared these
unaudited condensed consolidated financial statements based upon Securities and
Exchange Commission rules that permit reduced disclosure for interim periods.
These financial statements include all adjustments that are necessary for a
fair presentation of the Company's results of operations and financial condition
for the interim periods shown including normal recurring accruals and other
items. The results of operations for the interim periods presented are not
necessarily indicative of results for the full year.
For a more complete discussion of the Company's accounting policies and
certain other information, refer to the financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to those classifications used in 2002 (see Note 2).
2. RECENT ACCOUNTING PRONOUNCEMENTS
SFAS NO. 133, AS AMENDED
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivatives and Hedging Activities,"
as amended. SFAS No. 133 establishes accounting and reporting standards for
derivatives and hedging activities. SFAS No. 133 requires that all derivative
instruments be reported on the balance sheet at their fair values. Upon adoption
of SFAS No. 133, the Company recognized as income a cumulative effect of
accounting change, net of related income taxes, of $384.5 million. The increase
in income consisted of a $400.2 million adjustment to record the debt component
of indexed debt at a discount from its value at maturity and $191.3 million
principally related to the reclassification of gains previously recognized as a
component of accumulated other comprehensive income (loss) on the Company's
equity derivative instruments, net of related deferred income taxes of $207.0
million.
SFAS NO. 142
The Financial Accounting Standards Board ("FASB") issued SFAS No. 142,
"Goodwill and Other Intangible Assets," in June 2001. SFAS No. 142 addresses how
intangible assets that are acquired individually or with a group of other assets
should be accounted for in financial statements upon and subsequent to their
acquisition. The Company adopted SFAS No. 142 on January 1, 2002, as required by
the new statement. Upon adoption, the Company no longer amortizes goodwill and
other indefinite lived intangible assets, which consist of cable and sports
franchise rights. The Company is required to test its goodwill and intangible
assets that are determined to have an indefinite life for impairment at least
annually. The provisions of SFAS No. 142 require the completion of an initial
transitional impairment assessment, with any impairments identified treated as a
cumulative effect of a change in accounting principle. The Company completed
this assessment and determined that no cumulative effect results from adopting
this change in accounting principle. The provisions of SFAS No. 142 also require
the completion of an annual impairment test, with any impairments recognized in
current earnings. The Company
F-131
COMCAST CORPORATION AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2002
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
completed the annual impairment test during the three months ended June 30, 2002
and determined that no impairment charge is necessary (see Note 6).
SFAS NO. 143
The FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," in June 2001. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. The Company does not expect the
adoption of SFAS No. 143 will have a material impact on its financial condition
or results of operations.
SFAS NO. 144
The FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," in August 2001. SFAS No. 144, which addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of, supercedes SFAS No. 121 and is effective
for fiscal years beginning after December 15, 2001. The Company adopted SFAS No.
144 on January 1, 2002. The adoption of SFAS No. 144 had no impact on the
Company's financial condition or results of operations.
SFAS NO. 145
The FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections," in April
2002. SFAS No. 145 rescinds, amends or makes various technical corrections to
certain existing authoritative pronouncements. Among other things, SFAS No. 145
will change the accounting for certain gains and losses resulting from
extinguishments of debt by requiring that a gain or loss from extinguishments of
debt be classified as an extraordinary item only if it meets the specific
criteria of APB Opinion No. 30. SFAS No. 145 also requires that cash flows from
all trading securities, such as the Company's investment in Sprint PCS, be
classified as cash flows from operating activities in its statement of cash
flows.
The Company adopted the provisions of SFAS No. 145 effective April 1, 2002,
as permitted by the new statement. The Company previously classified losses from
debt extinguishments as extraordinary items in its statement of operations. Upon
adoption of SFAS No. 145, the Company reclassified these losses from
extraordinary items to interest expense for all periods presented in its
statement of operations. The change in classification had no effect on the
Company's net income (loss) or financial condition. The Company previously
classified cash flows from purchases, sales and maturities of its investment in
Sprint PCS as cash flows from investing activities in its statement of cash
flows. The change in classification was to increase the Company's net cash
provided by operating activities and to increase the Company's net cash used in
investing activities for the six months ended in June 30, 2001.
SFAS NO. 146
The FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," in June 2002. SFAS No. 146 changes the standards for
recognition of a liability for a cost associated with an exit or disposal
activity. SFAS No. 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred. SFAS No.
146 establishes that fair value is
F-132
COMCAST CORPORATION AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2002
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
the objective for initial measurement of the liability. SFAS No. 146 nullifies
the guidance of Emerging Issues Task Force ("EITF") 94-3 under which an entity
recognized a liability for an exit cost on the date that the entity committed
itself to an exit plan. The Company will adopt the provisions of SFAS No. 146
for exit or disposal activities that are initiated after December 31, 2002, as
required by the new statement. The Company does not expect the adoption of SFAS
No. 146 will have a material impact on its financial condition or results of
operations.
EITF 01-9
In November 2001, the EITF of the FASB reached a consensus on EITF 01-9,
"Accounting for Consideration Given to a Customer (Including a Reseller of the
Vendor's Products)." EITF 01-9 requires, among other things, that consideration
paid to customers should be classified as a reduction of revenue unless certain
criteria are met. Certain of the Company's content subsidiaries have paid or may
pay distribution fees to cable television and satellite broadcast systems for
carriage of their programming. The Company previously classified the
amortization of these distribution fees as expense in its statement of
operations. Upon adoption of EITF 01-9 on January 1, 2002, the Company
reclassified certain of these distribution fees from expense to a revenue
reduction for all periods presented in its statement of operations. The change
in classification had no impact on the Company's reported operating income
(loss) or financial condition. This change does not apply to distribution fees
paid by the Company's consolidated subsidiary, QVC, Inc. ("QVC") as the
counterparties to QVC's distribution agreements do not make revenue payments to
QVC. Amortization expense includes $5.0 million, $7.0 million, $9.6 million and
$14.1 million during the three months ended June 30, 2002 and 2001 and during
the six months ended June 30, 2002 and 2001, respectively, related to QVC
distribution fees.
EITF 01-14
In November 2001, the FASB staff announced EITF Topic D-103, "Income
Statement Characterization of Reimbursements Received for 'Out-of-Pocket'
Expenses Incurred," which has subsequently been recharacterized as EITF 01-14.
EITF 01-14 requires that reimbursements received for out-of-pocket expenses
incurred be characterized as revenue in the statement of operations.
Under the terms of its franchise agreements, the Company is required to pay
up to 5% of its gross revenues derived from providing cable services to the
local franchising authority. The Company normally passes these fees through to
its cable subscribers. The Company previously classified cable franchise fees
collected from its cable subscribers as a reduction of the related franchise fee
expense included within selling, general and administrative expenses in its
statement of operations.
EITF 01-14, by analogy, applies to franchise fees. Upon adoption of EITF
01-14 on January 1, 2002, the Company reclassified franchise fees collected from
cable subscribers from a reduction of selling, general and administrative
expenses to a component of service revenues for all periods presented in its
statement of operations. The change in classification had no impact on the
Company's reported operating income (loss) or financial condition.
3. EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding during the period on
a basic and diluted basis.
F-133
COMCAST CORPORATION AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2002
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The following table reconciles the numerator and denominator of the
computations of diluted earnings (loss) per common share ("Diluted EPS") for the
interim periods presented.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- --------------------
2002 2001 2002 2001
---------- --------- --------- --------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
Income (loss) before cumulative effect of
accounting change used for Diluted EPS........ $(209.6) $ 35.2 $(298.5) $651.9
======= ====== ======= ======
Basic weighted average number of common shares
outstanding................................... 952.3 951.1 951.9 948.2
Dilutive securities:
Series B convertible preferred stock.......... 2.1
Stock option and restricted stock plans....... 14.5 15.0
------- ------ ------- ------
Diluted weighted average number of common shares
outstanding................................... 952.3 965.6 951.9 965.3
======= ====== ======= ======
Diluted income (loss) before cumulative effect
of accounting change per common share......... $ (0.22) $ 0.04 $ (0.31) $ 0.67
======= ====== ======= ======
Potentially dilutive securities related to the Company's Zero Coupon
Debentures, stock options and restricted stock plans (see below) were excluded
from the computation of Diluted EPS for the three and six months ended June 30,
2002 because their effect on loss per common share was antidilutive.
The Company's Zero Coupon Convertible Debentures due 2020 (the "Zero Coupon
Debentures" -- see Note 7) may be converted at any time prior to maturity if the
closing sale price of the Company's Class A Special Common Stock is greater than
110% of the accreted conversion price (as defined). Diluted EPS for the three
months ended June 30, 2002 and 2001 and for the six months ended June 30, 2002
and 2001, respectively, excludes approximately 19.8 million, 21.1 million, 19.8
million and 21.1 million potential common shares related to the Zero Coupon
Debentures, respectively, as the weighted average closing sale price of the
Company's Class A Special Common Stock was not greater than 110% of the accreted
conversion price.
Diluted EPS for the three and six months ended June 30, 2002 excludes
approximately 64.7 million and 63.7 million potential common shares related to
the Company's stock option and restricted stock plans because the assumed
issuance of such potential common shares is antidilutive in periods in which
there is a loss. Diluted EPS for the three and six months ended June 30, 2001
excludes approximately 2.3 million and 2.1 million potential common shares,
respectively, related to the Company's stock option plans because the option
exercise price was greater than the average market price of the Company's common
stock for the period.
4. ACQUISITIONS AND OTHER SIGNIFICANT EVENTS
AGREEMENT AND PLAN OF MERGER WITH AT&T BROADBAND
On December 19, 2001, the Company entered into an Agreement and Plan of
Merger with AT&T Corp. ("AT&T") pursuant to which the Company agreed to a
transaction which will result in the combination of the Company and a holding
company of AT&T's broadband business ("AT&T
F-134
COMCAST CORPORATION AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2002
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Broadband") that AT&T will spin off to its shareholders immediately prior to the
combination. As of June 30, 2002, AT&T Broadband served approximately 13.3
million subscribers. Under the terms of the transaction, the combined company
will issue approximately 1.235 billion shares of its voting common stock to AT&T
Broadband shareholders in exchange for all of AT&T's interests in AT&T
Broadband, and approximately 115 million shares of its common stock to Microsoft
Corporation ("Microsoft") in exchange for AT&T Broadband shares that Microsoft
will receive immediately prior to the completion of the transaction for
settlement of their $5 billion aggregate principal amount in quarterly income
preferred securities. Excluding AT&T Broadband's exchangeable notes, which are
mandatorily redeemable at AT&T Broadband's option into shares of certain
publicly traded companies held by AT&T Broadband, the Company currently
estimates that the combined company will require approximately $20 billion of
assumed, refinanced and new indebtedness upon completion of the AT&T Broadband
transaction. For each share of a class of common stock of Comcast that they hold
at the time of the merger, each Comcast shareholder will receive one share of a
corresponding class of stock of the combined company. The Company expects that
the transaction will qualify as tax-free to both the Company and to AT&T. The
Company will account for the transaction as an acquisition under the purchase
method of accounting, with the Company as the acquiring entity. Consideration of
facts and circumstances leading to the identification of the Company as the
acquiring entity is described in Note 5 to the financial statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
On July 10, 2002, shareholders of both the Company and AT&T approved the
transaction. The transaction is subject to customary closing conditions and
regulatory and other approvals. The Company expects to close the transaction by
the end of 2002.
UNAUDITED PRO FORMA INFORMATION
The following unaudited pro forma information has been presented as if the
acquisitions made by the Company in 2001 each occurred on January 1, 2001. For a
discussion of the Company's 2001 acquisitions, refer to the financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2001. This information is based on historical results of operations and has
been adjusted for acquisition costs. This information is not necessarily
indicative of what the results would have been had the Company operated the
entities acquired since January 1, 2001.
(AMOUNTS IN
MILLIONS, EXCEPT
PER SHARE DATA)
SIX MONTHS ENDED
JUNE 30, 2001
----------------
Revenues.................................................... $4,806.1
Income before cumulative effect of accounting change........ $ 605.9
Net income.................................................. $ 990.4
Diluted EPS................................................. $ 1.03
OTHER INCOME (EXPENSE)
On January 1, 2001, the Company completed its cable systems exchange with
Adelphia Communications Corporation ("Adelphia"). The Company received cable
systems serving approximately 445,000 subscribers from Adelphia and Adelphia
received certain of the Company's cable systems serving approximately 441,000
subscribers. The Company recorded to other income (expense) a pre-tax gain of
$1.199 billion, representing the difference between the estimated fair value of
$1.799 billion as of the closing date of the transaction and the Company's cost
basis in the systems exchanged (see Note 9).
F-135
COMCAST CORPORATION AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2002
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
5. INVESTMENTS
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
(DOLLARS IN MILLIONS)
Fair value method
AT&T Corp. ............................................... $ 444.2 $1,514.9
Sprint Corp. PCS Group.................................... 758.2 2,109.5
Other..................................................... 100.8 227.2
-------- --------
1,303.2 3,851.6
Cost method................................................. 128.3 143.6
Equity method............................................... 353.7 307.2
-------- --------
Total investments......................................... 1,785.2 4,302.4
Less, current investments................................... 1,057.6 2,623.2
-------- --------
Non-current investments..................................... $ 727.6 $1,679.2
======== ========
FAIR VALUE METHOD
The Company holds unrestricted equity investments in certain publicly
traded companies which it accounts for as available for sale or trading
securities. The unrealized pre-tax gains on available for sale investments as of
June 30, 2002 and December 31, 2001 of $32.4 million and $280.3 million,
respectively, have been reported in the Company's balance sheet principally as a
component of accumulated other comprehensive income (loss), net of related
deferred income taxes of $11.3 million and $95.3 million, respectively.
The cost, fair value and gross unrealized gains and losses related to the
Company's available for sale securities are as follows:
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
(DOLLARS IN MILLIONS)
Cost........................................................ $469.7 $1,355.0
Gross unrealized gains...................................... 33.1 283.2
Gross unrealized losses..................................... (0.7) (2.9)
------ --------
Fair value.................................................. $502.1 $1,635.3
====== ========
DERIVATIVES
The Company uses derivative financial instruments to manage its exposure to
fluctuations in interest rates, securities prices and certain foreign
currencies. The Company also invests in businesses, to some degree, through the
purchase of equity call option or call warrant agreements. The Company has
issued indexed debt instruments and prepaid forward sale agreements whose value,
in part, is derived from the market value of Sprint PCS common stock.
The unrealized pre-tax losses on cash flow hedges as of June 30, 2002 and
December 31, 2001 of $1.7 million and $0.9 million have been reported in the
Company's balance sheet as a component of
F-136
COMCAST CORPORATION AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2002
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
accumulated other comprehensive income (loss), net of related deferred income
taxes of $0.6 million and $0.3 million, respectively.
INVESTMENT INCOME (EXPENSE)
Investment income (expense) for the interim periods includes the following
(in millions):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
2002 2001 2002 2001
-------- -------- --------- --------
Interest and dividend income................. $ 10.6 $ 17.4 $ 17.5 $ 35.0
(Losses) gains on sales and exchanges of
investments, net........................... (102.5) 448.0 (100.9) 459.6
Investment impairment losses................. (208.7) (45.0) (221.3) (939.1)
Reclassification of unrealized gains......... 1,092.4
Unrealized (loss) gain on Sprint PCS common
stock...................................... (420.2) 392.4 (1,439.7) 265.6
Mark to market adjustments on derivatives
related to Sprint PCS common stock......... 324.2 (317.9) 1,171.1 (191.5)
Mark to market adjustments on derivatives and
hedged items............................... (62.5) 7.8 (133.8) (4.6)
------- ------- --------- --------
Investment income (expense)............. $(459.1) $ 502.7 $ (707.1) $ 717.4
======= ======= ========= ========
The investment impairment losses for the three and six months ended June
30, 2002 and the six months ended June 30, 2001 relate principally to other than
temporary declines in the Company's investment in AT&T.
The Company reclassified its investment in Sprint PCS from an available for
sale security to a trading security in connection with the adoption of SFAS No.
133 on January 1, 2001. In connection with this reclassification, the Company
recorded to investment income (expense) the accumulated unrealized gain of
$1.092 billion on the Company's investment in Sprint PCS which was previously
recorded as a component of accumulated other comprehensive income (loss).
6. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill by business segment (see
Note 11) for the periods presented are as follows (in millions):
CORPORATE
AND
CABLE COMMERCE OTHER TOTAL
-------- -------- --------- --------
Balance, December 31, 2001................... $4,688.4 $834.8 $766.2 $6,289.4
Purchase price allocation adjustments...... 5.1 151.8 156.9
-------- ------ ------ --------
Balance, June 30, 2002....................... $4,693.5 $834.8 $918.0 $6,446.3
======== ====== ====== ========
During the six months ended June 30, 2002, the Company recorded the final
purchase price allocation related to the Company's acquisition, on October 30,
2001, of Outdoor Life Network, which resulted in an increase in goodwill and a
corresponding decrease in cable and satellite television distribution rights. In
F-137
COMCAST CORPORATION AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2002
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
addition, during the six months ended June 30, 2002, the Company recorded the
final purchase price allocation related to certain of its cable system
acquisitions, which resulted in an increase in goodwill and a corresponding
decrease in franchise rights.
As of June 30, 2002, the weighted average amortization period for the
Company's intangible assets subject to amortization is 8.3 years and estimated
related amortization expense for each of the five years ended December 31 is as
follows (in millions):
2002........................................................ $200.7
2003........................................................ $188.4
2004........................................................ $173.4
2005........................................................ $159.1
2006........................................................ $136.9
The following pro forma financial information for the three and six months
ended June 30, 2001, and for the years ended December 31, 2001, 2000 and 1999,
is presented as if SFAS No. 142 was adopted as of January 1, 1999 (amounts in
millions, except per share data):
THREE SIX
MONTHS MONTHS
ENDED ENDED
JUNE 30, JUNE 30, YEARS ENDED DECEMBER 31,
2001 2001 2001 2000 1999
-------- -------- -------- -------- --------
Net Income
As reported....................... $ 35.2 $1,036.4 $ 608.6 $2,021.5 $1,065.7
Amortization of goodwill....... 81.8 154.4 334.8 303.5 128.5
Amortization of equity method
goodwill..................... 6.8 11.1 15.0 15.2 4.4
Amortization of franchise
rights....................... 274.7 529.4 1,083.7 858.1 258.3
------ -------- -------- -------- --------
As adjusted....................... $398.5 $1,731.3 $2,042.1 $3,198.3 $1,456.9
====== ======== ======== ======== ========
Income before extraordinary items
and cumulative effect of
accounting change, as
adjusted....................... $398.5 $1,346.8 $1,659.1 $3,221.9 $1,507.9
====== ======== ======== ======== ========
Basic EPS
As reported....................... $ 0.04 $ 1.09 $ 0.64 $ 2.24 $ 1.38
Amortization of goodwill....... 0.08 0.17 0.35 0.34 0.17
Amortization of equity method
goodwill..................... 0.01 0.01 0.02 0.02 0.01
Amortization of franchise
rights....................... 0.29 0.56 1.14 0.96 0.35
------ -------- -------- -------- --------
As adjusted....................... $ 0.42 $ 1.83 $ 2.15 $ 3.56 $ 1.91
====== ======== ======== ======== ========
F-138
COMCAST CORPORATION AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2002
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
THREE SIX
MONTHS MONTHS
ENDED ENDED
JUNE 30, JUNE 30, YEARS ENDED DECEMBER 31,
2001 2001 2001 2000 1999
-------- -------- -------- -------- --------
Diluted EPS
As reported....................... $ 0.04 $ 1.07 $ 0.63 $ 2.13 $ 1.30
Amortization of goodwill....... 0.08 0.16 0.35 0.32 0.16
Amortization of equity method
goodwill..................... 0.01 0.01 0.02 0.02 0.01
Amortization of franchise
rights....................... 0.28 0.55 1.12 0.90 0.31
------ -------- -------- -------- --------
As adjusted....................... $ 0.41 $ 1.79 $ 2.12 $ 3.37 $ 1.78
====== ======== ======== ======== ========
7. LONG-TERM DEBT
COMMERCIAL PAPER
The Company's senior bank credit facility consists of a $2.25 billion,
five-year revolving credit facility and a $1.925 billion, 364-day revolving
credit facility (together, the "Comcast Cable Revolver"). The 364-day revolving
credit facility supports the commercial paper program of Comcast Cable
Communications, Inc., a wholly owned subsidiary of the Company. Amounts
outstanding under the commercial paper program are classified as long-term in
the Company's balance sheet as of June 30, 2002 and December 31, 2001 as the
Company has both the ability and the intent to refinance these obligations, if
necessary, on a long-term basis with amounts available under the Comcast Cable
Revolver.
ZERO COUPON CONVERTIBLE DEBENTURES
The Company's Zero Coupon Debentures have a yield to maturity of 1.25%,
computed on a semi-annual bond equivalent basis. The Zero Coupon Debentures may
be converted, subject to certain restrictions, into shares of the Company's
Class A Special Common Stock at the option of the holder at a conversion rate of
14.2566 shares per $1,000 principal amount at maturity, representing an initial
conversion price of $54.67 per share. The Zero Coupon Debentures are senior
unsecured obligations. The Company may redeem for cash all or part of the Zero
Coupon Debentures on or after December 19, 2005.
Holders may require the Company to repurchase the Zero Coupon Debentures on
December 19, 2002, 2003, 2005, 2010 and 2015. Holders may surrender the Zero
Coupon Debentures for conversion at any time prior to maturity if the closing
price of the Company's Class A Special Common Stock is greater than 110% of the
accreted conversion price for at least 20 trading days of the 30 trading days
prior to conversion. Amounts outstanding under the Zero Coupon Debentures are
classified as long-term in the Company's balance sheet as of June 30, 2002 and
December 31, 2001 as the Company has both the ability and the intent to
refinance the Zero Coupon Debentures on a long-term basis with amounts available
under the Comcast Cable Revolver in the event holders of the Zero Coupon
Debentures exercise their rights to require the Company to repurchase the Zero
Coupon Debentures in December 2002.
ZONES
At maturity, holders of the Company's 2.0% Exchangeable Subordinated
Debentures due 2029 (the "ZONES") are entitled to receive in cash an amount
equal to the higher of the principal amount of the ZONES or the market value of
Sprint PCS common stock.
F-139
COMCAST CORPORATION AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2002
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Prior to maturity, each ZONES is exchangeable at the holders' option for an
amount of cash equal to 95% of the market value of Sprint PCS Stock. As of June
30, 2002, the number of Sprint PCS shares held by the Company exceeded the
number of ZONES outstanding.
As of June 30, 2002 and December 31, 2001, long-term debt includes $689.1
million and $1.613 billion, respectively, of ZONES. Upon adoption of SFAS No.
133, the Company split the accounting for the ZONES into derivative and debt
components. The Company records the change in the fair value of the derivative
component of the ZONES (see Note 5) and the increase in the carrying value of
the debt component of the ZONES as follows (in millions):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2002 2001 2002 2001
------- ------ ------- ------
Increase (decrease) in derivative component
to investment income (expense)........... $(271.3) $245.0 $(935.0) $175.6
Increase in debt component to interest
expense.................................. $ 5.8 $ 5.5 $ 11.5 $ 11.0
NEW CREDIT FACILITIES
On May 3, 2002, AT&T Broadband Corp. and AT&T Comcast Corporation, a
company owned 50% each by AT&T and the Company ("AT&T Comcast"), entered into
definitive credit agreements with a syndicate of lenders for an aggregate of
$12.825 billion of new indebtedness in order to obtain the financing necessary
to complete the AT&T Broadband transaction (see Note 4) and for the combined
company's financing needs after the transaction. This financing requires
subsidiary guarantees, including guarantees by certain of the Company's wholly
owned subsidiaries and by subsidiaries of AT&T Broadband. Under the terms of the
new credit facilities, the obligations of the lenders to provide the financing
upon the completion of the AT&T Broadband transaction are subject to a number of
conditions, including the condition that the combined company holds
investment-grade credit ratings from both the Standard & Poor's and Moody's
rating agencies at the time of closing. Accordingly, there can be no assurance
that AT&T Broadband Corp. and AT&T Comcast will be able to obtain the financing
necessary to complete the AT&T Broadband transaction.
INTEREST RATES
Excluding the derivative component of the ZONES whose changes in fair value
are recorded to investment income (expense), the Company's effective weighted
average interest rate on its long-term debt outstanding was 6.35% and 6.03% as
of June 30, 2002 and December 31, 2001, respectively.
INTEREST RATE RISK MANAGEMENT
During the six months ended June 30, 2002, the Company settled $950.0
million aggregate notional amount of fixed to variable interest rate exchange
agreements ("Swaps") and received proceeds of $56.8 million. This amount is
being recognized as an adjustment to interest expense over the term of the
related debt. During the six months ended June 30, 2002, variable to fixed Swaps
with an aggregate notional amount of $70.2 million expired. As of June 30, 2002,
the Company has variable to fixed Swaps with an aggregate notional amount of
$180.1 million with an average pay rate of 4.9% and an average receive rate of
1.9%. The Swaps mature between 2002 and 2003.
In June 2002, the Company entered into interest rate lock agreements ("Rate
Locks") to hedge the risk that the cash flows related to the interest payments
on an anticipated issuance or assumption of
F-140
COMCAST CORPORATION AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2002
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
certain fixed rate debt in connection with the AT&T Broadband transaction may be
adversely affected by interest rate fluctuations. The Rate Locks mature in the
fourth quarter of 2002, the timing of the anticipated issuance or assumption of
the fixed rate debt. To the extent the Rate Locks are effective in offsetting
the variability of the hedged cash flows, changes in the fair value of the Rate
Locks will not be included in earnings but will be reported as a component of
accumulated other comprehensive income (loss). Upon the issuance or assumption
of the debt, the value of the Rate Locks will be recognized as an adjustment to
interest expense over the same period in which the related interest costs on the
debt are recognized in earnings.
LINES AND LETTERS OF CREDIT
As of June 30, 2002, certain subsidiaries of the Company had unused lines
of credit of $3.363 billion under their respective credit facilities.
As of June 30, 2002, the Company and certain of its subsidiaries had unused
irrevocable standby letters of credit totaling $85.4 million to cover potential
fundings under various agreements.
8. STOCKHOLDERS' EQUITY
RETIREMENT OF SHARES
In March 2002, as a result of the merger of a wholly owned subsidiary into
the Company, approximately 23.3 million shares of the Company's Class A Special
Common Stock held by the subsidiary were retired and returned to authorized but
unissued status.
COMPREHENSIVE INCOME (LOSS)
The Company's total comprehensive income (loss) for the interim periods was
as follows (in millions):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2002 2001 2002 2001
-------- ------- ------- --------
Net income (loss).............................. $(209.6) $ 35.2 $(298.5) $1,036.4
Unrealized (losses) gains on marketable
securities................................... (223.0) 82.3 (364.3) 196.9
Reclassification adjustments for losses (gains)
included in net income (loss)................ 198.4 (65.4) 203.1 (329.1)
Unrealized gains (losses) on the effective
portion of cash flow hedges.................. 3.7 (0.5) (0.5) (1.7)
Foreign currency translation gains (losses).... 5.2 2.7 (6.4) (6.7)
------- ------ ------- --------
Comprehensive income (loss).................... $(225.3) $ 54.3 $(466.6) $ 895.8
======= ====== ======= ========
F-141
COMCAST CORPORATION AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2002
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
9. STATEMENT OF CASH FLOWS -- SUPPLEMENTAL INFORMATION
The fair values of the assets and liabilities acquired by the Company
through noncash transactions during the six months ended June 30, 2001 are as
follows (in millions):
Current assets.............................................. $ 56.6
Property, plant & equipment................................. 686.1
Intangible assets........................................... 2,755.8
Current liabilities......................................... (37.0)
--------
Net assets acquired.................................... $3,461.5
========
The Company made cash payments for interest and income taxes during the
interim periods as follows (in millions):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2002 2001 2002 2001
------- ------- ------ ------
Interest........................................ $237.5 $193.5 $347.3 $296.7
Income taxes.................................... $128.9 $111.3 $158.4 $126.4
10. COMMITMENTS AND CONTINGENCIES
Certain litigation has been filed against the Company as a result of
alleged conduct of the Company with respect to its investment in and
distribution relationship with At Home Corporation ("At Home"). At Home was a
provider of high-speed Internet access and content services, which filed for
bankruptcy protection in September 2001. Filed actions are: (i) class action
lawsuits against the Company, Brian L. Roberts (the Company's President and a
director), AT&T (the former controlling shareholder of At Home and also a former
distributor of the At Home service) and other corporate and individual
defendants in the Superior Court of San Mateo County, California, alleging
breaches of fiduciary duty on the part of the Company and the other defendants
in connection with transactions agreed to in March 2000 among At Home, the
Company, AT&T, Cox Communications, Inc. ("Cox," also an investor in At Home and
a former distributor of the At Home service); and (ii) class action lawsuits
against the Company, AT&T and others in the United States District Court for the
Southern District of New York, alleging securities law violations and common law
fraud in connection with disclosures made by At Home in 2001. The actions in San
Mateo County, California have been stayed by the United States Bankruptcy Court
for the Northern District of California, the court in which At Home filed for
bankruptcy, as violating the automatic bankruptcy stay. In the Southern District
of New York actions, the court has ordered the actions consolidated into a
single action. It is expected that an amended consolidated complaint will be
served in mid-October 2002. Following closing of the AT&T Comcast transaction,
the Company may be contractually liable for 50% of the liabilities of AT&T
relating to At Home (AT&T would be liable for the other 50% of these
liabilities). The Company has denied any wrongdoing in connection with these
claims, and intends to vigorously defend itself.
On September 23, 2002, the Official Committee of Unsecured Bondholders of
At Home filed suit in the United States District Court for the District of
Delaware against the Company, Cox, Brian L. Roberts in his capacity as a
director of At Home, and other corporate and individual defendants. The
complaint seeks alleged "short-swing" profits under Section 16(b) of the
Securities and Exchange Act in connection with At Home put options the Company
and Cox entered into with AT&T. The complaint alleges a total
F-142
COMCAST CORPORATION AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2002
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
of at least $600 million in damages in the aggregate from the Company and Cox in
connection with this claim. The complaint also seeks damages in an unspecified
amount for alleged breaches of fiduciary duty by the defendants in connection
with transactions entered into among AT&T, At Home, the Company and Cox. The
Company believes this suit is without merit and intends to vigorously defend
itself in the action.
In management's opinion, the final disposition of all these claims
(including taking into account the Company's contractual liability for 50% of
AT&T's liability as described above), will not have a material adverse effect on
the Company's or, following the closing of the AT&T Broadband transaction, the
combined company's consolidated financial condition or results of operations.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to such actions is not expected to materially
affect the financial condition, results of operations or liquidity of the
Company.
In connection with a license awarded to an affiliate, the Company is
contingently liable in the event of nonperformance by the affiliate to reimburse
a bank which has provided a performance guarantee. The amount of the performance
guarantee is approximately $200 million; however the Company's current estimate
of the amount of future expenditures (principally in the form of capital
expenditures) that will be made by the affiliate necessary to comply with the
performance requirements will not exceed $75 million.
11. FINANCIAL DATA BY BUSINESS SEGMENT
The following represents the Company's significant business segments,
"Cable" and "Commerce." The components of net income (loss) below operating
income (loss) are not separately evaluated by the Company's management on a
segment basis (dollars in millions).
CORPORATE AND
CABLE COMMERCE OTHER(1) TOTAL
--------- --------- ------------- ---------
Three Months Ended June 30, 2002
Revenues(2).................................. $ 1,540.8 $ 994.5 $ 173.6 $ 2,708.9
Operating income before depreciation and
amortization(3)........................... 653.2 194.5 18.9 866.6
Depreciation and amortization................ 298.1 28.1 62.0 388.2
Operating income (loss)...................... 355.1 166.4 (43.1) 478.4
Interest expense............................. 141.8 2.9 37.9 182.6
Capital expenditures......................... 330.6 50.6 8.6 389.8
Three Months Ended June 30, 2001
Revenues(2).................................. $ 1,325.9 $ 876.0 $ 136.8 $ 2,338.7
Operating income (loss) before depreciation
and amortization(3)....................... 548.6 159.8 (15.5) 692.9
Depreciation and amortization................ 740.8 36.8 48.6 826.2
Operating income (loss)...................... (192.2) 123.0 (64.1) (133.3)
Interest expense............................. 128.9 7.1 42.5 178.5
Capital expenditures......................... 513.2 41.9 71.7 626.8
F-143
COMCAST CORPORATION AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2002
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
CORPORATE AND
CABLE COMMERCE OTHER(1) TOTAL
--------- --------- ------------- ---------
Six Months Ended June 30, 2002
Revenues(2).................................. $ 3,010.2 $1,988.0 $ 383.2 $ 5,381.4
Operating income before depreciation and
amortization(3)........................... 1,250.7 386.8 37.3 1,674.8
Depreciation and amortization................ 590.7 55.5 129.1 775.3
Operating income (loss)...................... 660.0 331.3 (91.8) 899.5
Interest expense............................. 287.3 6.4 75.6 369.3
Capital expenditures......................... 688.7 82.4 17.8 788.9
Six Months Ended June 30, 2001
Revenues(2).................................. $ 2,520.3 $1,760.0 $ 290.4 $ 4,570.7
Operating income (loss) before depreciation
and amortization(3)....................... 1,035.7 332.5 (41.1) 1,327.1
Depreciation and amortization................ 1,424.8 71.4 64.7 1,560.9
Operating income (loss)...................... (389.1) 261.1 (105.8) (233.8)
Interest expense............................. 261.7 15.1 84.0 360.8
Capital expenditures......................... 950.9 68.0 124.8 1,143.7
As of June 30, 2002
Assets....................................... $28,840.3 $2,800.9 $4,477.6 $36,118.8
Long-term debt, less current portion......... 8,147.7 1.4 2,394.4 10,543.5
As of December 31, 2001
Assets....................................... $29,084.6 $2,809.2 $6,366.7 $38,260.5
Long-term debt, less current portion......... 8,363.2 62.7 3,315.7 11,741.6
---------------
(1) Other includes segments not meeting certain quantitative guidelines for
reporting including the Company's content and business communications
operations as well as elimination entries related to the segments presented.
Corporate and other assets consist primarily of the Company's investments
(see Note 5).
(2) Revenues include $151.4 million, $113.1 million, $296.6 million and $234.4
million during the three months ended June 30, 2002 and 2001 and during the
six months ended June 30, 2002 and 2001, respectively, of non-U.S. revenues,
principally related to the Company's commerce segment. No single customer
accounted for a significant amount of the Company's revenues in any period.
(3) Operating income (loss) before depreciation and amortization is commonly
referred to in the Company's businesses as "operating cash flow (deficit)."
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 the Company'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 the Company's
industries, although the Company'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 the Company'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 such
measurements as an indicator of the Company's performance.
F-144
EXCHANGE AGENT LUXEMBOURG EXCHANGE AGENT
The Bank of New York The Bank of New York (Luxembourg) S.A.
Corporate Trust Reorganization Unit Aerogolf Center-1A, Hoehenhof
101 Barclay Street, 7E L-1736 Senningerberg
New York, New York 10286 Luxembourg
Attn: Kin Lau Attn: Sunjeeve D. Patel
Toll Free: (800) 254-2826 Telephone: 44 207 964 6337
Telephone: (212) 815-3750 Facsimile: 44 207 964 6399
Facsimile: (212) 298-1915
INFORMATION AGENT
D.F. King & Co., Inc. D.F. King (Europe) Limited
77 Water Street, 20(th) Floor 2 London Wall Buildings-2nd Floor
New York, New York 10005 London EC2 M5PP
Banks and Brokers Call Collect: Telephone: 44 207 920 9700
(212) 269-5550
All Others Call Toll Free:
(866) 868-2409
DEALER MANAGERS
The Dealer Managers for the Exchange Offer are, in alphabetical order, as
follows:
CREDIT SUISSE FIRST BOSTON DEUTSCHE BANK SECURITIES GOLDMAN, SACHS & CO.
CORPORATION 31 West 52nd Street 85 Broad Street
11 Madison Avenue New York, New York 10019 New York, New York 10004
New York, New York 10010 Attn: Liability Management Group Attn: Liability Management Group
Attn: Liability Management Group Toll Free: (866) 627-0391 Toll Free: (877) 686-5059
Telephone: (800) 820-1653 International: 44 207 545 8011 Collect: (212) 902-0041
Collect: (212) 325-2537
JPMORGAN MERRILL LYNCH & CO. MORGAN STANLEY
270 Park Avenue 4 World Financial Center 1585 Broadway
New York, New York 10017 New York, New York 10080 New York, New York 10036
Attn: Liability Management Group Attn: Liability Management Group Attn: Liability Management Group
Telephone: (866) 834-4666 Toll Free: (888) 654-8637 Telephone: (800) 624-1808
Collect: (212) 834-4851 Collect: (212) 449-4914 Collect: (212) 761-2219
LUXEMBOURG LISTING AGENT
AND PAYING AGENT
The Bank of New York (Luxembourg) S.A.
Aerogolf Center-1A, Hoehenhof
L-1736 Senningerberg
Luxembourg
Attn: Jacqueline Geisen
Telephone: 44 207 964 7306
Facsimile: 44 207 964 6399
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
AT&T CORP.
AT&T Corp. is a corporation organized under New York law. Pursuant to the
statutes of the State of New York, a director or officer of a corporation is
entitled, under specified circumstances, to indemnification by the corporation
against reasonable expenses, including attorney's fees, incurred by him/her in
connection with the defense of a civil or criminal proceeding to which he/she
has been made, or threatened to be made, a party by reason of the fact that
he/she was such director or officer. In certain circumstances, indemnity is
provided against judgments, fines and amounts paid in settlement.
In general, indemnification is available where the director or officer
acted in good faith, for a purpose he/she reasonably believed to be in the best
interests of the corporation. Specific court approval is required in some cases.
The foregoing statement is subject to the detailed provisions of Sections 715,
717 and 721-725 of the New York Business Corporation Law.
The AT&T By-laws provide that AT&T is authorized, by a resolution of
shareholders, a resolution of directors or an agreement providing for such
indemnification, to the fullest extent permitted by applicable law, to provide
indemnification and to advance expenses to its directors and officers in respect
of claims, actions, suits or proceedings based upon, arising from, relating to
or by reason of the fact that any such director or officer serves or served in
such capacity with AT&T or at the request of AT&T in any capacity with any other
enterprise.
AT&T has entered into contracts with its officers and directors, pursuant
to the provisions of New York Business Corporation Law Section 721, by which it
will be obligated to indemnify such persons, to the fullest extent permitted by
the New York Business Corporation Law, against expenses, fees, judgments, fines
and amounts paid in settlement in connection with any present or future
threatened, pending or completed action, suit or proceeding based in any way
upon or related to the fact that such person was an officer or director of AT&T
or, at the request of AT&T, an officer, director or other partner, agent,
employee or trustee of another enterprise. The contractual indemnification so
provided will not extend to any situation where a judgment or other final
adjudication adverse to such person establishes that his/her acts were committed
in bad faith or were the result of active and deliberate dishonesty or that
there inured to such person a financial profit or other advantage.
The directors and officers of AT&T are covered by insurance policies
indemnifying against certain liabilities, including certain liabilities arising
under the Securities Act, that might be incurred by them in such capacities.
AT&T BROADBAND CORP.
AT&T Broadband Corp. is a corporation organized under the laws of the State
of Delaware. Subsection (a) of Section 145 of the General Corporation Law of the
State of Delaware empowers a corporation to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no cause to believe his conduct was unlawful.
II-1
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification may be made in respect to any claim, issue or matter as to which
such person shall have been adjudged to be liable to the corporation unless and
only to the extent that the Court of Chancery or the court in which such action
or suit was brought shall determine that despite the adjudication of liability
but in view of all the circumstances of the case such person is fairly and
reasonably entitled to indemnify for such expenses which the court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) or (b) or in the
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith; that indemnification or advancement of expenses provided
for by Section 145 shall not be deemed exclusive of any other rights to which
the indemnified party may be entitled; and empowers the corporation to purchase
and maintain insurance on behalf of a director, officer, employee or agent of
the corporation against any liability asserted against him or incurred by him in
any such capacity or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
Article VIII, Section 1 of Broadband's Certificate of Incorporation
provides that a director of Broadband will not be personally liable to Broadband
or its shareholder for monetary damages for breach of fiduciary duty as
director, except if this exemption is not permitted by the General Corporation
Law of the State of Delaware. Any repeal or modification of this provision will
not affect the rights of a director of Broadband prior to such repeal or
modification.
Article VIII, Section 2 of Broadband's Certificate of Incorporation
provides that each person who was or is made a party or is otherwise in any way
involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "proceeding"), by reason of the
fact that he, or the person from whom he is legal representative, is or was a
director or officer of Broadband or is or was serving at its request as a
director, officer or employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan (hereinafter an "indemnitee"), whether the
basis of the proceeding is alleged action in an official capacity or in any
other capacity while serving as a director, officer or employee, will be
indemnified and held harmless by Broadband to the fullest extent authorized by
the General Corporation Law of the State of Delaware against all expense,
liability and loss (including attorneys' fees, judgments, fines, Employee
Retirement Income Security Act of 1974 excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by the indemnitee in
connection with the proceeding. In the event that the General Corporation Law of
the State of Delaware is amended, the indemnification provided will change only
to the extent that the amendment permits Broadband to provide broader
indemnification rights than previously permitted. However, except in the case of
proceedings to enforce rights to indemnification, Broadband will indemnify an
indemnitee in connection with a proceeding (or part thereof) initiated by the
indemnitee only if the proceeding was authorized by the Board of Directors of
Broadband. The right to indemnification includes the right to be paid by
Broadband the advancement of expenses incurred in defending any proceeding in
advance of its final disposition; provided, however, that, if the General
Corporation Law of the State of Delaware requires, an advancement of expenses
incurred by an indemnitee in his capacity as a director or officer only will be
made only upon delivery to Broadband of an undertaking, by or on behalf of the
indemnitee, to repay all amounts so advanced if it is ultimately determined that
the indemnitee is not entitled to be indemnified for the expenses. Also, the
Board of Directors of Broadband may grant rights to indemnification as described
above to any of Broadband's employees and agents.
II-2
If a claim for indemnification is not paid in full within 30 days after a
written claim is received by Broadband, the indemnitee may bring suit to recover
the unpaid amount of the claim, and if successful in whole or in part, the
indemnitee will be entitled to be paid also the expense of prosecuting the suit.
It shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred in defending any proceeding in advance of
its final disposition where the required undertaking, if any is required, has
been tendered) that the claimant has not met the standards of conduct which make
it permissible under the General Corporation Law of the State of Delaware for
Broadband to indemnify the claimant for the amount claimed, but Broadband would
bear the burden of proving this defense.
Broadband may maintain insurance, at its expense, to protect itself and any
director, officer, employee or agent of Broadband or another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss, whether or not Broadband would have the power to indemnify
such person under the General Corporation Law of the State of Delaware.
AT&T COMCAST CORPORATION
Indemnification under Pennsylvania Law and AT&T Comcast Charter and
Bylaws. Sections 1741 through 1750 of Subchapter D, Chapter 17, of the
Pennsylvania Business Corporation Law ("PBCL") contain provisions for mandatory
and discretionary indemnification of a corporation's directors, officers and
other personnel, and related matters.
Under Section 1741 of the PBCL, subject to certain limitations, a
corporation has the power to indemnify directors and officers under certain
prescribed circumstances against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with an action or proceeding, whether civil, criminal,
administrative or investigative (other than derivative actions), to which any
such officer or director is a party or is threatened to be made a party by
reason of such person being a representative of the corporation or serving at
the request of the corporation as a representative of another domestic or
foreign corporation for profit or not-for-profit, partnership, joint venture,
trust or other enterprise, so long as the director or officer acted in good
faith and in a manner reasonably believed to be in, or not opposed to, the best
interests of the corporation and, with respect to any criminal proceeding, such
officer or director had no reasonable cause to believe his/her conduct was
unlawful.
Section 1742 of the PBCL permits indemnification in derivative and
corporate actions if the appropriate standard of conduct is met, except in
respect of any claim, issue or matter as to which the person has been adjudged
to be liable to the corporation unless and only to the extent that the proper
court determines upon application that, despite the adjudication of liability
but in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for the expenses that the court deems proper.
Under Section 1743 of the PBCL, indemnification is mandatory to the extent
that the officer or director has been successful on the merits or otherwise in
defense of any action or proceeding referred to in Section 1741 or 1742 of the
PBCL.
Section 1744 of the PBCL provides that, unless ordered by a court, any
indemnification under Section 1741 or 1742 of the PBCL shall be made by the
corporation only as authorized in the specific case upon a determination that
the representative met the applicable standard of conduct, and such
determination will be made by (i) the board of directors by a majority vote of a
quorum of directors not parties to the action or proceeding, (ii) if a quorum is
not obtainable, or if obtainable and a majority of disinterested directors so
directs, by independent legal counsel in a written opinion, or (iii) by the
shareholders.
Section 1745 of the PBCL provides that expenses (including attorneys' fees)
incurred by an officer, director, employee or agent in defending any action or
proceeding referred to in Subchapter D of Chapter 17 of the PBCL may be paid by
the corporation in advance of the final disposition of such action or proceeding
upon receipt of an undertaking by or on behalf of such person to repay such
amount if it
II-3
shall ultimately be determined that he is not entitled to be indemnified by the
corporation. Except as otherwise provided in the corporation's bylaws,
advancement of expenses must be authorized by the board of directors.
Section 1746 of the PBCL provides generally that the indemnification and
advancement of expenses provided by Subchapter D of Chapter 17 of the PBCL shall
not be deemed exclusive of any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of shareholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding that office. In no event may indemnification be made in any case where
the act or failure to act giving rise to the claim for indemnification is
determined by a court to have constituted willful misconduct or recklessness.
Section 1747 of the PBCL grants a corporation the power to purchase and
maintain insurance on behalf of any director or officer against any liability
incurred by him in his capacity as officer or director, whether or not the
corporation would have the power to indemnify him against that liability under
Subchapter D of Chapter 17 of the PBCL.
Sections 1748 and 1749 of the PBCL extend the indemnification and
advancement of expenses provisions contained in Subchapter D of Chapter 17 of
the PBCL to successor corporations in fundamental changes and to representatives
serving as fiduciaries of employee benefit plans.
Section 1750 of the PBCL provides that the indemnification and advancement
of expenses provided by, or granted pursuant to, Subchapter D of Chapter 17 of
the PBCL shall, unless otherwise provided when authorized or ratified, continue
as to a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the heirs and personal representatives of such
person.
Upon completion of the AT&T Comcast transaction, Article Eleventh of the
AT&T Comcast charter and Article VII of the AT&T Comcast bylaws will provide
that no director of AT&T Comcast will be personally liable, as such, for
monetary damages (other than under criminal statutes and under laws imposing
such liability on directors or officers for the payment of taxes) unless such
person's conduct constitutes self-dealing, wilful misconduct or recklessness.
Article Eleventh of the AT&T Comcast charter will also extend such protection to
officers.
In addition, upon completion of the AT&T Comcast transaction, Article VII
of the AT&T Comcast bylaws will provide that each officer and director of AT&T
Comcast will be indemnified and held harmless by AT&T Comcast for all actions
taken by him or her and for all failures to take action (regardless of the date
of any such action or failure to take action) to the fullest extent permitted by
Pennsylvania law against all expense, liability and loss (including, without
limitation, attorneys' fees, judgments, fines, taxes, penalties and amounts paid
or to be paid in settlement) reasonably incurred or suffered by such officer or
director in connection with any threatened, pending or completed action, suit or
proceeding (including, without limitation, an action, suit or proceeding by or
in the right of AT&T Comcast), whether civil, criminal, administrative or
investigative.
The foregoing statements are subject to the detailed provisions of the PBCL
and to the applicable provisions of the AT&T Comcast charter and bylaws that
will be in effect upon completion of the transactions described in the joint
proxy statement/prospectus included in this registration statement.
Merger Agreement Provision Relating To AT&T and Comcast Directors and
Officers. AT&T Comcast has agreed in the merger agreement for the AT&T Comcast
transaction 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 AT&T Comcast transaction becomes such an officer or director, from their
acts or omissions in those capacities occurring at or prior to the completion of
such transactions 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 for the AT&T Comcast
transaction and the transactions contemplated by the merger agreement.
II-4
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 for the AT&T Comcast transaction and the transactions contemplated by
the merger agreement.
For six years after completion of the AT&T Comcast transaction, AT&T
Comcast will provide officers' and directors' liability insurance in respect of
acts or omissions occurring prior to completion of the such transactions
covering each officer and director identified in the second preceding paragraph
(for officers and directors of AT&T and its subsidiaries, only for acts or
omissions of such person acting in connection with either AT&T's broadband
business or the merger agreement for the AT&T Comcast transaction 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.
COMCAST CABLE COMMUNICATIONS, INC.
Comcast Cable Communications, Inc. is a corporation organized under the
laws of the State of Delaware. The applicable provisions relating to the
indemnification of officers and directors under the General Corporation Law of
the State of Delaware are described above under "-- AT&T Broadband Corp."
In addition, Section 7-1 of Comcast Cable's By-laws provides that Comcast
Cable will indemnify any of its directors or officers or any director or officer
who is or was serving as a director, officer, employee or agent of another
company, partnership, joint venture, trust or other enterprise (any such person
is hereinafter referred to as a "director or officer") against expenses
(including, but not limited to, attorneys' fees), judgments, fines and amounts
paid in settlement, actually and reasonably incurred by such director or
officer, to the fullest extent now or hereafter permitted by law in connection
with any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (a "Proceeding"), brought or
threatened to be brought against such director or officer by reason of the fact
that he or she is or was serving in any such capacity or in any other capacity
on behalf of the company, its parent or any of its subsidiaries.
Section 7-2 of Comcast Cable's By-laws provides that expenses incurred by
any director or officer in defending a Proceeding will be paid by Comcast Cable
in advance of the final disposition of such Proceeding as authorized by the
Board of Directors in the specific case upon receipt of an undertaking, by or on
behalf of such director or officer, to repay such amount without interest if it
is ultimately determined that he or she is not entitled to be indemnified by
Comcast Cable as authorized by law.
Section 7-4 of Comcast Cable's By-laws provides that Comcast Cable may
purchase and maintain insurance on behalf of any person who is or was a director
or officer of Comcast Cable against any liability asserted against him or her
and incurred by him or her in any such capacity, or arising out of his or her
status as such, whether or not Comcast Cable would have the power to indemnify
him or her against such liability under law.
MEDIAONE GROUP, INC.
MediaOne Group, Inc. is a corporation organized under the laws of the State
of Delaware. The indemnification of officers and directors provided for by
MediaOne's organizational documents and the General Corporation Law of the State
of Delaware is identical to the indemnification provisions described above under
"-- AT&T Broadband Corp."
II-5
AT&T BROADBAND, LLC
AT&T Broadband, LLC, referred to as TCI in this prospectus, is a limited
liability company organized under the laws of the State of Delaware. Section
18-108 of the Delaware Limited Liability Company Act permits a limited liability
company, subject to any restrictions that may be set forth in its limited
liability company agreement, to indemnify its members and managers from and
against any and all claims and demands.
Section 12(a) of TCI's LLC Agreement provides that TCI will indemnify the
manager and the member, which in each case is AT&T, and any current or former
director or officer of AT&T (each, an "indemnitee") from and against all loss,
damage, expense (including reasonable attorney's and other advisor's fees, court
costs and other liabilities incurred in any proceeding to which AT&T is made a
party) incurred because of AT&T's role as manager or member. Also, each
indemnitee will be indemnified for losses resulting from the indemnitee's acts
or failures to act with respect to the business or affairs of TCI, if the
indemnitee (a) acts in good faith, (b) if acting in an official capacity,
reasonably believed the action was in the best interests of TCI, and if not
acting in an official capacity, believed that the conduct was not opposed to
TCI's best interests, and (c) if in a criminal proceeding, had no reasonable
cause to believe its conduct was unlawful. Section 12(c) of TCI's LLC Agreement
provides that TCI may advance funds to AT&T in respect of expenses incurred by
AT&T in a proceeding prior to the final disposition of the proceeding if AT&T
gives written affirmation of its good-faith belief that it has complied with the
standards of conduct described in the preceding sentence, agrees to repay the
advancement with interest if it is determined that the standards of conduct were
not met, and TCI determines that indemnification is permissible under these
standards. Also, Section 12(e) provides that TCI will indemnify specified
officers, and it may in its discretion indemnify employees, on the same basis as
it indemnifies AT&T as described above.
Section 12(b) of TCI's LLC Agreement provides that, notwithstanding the
above paragraph, TCI will not indemnify an indemnitee in connection with any
proceeding in which AT&T is adjudged liable to TCI or any proceeding charging
improper personal benefit to AT&T wherein the indemnitee was adjudged liable on
the basis of improperly receiving a personal benefit.
Section 12(f) of TCI's LLC Agreement provides that neither AT&T nor
specified officers will be liable to TCI for any loss, damage or expense if AT&T
or such officers, as the case may be (a) acts in good faith, (b) if acting in an
official capacity, reasonably believed the action was in the best interests of
TCI, and if not in an official capacity, believed that the conduct was not
opposed to TCI's best interests, and (c) if in a criminal proceeding, had no
reasonable cause to believe its conduct was unlawful. However, AT&T or the
specified officers will be liable for any loss, expense or damage incurred in
connection with a proceeding in which AT&T or such officers is adjudged liable
to TCI as a result of not meeting the standards of conduct described in the
preceding sentence or a proceeding charging improper personal benefit to AT&T
wherein the indemnitee was adjudged liable on the basis of improperly receiving
a personal benefit.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT
NO. DOCUMENT
------- --------
1.1 Form of Dealer Manager Agreement.
2.1 Agreement and Plan of Merger dated as of December 19, 2001,
as amended, among AT&T Corp., AT&T Broadband Corp., Comcast
Corporation, AT&T Broadband Acquisition Corp., Comcast
Acquisition Corp. and AT&T Comcast Corporation.(1)
2.2 Separation and Distribution Agreement dated as of December
19, 2001, as amended, between AT&T Corp. and AT&T Broadband
Corp.(1)
2.3 Support Agreement dated as of December 19, 2001, as amended,
AT&T Corp., Comcast Corporation, AT&T Comcast Corporation,
Sural LLC and Brian L. Roberts.(1)
II-6
EXHIBIT
NO. DOCUMENT
------- --------
2.4 Tax Sharing Agreement dated as of December 19, 2001 between
AT&T Corp. and AT&T Broadband Corp.(1)
2.5 Employee Benefits Agreement dated as of December 19, 2001
between AT&T Corp. and AT&T Broadband Corp.(2)
2.6 Exchange Agreement dated as of December 7, 2001, as amended,
between Microsoft Corporation and Comcast Corporation.(3)
2.7 Instrument of Admission dated as of December 19, 2001, as
amended, between AT&T Comcast Corporation and AT&T Corp.(1)
4.1 Indenture, dated as of September 7, 1990 between AT&T Corp.
and The Bank of New York, as trustee, relating to the
Broadband Eligible Notes and the AT&T Eligible Notes.(3)
4.2 First Supplemental Indenture, dated as of October 30, 1992
between AT&T Corp. and The Bank of New York, as trustee,
relating to the Broadband Eligible Notes and AT&T Eligible
Notes.(4)
4.3 Form of Permanent Global Registered Fixed Rate Note.(3)
4.4 Form of Definitive Registered Fixed Rate Note.(3)
4.5 Form of Temporary Global Bearer Fixed Rate Note.(3)
4.6 Form of Permanent Global Bearer Fixed Rate Note.(3)
4.7 Form of Definitive Bearer Fixed Rate Note.(3)
4.8 Form of Medium-Term Global Floating Rate Note, Registered
Security.(4)
4.9 Form of Medium-Term Definitive Floating Rate Note,
Registered Security.(4)
4.10 Form of Second Supplemental Indenture between AT&T Corp. and
The Bank of New York, as trustee, relating to the Note
Amendment.(6)
4.11 5.625% Notes Due 2004 (New AT&T Notes).(6)
4.12 6.75% Notes Due 2004 (New AT&T Notes).(6)
4.13 7.75% Medium-Term Notes, Series A Due May 15, 2025 (New AT&T
Notes).(6)
4.14 8.00% Medium-Term Notes, Series A Due May 15, 2025 (New AT&T
Notes).(6)
4.15 6.50% Notes Due March 15, 2013 (New AT&T Notes).(6)
4.16 FRN Medium-Term Notes, Series A Due 2054 (New AT&T
Notes).(6)
4.17 Form of Third Supplemental Indenture among AT&T Corp., AT&T
Broadband Corp. and The Bank of New York, as trustee,
relating to the Broadband Exchange Notes, including forms of
the Broadband Exchange Notes.(6)
4.18 Form of Indenture among AT&T Broadband Corp., the Cable
Guarantors party thereto and the Bank of New York, as
trustee, relating to the New Broadband Notes.(6)
4.19 Form of New Broadband Notes.(6)
4.20 Credit Agreement dated as of April 26, 2002 among AT&T
Comcast Corporation, AT&T Broadband Corp., the Financial
Institutions party thereto, JPMorgan Chase Bank, as
Administrative Agent, Swing Line Lender and Issuing Lender,
Citibank, N.A., as Syndication Agent, and Bank of America,
N.A., Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Morgan Stanley Senior Funding, Inc.,
as Co-Documentation Agents.(5)
4.21 Bridge Credit Agreement dated as of April 26, 2002 among
AT&T Comcast Corporation, AT&T Broadband Corp., the
Financial Institutions party thereto, JPMorgan Chase Bank,
as Administrative Agent, Swing Line Lender and Issuing
Lender, Citibank, N.A., as Syndication Agent, and Bank of
America, N.A., Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Morgan Stanley Senior
Funding, Inc., as Co-Documentation Agents.(5)
II-7
EXHIBIT
NO. DOCUMENT
------- --------
4.22 Credit Agreement dated as of May 3, 2002 among AT&T
Broadband Corp., AT&T Comcast Corporation, the Financial
Institutions party thereto, JPMorgan Chase Bank, as
Administrative Agent, Citibank, N.A., Bank of America, N.A.,
Merrill Lynch Capital Corporation and Morgan Stanley Senior
Funding, Inc.(5)
5.1 Opinion of Robert S. Feit with respect to the New AT&T Notes
and the Broadband Exchange Notes.
5.2 Opinion of James N. Zerefos with respect to the Broadband
Exchange Notes.
5.3 Opinion of Davis Polk & Wardwell with respect to the New
Broadband Notes.
12.1 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges for AT&T Corp.(6)
12.2 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges for AT&T Broadband Corp.(6)
12.3 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges for Comcast Corporation.(6)
12.4 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges for Comcast Cable Communications, Inc.(6)
12.5 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges with respect to MediaOne Group, Inc.(6)
12.6 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges with respect to AT&T Broadband, LLC.(6)
12.7 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges with respect to AT&T Comcast Corporation.(6)
23.1 Consent of Deloitte & Touche LLP with respect to AT&T
Comcast Corporation.
23.2 Consent of Deloitte & Touche LLP with respect to Comcast
Cable Communications, Inc.
23.3 Consent of Deloitte & Touche LLP with respect to Comcast
Corporation.
23.4 Consent of PricewaterhouseCoopers LLP with respect to AT&T
Corp.
23.5 Consent of PricewaterhouseCoopers LLP with respect to AT&T
Broadband Corp.
23.6 Consent of PricewaterhouseCoopers LLP with respect to AT&T
Broadband Group.
23.7 Consent of PricewaterhouseCoopers LLP with respect to
Concert, B.V.
23.8 Consent of KPMG LLP with respect to AT&T Canada Inc.
23.9 Consent of KPMG LLP with respect to Liberty Media
Corporation.
23.10 Consent of Robert S. Feit (included in Exhibit 5.1).
23.11 Consent of James N. Zerefos (included in Exhibit 5.2).
23.12 Consent of Davis Polk & Wardwell (included in Exhibit 5.3).
24 Powers of Attorney.(6)
25.1 Statement of Eligibility on Form T-1 of The Bank of New
York, as trustee, with respect to the Second Supplemental
Indenture between AT&T Corp. and The Bank of New York, as
trustee, relating to the Note Amendment.(6)
25.2 Statement of Eligibility on Form T-1 of The Bank of New
York, as trustee, with respect to the Third Supplemental
Indenture between AT&T Corp. and The Bank of New York, as
trustee, relating to the Broadband Exchange Notes.(6)
25.3 Statement of Eligibility on Form T-1 of The Bank of New
York, as trustee, with respect to the Indenture among AT&T
Broadband Corp., the Cable Guarantors party thereto and The
Bank of New York, as trustee, relating to the New Broadband
Notes.(6)
99.1.1 Form of Letter of Transmittal for Broadband Eligible
Notes.(6)
II-8
EXHIBIT
NO. DOCUMENT
------- --------
99.1.2 Form of Letter of Transmittal for AT&T Eligible Notes.(6)
99.2.1 Form of Notice of Guaranteed Delivery for Broadband Eligible
Notes.(6)
99.2.2 Form of Notice of Guaranteed Delivery for AT&T Eligible
Notes.(6)
99.3.1 Form of Letter to Registered Holders and The Depository
Trust Company Participants for Broadband Eligible Notes.(6)
99.3.2 Form of Letter to Registered Holders and The Depository
Trust Company Participants for AT&T Eligible Notes.(6)
99.4.1 Form of Letter to Clients for Broadband Eligible Notes.(6)
99.4.2 Form of Letter to Clients for AT&T Eligible Notes.(6)
99.5.1 Form of Instructions to Registered Holder and/or Book-Entry
Transfer Participant from Owner for Broadband Eligible
Notes.(6)
99.5.2 Form of Instructions to Registered Holder and/or Book-Entry
Transfer Participant from Owner for AT&T Eligible Notes.(6)
---------------
(1) Incorporated by reference to the AT&T Comcast Corporation Registration
Statement on Form S-4, filed on February 11, 2002.
(2) Incorporated by reference to AT&T's Annual Report on Form 10-K for the year
ended December 31, 2001, filed on April 1, 2002.
(3) Incorporated by reference to AT&T's Registration Statement on Form SE, dated
September 10, 1990.
(4) Incorporated by reference to AT&T's Current Report on Form 8-K, dated
December 1, 1992.
(5) Incorporated by reference to the AT&T Comcast Corporation Amended
Registration Statement on Form S-4/A, filed on May 14, 2002.
(6) Previously filed with this Registration Statement.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrants hereby undertake that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) The undersigned registrants hereby undertake to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
If a claim for indemnification against such liabilities (other than the payment
by us of expenses incurred or paid by one of our directors, officers or
controlling persons in the successful defense of any action, suit or
II-9
proceeding) is asserted by such director, officer or controlling person in
connection with the notes being registered, we will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(d) The undersigned hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(e) The undersigned hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-10
SIGNATURES FOR AT&T CORP.
Pursuant to the requirements of the Securities Act of 1933, AT&T CORP. has
duly caused this amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on
October 4, 2002.
AT&T CORP.
By: /s/ ROBERT S. FEIT
------------------------------------
Name: Robert S. Feit
Title: Vice President--Law and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
* Chairman and Chief Executive October 4, 2002
------------------------------------------------ Officer (Principal Executive
C. Michael Armstrong Officer) and Director
* Senior Executive Vice President October 4, 2002
------------------------------------------------ and Chief Financial Officer
Thomas W. Horton (Principal Financial Officer)
* Vice President and Controller October 4, 2002
------------------------------------------------ (Principal Accounting Officer)
Nicholas S. Cyprus
* Director October 4, 2002
------------------------------------------------
J. Michael Cook
* Director October 4, 2002
------------------------------------------------
David W. Dorman
* Director October 4, 2002
------------------------------------------------
M. Kathryn Eickhoff
* Director October 4, 2002
------------------------------------------------
George M.C. Fisher
* Director October 4, 2002
------------------------------------------------
Frank C. Herringer
* Director October 4, 2002
------------------------------------------------
Amos B. Hostetter, Jr.
* Director October 4, 2002
------------------------------------------------
Shirley A. Jackson
II-11
SIGNATURE CAPACITY DATE
--------- -------- ----
* Director October 4, 2002
------------------------------------------------
Donald F. McHenry
* Director October 4, 2002
------------------------------------------------
Charles H. Noski
* Director October 4, 2002
------------------------------------------------
Louis A. Simpson
* Director October 4, 2002
------------------------------------------------
Michael I. Sovern
* Director October 4, 2002
------------------------------------------------
Sanford I. Weill
* Director October 4, 2002
------------------------------------------------
Tony L. White
*By: /s/ ROBERT S. FEIT
------------------------------------------
Robert S. Feit
(Attorney-in-fact)
October 4, 2002
II-12
SIGNATURES FOR AT&T BROADBAND CORP.
Pursuant to the requirements of the Securities Act of 1933, AT&T BROADBAND
CORP. has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on October 4, 2002.
AT&T BROADBAND CORP.
By: /s/ ROBERT S. FEIT
------------------------------------
Name: Robert S. Feit
Title: Vice President and Assistant
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
* Chairman and President (Principal October 4, 2002
------------------------------------------------ Executive Officer) and Director
Raymond E. Liguori
* Vice President and Treasurer October 4, 2002
------------------------------------------------ (Principal Financial and
Edward M. Dwyer Accounting Officer)
/s/ DAVID J. PESTER Director October 4, 2002
------------------------------------------------
David J. Pester
/s/ ROBERT S. FEIT Director October 4, 2002
------------------------------------------------
Robert S. Feit
*By: /s/ ROBERT S. FEIT
-----------------------------------------
Robert S. Feit
(Attorney-in-fact)
October 4, 2002
II-13
SIGNATURES FOR AT&T COMCAST CORPORATION
Pursuant to the requirements of the Securities Act of 1933, AT&T COMCAST
CORPORATION has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on October 4, 2002.
AT&T COMCAST CORPORATION
By: /s/ ARTHUR R. BLOCK
------------------------------------
Name: Arthur R. Block
Title: Senior Vice President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
* Co-President (Co-Principal October 4, 2002
------------------------------------------------ Executive Officer)
Brian L. Roberts
* Co-President (Co-Principal October 4, 2002
------------------------------------------------ Executive Officer)
C. Michael Armstrong
* Executive Vice President and October 4, 2002
------------------------------------------------ Co-Treasurer (Co-Principal
John R. Alchin Financial Officer)
* Executive Vice President and October 4, 2002
------------------------------------------------ Co-Treasurer and Director
Charles H. Noski (Co-Principal Financial Officer)
* Executive Vice President and October 4, 2002
------------------------------------------------ Director (Co-Principal Accounting
Lawrence S. Smith Officer)
* Executive Vice President (Co- October 4, 2002
------------------------------------------------ Principal Accounting Officer)
Nicholas S. Cyprus
* Executive Vice President, Co- October 4, 2002
------------------------------------------------ Secretary and Director
Stanley Wang
* Executive Vice President, Co- October 4, 2002
------------------------------------------------ Secretary and Director
James Cicconi
/s/ ARTHUR R. BLOCK Senior Vice President, Assistant October 4, 2002
------------------------------------------------ Secretary, Assistant Treasurer,
Arthur R. Block and Director
*By: /s/ ARTHUR R. BLOCK
------------------------------------------
Arthur R. Block
(Attorney-in-fact)
October 4, 2002
II-14
SIGNATURES FOR COMCAST CABLE COMMUNICATIONS, INC.
Pursuant to the requirements of the Securities Act of 1933, COMCAST CABLE
COMMUNICATIONS, INC. has duly caused this amendment to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of New York, State of
New York, on October 4, 2002.
COMCAST CABLE
COMMUNICATIONS, INC.
By: /s/ ARTHUR R. BLOCK
------------------------------------
Name: Arthur R. Block
Title: Senior Vice President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
* Chairman and Director October 4, 2002
------------------------------------------------
Ralph J. Roberts
* Vice Chairman and Director October 4, 2002
------------------------------------------------ (Principal Executive Officer)
Brian L. Roberts
* Executive Vice President and October 4, 2002
------------------------------------------------ Director
Lawrence S. Smith
* Executive Vice President, October 4, 2002
------------------------------------------------ Secretary and Director
Stanley L. Wang
* Executive Vice President and October 4, 2002
------------------------------------------------ Treasurer (Principal Financial
John R. Alchin Officer)
* Senior Vice President (Principal October 4, 2002
------------------------------------------------ Accounting Officer)
Lawrence J. Salva
*By: /s/ ARTHUR R. BLOCK
------------------------------------------
Arthur R. Block
(Attorney-in-fact)
October 4, 2002
II-15
SIGNATURES FOR MEDIAONE GROUP, INC.
Pursuant to the requirements of the Securities Act of 1933, MEDIAONE GROUP,
INC. has duly caused this amendment to be signed on its behalf by the
undersigned, in the City of New York, State of New York, on October 4, 2002.
MEDIAONE GROUP, INC.
By: /s/ ROBERT S. FEIT
------------------------------------
Name: Robert S. Feit
Title: Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
* President and Chief Executive October 4, 2002
------------------------------------------------ Officer (Principal Executive
William T. Schleyer Officer) and Director
* Executive Vice President and Chief October 4, 2002
------------------------------------------------ Financial Officer (Principal
Michael P. Huseby Financial Officer)
* Vice President and Controller October 4, 2002
------------------------------------------------ (Principal Accounting Officer)
Scott D. Macdonald
/s/ ROBERT S. FEIT Director October 4, 2002
------------------------------------------------
Robert S. Feit
*By: /s/ ROBERT S. FEIT
------------------------------------------
Robert S. Feit
(Attorney-in-fact)
October 4, 2002
II-16
SIGNATURES FOR AT&T BROADBAND, LLC
Pursuant to the requirements of the Securities Act of 1933, AT&T BROADBAND,
LLC has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on October 4, 2002.
AT&T BROADBAND, LLC
By: /s/ ROBERT S. FEIT
------------------------------------
Name: Robert S. Feit
Title: Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
* President and Chief Executive October 4, 2002
------------------------------------------------ Officer (Principal Executive
William T. Schleyer Officer)
* Executive Vice President and Chief October 4, 2002
------------------------------------------------ Financial Officer (Principal
Michael P. Huseby Financial Officer)
* Vice President and Controller October 4, 2002
------------------------------------------------ (Principal Accounting Officer)
Scott D. Macdonald
*By: /s/ ROBERT S. FEIT
------------------------------------------
Robert S. Feit
(Attorney-in-fact)
AT&T CORP.
By: /s/ ROBERT S. FEIT Sole Member October 4, 2002
------------------------------------------
Robert S. Feit
Vice President -- Law
and Secretary
October 4, 2002
II-17
INDEX OF EXHIBITS
EXHIBIT
NO. DOCUMENT
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1.1 Form of Dealer Manager Agreement.
2.1 Agreement and Plan of Merger dated as of December 19, 2001,
as amended, among AT&T Corp., AT&T Broadband Corp., Comcast
Corporation, AT&T Broadband Acquisition Corp., Comcast
Acquisition Corp. and AT&T Comcast Corporation.(1)
2.2 Separation and Distribution Agreement dated as of December
19, 2001, as amended, between AT&T Corp. and AT&T Broadband
Corp.(1)
2.3 Support Agreement dated as of December 19, 2001, as amended,
AT&T Corp., Comcast Corporation, AT&T Comcast Corporation,
Sural LLC and Brian L. Roberts.(1)
2.4 Tax Sharing Agreement dated as of December 19, 2001 between
AT&T Corp. and AT&T Broadband Corp.(1)
2.5 Employee Benefits Agreement dated as of December 19, 2001
between AT&T Corp. and AT&T Broadband Corp.(2)
2.6 Exchange Agreement dated as of December 7, 2001, as amended,
between Microsoft Corporation and Comcast Corporation.(1)
2.7 Instrument of Admission dated as of December 19, 2001, as
amended, between AT&T Comcast Corporation and AT&T Corp.(1)
4.1 Indenture, dated as of September 7, 1990 between AT&T Corp.
and The Bank of New York, as trustee, relating to the
Broadband Eligible Notes and the AT&T Eligible Notes.(3)
4.2 First Supplemental Indenture, dated as of October 30, 1992
between AT&T Corp. and The Bank of New York, as trustee,
relating to the Broadband Eligible Notes and AT&T Eligible
Notes.(4)
4.3 Form of Permanent Global Registered Fixed Rate Note.(3)
4.4 Form of Definitive Registered Fixed Rate Note.(3)
4.5 Form of Temporary Global Bearer Fixed Rate Note.(3)
4.6 Form of Permanent Global Bearer Fixed Rate Note.(3)
4.7 Form of Definitive Bearer Fixed Rate Note.(3)
4.8 Form of Medium Term Global Floating Rate Note, Registered
Security.(4)
4.9 Form of Medium Term Definitive Floating Rate Note,
Registered Security.(4)
4.10 Form of Second Supplemental Indenture between AT&T Corp. and
The Bank of New York, as trustee, relating to the Note
Amendment and the New AT&T Notes.(6)
4.11 5.625% Notes Due 2004 (New AT&T Notes).(6)
4.12 6.75% Notes Due 2004 (New AT&T Notes).(6)
4.13 7.75% Medium-Term Notes, Series A Due May 15, 2025 (New AT&T
Notes).(6)
4.14 8.00% Medium-Term Notes, Series A Due May 15, 2025 (New AT&T
Notes).(6)
4.15 6.50% Notes Due March 15, 2013 (New AT&T Notes).(6)
4.16 FRN Medium-Term Notes, Series A Due 2054 (New AT&T
Notes).(6)
4.17 Form of Third Supplemental Indenture among AT&T Corp., AT&T
Broadband Corp. and The Bank of New York, as trustee,
relating to the Broadband Exchange Notes, including forms of
the Broadband Exchange Notes.(6)
4.18 Form of Indenture among AT&T Broadband Corp., the Cable
Guarantors party thereto and The Bank of New York, as
trustee, relating to the New Broadband Notes.(6)
4.19 Form of New Broadband Notes.(6)
EXHIBIT
NO. DOCUMENT
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4.20 Credit Agreement dated as of April 26, 2002 among AT&T
Comcast Corporation, AT&T Broadband Corp., the Financial
Institutions party thereto, JPMorgan Chase Bank, as
Administrative Agent, Swing Line Lender and Issuing Lender,
Citibank, N.A., as Syndication Agent, and Bank of America,
N.A., Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Morgan Stanley Senior Funding, Inc.,
as Co-Documentation Agents.(5)
4.21 Bridge Credit Agreement dated as of April 26, 2002 among
AT&T Comcast Corporation, AT&T Broadband Corp., the
Financial Institutions party thereto, JPMorgan Chase Bank,
as Administrative Agent, Swing Line Lender and Issuing
Lender, Citibank, N.A., as Syndication Agent, and Bank of
America, N.A., Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Morgan Stanley Senior
Funding, Inc., as Co-Documentation Agents.(5)
4.22 Credit Agreement dated as of May 3, 2002 among AT&T
Broadband Corp., AT&T Comcast Corporation, the Financial
Institutions party thereto, JPMorgan Chase Bank, as
Administrative Agent, Citibank, N.A., Bank of America, N.A.,
Merrill Lynch Capital Corporation and Morgan Stanley Senior
Funding, Inc.(5)
5.1 Opinion of Robert S. Feit with respect to the New AT&T Notes
and the Broadband Exchange Notes.
5.2 Opinion of James N. Zerefos with respect to the Broadband
Exchange Notes.
5.3 Opinion of Davis Polk & Wardwell with respect to the New
Broadband Notes.
12.1 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges for AT&T Corp.(6)
12.2 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges for AT&T Broadband Corp.(6)
12.3 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges for Comcast Corporation.(6)
12.4 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges for Comcast Cable Communications, Inc.(6)
12.5 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges with respect to MediaOne Group, Inc.(6)
12.6 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges with respect to AT&T Broadband, LLC.(6)
12.7 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges with respect to AT&T Comcast Corporation.(6)
23.1 Consent of Deloitte & Touche LLP with respect to AT&T
Comcast Corporation.
23.2 Consent of Deloitte & Touche LLP with respect to Comcast
Cable Communications, Inc.
23.3 Consent of Deloitte & Touche LLP with respect to Comcast
Corporation.
23.4 Consent of PricewaterhouseCoopers LLP with respect to AT&T
Corp.
23.5 Consent of PricewaterhouseCoopers LLP with respect to AT&T
Broadband Corp.
23.6 Consent of PricewaterhouseCoopers LLP with respect to AT&T
Broadband Group.
23.7 Consent of PricewaterhouseCoopers LLP with respect to
Concert, B.V.
23.8 Consent of KPMG LLP with respect to AT&T Canada Inc.
23.9 Consent of KPMG LLP with respect to Liberty Media
Corporation.
23.10 Consent of Robert S. Feit (included in Exhibit 5.1).
23.11 Consent of James N. Zerefos (included in Exhibit 5.2).
23.12 Consent of Davis Polk & Wardwell (included in Exhibit 5.3).
24 Powers of Attorney.(6)
EXHIBIT
NO. DOCUMENT
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25.1 Statement of Eligibility on Form T-1 of The Bank of New
York, as trustee, with respect to the Second Supplemental
Indenture between AT&T Corp. and The Bank of New York, as
trustee, relating to the Note Amendment.(6)
25.2 Statement of Eligibility on Form T-1 of The Bank of New
York, as trustee, with respect to the Third Supplemental
Indenture between AT&T Corp. and The Bank of New York, as
trustee, relating to the Broadband Exchange Notes.(6)
25.3 Statement of Eligibility on Form T-1 of The Bank of New
York, as trustee, with respect to the Indenture among AT&T
Broadband Corp., the Cable Guarantors party thereto and The
Bank of New York, as trustee, relating to the New Broadband
Notes.(6)
99.1.1 Form of Letter of Transmittal for Broadband Eligible
Notes.(6)
99.1.2 Form of Letter of Transmittal for AT&T Eligible Notes.(6)
99.2.1 Form of Notice of Guaranteed Delivery for Broadband Eligible
Notes.(6)
99.2.2 Form of Notice of Guaranteed Delivery for AT&T Eligible
Notes.(6)
99.3.1 Form of Letter to Registered Holders and The Depository
Trust Company Participants for Broadband Eligible Notes.(6)
99.3.2 Form of Letter to Registered Holders and The Depository
Trust Company Participants for AT&T Eligible Notes.(6)
99.4.1 Form of Letter to Clients for Broadband Eligible Notes.(6)
99.4.2 Form of Letter to Clients for AT&T Eligible Notes.(6)
99.5.1 Form of Instructions to Registered Holder and/or Book-Entry
Transfer Participant from Owner for Broadband Eligible
Notes.(6)
99.5.2 Form of Instructions to Registered Holder and/or Book-Entry
Transfer Participant from Owner for AT&T Eligible Notes.(6)
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(1) Incorporated by reference to the AT&T Comcast Corporation Registration
Statement on Form S-4, filed on February 11, 2002.
(2) Incorporated by reference to AT&T's Annual Report on Form 10-K for the year
ended December 31, 2001, filed on April 1, 2002.
(3) Incorporated by reference to AT&T's Registration Statement on Form SE, dated
September 10, 1990.
(4) Incorporated by reference to AT&T's Current Report on Form 8-K, dated
December 1, 1992.
(5) Incorporated by reference to the AT&T Comcast Corporation Amended
Registration Statement on Form S-4/A, filed on May 14, 2002.
(6) Previously filed with this Registration Statement.