-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ag7wW+paezipiAREE3W/H1dvbJ3yemEAhxbMxDrR0otPfn3l9ZwS3aoFp3eX1pSe WnX0DoQYiHPYmysdVd1sHA== 0000005907-99-000010.txt : 19990322 0000005907-99-000010.hdr.sgml : 19990322 ACCESSION NUMBER: 0000005907-99-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AT&T CORP CENTRAL INDEX KEY: 0000005907 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 134924710 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-01105 FILM NUMBER: 99568589 BUSINESS ADDRESS: STREET 1: 32 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10013 BUSINESS PHONE: 2123875400 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN TELEPHONE & TELEGRAPH CO DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K FOR THE FISCAL YEAR ENDED 12/31/98 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Fiscal Year Ended December 31, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period From _________ to _________ Commission File Number 1-1105 AT&T CORP. A NEW YORK I.R.S. EMPLOYER CORPORATION NO. 13-4924710 32 Avenue of the Americas, New York, New York 10013-2412 Telephone Number 212-387-5400 Securities registered pursuant to Section 12(b) of the Act: See attached SCHEDULE A. Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes....x.... No........ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not con-tained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] At February 26, 1999, the aggregate market value of voting stock held by non-affiliates was $143,517,069,605. At February 26, 1999, 1,746,368,779 common shares were outstanding. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the registrant's annual report to shareholders for the year ended December 31, 1998 (Part II) (2) Portions of the registrant's definitive proxy statement dated March 25, 1999 issued in connection with the annual meeting of shareholders (Part III) SCHEDULE A Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered Common Shares # New York, Boston, Chicago, (Par Value $1 Per Share) #### Philadelphia and Pacific # Stock Exchanges Class A Liberty Media Group Tracking # Shares (common, Par Value $1 Per Share) # #### New York Stock Exchange Class B Liberty Media Group Tracking # Shares (common, Par Value $1 Per Share) # Thirty-Six Year 4-3/8% Debentures, # due May 1, 1999 # # Thirty-Three Year 6% Debentures, # due August 1, 2000 # # Thirty-Five Year 5-1/8% Debentures, # due April 1, 2001 # # Ten Year 7-1/8% Notes, due January 15, 2002 # # Ten Year 6-3/4% Notes, due April 1, 2004 # # Ten Year 7% Notes, due May 15, 2005 # # Twelve Year 7-1/2% Notes, due June 1, 2006 ###### New York Stock Exchange # Twelve Year 7-3/4% Notes, due March 1, 2007 # # Thirty Year 8-1/8% Debentures, # due January 15, 2022 # # Medium Term Note 8.2, due February 15, 2005 # # Thirty Year 8.35% Debentures, # due January 15, 2025 # # Thirty-Two Year 8-1/8% Debentures, # due July 15, 2024 # # Forty Year 8-5/8% Debentures, # due December 1, 2031 # TABLE OF CONTENTS PART I Item Description Page 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 39 4. Submission of Matters to a Vote of Security-Holders . . . . . . . 41 PART II Description 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . 42 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 42 8. Financial Statements and Supplementary Data . . . . . . . . . . . . 42 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . 42 PART III Description 10. Directors and Executive Officers of the Registrant . . . . . . . . 42 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 42 12. Security Ownership of Certain Beneficial Owners and Management . . 42 13. Certain Relationships and Related Transactions . . . . . . . . . . 42 PART IV Description 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K . . 43 See page 41 for "Executive Officers of the Registrant." PART I ITEM 1. BUSINESS. GENERAL AT&T Corp. was incorporated in 1885 under the laws of the State of New York and has its principal executive offices at 32 Avenue of the Americas, New York, New York 10013-2412 (telephone number 212-387-5400). On March 9, 1999, AT&T completed the acquisition of Tele-Communications, Inc. (TCI) in a merger. In the merger, AT&T acquired all the business and assets of the TCI Group, which consists primarily of TCI's domestic cable and telecommunications operations, as well as TCI's interest in At Home Corporation (@Home) in exchange for approximately 439 million shares of Common Stock. AT&T Common Stock will continue to represent an interest in the business and assets of the historical AT&T together with those assets acquired in the merger (now referred to as AT&T Broadband and Internet Services). In addition, at the time of the merger TCI combined Liberty Media Group, its programming arm, and TCI Ventures Group, its technology investments unit, to form the new Liberty Media Group. The shareowners of the new Liberty Media Group were issued separate tracking stock rather than traditional Common Stock by AT&T Corp. in exchange for the shares held in Liberty Media Group and TCI Ventures Group. Under the tracking stock arrangement, the Liberty Media Group's earnings and losses will be excluded from earnings available to the holders of Common Stock and the Liberty Media Group's businesses and assets will be managed by a separate operating Board of Directors. As a result, although the Liberty Media Group is wholly owned by AT&T Corp., it is accounted for as an equity investment in the consolidated financial statements of AT&T Corp. since AT&T does not have a "controlling financial interest" in the Liberty Media Group. Consequently, throughout this document, references to AT&T or the Company refer to the businesses, results or assets attributable to the Common Stock; references to Liberty Media refer to the businesses, results or assets attributable to the Liberty Media Group tracking stock; and references to AT&T Corp. refer to the combined legal entity. References herein to AT&T Common Shares, Common Shares, AT&T Common Stock or Common Stock excludes the Liberty Media Group tracking stock. AT&T AT&T is among the world's communications leaders, providing voice, data and video communications services to large and small businesses, consumers and government entities. AT&T and its subsidiaries furnish domestic long distance, international long distance, regional, local and wireless telecommunications services, cable television and Internet communications transmission services. AT&T also provides billing, directory, and calling card services to support its communications business. AT&T's primary lines of business are business services; consumer services; AT&T Broadband and Internet Services; and wireless services. In addition, AT&T's other lines of business include local services, which includes Teleport Communications Group Inc. (TCG); network management and professional services through AT&T Solutions; international operations and ventures; and AT&T WorldNet services. Internet users can access information about AT&T and its services at http://www.att.com. Our web site is not a part of this Form 10-K. DEVELOPMENT OF BUSINESS Separation During 1998 AT&T continued the transformation of its business begun in 1996 when AT&T separated its business into three publicly held stand-alone companies: the current AT&T, focused on communications and information services; Lucent Technologies Inc. (Lucent), focused on communications systems and technology; and NCR Corporation (NCR), focused on transaction-intensive computing. AT&T distributed to its shareowners all of the shares AT&T owned of Lucent on September 30, 1996 and all of the shares of NCR on December 31, 1996. Asset Sales Following the separation, AT&T focused on its core businesses and disposed of assets and businesses that were not strategic. In October 1996, AT&T completed the sale of its majority interest in AT&T Capital Corporation (leasing services business). In 1997, AT&T completed the sales of AT&T Skynet (satellite services), AT&T Tridom (satellite data and video communications services), and its submarine systems business, as well as its investment in DirectTV (direct-broadcast television service and DSS equipment business). In addition, in 1998 AT&T sold AT&T Universal Card Services, Inc. (credit card services business), American Transtech Inc. (customer care services), its investment in LIN Television Corporation (commercial television broadcasting), and its investment in SmarTone Telecommunications Holdings Limited (a wireless joint venture in Hong Kong). TCG Acquisition During 1998, AT&T engaged in a series of transactions to further transform the Company from one dominated by a single product, domestic long distance telecommunications, to a fully integrated, any distance, broadband communications service provider. In July 1998, AT&T completed the merger with TCG pursuant to which each share of TCG was exchanged for 0.943 of an AT&T Common Share in an all-stock transaction. TCG was the largest competitive local exchange carrier (CLEC) in the United States, offering comprehensive telecommunications services in major metropolitan markets throughout the United States. TCG provides a broad array of telecommunications services, including basic local exchange services, enhanced switch services, Internet services, disaster avoidance services and video channel transmission services, aimed at addressing high-volume business customers. TCI Acquisition On June 24, 1998, AT&T announced that it had agreed to acquire TCI through a merger. In the merger, which closed on March 9, 1999, AT&T issued 0.7757 of an AT&T Common Share for each share of TCI Group Series A tracking stock and 0.8533 of an AT&T Common Share for each share of TCI Group Series B tracking stock. In addition, AT&T Corp. issued one share of newly created Liberty Media Group Class A or Class B tracking stock for each outstanding TCI Liberty Media Group Class A or Class B tracking stock and 0.52 share of newly created Liberty Media Group Class A or Class B tracking stock for each outstanding TCI Ventures Group Class A or Class B tracking stock. In the merger, AT&T also exchanged AT&T Common Shares or Liberty Media Group tracking stock for shares of TCI convertible preferred stock and made a cash payment in lieu of any fractional AT&T Common Share or Liberty Media Group tracking share. In total, AT&T issued approximately 439 million AT&T Common Shares. BT Joint Venture On July 26, 1998 AT&T and British Telecommunications plc (BT) announced that they will create a global venture to serve the communications needs of multinational companies and the international calling needs of businesses around the world. The venture, which will be owned equally by AT&T and BT, will combine transborder assets and operations of each company, including their existing international networks, all of their international traffic, all of their transborder products for business customers -- including an expanding set of Concert services -- and AT&T and BT's multinational accounts in selected industry sectors. The formation of the venture is subject to certain conditions, but is expected to be completed by mid-1999. Vanguard Acquisition On October 5, 1998, AT&T announced that it had signed a definitive merger agreement to purchase Vanguard Cellular Systems, Inc. (Vanguard) in a stock and cash transaction valued at approximately $1.5 billion, including approximately $600 million in debt. Under the terms of the agreement, each share of Vanguard stock would be exchanged, at each shareholder's option, for either $23.00 in cash or 0.3987 of an AT&T Common Share, subject to the limitation that the overall consideration will consist of 50% cash and 50% AT&T stock. The merger is subject to various closing conditions, including the approval by Vanguard shareholders. The transaction is expected to close in the first half of 1999. IBM Global Network Acquisition On December 8, 1998, AT&T announced it had agreed to acquire International Business Machines Corporation's (IBM) Global Network business for $5 billion in cash, and the two companies will enter into outsourcing contracts with each other. IBM will outsource a significant portion of its global networking needs to AT&T. AT&T will outsource certain applications processing and data center management operations to IBM. The IBM Global Network business AT&T will acquire serves the networking needs of several hundred large global companies, tens of thousands of mid-sized businesses and more than one million individual Internet users in 59 countries. About 5,000 IBM employees will join AT&T as part of the acquisition. IBM's Global Network has more than 1,300 dial-up points of presence and dedicated access from more than 850 cities in 59 countries. The Global Network offers business customers innovative services and worldwide operations and support, including in-country, native-language support personnel. AT&T expects the acquisition to conclude by mid-1999, following clearance by regulatory authorities. Cable Operator Joint Ventures On January 8, 1999, AT&T announced that it had reached agreements with five TCI affiliates to form separate joint ventures to offer customers advanced communications services. AT&T expects to finalize joint ventures with Bresnan Communications, Falcon Cable TV, Insight Communications, InterMedia Partners and Peak Cablevision in early 1999, and begin commercial operations in the year 2000. The joint ventures will offer customers new communications services that feature multiple phone lines per household, along with options such as conference calling, call waiting, call forwarding and individual message centers for family members. AT&T, which expects to own 51 percent of each of these joint ventures, will have long-term exclusive rights to offer communications services over the systems of each of the five operators in return for one-time payments to be made when the systems meet certain performance milestones. AT&T expects the total of these payments to be in the tens of millions of dollars. In addition, the operators will receive ongoing monthly telephony subscriber payments, with guaranteed minimum penetration levels. Time Warner Joint Venture On February 1, 1999 AT&T and Time Warner, Inc. announced the formation of a joint venture to offer AT&T-branded cable telephony service to residential and small business customers over Time Warner's existing cable television systems in 33 states. The two companies also agreed to jointly market communications services and to develop other broadband communications services, such as video telephony. Under the terms of the agreement, AT&T will own 77.5 percent of the joint venture and Time Warner will own 22.5 percent. The joint venture will have exclusive rights to offer residential and small business telephony services over Time Warner's cable systems for 20 years. In return, the joint venture will make payments (estimated at $300 million) to Time Warner on a per home passed basis as systems are upgraded. In addition, the joint venture will pay a monthly fee per telephony subscriber, with guaranteed minimum penetration levels. AT&T will fund the venture's negative cash flow and be responsible for the venture's capital expenditures, including the cost of powering the system, and, as customers sign up for the service, the cost of adding communications equipment to cable nodes and in people's homes. The companies said they expect to finalize their agreement within 90 days and to close the joint venture thereafter. The transaction is subject to certain conditions, including definitive documentation and various approvals. MetroNet Merger On March 4, 1999, AT&T Canada Corp. announced that it had agreed to merge with MetroNet Communications Corp., Canada's largest competitive local exchange carrier. Under the terms of the agreement, AT&T would receive 31% of the combined entity in exchange for its 33 percent voting interest in AT&T Canada Corp., 100 percent interest in ACC TelEnterprises Ltd., and 67 percent interest in the former AT&T Canada Long Distance Services currently held in trust. In addition, AT&T agreed to purchase all of the remaining shares at the greater of the then appraised fair market value or the accreted minimum price, which initially is C$75 accreting after June 30, 2000 at a rate of 16% per annum, compounded quarterly. If the acquisition is not completed by June 30, 2003, those shares would be sold through an auction process and AT&T will make whole the shareholders for the amount they would have been entitled to if AT&T had purchased the shares. The completion of the merger and acquisition is subject to various conditions and regulatory approvals, including, for the acquisition, a change in Canada's foreign ownership restrictions. BUSINESS SERVICES Long Distance Voice and Data Business Services provide voice, data and video communications services to large and small businesses, the Federal government and state and local governments. Business units within this group provide regular and custom long distance communications services, data transmission services, 500 services, toll-free or 800 and 888 services, 900 services, private line services, software defined network services (SDN), asynchronous transfer mode (ATM) and Internet protocol (IP) technology based services, integrated services digital network (ISDN) technology based services, electronic mail, electronic data interchanges and enhanced facsimile services. AT&T also provides special long distance services, including AT&T Calling Card services, special calling plans and the Company's domestic and international operator services. AT&T provides communications services internationally, including transaction services, global networks, network management and value added network services (i.e., services offered over communications transmission facilities that employ computer processing applications). Long Distance Voice. Business Services' voice communication offerings include the traditional "one plus" dialing of domestic and international long distance for customers that select AT&T as their primary long distance carrier. Business Services' dedicated services include private line and special access services that use high-capacity digital circuits to carry voice, data and video (or multimedia) transmission from point-to-point in multiple configurations. These services provide high-volume customers with a direct connection to an AT&T switch instead of switched access shared by many users. These services permit customers to create internal computer networks, access external computer networks and the Internet, as well as reduce originating access costs. Business Services also offers toll free (800 or 888) inbound service, where the receiving party pays for the call. This is used in a wide variety of applications, many of which generate revenue for the user (such as reservation centers or customer service centers). AT&T offers a variety of features to enhance customers toll free service, including call routing by origination point and time of day routing. Business Services also offers a variety of calling cards which allow the user to place calls from virtually anywhere in the world. Additional features include prepaid calling cards, conference calling, international origination, information service access (such as weather or stock quotes), speed dialing and voice messaging. Enhanced Data Communication. Enhanced data services consist of interexchange data networks utilizing packet switching and transmission technologies and application services, such as Internet access and Web Site hosting and management, which utilize the frame relay network. Enhanced data services enable customers to economically and securely transmit large volumes of data typically sent in bursts from one site to another. Enhanced data services are utilized for local area network (LAN) interconnection, remote site, point of sale and branch office communications solutions. AT&T utilizes both IP and ATM systems. Both technologies offer significant efficiencies over circuit switched systems which use a single, dedicated circuit to complete each transmission. ATM switching is also a more efficient method of switching and transmitting comingled or multimedia information. The packet switching technology breaks up a transmission into short pieces, or packets, which are encoded and transmitted with other packets on the same circuit, and reassembled at the desired destination. ATM differs from IP in that the data packets used in ATM (called cells) are one size (53 bytes) whereas in IP the data packets vary in length. Also, whereas ATM establishes virtual circuits to ensure that the information sent is reassembled at its destination in its proper sequence, IP ships each packet of information to its destination by a different path. While AT&T will continue to have both circuit and packet switching and transmission technologies for some time, no more significant future capital expenditures are scheduled for circuit switching. ISDN services provide customers with multiple voice and data communications services over a single telecommunications line. The Company's ISDN services allow customers to perform multiple functions such as simultaneous voice and computer links, and enable the Company to offer customers value-added features. High speed ISDN applications include desk top video conferencing, interconnection of LANs and Internet access. Business Services has a dedicated sales force through which it markets its long distance voice and data communication services. Sales forces are divided into geographic markets, and in each market focus on large, multinational corporations, small businesses, government markets, and value-added resellers and other wholesalers. Business Services employs full service support teams to provide significant customer support and service to ensure customer satisfaction and retention. Business Services offers its services in accordance with applicable tariffs filed with the Federal Communications Commission (FCC). Rates can vary by a number of factors, particularly the volume of usage and the day and time that calls are made. AT&T Business Services offers long distance and data services individually and in combination with other offerings. Through combined offerings, AT&T provides customers with benefits such as single billing, unified services for multilocation companies and customized calling plans. Transport Business Services is one of the leaders in providing wholesale networking services to other carriers, providing both network capacity and switched services. AT&T offers a combination of high-volume transmission capacity, conventional dedicated line services and dedicated switched services to Internet service providers (ISPs) and Tier 1 and Tier 2 carriers on a national or regional basis, as well as switchless resale services to Tier 3 carriers. Wholesale networking service is typically provided pursuant to long-term service agreements for terms of one year or longer. These agreements generally provide for "take or pay" monthly payments at fixed rates based on the capacity and length of the circuit used. Customers are typically billed on a monthly basis and also may incur an installation charge or certain ancillary charges for equipment. After contract expiration, the contracts may be renewed or the services may be provided on a month-to-month basis. Switched services agreements are generally offered on a month-to-month basis and the service is billed on a minutes-of-use basis. CONSUMER SERVICES AT&T is the United States' leading provider of domestic and international long distance service to residential consumers. AT&T provides regular and custom long distance communications services which it offers individually and in combination with other offerings. AT&T provides interstate and intrastate long distance telecommunications services throughout the continental United States and provides, or joins in providing with other carriers, telecommunications services to and from Alaska, Hawaii, Puerto Rico and the Virgin Islands and international telecommunications services to and from virtually all nations and territories around the world. Consumers can use AT&T domestic and international long distance services by the traditional "one plus" dialing of the desired call destination, by dial-up access or through the use of AT&T calling cards. AT&T both delivers and receives international traffic pursuant to its operating agreements with foreign carriers throughout the world. The terms of most switched voice operating agreements, as well as established FCC policy, require that inbound switched voice traffic from the foreign carrier to the United States be routed to United States international carriers, like AT&T, in proportion to the percentage of United States outbound traffic routed by that United States international carrier to the foreign carrier. AT&T's revenues and costs of sales are sensitive to changes in international settlement rates and international traffic routing patterns. In the continental United States, AT&T provides long distance telecommunications services over AT&T's backbone network. International telecommunications services are provided by submarine cable systems in which AT&T holds investment positions, satellites and facilities of other domestic and foreign carriers. AT&T markets its consumer long distance services in a variety of ways, including by means of television advertising, direct mail solicitations and customer care telephonic solicitations, as well as through brand awareness. Beginning at the end of 1997, AT&T implemented significant modifications to its marketing efforts in response to strategic choices made to improve profitability. Primarily, AT&T commenced using free minutes in place of checks as well as migrating customers to more favorable optional calling plans in order to attract and retain its most profitable customers. As a result of this strategy, AT&T now has over 26 million customers on its One Rate registered trademark plans, including more than 13 million on AT&T One Rate Plus registered trademark, with more than 75% of AT&T's consumer long distance minutes were generated by customers on optional calling plans. Also, AT&T began targeting its marketing efforts to emphasize high-value customers to optimize its customer base for profitable future growth. Typically, AT&T charges customers based on applicable rates filed with the FCC. Customers select different services and from various rate plans which determine the price per minute that they pay on their long distance calls. Rates typically vary based on a variety or factors, particularly the volume of usage and the day and time that calls are made. In 1997, AT&T began conducting integrated billing for those customers using more than one service and in 1998 introduced a new rate plan for those customers subscribing to AT&T long distance and AT&T WorldNet service. In addition, in January 1999 AT&T began offering AT&T Personal Network services which bundle consumer domestic and international long distance, wireless, Internet, personal 800 and calling card services. AT&T BROADBAND AND INTERNET SERVICES AT&T Broadband and Internet Services is principally comprised of the businesses and assets of the TCI Group and TCI's interest in At Home Corporation acquired in the TCI merger. TCI Group Cable television systems receive video, audio and data signals transmitted by nearby television and radio broadcast stations, terrestrial microwave relay services and communications satellites. Such signals are then amplified and distributed by coaxial cable and optical fiber to the premises of customers who pay a fee for the service. In many cases, cable television systems also originate and distribute local programming. At December 31, 1998, approximately 66% of TCI Group's cable television systems had bandwidth capacities ranging from 450 megahertz to 750 megahertz. The Company's cable television systems generally carry up to 78 analog channels. Compressed digital video technology converts on average as many as fourteen analog signals (now used to transmit video and voice) into a digital format and compresses such signals (which is accomplished primarily by eliminating the redundancies in television imagery) into the space normally occupied by one analog signal. The digitally compressed signal is uplinked to a satellite, which retransmits the signal to a customer's satellite dish or to a cable system's headend to be distributed, via optical fiber and coaxial cable, to the customer's home. At the home, a set-top video terminal converts the digital signal into analog channels that can be viewed on a normal television set. TCI Group began offering digital cable television service to selected markets in 1997. In February 1998, TCI Group initiated broader marketing efforts intended to increase the number of digital cable television customers. Such marketing efforts encompass multi-media, product enhancements, sales promotions and sales incentives. TCI Group operates its cable television systems either through its operating divisions or through certain other subsidiaries of TCI attributed to TCI Group. Domestic Basic-TV cable customers served by TCI Group are summarized as follows (amounts in millions):
Basic-TV customers at December 31, 1998 1997 1996 1995 1994 Managed through TCI Group's operating divisions 11.4 14.2 13.4 11.9 10.7 Other non-managed subsidiaries of TCI attributed to TCI Group 0.5 0.2 0.5 0.6 0.5 ------- ------- ------- ------- ------- 11.9 14.4 13.9 12.5 11.2 ======= ======= ======= ======= =======
The decline in total Basic-TV customers between 1997 and 1998 is attributable to certain contribution transactions entered into in 1998. In the most significant of these transactions, on March 4, 1998, TCI contributed to Cablevision Systems Corporation (CSC) certain of its cable television systems serving approximately 830,000 customers in exchange for approximately 48.9 million newly issued CSC Class A common shares (the CSC Transaction) and the assumption of indebtedness. TCI has also entered into letters of intent with CSC which provide for the TCI Group to acquire a cable system in Michigan and an additional 4% of CSC's Class A common shares and for CSC to acquire cable systems in Connecticut and assume certain indebtedness. The ability of the Company to sell or increase its investment in CSC is subject to certain restrictions and limitations set forth in a stockholders agreement with CSC. In addition to the CSC Transaction, during 1998 TCI also completed eight transactions whereby TCI contributed cable television systems serving in the aggregate approximately 1,924,000 customers to eight separate joint ventures (collectively, the 1998 Joint Ventures) in exchange for non-controlling ownership interests in each of the 1998 Joint Ventures, and the assumption and repayment by the 1998 Joint Ventures of indebtedness. In addition, TCI, as of December 31, 1998, has signed agreements or letters of intent to contribute within the next twelve months certain cable television systems serving approximately 1.2 million basic customers to joint ventures in which the Company will retain non-controlling ownership interests. No assurance can be given that any of these pending contribution transactions will be consummated. TCI Group had approximately 1 million digital customers at December 31, 1998. TCI Group operates cable television systems throughout the United States. Service Charges. TCI Group offers a limited "basic service" (Basic-TV) (primarily comprised of local broadcast signals and public, educational and governmental (PEG) access channels) and an "expanded tier" (primarily comprised of specialized programming services, in such areas as health, family entertainment, religion, news, weather, public affairs, education, shopping, sports and music). The monthly fee for basic service generally ranges from $9.00 to $12.00, and the monthly service fee for the expanded tier generally ranges from $13.00 to $19.00. TCI Group offers "premium services" (referred to in the cable television industry as "Pay-TV" and "pay-per-view") to its customers. Such services consist principally of feature films, as well as live and taped sports events, concerts and other programming. TCI Group offers Pay-TV services for a monthly fee generally ranging from $6.00 to $15.00 per service, except for certain movie services (such as certain Pay-TV channels) offered at $1.00 to $2.00 per month, pay-per-view movies offered separately at $1.00 to $4.00 per movie and certain pay-per-view events offered separately at $6.00 to $50.00 per event. Charges are usually discounted when multiple Pay-TV services are ordered. In most markets, customers may also elect to subscribe to digital video services comprised of up to 36 additional video and 10 additional audio channels featuring additional specialized programming and premium services at an average incremental monthly charge of $10. As further enhancements to their cable services, for a monthly charge customers may generally rent converters or converters with remote control devices, as well as purchase a channel guide. Also a nonrecurring installation charge is usually charged. Monthly fees for Basic-TV and Pay-TV services to commercial customers vary widely depending on the nature and type of service. Except under the terms of certain contracts to provide service to commercial accounts, customers are free to discontinue service at any time without penalty. The Cable Television Consumer Protection and Competition Act of 1992 (the 1992 Cable Act) and the Telecommunications Act of 1996 (the Telecommunications Act, together with the 1992 Cable Act, the Cable Acts), established rules under which TCI Group's basic service and expanded tier service rates and equipment and installation charges are regulated if a complaint is filed or if the appropriate franchise authority is certified. Local Franchises. Cable television systems generally are constructed and operated under the authority of nonexclusive permits or "franchises" granted by local and/or state governmental authorities. Federal law, including the Cable Communications Policy Act of 1984 (the 1984 Cable Act) and the 1992 Cable Act, limits the power of the franchising authorities to impose certain conditions upon cable television operators as a condition of the granting or renewal of a franchise. Franchises contain varying provisions relating to construction and operation of cable television systems, such as time limitations on commencement and/or completion of construction; quality of service, including (in certain circumstances) requirements as to the number of channels and broad categories of programming offered to customers; rate regulation; provision of service to certain institutions; provision of channels for public access and commercial leased-use; and maintenance of insurance and/or indemnity bonds. TCI Group's franchises also typically provide for periodic payments of fees, not to exceed 5% of revenue, to the governmental authority granting the franchise. Additionally, many franchises require payments to the franchising authority for the funding of PEG access channels. Franchises usually require the consent of the franchising authority prior to a transfer of the franchise or a transfer or change in ownership or operating control of the franchisee. Subject to applicable law, a franchise may be terminated prior to its expiration date if the cable television operator fails to comply with the material terms and conditions thereof. Under the 1984 Cable Act, if a franchise is lawfully terminated, and if the franchising authority acquires ownership of the cable television system or effects a transfer of ownership to a third party, such acquisition or transfer must be at an equitable price or, in the case of a franchise existing on the effective date of the 1984 Cable Act, at a price determined in accordance with the terms of the franchise, if any. In connection with a renewal of a franchise, the franchising authority may require the cable operator to comply with different and more stringent conditions than those originally imposed, subject to the provisions of the 1984 Cable Act and other applicable federal, state and local law. The 1984 Cable Act, as supplemented by the renewal provisions of the 1992 Cable Act, establishes an orderly process for franchise renewal which protects cable operators against unfair denials of renewals when the operator's past performance and proposal for future performance meet the standards established by the 1984 Cable Act. TCI Group believes that its cable television systems generally have been operated in a manner which satisfies such standards and allows for the renewal of such franchises; however, there can be no assurance that the franchises for such systems will be successfully renewed as they expire. Most of TCI Group's present franchises had initial terms of approximately 10 to 15 years. The duration of TCI Group's outstanding franchises presently varies from a period of months to an indefinite period of time. Approximately 1090 of TCI Group's franchises expire within the next five years. This represents approximately twenty-five percent of the franchises held by TCI Group and involves approximately 4.6 million basic customers. At Home Corporation @Home, which became a public company in July 1997, is a leading provider of broadband Internet services that delivers data to homes and businesses through the cable television infrastructure and a cable modem at speeds up to 100 times faster than traditional telephone dial-up alternatives. @Home currently offers two Internet services: @Home for residential consumers and @Work for businesses and tele-commuters. @Home's primary offering ("the @Home service") allows residential subscribers to connect their personal computers via cable modem to a high-speed Internet backbone network developed and managed by @Home. @Home has entered into distribution arrangements with cable companies whose cable systems pass approximately 57.3 million homes. @Home's residential offering had approximately 331,000 cable modem subscribers across North America at December 31, 1998 representing an increase of approximately 158% from the 210,000 subscribers reported at September 30, 1998. As of December 31, 1998, approximately 13.2 million of the homes served by the cable companies with which @Home has distribution agreements are passed by upgraded two-way hybrid fiber co-axial cable. For businesses, @Home's @Work service provides a platform for Internet, intranet and extranet connectivity solutions and networked business applications over both cable infrastructure and digital telecommunications lines. As of December 31, 1998, @Work had over 1,700 corporate customers, and the @Work service was available in 22 metropolitan markets. TCI was a founding partner of @Home and at March 15, 1999 the TCI Group held a significant equity interest and a controlling voting interest in @Home. Four officers or directors of AT&T or TCI currently serve on @Home's 11 member board; however, TCI has the right, at any time, to increase the size of @Home's Board of Directors and elect a majority of the directors of the @Home Board. TCI's controlling position in @Home is, however, subject to certain protective rights held by @Home. TCI has agreed that @Home will be the exclusive high-speed Internet service provider distributed over TCI's cable systems, subject to certain exceptions, until at least June 4, 2002, subject to early termination in certain circumstances. @Home's recently announced merger with Excite Inc. would, if approved and completed, dilute the TCI Group's economic interest and voting rights in @Home. WIRELESS SERVICES AT&T Wireless Services (Wireless Services) is the United States' largest wireless service provider based on domestic revenues, and has the greatest number of digital customers. The services provided by Wireless Services currently include wireless voice and data. At December 31, 1998, Wireless Services served almost 10 million wireless subscribers, including partnership markets. Wireless operations are conducted in 130 markets (including partnerships), known as metropolitan statistical areas, rural service areas or major trading areas. Wireless Services provides wireless services over its wireless network, which operates both 850 megahertz and 1900 megahertz broadband wireless licenses, covering, in the aggregate, approximately 55% of the United States population before giving effect to Wireless Services roaming agreements and 96% of the United States after giving effect to Wireless Services roaming agreements. Wireless Services currently intends to increase its footprint to improve its coverage, thereby reducing roaming expenses. Services offered include custom calling services, such as voice mail, call forwarding, call waiting, three-way calling, no-answer and busy transfer. Wireless Services also offers a variety of other enhanced features, including display messaging, which allows a cellular phone to receive and store voice mail messages, short alphanumeric messages and pages, even if the handset is in use or switched off, and enhanced directory assistance, which enables callers to be connected to the party whose number was sought without hanging up and redialing. Specialized services for business customers include Wireless Office Service, which, among other features, provides four- or five-digit dialing for large customers. Wireless Services is now integrating other communications technologies into the network and will continue to explore the use of emerging technologies to expand the reach of the network and to provide additional services. Wireless Services also has an interest in several wireless communications companies outside of the United States, including cellular operators licensed to serve Columbia, Taiwan and parts of India. Marketing efforts focus primarily on "high-value" customer segments (i.e., customers that spend over $50/month on wireless services). Digital service is a key element to attract and retain these high-value customers. Wireless Services is an industry leader in digital migration: at present, over 50% of Wireless Services' customer base is using digital service. Wireless Services currently offers wireless and wireline bundled services, such as a common bill and AT&T Personal Network (i.e., consumer domestic and international long distance, Internet, personal 800 and calling card services) with AT&T Digital One RateSM service. The number of new bundled offers is expected to increase over time. Wireless Services markets its services through a direct sales force, through sales points of presence in AT&T stores and kiosks, through direct marketing programs and through nonaffiliated retailers throughout the United States. Marketing to large business customers is conducted through direct solicitations or through combined offerings with other AT&T offerings. Wireless Services also relies upon dealers to market its services in certain locations. Dealers are independent contractors that solicit customers for Wireless Services service, and, typically, include specialized cellular stores, specialized electronics stores and department stores. Customer charges can include charges for service activation, monthly access, per-minute airtime and customer-calling features, and generally offers a variety of pricing options, most of which combine a fixed monthly access fee and per-minute charges. Long distance and roaming fees may also be incurred. Non-AT&T long distance customers are billed directly by their selected long distance carrier. Wireless Services offers long distance service to its cellular customers, although customers on some rate plans have the choice of an alternate long distance carrier. AT&T Digital One RateSM. AT&T Digital One Rate customers pay one rate for incoming and outgoing calls throughout the United States, which means that customers pay home rates when they roam across the United States. This rate consists of a monthly fee, which includes the use of a certain number of minutes, and a fee for usage beyond the monthly included minutes. Roaming Rates. Wireless Services pays other wireless providers negotiated rates when Wireless Services customers make or receive wireless calls when located in the other approved carriers' coverage areas and outside of Wireless Services' coverage area. Wireless Services currently has in place favorable roaming rates with most carriers across the United States based upon volume and growth. There is, however, no assurance that Wireless Services will continue to be successful in negotiating reasonable roaming rates with other wireless providers or expand its build out to cover such service areas. With the addition of AT&T Digital One Rate offerings, AT&T's sensitivity to changes in roaming rates has increased. Wireless Network. Wireless Services' ownership position in U.S. markets was obtained through the FCC lottery and settlement process as well as through purchases and exchanges of licenses with other cellular providers. Wireless Services' cellular licenses generally were granted for an initial 10-year term and are renewable for successive 10-year terms. FCC license renewal applications continue to be filed and currently are being processed by the FCC with no opposition. In addition, Wireless Services is required by the FCC to provide adequate personal communication service to at least one-third of the population in its 1900 megahertz licensed areas within five years of being licensed and two-thirds of the population in its licensed areas within 10 years of being licensed. Wireless Services has created service clusters in major metropolitan areas, and has linked its and selected other service providers' systems into a network that permits its wireless subscribers to both place and receive calls anywhere they travel in areas covered by the network, even if the local wireless telephone service is not provided by Wireless Services. Analog and digital service are offered in 850 megahertz markets and digital service in 1900 megahertz markets. Wireless Services believes that digital cellular technology offers many advantages over analog technology, including substantially increased capacity, greater call privacy, lower operating costs, reduced susceptibility to fraud and the opportunity to provide improved data transmission. However, analog networks provide the only common roaming platform currently available throughout the United States. Wireless Services markets primarily multi-network phones, capable of operating in the digital mode at 1900 megahertz and in digital and analog modes at 850 megahertz. Wireless Services has selected time division multiple access (TDMA) as its digital wireless technology in the United States and has deployed TDMA service in its major markets. Wireless Services believes that TDMA technology is an improvement over analog in that it allows for clearer calls, enhanced security, greater functionality and additional capacity to process more calls. A number of other wireless service providers have chosen code division multiple access (CDMA) or the global system for mobile communications (GSM) as their digital wireless technology. Since no manufacturers currently offer digital handsets capable of receiving more than one digital standard, users will not be able to roam between networks possessing different digital standards at this time. OTHER BUSINESSES Local Services Local exchange carriers provide local, toll, access and resale services; sell, install and maintain customer premises equipment; and provide directory services. The market for local exchange services consists of a number of distinct service components. These service components are defined by specific regulatory tariff classifications including: (i) local network services, which generally include basic dial tone charges and private line services; (ii) network access services, which consist of access charges received by LECs from long distance carriers for the local portion of long distance telephone calls; (iii) long distance network services, which include the variable portion of charges received by local exchange carriers (LECs) for intra-LATA long distance calls; and (iv) additional value added services such as caller identification, voice mail and call waiting. Consumer Local Services. By the end of 1997, AT&T offered resold local service to residential customers in 8 states. Notwithstanding its substantial efforts, AT&T experienced significant difficulty in entering local markets. AT&T's ability to purchase combined network elements from the incumbent LECs (ILECs), one of the primary methods by which AT&T intended to provide local service to residential customers, was severely limited by, among other factors, regulatory and judicial actions and a lack of technical and operational interfaces necessary to order network elements from ILECs. In spite of strong demand, in the fourth quarter of 1997 AT&T stopped actively marketing resold local service to residential customers in most of the areas in which it offered such service because of limitations on ILECs' ability to handle anticipated demand and because discounts AT&T received from ILECs on the sale of such service were insufficient to make resale a viable method of offering service. AT&T intends to pursue local entry by transforming the cable footprint of one-way cable plant into a two-way, broadband network capable of meeting the full spectrum of communication needs of the residential customer. AT&T intends to deploy a variety of services over the upgraded cable plant, including a richly featured "all-distance" (i.e., local, long distance, international) voice telephony offering. AT&T plans to use existing circuit-switched technology to pilot telephony service offers over the cable plant beginning in 1999. However, AT&T expects to begin to transition to an integrated Internet protocol (IP) packet data architecture by the end of 2000 that affords cost and feature benefits over the older circuit-switched technology. In addition, AT&T will pursue other transport options, including: - - Expanding AT&T's ability to offer the full range of consumer services beyond the TCI Group cable footprint through a variety of partnership and investment initiatives, including the Time Warner and other cable operator joint ventures already announced; - - Continued investment in alternative narrowband, wideband and broadband access technologies, including the fixed wireless technology that AT&T is currently testing in select markets, and the construction of dedicated, high-capacity access facilities to serve the broadband communication needs of residential customers living in multiple dwelling units (MDUs); and - - Resale of several forms of ILEC unbundled network elements which can be combined with switching, routing and other network elements to support differentiated voice and data services. AT&T intends to utilize the former TCI Group's sales force to actively solicit cable customers as local service customers. In these areas, AT&T intends to offer cable and local telephony as a bundle of services. AT&T will market local service in other areas as it rolls out its local telephony capabilities. For local service, customers are billed a fixed charge plus usage. AT&T intends to offer rates competitive with those offered by LECs, as well as discounted offers for certain bundles of services. Currently, billing is done internally. It is expected that local service sold as part of a cable bundle will be billed in one billing statement to consumers. Business Local Services. As of June 30, 1998, AT&T offered AT&T Digital Link service for business customers on an outbound only basis in 48 states and on an inbound and outbound basis in one state. AT&T's ability to provide facilities-based local service to business customers through AT&T Digital Link service was hampered by the inability to provide local number portability and other factors. On July 23, 1998, AT&T completed the merger with TCG, the largest CLEC in the United States with local networks aimed at addressing high-volume business customers, and combined its business local services with those of TCG. At December 31, 1998, TCG possessed local networks in operation in 83 U.S. markets, encompassing over 11,400 route miles, over 549,600 fiber miles, and 51 local digital voice switches. TCG's customers are principally telecommunications-intensive businesses, healthcare, and educational institutions, governmental agencies, long distance carriers and resellers, ISPs, disaster recovery service providers and wireless communications and financial services companies. TCG's centrally managed customer care and support operations are designed to facilitate the installation of new services and the processing of orders for changes and upgrades in customer services. With a direct sales force in each of its markets, TCG initially targets the large telecommunications-intensive businesses concentrated in the major metropolitan markets served by its networks. TCG also targets small- and medium-sized business customers in office buildings or multiple dwelling units already served by its network. TCG generally offers its services in accordance with applicable tariffs filed with state regulatory agencies (for intrastate services). TCG typically offers local service as part of a package of services, which can include any combination of other AT&T offerings. Customers also choose among analog, digital voice-only and ISDN Centrex telephone lines to their desktops. AT&T owns, houses, manages and maintains the switch, while customers retain control over network configurations, allowing customers to add, delete and move lines as needed. For local service, customers are billed a fixed charge plus usage. AT&T Solutions AT&T Solutions, established in 1995, provides outsourcing, consulting and networking integration services to large businesses. AT&T Solutions provides clients with a broad array of professional services to satisfy clients complete networking technology needs. AT&T Solutions' offerings include operational and networking management services for a broad range of computing platforms, including mainframe, mid-range computers, personal computer and network environments, such as local-area networks and wide-area networks. Most customers execute long-term contracts for AT&T Solutions networking services. AT&T Solutions' customers are generally within the top 2000 multinational corporations in the world. AT&T Solutions' sales force engages in direct solicitation of those customers as well as referrals from other units of AT&T. AT&T WorldNet(R) Consumer services AT&T offers dial-up Internet access to consumers through its AT&T WorldNet service business unit, a leading provider of direct Internet access service in the United States. At December 31, 1998, AT&T WorldNet service had over 1.3 million customers and provided over 466 points of presence, located in over 389 cities. Most of these dial-in numbers have been upgraded to accommodate high speed 56K technology. In 1998, AT&T WorldNet service entered into agreements with Yahoo!, Excite, Infoseek and Lycos, four of the most popular sites on the Internet (known as "portals"), to offer co-branded access services to the portals' customers. For example, a Yahoo! customer may subscribe to Internet access through Yahoo! Online Powered by AT&T WorldNet service. In these cases the AT&T WorldNet service supplies the underlying access, billing and customer care, while the portal provides the content in the form of a personalizable start page and other popular features. AT&T WorldNet service generates revenues principally through subscription and usage fees, as well as from electronic commerce and advertising revenues. AT&T WorldNet service offers a variety of pricing plan options, including bundled options. Generally, customers are charged a flat rate for unlimited hours, or a flat rate for a certain number of hours with charges for each additional hour of usage. AT&T WorldNet service's marketing programs are designed to attract and retain profitable customers. AT&T seeks to build brand recognition and customer loyalty and to make it easy for consumers to try, and stay with, AT&T WorldNet service. In addition to direct marketing through brand name advertising, direct mail and magazine insert promotions and bundling offers, AT&T WorldNet service maintains a large indirect channel marketing effort. Through this indirect channel AT&T WorldNet service software is bundled in new computers produced by major manufacturers, and is included on millions of software titles published by independent software vendors. AT&T Business Internet Services AT&T WorldNet Business Services provides IP connectivity and IP value-added services, messaging, and electronic commerce services to businesses. AT&T offers Managed Internet Service, which gives customers dedicated, high-speed access to the public Internet for business applications at a variety of speeds and types of access, as well as Business Dial Service, a dial-up version of Internet access designed to meet the needs of small- and medium-sized businesses. AT&T Virtual Private Network (VPN) Service allows businesses to obtain remote access to e-mail, order entry systems, employee directories, human resources and other databases, or to create an Intranet and extranets with their clients, suppliers and business partners, and enables customers to tailor their VPNs to accommodate specific business applications, performance requirements or the need to integrate with existing data networks. AT&T Web Site Services are a family of hosting and transaction services and platforms serving the web needs of thousands of businesses. Offers include AT&T Shared Hosting Services, an economical way for businesses to establish a presence on the World Wide Web, and AT&T Enhanced Web Development Package for businesses that want to create web sites that require higher performance and greater user demand. AT&T Dedicated Hosting Service provides customizable and pre-packaged Web hosting solutions. AT&T SecureBuySM Service provides the backoffice infrastructure required to electronically process credit card transactions online, high-speed links into two of the leading credit card processing services, and management reports that measure a site's success. Other IP services AT&T offers let Web site visitors click on a "call me now" icon if they wish to speak to a customer service agent; connect enterprise networks that use host or LAN-based and browser-based e-mail systems to AT&T's value-added messaging services such as e-mail and fax; and enhanced fax services. International AT&T has established a number of international alliances to increase the reach and scope of AT&T's services and network over time and has invested in certain countries in order to increase the range of services AT&T offers in those countries. For example, in early 1997 AT&T's joint venture in Mexico, Alestra, began offering long distance service. In addition, on July 26, 1998, AT&T and BT announced that they will create a global venture to serve the communications needs of multinational companies and the international calling needs of businesses around the world. The venture, which will be owned equally by AT&T and BT, will combine trans-border assets and operations of each company, including their existing international networks, all of their international traffic, all of their transborder products for business customers -- including an expanding set of Concert services -- and AT&T and BT's multinational accounts in selected industry sectors. The formation of the venture is subject to certain conditions, and is expected to be completed by mid-1999. LEGISLATIVE AND REGULATORY DEVELOPMENTS Telecommunications Act of 1996 In February 1996, the Telecommunications Act became law. The Telecommunications Act, among other things, was designed to foster local exchange competition by establishing a regulatory framework to govern new competitive entry in local and long distance telecommunications services. The Telecommunications Act will permit the Regional Bell Operating Companies (RBOCs) to provide interexchange services originating in any state in its region after demonstrating to the FCC that such provision is in the public interest and satisfying the conditions for developing local competition established by the Telecommunications Act. In August 1996, the FCC adopted rules and regulations, including pricing rules (the "Pricing Rules") to implement the local competition provisions of the Telecommunications Act, including with respect to the terms and conditions of interconnection with LEC networks and the standards governing the purchase of unbundled network elements and wholesale services from LECs. These implementing rules rely on state public utilities commissions to develop the specific rates and procedures applicable to particular states within the framework prescribed by the FCC. On July 18, 1997, the United States Court of Appeals for the 8th Circuit issued a decision holding that the FCC lacks authority to establish pricing rules to implement the sections of the local competition provisions of the Telecommunications Act applicable to interconnection with LEC networks and the purchase of unbundled network elements and wholesale services from LECs. Accordingly, the Court vacated the rules that the FCC had adopted in August 1996, and which had been stayed by the Court since September 1996. On October 14, 1997, the 8th Circuit Court of Appeals vacated an FCC Rule that had prohibited incumbent LECs from separating network elements that are combined in the LEC's network, except at the request of the competitor purchasing the elements. This decision increased the difficulty and costs of providing competitive local service through the use of unbundled network elements purchased from the incumbent LECs. On January 25, 1999, the Unites States Supreme Court issued a decision reversing the 8th Circuit Court of Appeal's holding that the FCC lacks jurisdiction to establish pricing rules applicable to interconnection and the purchase of unbundled network elements, and the Court of Appeal's decision to vacate the FCC's rule prohibiting incumbent LECs from separating network elements that are combined in the LEC's network. The effect of the Supreme Court's decision is to reinstate the FCC's rules governing pricing and the separation of unbundled network elements. The 8th Circuit Court of Appeals will now consider the incumbent LECs' claims that although the FCC has jurisdiction to adopt pricing rule, the rules it adopted are not consistent with the applicable provisions of the Act. The Supreme Court also vacated the FCC's rule identifying and defining the unbundled network elements that incumbent LECs are required to make available to new entrants, and directed the FCC to reexamine this issue in light of the standards mandated by the Act. In view of the proceedings pending before the 8th Circuit, FCC and state PUCs, 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 with new market opportunities. On December 31, 1997, the U.S. District Court for the Northern District of Texas issued a memorandum opinion and order holding that the Telecommunications Act's restrictions on the provision of in-region, interLATA service by the RBOCs are unconstitutional. AT&T and other carriers and the FCC filed prompt appeals with the United States Court of Appeals for the 5th Circuit. On February 11, 1998, the District Court stayed the effectiveness of its December 31 memorandum opinion and order pending appeal. On September 4, 1998, the United States Court of Appeals for the 5th Circuit rejected arguments that the Telecommunications Act is unconstitutional, and reversed the district court's contrary opinion. On December 22, 1998, the United States Court of Appeals for the District of Columbia Circuit rejected a similar challenge to the constitutionality of the Telecommunications Act. On January 19, 1999, the United States Supreme Court denied petitions filed by the RBOCs to review the decision of the 5th Circuit Court of Appeals. Modification of Final Judgment of 1982 Prior to 1996, AT&T and the RBOCs were subject to the provisions of the Modification of Final Judgment of 1982 (MFJ) since its implementation. The Telecommunications Act effectively superseded future operation of the MFJ. Consequently, on April 11, 1996, Judge Harold Greene issued an order terminating the MFJ. Regulation of Rates AT&T is subject to the jurisdiction of the FCC with respect to interstate and international rates, lines and services, and other matters. From July 1989 to October 1995, the FCC regulated AT&T under a system known as "price caps" whereby AT&T's prices, rather than its earnings, were limited. On October 12, 1995, recognizing a decade of enormous change in the long distance market and finding that AT&T lacked market power in the interstate long distance market, the FCC reclassified AT&T as a "non-dominant" carrier for its domestic interstate services. As a result, AT&T became subject to the same regulations as its long distance competitors for such services. Thus, AT&T was no longer subject to price cap regulation for these services, was able to file tariffs that are presumed lawful on one day's notice, and was free of other regulations and reporting requirements that apply only to dominant carriers. In addition, on October 31, 1996, the FCC issued an order that would have prohibited non-dominant carriers, including AT&T, from filing tariffs for their domestic interstate services. AT&T and other parties have filed an appeal of the FCC's order with the United States Court of Appeals for the D.C. Circuit. In February 1997, the D.C. Circuit stayed the effectiveness of the FCC's order pending appeal. Oral argument has not yet been scheduled. If the Court affirms the FCC's order and lifts the stay, non-dominant carriers, including AT&T, will have to utilize mechanisms other than tariffs to establish the terms and conditions that apply to domestic, interstate telecommunications services. Furthermore, in May 1997, the FCC adopted three orders relating to Price Caps, Access Reform, and Universal Service that substantially revised the level and structure of access charges that AT&T as a long distance carrier pays to incumbent LECs. AT&T has agreed to pass through to consumers any savings to AT&T as a result of access charge reform. AT&T began implementing these reductions July 15, 1997. Consequently, AT&T's results after June 1997 reflects lower revenues per minute of usage and lower access and other interconnection costs per minute of usage. The Price Cap Order requires LECs to reduce their price cap indices by 6.5 percent annually, less an adjustment for inflation, which is likely to result in a reduction in the interstate access charges that long distance carriers, such as AT&T, pay to LECs. The Access Charge Reform Order restructured access charges so that certain costs that do not vary with usage will be recovered on a flat-rate basis and permitted increased flat-rate assessments on multiline business customers and on residential lines beyond the primary telephone line. This restructuring allows a reduction in access charges assessed on long distance carriers on a usage basis. Finally, the Universal Service Order (which represents an FCC mandated contribution to support schools and libraries and rural health care programs, high cost support and low income support mechanisms which are paid to the Universal Service Administrative Company) adopts a new mechanism for funding universal service which expands the set of carriers that must contribute to support universal service from only long distance carriers to all carriers, including LECs, that provide interstate telecommunications services. Similarly, the set of carriers eligible for the universal service support has been expanded from only LECs to any eligible carrier providing local service to a customer, including AT&T as a new entrant in local markets. The Universal Service Order also adopted measures to provide discounts on telecommunications services, Internet access and inside wire to eligible schools and libraries and rural health carrier providers. AT&T remains subject to the statutory requirements of Title II of the Communications Act. AT&T must offer service under rates, terms and conditions that are just, reasonable and not unreasonably discriminatory; it is subject to the FCC's complaint process, and it must give notice to the FCC and affected customers prior to discontinuance, reduction, or impairment of service. AT&T has also made certain commitments that address concerns that had been raised with regard to the potential impact of declaring AT&T to be non-dominant, including a three-year rate assurance for low income and low usage residential users and a three-year limit on, and 5 days advance notice for, rate increases on 800 directory assistance and analog private line services. AT&T's international private line services have been classified as non-dominant for several years. AT&T's switched international services have become subject to increased competition, similar to its domestic services and on May 9, 1996, the FCC adopted an order reclassifying AT&T as a non-dominant carrier for such services. AT&T has made certain voluntary commitments that address issues raised in that proceeding, including commitments: (i) to maintain its annual average revenues per minute for international residential calls at or below the 1995 level through May 9, 1999, and in the event of a significant change that substantially raises AT&T's costs, to provide the FCC five business days notice prior to implementing rate increases that would raise the annual average revenues per minute for such calls above the 1995 level; and (ii) to maintain certain discount calling plans providing at least a 15% discount off basic pricing schedules until May 9, 1999. AT&T also made voluntary commitments relating to its operation of international cable facilities, its negotiation of settlement agreements with foreign carriers and its relationship with foreign partners. In addition to the matters described above with respect to the Telecommunications Act, state public service commissions or similar authorities having regulatory power over intrastate rates, lines and services and other matters regulate AT&T's local and intrastate communications services. The system of regulation used in many states is rate-of-return regulation. In recent years, many states have adopted different systems of regulation, such as: complete removal of rate-of-return regulation, pricing flexibility rules, price caps and incentive regulation. Wireless Regulatory Environment Wireless Services' operations (cellular and PCS) are licensed and regulated by the FCC. The licenses must be renewed periodically. Furthermore, if a licensee fails to provide service to a specified percentage of the population in the licensed area, the FCC may reduce the size of the licensed area to that which is receiving service. Wireless Services does not foresee difficulties with renewals or risks of license restrictions that would have a material impact on the performance of its wireless businesses. Currently, the FCC limits wireless operators to holding a maximum of 45 MHz of cellular, broadband PCS or specialized mobile radio (SMR) licenses in a single market. However, the FCC recently opened a proceeding to examine whether to modify or abolish its spectrum cap policy. The FCC has exclusive jurisdiction to regulate rates and entry for wireless services and currently does so by permitting competitive market forces to operate. However, in addition to the licensing rules specified above, the FCC has imposed a number of other regulatory obligations on wireless carriers. It requires wireless carriers, as well as other telecommunications carriers, to remit a portion of their revenues to a federal Universal Service Fund, which is designed to promote the availability of affordable local telephone service, the FCC has issued regulations pursuant to the Telecommunications Act that require the industry to implement local number portability by March 31, 2000. The FCC is planning to issue rules that would implement provisions of the Telecommunications Act that require all telecommunications carriers to make their services accessible to individuals with disabilities if readily achievable. Similarly, the FCC has required wireless carriers to ensure that customers using TTY devices (i.e., teletype devices used by the deaf) can call emergency services (e.g., calls to 911) over wireless digital service as well as over analog services. The FCC also has specified the technical services that wireless carriers must provide in order to support electronic wiretapping by law enforcement authorities pursuant to Communications Assistance to Law Enforcement Act of 1994. It may not be practicable for Wireless Services or the industry to meet certain of the deadlines that have been established by the FCC and investments will be required to comply with the relevant regulations. However, the FCC is reviewing petitions that have been filed by Wireless Services and by other members of the wireless industry to postpone compliance dates and modify regulations that would minimize the burden and expense of compliance. State and local governments are preempted from regulating either market entry by, or the rates of, cellular and PCS operators. However, state governments can regulate other terms and conditions of wireless service and several states have imposed (or have proposed legislation that will impose) various consumer protection regulations on the wireless industry. States may also impose their own universal service support regimes on wireless and other telecommunications carriers, similar to the requirements that have been established by the FCC. At the local level, wireless facilities are typically subject to zoning and land use regulation. However, under the federal Telecommunications Act, neither local nor state governments may categorically prohibit the construction of cellular or broadband PCS facilities in any community. Cable Regulation and Legislation The operation of cable television systems is extensively regulated by the FCC, some state governments and most local governments. The Telecommunications Act removes barriers to competition in both the cable television market and the local telephone market and reduces the scope of cable rate regulation. The Telecommunications Act requires the FCC to implement numerous rulemakings, the final outcome of which cannot yet be determined due to court challenges. Moreover, Congress and the FCC have frequently revisited the subject of cable television regulation and may do so again. Future legislative and regulatory changes could adversely affect TCI Group's operations. This section briefly summarizes key laws and regulations currently affecting the growth and operation of TCI Group's cable systems. Cable Rate Regulation. The 1992 Cable Act imposed extensive rate regulation on the cable television industry. All cable systems are subject to rate regulation of their basic and upper tier programming services, as well as their provision of customer equipment used to receive basic tier services, unless they face "effective competition" in their local franchise area. Under the 1992 Cable Act, the incumbent cable operator can demonstrate effective competition by showing either low penetration (less than 30% of the occupied households in the franchise area subscribe to basic service), or the presence (measured collectively as 50% availability, 15% customer penetration) of other multichannel video programming distributors (MVPDs). The Telecommunications Act expands the existing definition of effective competition to create a special test for a competing MVPD (other than a direct broadcast satellite (DBS) distributor) affiliated with a LEC. There is no penetration minimum for a LEC affiliate to qualify as an effective competitor, but it must offer comparable programming services in the franchise area. Although the FCC establishes all cable rate rules, local government units (commonly referred to as local franchising authorities or LFAs) are primarily responsible for administering the regulation of the lowest level of cable -- the basic service tier (BST), which typically contains local broadcast stations and PEG access channels. Before an LFA begins BST rate regulation, it must certify to the FCC that it will follow applicable federal rules, and many LFAs have voluntarily declined to exercise this authority. LFAs also have primary responsibility for regulating cable equipment rates. Under federal law, charges for various types of cable equipment must be unbundled from each other and from monthly charges for programming services, and priced no higher than the operator's actual cost, plus an 11.25% rate of return. The FCC itself directly administers rate regulation of any cable programming service tiers (CPST), which typically contain satellite-delivered programming. Under the Telecommunications Act, the FCC can regulate CPST rates only if an LFA first receives at least two complaints from local customers within 90 days of a CPST rate increase and then files a formal complaint with the FCC. When new CPST rate complaints are filed, the FCC now considers only whether the incremental increase is justified and will not reduce the previously established CPST rate. Under the FCC's rate regulations, TCI Group was required to reduce its BST and CPST rates in 1993 and 1994, and has since had its rate increases governed by a complicated price structure that allows for the recovery of inflation and certain increased costs, as well as providing some incentive for expanding channel carriage. The FCC has modified its rate adjustment regulations to allow for annual rate increases and to minimize previous problems associated with delays in implementing rate increases. Operators also have the opportunity of bypassing this "benchmark" structure in favor of traditional cost-of-service regulation in cases where the latter methodology appears favorable. However, the FCC significantly limited the inclusion in the rate base of acquisition costs in excess of the historical cost of tangible assets. As a result, TCI Group pursued cost of service justifications in only a few cases. Premium cable services offered on a per channel or per program basis remain unregulated, as do affirmatively marketed packages consisting entirely of new programming product. The Telecommunications Act sunsets FCC regulation of CPST rates for all systems (regardless of size) on March 31, 1999. However, certain members of Congress and FCC officials have called for the delay of this regulatory sunset and further have urged more rigorous rate regulation (including limits on programming cost pass-throughs to cable customers) until a greater degree of competition to incumbent cable operators has developed. The Telecommunications Act also relaxes existing uniform rate requirements by specifying that uniform rate requirements do not apply where the operator faces effective competition, and by exempting bulk discounts to MDUs, although complaints about predatory pricing in MDUs still may be made to the FCC. Cable Entry Into Telecommunications. The Telecommunications Act provides that no state or local laws or regulations may prohibit or have the effect of prohibiting any entity from providing any interstate or intrastate telecommunications service. States are authorized, however, to impose "competitively neutral" requirements regarding universal service, public safety and welfare, service quality, and consumer protection. State and local governments also retain their authority to manage the public rights-of-way. Although the Telecommunications Act clarifies that traditional cable franchise fees may be based only on revenues related to the provision of cable television services, it also provides that LFAs may require reasonable, competitively neutral compensation for management of the public rights-of-way when cable operators provide telecommunications service. The Telecommunications Act prohibits LFAs from requiring cable operators to provide telecommunications service or facilities as a condition of a franchise grant, renewal or transfer, except that LFAs argue they can seek "institutional networks" as part of such franchise negotiations. The favorable pole attachment rates afforded cable operators under federal law can be increased by utility companies owning the poles during a five year phase-in period beginning in 2001, if the cable operator provides telecommunications service, as well as cable service, over its plant. Telephone Company Entry Into Cable Television. The Telecommunications Act allows telephone companies to compete directly with cable operators by repealing the historic telephone company/cable company cross-ownership ban and the FCC's video dialtone regulations. This will allow LECs, including the RBOCs, to compete with cable operators both inside and outside their telephone service areas. Because of their resources, LECs could be formidable competitors to traditional cable operators, and certain LECs have begun offering cable service. Under the Telecommunications Act, a LEC or other entity providing video programming to customers will be regulated as a traditional cable operator (subject to local franchising and federal regulatory requirements), unless it elects to provide its programming via an "open video system" (OVS). It was anticipated that the primary benefit of using an OVS regulatory model was to avoid the need to obtain a local franchise prior to providing services. However, a January 1999 federal court of appeals decision held that OVS providers can be required to obtain such a franchise. To be eligible for OVS status, the provider cannot occupy more than one-third of the system's activated channels when demand for channels exceeds supply. Nor can it discriminate among programmers or establish unreasonable rates, terms or conditions for service. Although LECs and cable operators can now expand their offerings across traditional service boundaries, the general prohibitions remain on LEC buyouts (i.e., any ownership interest exceeding 10 percent) of co-located cable systems, cable operator buyouts of co-located LEC systems, and joint ventures among cable operators and LECs in the same market. The Telecommunications Act provides a few limited exceptions to this buyout prohibition. Electric Utility Entry Into Telecommunications/Cable Television. The Telecommunications Act provides that registered utility holding companies and subsidiaries may provide telecommunications services, information services, and other services or products subject to the jurisdiction of the FCC, notwithstanding the Public Utilities Holding Company Act. Electric utilities must establish separate subsidiaries, known as "exempt telecommunications companies" and must apply to the FCC for operating authority. Again, because of their resources, electric utilities could be significant competitors. Additional Ownership Restrictions. Pursuant to the 1992 Cable Act, the FCC adopted regulations establishing a 30% limit on the number of homes nationwide that a cable operator may reach through cable systems in which it holds an attributable interest with an increase to 35% if the additional cable systems are minority controlled. The FCC stayed the effectiveness of its ownership limits pending the appeal of a September 16, 1993 decision by the United States District Court for the District of Columbia which, among other things, found unconstitutional the provision of the 1992 Cable Act requiring the FCC to establish such ownership limits. If the ownership limits are determined on appeal to be constitutional, they may affect TCI Group's ability to acquire attributable interests in additional cable systems. The FCC is currently conducting a reconsideration of its national customer limit rules, and it is possible the FCC will revise both the national customer reach percentage limitation and/or the manner in which it attributes ownership to a cable operator. Either of these revisions, which are expected to be completed in 1999, could adversely affect various joint ventures, partnerships and equity ownership arrangements announced by TCI Group in 1997 and 1998 in TCI Group's effort to reduce the number of cable systems over which it has control and management responsibility. The FCC also adopted regulations limiting carriage by a cable operator of national programming services in which that operator holds an attributable interest (using the same attribution standards as were adopted for its limits on the number of homes nationwide that a cable operator may reach through its cable systems) to 40% of the activated channels on each of the cable operator's systems. The rules provide for the use of two additional channels or a 45% limit, whichever is greater, provided that the additional channels carry minority controlled programming services. The regulations also grandfather existing carriage arrangements which exceed the channel limits, but require new channel capacity to be devoted to unaffiliated programming services until the system achieves compliance with the regulations. These channel occupancy limits apply only up to 75 activated channels on the cable system, and the rules do not apply to local or regional programming services. The Telecommunications Act eliminates statutory restrictions on broadcast/cable cross-ownership (including broadcast network/cable restrictions), but leaves in place existing FCC regulations prohibiting local cross-ownership between television stations and cable systems. The Telecommunications Act leaves in place existing restrictions on cable cross-ownership with Satellite Master Antenna Television (SMATV) and multi-channel multi-point distribution systems (MMDS) facilities, but lifts those restrictions where the cable operator is subject to effective competition. In January 1995, however, the FCC adopted regulations which permit cable operators to own and operate SMATV systems within their franchise area, provided that such operation is consistent with local cable franchise requirements. Must Carry/Retransmission Consent. The 1992 Cable Act contains broadcast signal carriage requirements that allow local commercial television broadcast stations to elect once every three years between requiring a cable system to carry the station ("must carry") or negotiating for payments for granting permission to the cable operator to carry the station ("retransmission consent"). Less popular stations typically elect must carry, and more popular stations typically elect retransmission consent. Must carry requests can dilute the appeal of a cable system's programming offerings, and retransmission consent demands may require substantial payments or other concessions (e.g. a requirement that the cable system also carry the local broadcaster's affiliated cable programming service). Either option has a potentially adverse effect on TCI Group's business. The burden associated with must-carry obligations could dramatically increase if television broadcast stations proceed with planned conversions to digital transmissions and if the FCC determines in a pending rulemaking that cable systems must carry all analog and digital signals transmitted by the television stations. Access Channels. LFAs can include franchise provisions requiring cable operators to set aside certain channels for PEG access programming. Federal law also requires a cable system with 36 or more channels to designate a portion of its activated channel capacity (either 10% or 15%) for commercial leased access by unaffiliated third parties. The FCC has adopted rules regulating the terms, conditions and maximum rates a cable operator may charge for use of this designated channel capacity, but use of commercial leased access channels has been relatively limited. In February of 1997, the FCC released revised rules which mandated a modest rate reduction that has made commercial leased access a more attractive option for third party programmers, particularly for part-time leased access carriage. "Anti-Buy Through" Provisions. Federal law requires each cable system to permit customers to purchase premium or pay-per-view video programming offered by the operator on a per-channel or a per-program basis without the necessity of subscribing to any tier of service (other than the basic service tier) unless the system's lack of addressable converter boxes or other technological limitations does not permit it to do so. The statutory exemption for cable systems that do not have the technological capability to comply expires in October 2002, but the FCC may extend that period if deemed necessary. Access to Programming. To spur the development of independent cable programmers and competition to incumbent cable operators, the 1992 Cable Act imposed restrictions on the dealings between cable operators and cable programmers. Of special significance from a competitive business posture, the 1992 Cable Act precludes satellite video programmers affiliated with cable operators from favoring cable operators over competing multichannel video programming distributors (such as DBS and MMDS distributors). This provision limits the ability of vertically integrated satellite cable programmers to offer exclusive programming arrangements to TCI Group. Recently, both Congress and the FCC have considered proposals that would expand the program access rights of cable's competitors, including the possibility of subjecting both terrestrially delivered video programming and video programmers who are not affiliated with cable operators to all program access requirements. Inside Wiring. In a 1997 Order, the FCC established rules that require an incumbent cable operator upon expiration or termination of an MDU service contract to sell, abandon, or remove "home run" wiring that was installed by the cable operator in a MDU building. These inside wiring rules will assist building owners in their attempts to replace existing cable operators with new video programming providers who are willing to pay the building owner a higher fee. Additionally, the FCC has proposed abrogating all exclusive MDU contracts held by cable operators, but at the same time allowing competitors to cable to enter into exclusive MDU service contracts. Internet Service Regulation. Although there is no significant federal regulation of cable system delivery of internet services at the current time, and the FCC recently issued a report to Congress finding no immediate need to impose such regulation, this situation may change as cable systems expand their broadband delivery of internet services. In particular, proposals have been advanced at the FCC that would require cable operators to provide access to unaffiliated internet service providers and online service providers. Certain internet service providers also are attempting to use existing commercial leased access provisions of the Telecommunications Act to gain access to cable system delivery. Finally, some local franchising authorities are considering the imposition of mandatory internet access requirements as part of cable franchise renewals or transfer approvals. Other FCC Regulations. In addition to the FCC regulations noted above, there are other FCC regulations covering such areas as equal employment opportunity, customer privacy, programming practices (including, among other things, syndicated program exclusivity, network program nonduplication, local sports blackouts, indecent programming, lottery programming, political programming, sponsorship identification, and children's programming advertisements), registration of cable systems and facilities licensing, maintenance of various records and public inspection files, frequency usage, lockbox availability, antenna structure notification, tower marking and lighting, consumer protection and customer service standards, technical standards, and consumer electronics equipment compatibility. FCC requirements imposed in 1997 for Emergency Alert Systems and for hearing-impaired Closed Captioning on programming will result in new and potentially significant costs for TCI Group. The FCC has the authority to enforce its regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses needed to operate certain transmission facilities used in connection with cable operations. The FCC recently completed a rulemaking designed to encourage and facilitate third-party sale of cable converters to cable customers. Specifically, the FCC requires cable operators to segregate security functions of set top boxes from all other functions by July 1, 2000. Additionally, as of January 1, 2005, cable operators can no longer lease or sell converter set top boxes that have integrated security and navigation functions. The result of this rulemaking is that cable subscribers will not necessarily obtain their set top boxes from the cable operator, but, instead, may purchase such set top boxes from third-party vendors. Such third-party sales of previously unmodified cable set top boxes could make it more difficult for cable operators to combat theft of service. Copyright. Cable television systems are subject to federal copyright licensing covering carriage of television and radio broadcast signals. In exchange for filing certain reports and contributing a percentage of their revenue to a federal copyright royalty pool (such percentage varies depending on the size of the system and the number of distant broadcast television signals carried), cable operators can obtain blanket permission to retransmit copyrighted material on broadcast signals. The possible modification or elimination of this compulsory copyright license is subject to continuing review and could adversely affect TCI Group's ability to obtain desired broadcast programming. In addition, the cable industry pays music licensing fees to Broadcast Music, Inc. and is negotiating a similar arrangement with the American Society of Composers, Authors and Publishers. Copyright clearances for nonbroadcast programming services are arranged through private negotiations. State and Local Regulation. Cable television systems generally are operated pursuant to nonexclusive franchises granted by a municipality or other state or local government entity. The Telecommunications Act clarified that the need for an entity providing cable services to obtain a local franchise depends solely on whether the entity crosses public rights of way. Federal law now prohibits franchise authorities from granting exclusive franchises or from unreasonably refusing to award additional franchises covering an existing cable system's service area. Cable franchises generally are granted for fixed terms and in many cases are terminable if the franchisee fails to comply with material provisions. Non-compliance by the cable operator with franchise provisions may also result in monetary penalties. The terms and conditions of franchises vary materially from jurisdiction to jurisdiction. Each franchise generally contains provisions governing cable operations, service rates, franchise fees, system construction and maintenance obligations, system channel capacity, design and technical performance, customer service standards, and indemnification protections. A number of states subject cable television systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. Although LFAs have considerable discretion in establishing franchise terms, there are certain federal limitations. For example, LFAs cannot insist on franchise fees exceeding 5% of the system's gross revenue, cannot dictate the particular technology used by the system, and cannot specify video programming other than identifying broad categories of programming. Federal law contains renewal procedures designed to protect incumbent franchisees against arbitrary denials of renewal. Even if a franchise is renewed, the franchise authority may seek to impose new and more onerous requirements such as significant upgrades in facilities and services or increased franchise fees and funding for PEG channels as a condition of renewal. Similarly, if a franchise authority's consent is required for the purchase or sale of a cable system or franchise, such authority may attempt to impose more burdensome or onerous franchise requirements in connection with a request for consent. Historically, franchises have been renewed for cable operators that have provided satisfactory services and have complied with the terms of their franchises. COMPETITION Competition in communications services is based on price and pricing plans, the types of services offered, customer service, access to customer premises, and communications quality, reliability and availability, as well as, for business customers, the ability to provide high quality data communication services and technical support. AT&T's principal competitors include MCIWorldcom, Inc. and Sprint Corporation, for long distance, and the RBOCs and GTE Corporation, for local services. AT&T also experiences significant competition in long-distance from dial around resellers. The ILECs have very substantial capital and other resources, long standing customer relationships and extensive existing facilities and network rights-of-way and are AT&T's primary competitors in the local services market. In addition, it is anticipated that a number of long distance telecommunication, wireless and cable service providers and others will enter the local services market in competition with AT&T. Some of these potential competitors have substantial financial and other resources. AT&T will also compete in the local services market with a number of CLECs, a few of which have existing local networks and significant financial resources. Wireless Services' primary competitors are AirTouch Communications, Inc., BellSouth Corporation, Ameritech Corp., Bell Atlantic Mobile Systems Inc., GTE Corporation, SBC Communications Inc., Sprint PCS, Inc. and Nextel Communication, Inc. Competition is principally on the basis of service quality, service offering and packaging capability, price and coverage area. Wireless Services' cellular operations have always experienced direct competition from the second cellular licensee in each market. Beginning in 1997, Wireless Services began experiencing competition from as many as six license holders in certain markets. Competition from new providers in Wireless Services' markets will continue to increase as the networks of license holders are built out over the next several years. While Wireless Services will continue to build out its wireless network, there is no assurance that Wireless Services will be able to continue to do so in a reasonable and economical manner as new entrants lower rates and the cost of construction permits and licenses rise. In addition, as the number of new entrants in Wireless Services' markets increases, AT&T anticipates that there may be increased pressure to reduce prices, which may adversely affect margins. Cable television competes for customers in local markets with other providers of entertainment, news and information. The competitors in these markets include broadcast television and radio, newspapers, magazines and other printed material, motion picture theatres, video cassettes and other sources of information and entertainment including directly competitive cable television operations and internet service providers. The Cable Acts are designed to increase competition in the cable television industry. There are alternative methods of distributing the same or similar video programming offered by cable television systems. These include DBS (allowing the subscriber to receive video services directly via satellite using a relatively small dish), telephone networks (whether it is through wireless cable, or through upgraded telephone networks), utility company networks, MMDS (which deliver programming services over microwave channels received by customers with special antennas), competitive, non-exclusive franchises, city provided cable services, SMATV systems (which provide multichannel program services directly to hotel, motel, apartment, condominium and similar multi-unit complexes within a cable television system's franchise area, generally free of any regulation by state and local governmental authorities). In addition to competition for customers, the cable television industry competes with broadcast television, radio, the print media and other sources of information and entertainment for advertising revenue. AT&T currently faces significant competition and expects that the level of competition will continue to increase. As competitive, regulatory and technological changes occur, including those occasioned by the Telecommunications Act, AT&T anticipates that new and different competitors will enter and expand their position in the communications services markets. These may include entrants from other segments of the communications and information services industry or global competitors seeking to expand their market opportunities. Many such new competitors are likely to enter with a strong market presence, well recognized names and pre-existing direct customer relationships. The Telecommunications Act has already impacted the competitive environment. Anticipating changes in the industry, non-RBOC LECs, which are not required to implement the Telecommunications Act's competitive checklist prior to offering long distance in their home markets, have begun integrating their local service offerings with long distance offerings in advance of AT&T being able to offer combined local and long distance service in these areas, adversely affecting AT&T's revenues and earnings in these service regions. In addition, mergers, such as the proposed Bell Atlantic/GTE merger, could accelerate RBOC entry into long distance. In addition, the Telecommunications Act will permit RBOCs to provide interLATA interexchange services after demonstrating to the FCC that such provision is in the public interest and satisfying the conditions for developing local competition established by the Telecommunications Act. The RBOCs have petitioned the FCC for permission to provide interLATA interexchange services in one or more states within their home market; to date the FCC has not granted any petition. To the extent that the RBOCs obtain in-region interLATA authority before the Telecommunications Act's checklist of conditions have been fully or satisfactorily implemented and adequate facilities-based local exchange competition exists, there is a substantial risk that AT&T and other interexchange service providers would be at a disadvantage to the RBOCs in providing both local service and combined service packages. Because it is widely anticipated that substantial numbers of long distance customers will seek to purchase local, interexchange and other services from a single carrier as part of a combined or full service package, any competitive disadvantage, inability to profitably provide local service at competitive rates or delays or limitations in providing local service or combined service packages could adversely affect AT&T's future revenues and earnings. In any event, the simultaneous entrance of numerous new competitors for interexchange and combined service packages is likely to adversely affect AT&T's future long distance revenues and could adversely affect future earnings. Furthermore, in February 1997, a General Agreement on Trade in Services (GATS) was reached under the World Trade Organization. The GATS, which became effective January 1, 1998, is designed to open each country's domestic telecommunications markets to foreign competitors. The GATS, and future trade agreements, may accelerate the entrance into the U.S. market of foreign telecommunications providers, certain of whom are likely to possess dominant home market positions in which there is not effective competition. The GATS may also permit AT&T's entrance into other markets as only a small number of countries refused to eliminate their foreign ownership restrictions. In addition to the matters referred to above, various other factors, including technological hurdles, market acceptance, start-up and ongoing costs associated with the provision of new services and local conditions and obstacles, could adversely affect the timing and success of AT&T's entrance into the local exchange services market and AT&T's ability to offer combined service packages that include local service. FORWARD LOOKING STATEMENTS Except for the historical statements and discussions contained herein, statements contained in this Report on Form 10-K constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Any Form 10-K, Annual Report to Shareholders, Form 10-Q or Form 8-K of AT&T may include forward looking statements. In addition, other written or oral statements which constitute forward looking statements have been made and may in the future be made by or on behalf of AT&T, including statements concerning future operating performance, AT&T's share of new and existing markets, AT&T's short- and long-term revenue and earnings growth rates, and general industry growth rates and AT&T's performance relative thereto. These forward looking statements rely on a number of assumptions concerning future events, including the outcome of litigation, the adoption and implementation of balanced and effective rules and regulations by the FCC and the state public regulatory agencies, and AT&T's ability to achieve a significant market penetration in new markets. These forward looking statements are subject to a number of uncertainties and other factors, many of which are outside AT&T's control, that could cause actual results to differ materially from such statements. These factors include, but are not limited to: - - the adoption and implementation of balanced and effective rules and regulations by the FCC and state regulatory agencies to implement the provisions of the Telecommunications Act; the outcome of litigation relative thereto; and the impact of regulatory changes relating to access reform, the unbundling of cable facilities and international settlement reform; - - success and market acceptance for new initiatives, including the launch of cable telephony, many of which are untested; the level and timing of the growth and profitability of new initiatives; start-up costs associated with entering new markets, including advertising and promotional efforts; successful deployment and technological implementations of new systems and applications to support new initiatives; the ability to address the needs of customers for broadband and Internet access; and local conditions and obstacles; - - competitive pressures, including pricing pressures, alternative routing developments, and the ability to offercombined service packages that include local service; technological developments, including the rate of technological advances in, and implementation of, internet telephony services that compete with traditional telephony services; the extent and pace at which different competitive environments develop for each segment of the telecommunications industry; the extent at and duration for which competitors from each segment of the telecommunications industry are able to offer combined or full service packages prior to AT&T being able to; and the degree to which AT&T experiences material competitive impacts to its traditional service offerings prior to achieving adequate local service entry; - - the availability, terms and deployment of capital; the impact of regulatory and competitive developments on capital outlays; the ability to achieve cost savings and realize productivity improvements; the ability to effectively integrate TCI's and TCG's operations with AT&T; the ability to realize cost-saving and revenue synergies from the TCI merger and TCG merger; the ability to successfully implement the BT, Time Warner and cable operator joint ventures; the ability to expand the cable footprint and the wireless footprint in an economical and expeditious manner; and the ability to enter into agreements which provide for reasonable roaming rates for wireless services; and - - the ability to attract and retain qualified management employees in all key areas of the business; general economic conditions, government and regulatory policies, and business conditions in the communications industry. Readers are cautioned not to put undue reliance on such forward looking statements. For a more detailed description of these and additional uncertainties and other factors that could cause actual results to differ materially from such forward looking statements, see "Results of Operations", "Financial Condition", "Regulatory and Legislative Developments", and "Competition" included in or incorporated by reference into this Form 10-K. As described elsewhere in this Form 10-K, these uncertainties and factors could adversely affect the timing and success of AT&T's entrance into the local exchange services market and AT&T's ability to offer combined service packages that include local service, thereby adversely affecting AT&T's future revenues and earnings. AT&T disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information, future events or otherwise. LIBERTY MEDIA GROUP LIBERTY MEDIA GROUP Programming Services Liberty Media Group, through Liberty Media Corporation, and its attributed subsidiaries and affiliates, produces, acquires and distributes entertainment, sports and informational programming services, as well as electronic retailing services. Such programming is delivered via cable television and other distribution technologies to viewers in the United States and overseas. Liberty Media Group's assets also include video and telephony distribution businesses which operate in countries outside the United States. Liberty Media Group's principal assets include interests in Encore Media Group LLC, Discovery Communications, Inc., Fox/Liberty regional and national sports networks, Time Warner Inc., QVC, Inc., and USA Networks, Inc. Liberty Media Group also has interests in certain other domestic and international programming networks and businesses. Cable television networks distribute their programming via cable and other distribution technologies, including direct-to-home satellite (DTH) companies, broadcast television stations, SMATV systems, MMDS, and the Internet. Both basic cable networks and pay television programming services generally enter into separate multi-year agreements, known as "affiliation agreements," with operators of cable television systems, SMATV systems, MMDS and DTH distribution companies that have agreed to carry such networks. With the proliferation of new cable networks and services, competition for cable carriage on the limited available channel capacity has intensified. Basic cable networks generate their revenue principally from the sale of advertising time on the networks and from receipt of monthly per subscriber fees paid by cable operators, DTH distribution companies and other customers, who have contracted to receive and distribute such networks. Pay-TV networks do not sell advertising and generate their revenue principally from monthly subscriber fees. Relationship with the TCI Group. Most of the networks affiliated with Liberty Media Group have entered into affiliation agreements with Satellite Services, Inc. (TCI-SSI) a company within the TCI Group. TCI-SSI purchases programming services from programming suppliers and then makes such services available to cable television systems owned by or affiliated with the TCI Group (TCI-SSI Affiliates). Customers served by TCI-SSI Affiliates (TCI-SSI Subscribers) represented approximately 24% of U.S. households which received cable or satellite delivered programming at December 31, 1998. The following details each national network which had a number of TCI-SSI Subscribers, as a percentage of total subscribers, in excess of 24% as of December 31, 1998: FX (28%), Fox Sports World (64%), Fox Sports World Espanol (35%), and International Channel (26%). Regional networks, such as Bay TV and the regional sports networks may be disproportionately dependent on the predominant cable provider in their region, whether a TCI-SSI Affiliate or an unaffiliated cable operator. Therefore, where a TCI-SSI Affiliate is the predominant cable provider in the region, the ratio of TCI-SSI Subscribers to overall subscribers to such networks significantly exceeds 24%. For example, at December 31, 1998, approximately 87% of the subscribers of Bay TV, a regional network for the San Francisco region, were TCI-SSI Affiliates. Each of EMG and TCI Music, Inc. ("TCI Music") has entered into long term, fixed rate affiliation agreements with the TCI Group pursuant to which the TCI Group pays monthly fixed amounts in exchange for unlimited access to certain programming services of such companies. Programming Services Encore Media Group LLC. EMG provides 25 channels of cable and satellite-delivered premium movie services, including Encore, which predominantly airs hit movies from the `60's, `70's and `80's as well as first run movies; six thematic multiplexed channels--Love Stories, Westerns, Mystery, Action, True Stories and WAM!, a 24-hour youth oriented education and entertainment service; STARZ! a first-run movie service; STARZ!2, offering "prime time movies all the time," and BET Movies/STARZ!3 featuring African American actors and directors. EMG also offers MOVIEplex, a "theme by day" channel featuring a different Encore or thematic multiplex channel each day, on a weekly rotation. Discovery Communications, Inc. ("Discovery") Discovery is the largest originator of documentary, non-fiction programming in the world. Discovery operates several business units. The first of these, Discovery Networks, US, consists of four basic cable networks: Discovery Channel, The Learning Channel, Animal Planet, and the recently acquired Travel Channel, and six networks created for the digital platform: Discovery Science, Discovery Civilization, Discovery Home & Leisure, Discovery Kids, Discovery Health and Discovery Wings. Discovery Channel and The Learning Channel provide nature, science, technology and other non-fiction programming, and are distributed in virtually all U.S. pay-television homes. Animal Planet offers a range of animal programming, including children's programs, game shows, feature films, wildlife documentaries and how-to pet shows. Discovery Networks International distributes various Discovery networks in Latin America, Europe, Asia and Africa. Discovery's international networks serve more than 66 million customers in more than 50 countries outside the United States. Discovery Retail operates over 115 retail stores in the United States and the United Kingdom. These include The Nature Company stores, Discovery Channel Stores and one Discovery Channel Destination flagship store. Discovery also markets and distributes BBC America, which launched in March 1998. Discovery recently purchased Eye on People, a 24-hour cable channel focused on people and personalities, from CBS Corporation. Time Warner Inc. Time Warner has interests in four fundamental areas of business: Entertainment, consisting primarily of interests in filmed entertainment, television production, television broadcasting, recorded music and music publishing; Cable Networks, consisting principally of interests in cable television programming; Publishing, consisting principally of interests in magazine publishing, book publishing and direct marketing; and Cable, consisting principally of interests in cable television systems. Time Warner is a holding company which derives its operating income and cash flow from its investments in its direct subsidiaries, Time Warner Companies, Inc. and TBS. In connection with the TBS/Time Warner Merger in which Liberty Media Group received Time Warner common shares, Time Warner, TBS, TCI and Liberty Media Group entered into an Agreement Containing Consent Order with the Federal Trade Commission (FTC), dated August 14, 1996, as amended on September 4, 1996 (the FTC Consent Decree). Pursuant to the FTC Consent Decree, among other things, Liberty Media Group agreed to exchange its shares of Time Warner common stock for shares of a separate series of Time Warner common stock with limited voting rights designated as Series LMCN-V common stock (the "TW Exchange Stock"). The TW Exchange Stock entitles the holder to one one-hundredth (1/100th) of a vote for each share with respect to the election of directors. Liberty Media Group holds approximatley 114 million shares of the TW Exchange Stock, which represent less than 1% of the voting power of Time Warner's outstanding common stock. Each share of TW Exchange Stock is exchangeable, under certain circumstances, for one share of Time Warner common Stock. ACTV, Inc. On September 21, 1998 Liberty Media Group purchased a 7.5% interest in ACTV, Inc., a company which produces tools for the creation of programming that allows viewer participation for both television and internet platforms. BET Holdings II, Inc. (BET). BET's primary operations are conducted by BET Cable Network, an advertiser-supported basic cable network which provides a broad mix of music videos, off-network situation comedies and original programming targeted to the interests and concerns of African American viewers. BET also operates BET on Jazz featuring jazz concerts and music videos, as well as BET Action Pay-Per-View, which distributes films produced by major studios and independent film companies. In addition, BET has interests in magazine and book publishing, as well as motion picture production. Court TV. Court TV is a basic cable network which provides live and/or tape delayed coverage and analysis of selected criminal and civil legal proceedings. TCI Music, Inc. TCI Music is a diversified music entertainment company delivering audio and video music services to commercial and residential customers via television, the Internet and other distribution technologies. TCI Music's principal services include THE BOX, an interactive all music video channel; Digital Music Express, a premium digital audio music service; and SonicNet, a leading music site on the Internet. E! Entertainment Television. E! Entertainment Television is a 24-hour basic cable network devoted to the world of celebrities and entertainment. The network's programming mix includes entertainment news reports, original programs, and exclusive live coverage of major awards shows and celebrity events. International Cable Channels Partnership, Ltd. (ICCP). ICCP distributes and markets ethnic programming in the United States. Its basic network, International Channel, provides news, sports, music, movies and general entertainment programming from around the world in more than 20 different languages. ICCP also operates Premium Networks, a digital tier of single-language channels, such as Chinese and French. In addition, ICCP markets and distributes Canales n, a newly launched digital tier of Spanish-language cable television channels designed to serve the growing Latino market in the United States. Odyssey. Odyssey, a national basic cable network, provides viewers with non-denominational religious and values-based entertainment and informational programming. Hallmark Entertainment and The Jim Henson Company, both leaders in the production of family entertainment, recently invested in Odyssey, reducing the Liberty Media Group's ownership interest from 49% to approximately 33%. Both Hallmark Entertainment and The Jim Henson Company will make their programming available to Odyssey. MacNeil/Lehrer Productions. MacNeil/Lehrer Productions is the primary producer of the News Hour on the Public Broadcasting System and a producer of other high-quality documentary and public affairs programming. TV Guide, Inc. (formerly United Video Satellite Group, Inc.) is a media and communications company engaged predominantly in providing print, passive and interactive program listings guides to households, distributing superstation programming to cable television systems and DTH satellite providers, and marketing satellite delivered programming to C-band satellite dish owners. On March 1, 1999, UVSG acquired Liberty Media Group's 40% interest in Superstar/Netlink Group LLC (SNG), and Liberty Media Group's 100% interest in Netlink USA in exchange for 12,750,000 shares of UVSG Class B Common Stock (the Netlink Transaction). As a result of the Netlink Transaction, UVSG owns approximately 80% of SNG which markets packages of satellite entertainment programming to C-band satellite dish owners in North America. Netlink USA uplinks the signals of six broadcast television stations to C-band packagers such as SNG. On the same date, UVSG acquired from TVG Holdings, Inc., an indirect subsidiary of News Corp., the stock of News America Publications, Inc. and TVSM, Inc. (the TV Guide Transaction). These entities publish TV Guide Magazine and other printed television program listings guides and distribute, through the internet, an entertainment service known as TV Guide Online. News Corp. received consideration consisting of approximately 22.5 million shares of UVSG Class A common stock, approximately 37.5 million shares of UVSG Class B common stock and $800 million in cash. News Corp. then elected to purchase approximately 6.5 million additional shares of UVSG Class A Common Stock for approximately $129 million in cash to equalize its ownership with that of TCI. Upon closing of the foregoing transactions, UVSG's name was changed to TV Guide, Inc. TCI and News Corp. each owned approximately 44% of the issued and outstanding common stock of UVSG and each owned approximately 49% of the total voting power of UVSG. TCI's entire interest in UVSG is attributed to Liberty Media Group and TCI Ventures Group. USA Networks, Inc. USAi, formerly known as HSN, Inc., is a diversified media and electronic commerce company that is engaged in five principal areas of business: HSN, which primarily engages in the electronic retailing business; Networks and television production, which operates the USA Network, a general entertainment basic cable television network, and The Sci-Fi Channel, which features classic science fiction movies, science fact, fiction, movies and original production; Studios USA, which produces and distributes television programming; USA Broadcasting, which owns and operates a group of UHF and low power television stations; Ticketmaster Group, Inc., which is the leading provider of automated ticketing services in the United States; and Internet services. Liberty Media Group's interest in USAi consists of shares of USAi common stock held by Liberty Media Group and its subsidiaries, shares of USAi common stock held by certain entities in which Liberty Media Group has an equity interest but only limited voting rights, and securities of certain subsidiaries of USAi which are exchangeable for shares of USAi common stock. In general, until the occurrence of certain events and with the exception of certain negative controls, Mr. Barry Diller has voting power over Liberty Media Group's interest in USAi. Fox Sports Networks. In April 1996, Liberty Media Group and News Corp., formed Fox/Liberty Networks (Fox Sports), a joint venture to hold Liberty Media Group's national and regional sports networks and the FX network. In December 1997, Fox Sports completed a series of transactions (the Rainbow Transactions) with Rainbow Media Sports Holdings, Inc. (Rainbow) in which Fox Sports acquired a 40% interest in Rainbow's eight regional sports networks, the Madison Square Garden entertainment complex, Radio City Productions LLC, the New York Rangers, a professional hockey team, and the New York Knicks, a professional basketball team. As of December 31, 1998, Fox Sports owned interests in, or was affiliated with, 24 regional sports networks, 17 of which operate under the Fox Sports name. These regional sports networks have rights to telecast live games of professional sports teams in the National Basketball Association, the National Hockey League and/or Major League Baseball, and numerous collegiate sports teams. As part of the Rainbow Transaction, Fox Sports and Rainbow established a 50-50 partnership to operate Fox Sports Net, which provides affiliated regional sports networks, 24 hours per day, with national sports programming to supplement their regional sports offerings. Fox Sports Net features live and replayed sporting events, as well as other original sports programming, including a national sports news program, Fox Sports News. Fox Sports and Rainbow also established a national advertising representative firm to sell advertising time during both the regional affiliates' local programming and national network programming provided by Fox Sports Net. Fox Sports also operates several national networks in addition to Fox Sports Net, including FX, a general entertainment network which also carries various sporting events; FiT TV, which features health and fitness programming; Speedvision, which provides coverage of the automotive, motorcycle, aviation and marine industries; and Outdoor Life Network, which is devoted to adventure, wildlife and environmental issues and the outdoor lifestyle. At the international level, Liberty Media Group and TINTA formed a joint venture with News Corp. to hold their international sports interests. These include Fox Sports World Espanol, a Spanish language sports network, distributed in the United States and in Latin America, and STAR TV, a satellite-delivered programming platform available to 220 million viewers in Asia, India and the Middle East. Outside of the venture with News Corp., Liberty Media Group and TINTA own an interest in J-Sports, a sports network in Japan featuring coverage of SUMO wrestling, soccer, baseball and other international sporting events; and Torneos y Competencias S.A. ("TyC"), Argentina's dominant sports programming service. TyC also owns an interest in Canal 9, a general entertainment broadcast channel in Buenos Aires, Argentina which has become an international superchannel, providing programming to the United States and, via cable, to outlying areas of Argentina. The sports programming networks typically enter into rights agreements with one or more professional sports teams in their regions and acquire rights to collegiate and other sporting events through arrangements with regional conferences, individual schools, programming syndicators and event organizers. Fox Sports also acquires national rights agreements with professional leagues, such as Major League Baseball, and with regional collegiate conferences. Programming acquired under national rights agreements may be exhibited on Fox Sports Net and FX in addition to the regional sports networks. The duration of the rights agreements with the professional teams ranges from one to 20 years. The rights agreements for collegiate sporting events typically range from two to 10 years. Certain factors such as player strikes, bankruptcy of leagues or individual teams or team relocations may have an adverse effect on the revenue of the regional sports networks. Telemundo. On August 12, 1998, Liberty Media Group, in a 50-50 partnership with Sony Pictures Entertainment, acquired 100% of the Telemundo network and approximately 50% of the Telemundo station group. The Telemundo network is a broadcast network which provides 24-hour Hispanic language programming to 61 markets in the United States, including the 37 largest Hispanic markets, and reaches approximately 85% of all Hispanic households in the United States. The Telemundo station group owns and operates eight full power UHF stations and 15 low power television stations serving some of the largest Hispanic markets in the United States and Puerto Rico. While Liberty Media Group has approximately a 25% interest in the Telemundo station group, its voting power is less than 5% to meet certain regulatory requirements. Electronic Retailing. Liberty Media Group has significant investments in the two largest home shopping companies in the United States--QVC and HSN. These companies market and sell a wide variety of consumer products and services primarily by means of televised shopping programs on the QVC and HSN networks and via the Internet through iQVC and Internet Shopping Network. QVC also operates shopping networks in the United Kingdom and Germany, while HSN operates home shopping networks in Japan and Germany. TINTA. On November 19, 1998 TINTA completed its merger with a wholly owned subsidiary of TCI and, as a result, TCI now owns 100% of TINTA. Prior to the TINTA merger the TCI Ventures Group owned approximately 83% of TINTA's Series A common stock and all of TINTA's Series B common stock. Following the TINTA merger, approximately 85% of TINTA was attributed to the TCI Ventures Group and 15% was attributed to the Liberty Media Group. Regulation-Programming Companies The FCC regulates the providers of satellite communications services and facilities for the transmission of programming services, the cable television systems that carry such services, and, to some extent, the availability of the programming services themselves through its regulation of program licensing. Cable television systems are also regulated by municipalities or other state and local government authorities. Continued rate regulation or other franchise conditions could place downward pressure on subscriber fees earned by the programming companies described above in which Liberty Media Group has interests (the Programming Companies) and regulatory carriage requirements could adversely affect the number of channels available to carry the Programming Companies. Regulation of Program Licensing. The 1992 Cable Act directed the FCC to promulgate regulations regarding the sale and acquisition of cable programming between multi-channel video programming distributors (including cable operators) and satellite-delivered programming services in which a cable operator has an attributable interest. The legislation and the implementing regulations adopted by the FCC preclude virtually all exclusive programming contracts between cable operators and satellite programmers affiliated with any cable operator (unless the FCC first determines the contract serves the public interest) and generally prohibit a cable operator that has an attributable interest in a satellite programmer from improperly influencing the terms and conditions of sale to unaffiliated multi-channel video programming distributors. Further, the 1992 Cable Act requires that such affiliated programmers make their programming services available to cable operators and competing multi-channel video programming distributors such as MMDS and direct broadcast satellite distributors on terms and conditions that do not unfairly discriminate among such distributors. The Telecommunications Act has extended these rules to programming services in which telephone companies and other common carriers have attributable ownership interests. The FCC recently revised its program licensing rules, by implementing a damages remedy in situations where the defendant knowingly violates the regulations and by establishing a timeline for the resolution of such complaints, among other things. Regulation of Carriage of Programming. Under the Telecommunications Act, the FCC has adopted regulations prohibiting cable operators from requiring a financial interest in a programming service as a condition to carriage of such service, coercing exclusive rights in a programming service or favoring affiliated programmers so as to restrain unreasonably the ability of unaffiliated programmers to compete. Regulation of Ownership. The 1992 Cable Act required the FCC, among other things, (a) to prescribe rules and regulations establishing reasonable limits on the number of channels on a cable system that will be allowed to carry programming in which the owner of such cable system has an attributable interest and (b) to consider the necessity and appropriateness of imposing limitations on the degree to which multi-channel video programming distributors (including cable operators) may engage in the creation or production of video programming. In 1993, the FCC adopted regulations limiting carriage by a cable operator of national programming services in which that operator holds an attributable interest to 40% of the first 75 activated channels on each of the cable operator's systems. The rules provide for the use of two additional channels or a 45% limit, whichever is greater, provided that the additional channels carry minority-controlled programming services. The regulations also grandfather existing carriage arrangements that exceed the channel limits, but require new channel capacity to be devoted to unaffiliated programming services until the system achieves compliance with the regulations. These channel occupancy limits apply only up to 75 activated channels on the cable system, and the rules do not apply to local or regional programming services. These rules may limit carriage of the Programming Companies on certain systems of affiliated cable operators. In the same rulemaking, the FCC concluded that additional restrictions on the ability of multi-channel distributors to engage in the creation or production of video programming were then unwarranted. Regulation of Carriage of Broadcast Stations. The 1992 Cable Act granted broadcasters a choice of must carry rights or retransmission consent rights. The rules adopted by the FCC generally provided for mandatory carriage by cable systems of all local full-power commercial television broadcast signals selecting must carry rights and, depending on a cable system's channel capacity, non-commercial television broadcast signals. Such statutorily mandated carriage of broadcast stations coupled with the provisions of the 1984 Cable Act, which require cable television systems with 36 or more "activated" channels to reserve a percentage of such channels for commercial use by unaffiliated third parties and permit franchise authorities to require the cable operator to provide channel capacity, equipment and facilities for PEG access channels access, could adversely affect some or substantially all of the Programming Companies by limiting the carriage of such services in cable systems with limited channel capacity. The FCC recently initiated a proceeding asking to what extent cable operators must carry all digital signals transmitted by broadcasters. The imposition of such additional must carry regulation, in conjunction with the current limited cable system channel capacity, would make it likely that cable operators will be forced to drop cable programming services, which may have an adverse impact on the Programming Companies' programming interests. Closed Captioning Regulation. The 1992 Cable Act also required the FCC to establish rules and an implementation schedule to ensure that video programming is fully accessible to the hearing impaired through closed captioning. The rules adopted by the FCC will require substantial closed captioning over an eight to 10 year phase-in period with only limited exemptions. As a result, the Programming Companies are expected to incur significant additional costs for closed captioning. Copyright Regulation. Under regulations adopted by the Copyright Office, satellite carriers such as Netlink USA are not "cable systems" within the meaning of the Copyright Revision Act of 1976 as amended. Accordingly, satellite carriers are not permitted to provide superstation or network station broadcast signals to home satellite dish owners under the separate compulsory license extended to cable systems. Instead, Congress granted a statutory copyright license to satellite carriers retransmitting the broadcast signals of "superstations," such as KWGN and WGN, and of network stations to the public for private home viewing under the Satellite Home Viewer Act of 1994 (the SHV Act), which license is scheduled to expire on December 31, 1999. Although bills, which, among other things, would extend the license granted under the SHV Act, have been introduced in Congress, if the license is not further extended, satellite carriers will be required to negotiate private licenses for the retransmission of copyright material to home satellite dish owners after 1999. Satellite carriers may only distribute the signals of network broadcast stations, as distinguished from superstations, to "unserved households" that are outside the Grade B contours of a primary station affiliated with such network. The FCC released new rules on February 2, 1999 for determining whether households are unserved. Netlink USA entered into an agreement with the National Association of Broadcasters, the ABC, CBS, FOX and NBC networks, their affiliate associations, and several hundred broadcast stations, effective May 1, 1998, to identify by zip code those geographic areas which are "unserved" by network affiliated stations. Depending upon the implementation of the agreement and such identification, Netlink USA may be required, after expiration of a transition period on August 31, 1999, to disconnect a substantial number of existing subscribers. Under the SHV Act, satellite carriers must pay a monthly fee for each subscriber. To the extent that satellite carriers transmit superstation or network station signals to cable operators, such cable operators pay the copyright fee under the separate compulsory license. Satellites and Uplink. In general, authorization from the FCC must be obtained for the construction and operation of a communications satellite. The FCC authorizes utilization of satellite orbital slots assigned to the United States by the World Administrative Radio Conference. Such slots are finite in number, thus limiting the number of carriers that can provide satellite transponders and the number of transponders available for transmission of programming services. At present, however, there are numerous competing satellite service providers that make transponders available for video services to the cable industry. Proposed Changes in Regulation. The regulation of programming services, cable television systems, satellite carriers and television stations is subject to the political process and has been in constant flux over the past decade. Further material changes in the law and regulatory requirements must be anticipated and there can be no assurance that the Liberty Media Group's business will not be affected adversely by future legislation, new regulation or deregulation. Competition-Programming Companies The business of distributing programming for cable television is highly competitive. The Programming Companies directly compete with other programming services for distribution on a limited number of cable television channels and on other distribution media. In addition to competition for cable distribution, viewers and advertisers, the Programming Companies also compete, to varying degrees, for programming content. HSN and QVC operate in direct competition with businesses which are engaged in retail merchandising. BUSINESS OF THE TCI VENTURES GROUP On March 9, 1999, TCI combined the businesses and assets of Liberty Media Group and of TCI Ventures Group in conjunction with the TCI merger. The following information about TCI Ventures Group is dated as of March 1, 1999 and does not reflect the effects of the Liberty/Ventures Combination. In connection with the TCI merger and immediately prior thereto, certain of the assets attributed to TCI Ventures Group were transferred to TCI Group in exchange for approximately $5.5 billion cash. The assets attributed to the TCI Ventures Group, a business unit created in 1997, include interests in certain technology investments. Assets attributed to the TCI Ventures Group are held directly and indirectly through partnerships, joint ventures, common stock investments and instruments convertible or exchangeable into common stock. In some cases, the TCI Ventures Group's interest may be subject to buy-sell procedures, repurchase rights, performance guarantees and other restrictions. Diversified Satellite Communications TV Guide, Inc. (formerly UVSG) Following completion of the Netlink and TV Guide Transactions, TCI had approximately a 44% equity interest and a 49% voting interest in UVSG of which a 27% equity interest and a 32% voting interest was attributed to TCI Ventures Group and the balance of which was attributed to Liberty Media Group. UVSG is a media and communications company engaged predominantly in providing print, passive and interactive program listings guides to households, distributing superstation programming to cable television systems and DTH satellite providers, and marketing satellite delivered programming to C-band satellite dish owners. UVSG has been organized into three operating groups: Magazine Group; Entertainment Group; and United Video Group. The Magazine Group publishes and distributes TV Guide Magazine and customized monthly programming guides for cable and satellite operators in the US and internationally. The Entertainment Group supplies satellite-delivered on-screen program promotion and guide services, including TV Guide Channel and Sneak Prevue. The United Video Group provides DTH satellite services, satellite distribution of video entertainment services, software development and systems integration services and satellite transmission services for private networks. This group includes SNG and Netlink USA in addition to UVSG's UVTV division which markets and distributes to cable television systems and other multi-channel video distributors WGN (Chicago), KTLA (Los Angeles) and WPIX (New York), three independent "superstations". Domestic Telephony The TCI Ventures Group's telephony assets consist primarily of its ownership of an approximately 24% equity interest in the "Sprint PCS Group," consisting of shares of Sprint PCS Stock (which have limited voting rights) and certain warrants and shares of convertible preferred stock exercisable for or convertible into such shares. Pursuant to the Final Judgment agreed to by TCI, AT&T and the DOJ on December 31, 1998, Liberty/Ventures Group prior to the AT&T Merger transferred all of the Sprint Securities to a trust with the Trustee, pursuant to a trust agreement approved by the DOJ. The Final Judgment, if entered by the United States District Court for the District of Columbia, would require the Trustee, on or before May 23, 2002, to dispose of a portion of the Sprint Securities held by the trust and beneficially owned by Liberty/Ventures Group sufficient to cause Liberty/Ventures Group to own beneficially no more than 10% of the outstanding Series 1 PCS stock of Sprint on a fully diluted basis (assuming the issuance of all shares of Series 1 PCS stock of Sprint ultimately issuable in respect of the applicable securities of Sprint upon the exercise, conversion or other issuance thereof in accordance with the terms of such securities) on such date. On or before May 23, 2004, the Trustee must divest the remainder of the Sprint Securities beneficially owned by Liberty/Ventures Group. For additional information, see note 2 to the Company's consolidated financial statements included in Part II of this report. International Cable and Programming TINTA. TCI owns 100% of the equity in TINTA, of which 85% is attributed to the TCI Ventures Group and 15% is attributed to the Liberty Media Group. TINTA provides diversified programming services and operates broadband cable television and telephony distribution networks in selected markets outside the United States. At December 31, 1998, TINTA had ownership interests in or managed 61 cable and satellite programming services, which are received by subscribers in various countries outside the United States. TINTA also has ownership interests in companies operating broadband networks that, at December 31, 1998, provided cable television service to an aggregate of approximately 4.5 million basic subscribers and, primarily in the United Kingdom, provided telephone service over approximately 1.5 million telephone lines. TINTA has recently placed greater emphasis on the acquisition and development of multi-channel programming businesses, while maintaining meaningful and complementary interests in cable distribution assets. TINTA's distribution and programming ventures are concentrated in the United Kingdom, Europe, Latin America, Asia and the Caribbean, with particular focus, at present, on the United Kingdom, Argentina and Japan. Included among TINTA's cable and telephony distribution assets are an indirect 22% interest in Telewest Communications plc (Telewest) and a 40% interest in Jupiter Telecommunications Co. Ltd (Jupiter). Telewest is a leading provider of cable television and cable telephony services in the United Kingdom providing cable television services over a broadband (i.e., high capacity) network and uses such network, together with twisted-pair copper wire connections for final delivery to the customer premises, to provide telephony services to its customers. Jupiter provides residential and business television and cable telephony in Japan. TINTA also currently has an approximate 28% ownership interest and certain conditional management rights in Cablevision S.A. (Cablevision), which is one of the two largest cable television companies in Argentina. At December 31, 1998, Cablevision provided cable television service to an aggregate of approximately 1.5 million subscribers. TINTA's programming interests include a 37% equity interest (representing a 50% voting interest) in Flextech p.l.c. (Flextech), a 30% interest in MultiThematiques, S.A. (MultiThematiques) and a 50% interest in Jupiter Programming. Through its subsidiaries and affiliates, Flextech creates, packages and markets entertainment and information programming for distribution on cable television and DTH satellite providers throughout the United Kingdom and parts of continental Europe. Flextech's ordinary shares trade on the London Stock Exchange. MultiThematiques and Jupiter Programming provide multi-channel programming to cable television and DTH satellite providers in continental Europe and Japan, respectively. In addition, in August 1998, TINTA purchased Pramer S.C.A., an Argentine company which programs, markets and distributes 16 cable channels in Argentina, of which 10 are distributed throughout Latin America, and which markets one terrestrial station to operators in Argentina and neighboring countries. Liberty/TINTA, through a 50/50 joint venture with News Corp., holds international sports interests. These include Fox Sports World Espanol, a Spanish language sports network, distributed in the United States and in Latin America, and STAR TV, a satellite-delivered programming platform available to 220 million viewers in Asia, India and the Middle East. Outside of the venture with News Corp., Liberty Media Group and TINTA own an interest in J-Sports, a sports network in Japan featuring coverage of SUMO wrestling, soccer, baseball and other international sporting events; and TyC, Argentina's dominant sports programming service. TyC also owns an interest in Canal 9, a general entertainment broadcast channel in Buenos Aires, Argentina which has become an international superchannel, providing programming to the United States and, via cable, to outlying areas of Argentina. Competition. The various cable operators in which TINTA has interests directly compete for customers and advertisers in local markets with other providers of entertainment, news and information. Such cable operators also compete with companies who use alternative methods of distributing the same or similar video programming offered by cable television systems. The business of distributing programming for cable and satellite television is also highly competitive. TINTA's programming subsidiaries and affiliates directly compete with other programming services for distribution on a limited number of television channels and, when distribution is obtained, they compete for viewers and advertisers with other programming services. Government Regulation. Substantially every country in which TINTA has, or proposes to make, an investment regulates, in varying degrees, (a) the granting of cable and telephony franchises, the construction of cable and telephony systems and the operations of cable, other multi-channel television operators and telephony operators and service providers, as well as the acquisition of, and foreign investments in, such operators and service providers, and (b) the broadcast and content of programming and Internet services and foreign investment in programming companies. Regulations or laws may cover wireline and wireless telephony, satellite and cable communications and Internet services, among others. Regulations or laws that exist at the time TINTA makes an investment in a subsidiary or affiliate may thereafter change, and there can be no assurance that material and adverse changes in the regulation of the services provided by TINTA's subsidiaries and affiliates will not occur in the future. Regulation can take the form of price controls, service requirements and programming and other content restrictions, among others. Moreover, some countries do not issue exclusive licenses to provide multi-channel television services within a geographic area, and in those instances TINTA may be adversely affected by an overbuild by a competing cable operator. In certain countries where multi-channel television is less developed, there is minimal regulation of cable television, and, hence, the protections of the cable operator's investment available in the United States and other countries (such as rights to renewal of franchises and utility pole attachment) may not be available in these countries. SEGMENT, OPERATING REVENUE AND RESEARCH AND DEVELOPMENT EXPENSE INFORMATION For information about the Company's research and development expense, see Note 2 to the Consolidated Financial Statements. For information about the consolidated operating revenues contributed by the Company's major classes of products and services, see the revenue tables and descriptions on pages 31, 32 and 38-43 and Consolidated Statements of Income on page 52 of the Company's annual report to shareholders for the year ended December 31, 1998. All such information is incorporated herein by reference pursuant to General Instruction G(2). EMPLOYEE RELATIONS At December 31, 1998 AT&T employed approximately 107,800 persons in its operations, approximately 105,000 of whom are located domestically. About 40% of the domestically located employees of AT&T are represented by unions. Of those so represented, about 95% are represented by the Communications Workers of America (CWA), which is affiliated with the AFL-CIO; about 4% by the International Brotherhood of Electrical Workers (IBEW), which is also affiliated with the AFL-CIO. In addition, there is a very small remainder of domestic employees represented by other unions. Labor agreements with most of these unions extend through May 2002. ITEM 2. PROPERTIES. The properties of AT&T Corp. consist primarily of plant and equipment used to provide long distance and wireless telecommunications services and cable television services and administrative office buildings. Telecommunications plant and equipment consists of: central office equipment, including switching and transmission equipment; connecting lines (cables, wires, poles, conduits, etc.); wireless cell sites, antennas and wireless switching facilities; land and buildings; and miscellaneous properties (work equipment, furniture, plant under construction, etc.). The majority of the connecting lines are on or under public roads, highways and streets and international and territorial waters. The remainder are on or under private property. AT&T also operates a number of sales offices, customer care centers, and other facilities, such as research and development laboratories. AT&T continues to manage the deployment and utilization of its assets in order to meet its global growth objectives while at the same time ensuring that these assets are generating value for the shareholder. AT&T will continue to manage its asset base consistent with globalization initiatives, marketplace forces, productivity growth and technology change. TCI currently leases its executive offices in a suburb of Denver, Colorado, and leases most of its regional and local operating offices. TCI owns many of its head-end and antenna sites. During 1999 TCI will relocate its executive offices to owned properties in a suburb of Denver, Colorado. Its physical cable television properties, which are located throughout the United States, consist of system components, motor vehicles, miscellaneous hardware, spare parts and other components. TCI's cable television facilities are, in the opinion of management, suitable and adequate by industry standards. Physical properties of TCI are not held subject to any major encumbrance. A substantial number of the administrative offices of AT&T Corp. are in leased buildings. Substantially all of the important long distance communications facilities are in buildings wholly owned by AT&T or in buildings owned partially by AT&T and partially by the regional holding companies created at divestiture. Many of the smaller facilities are in rented quarters. Most of the important buildings used in connection with long distance services are on land held in fee, but a few are on land held under long-term leases. ITEM 3. LEGAL PROCEEDINGS. In the normal course of business, AT&T Corp. is subject to proceedings, lawsuits and other claims, including proceedings under government laws and regulations related to environmental and other matters. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, AT&T Corp. is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at December 31, 1998. While these matters could affect operating results of any one quarter when resolved in future periods, it is management's opinion that after final disposition, any monetary liability or financial impact to AT&T Corp. beyond that provided for at year-end would not be material to AT&T Corp.'s annual consolidated financial position or results of operations. On July 6, 1997, MCI Telecommunications Corp. and Ronald A. Katz Technology Licensing, L.P. filed suit in United States District Court in Philadelphia, Pennsylvania against AT&T. The suit alleges that a number of AT&T services infringe patents owned by Katz but licensed to MCI for enforcement against AT&T. This matter is currently in discovery. Based on review to date, it is management's opinion that the claims do not present any material monetary liability or financial impact to AT&T that is not subject to patent indemnity agreements with third-party equipment vendors. AT&T is also a named party in a number of environmental actions, none of which is material to the consolidated financial statements or business of the Company. In addition, pursuant to the Separation and Distribution Agreement by and among AT&T, Lucent, and NCR, dated as of February 1, 1996, and amended and restated as of March 29, 1996, Lucent has assumed liability, subject to the liability sharing provisions of that agreement, for a number of actions in which AT&T remains a named party. AT&T is working to be released as a party to these actions, although there can be no assurance that it will be successful in this regard. There are four environmental proceedings which are required to be reported pursuant to Instruction 5.C. of Item 103 of Regulation S-K. In September 1997, the government of the U.S. Virgin Islands filed suit in the federal district court of the Virgin Islands against the Company, AT&T Submarine Systems International ("SSI International"), A&L Underground, Inc., a contractor for SSI International at that time, and other entities. In connection with the purported 1996 release of non-toxic bentonite drilling mud within the coastal region of St. Croix by the contractor, the suit seeks penalties for violations of various federal and Virgin Island statutes; damages under several statutory and common law theories; removal of the mud (which has since been completed to the satisfaction of the federal agency that ordered the cleanup); and restitution of response costs allegedly incurred by the Virgin Islands. SSI International was a wholly owned subsidiary of AT&T at the time of the alleged violation. On December 31, 1998 the Government of the U.S. Virgin Islands filed an administrative complaint against AT&T of the Virgin Islands, Inc., seeking $23 million in penalties (primarily for the release of drilling mud in 1996 in conjunction with the construction of the St. Croix cable landing station). The foregoing environmental proceeding is not material to the consolidated financial statements or business of the Company and would not be reported but for Instruction 5 C. of Item 103 of Regulation S-K, which requires disclosure of such matters. In addition, three proceedings involve matters for which Lucent has assumed liability, as described above. On July 31, 1991, the United States Environmental Protection Agency Region III issued a complaint pursuant to Section 3008a of the Resource Conservation and Recovery Act alleging violations of various waste management regulations at the Company's Richmond Works, Richmond, Virginia. The complaint seeks a total of $4.2 million in penalties. In addition, on July 31, 1991, the United States Environmental Protection Agency filed a civil complaint in the U.S. District Court for the Southern District of Illinois against the Company and nine other parties seeking enforcement of its Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") Section 106 cleanup order, issued in November 1990 for the NL Granite City Superfund site, Granite, Illinois, past costs, civil penalties of $25,000 per day and treble damages related to certain United States' costs. Finally, during 1994, AT&T Nassau Metals Corporation ("Nassau"), a wholly owned subsidiary of AT&T, and the New York State Department of Environmental Conservation ("NYSDEC") were engaged in negotiations over a study and cleanup of the Nassau plant located on Richmond Valley Road in Staten Island, New York. During these negotiations, in June 1994, NYSDEC presented Nassau with a draft consent order which included not only provisions relating to site investigation and remediation but also a provision for payment of a $3.5 million penalty for alleged violations of hazardous waste management regulations. No formal proceeding has been commenced by NYSDEC. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. No matter was submitted to a vote of security holders in the fourth quarter of the fiscal year covered by this report.
Executive Officers of the Registrant (as of March 17, 1999) Became AT&T Name Age Executive Officer On - ---- --- -------------------- C. Michael Armstrong* . . . . 60 Chairman of the Board and Chief Executive Officer . . . . . . . . . . . . 10-97 Harold W. Burlingame . . . . 58 Executive Vice President, Merger & Joint Venture Integration . . . . . . 9-86 James Cicconi . . . . . . . . 46 Executive Vice President-Law & Government Affairs and General Counsel . . 12-98 Mirian Graddick . . . . . . . 44 Executive Vice President, Human Resources . . . . . . . . . . . . . . . . 3-99 Daniel R. Hesse . . . . . . . 45 Executive Vice President and President & CEO, AT&T Wireless Services . . 5-97 Leo J. Hindery, Jr. . . . . . 51 President and Chief Executive Officer, AT&T Broadband and Internet Services . . . . . . . . . . . . . . . . . . . . . . . . . 3-99 Frank Ianna . . . . . . . . . 49 Executive Vice President and President, AT&T Network Services . . . . . . 3-97 Michael G. Keith . . . . . . 50 Executive Vice President and President, AT&T Business Services . . . . . 12-98 H. Eugene Lockhart . . . . . 49 Executive Vice President, Chief Marketing Officer . . . . . . . . . . . . 2-99 Richard J. Martin . . . . . . 52 Executive Vice President, Public Relations and Employee Communication . . 11-97 John C. Malone** . . . . . . 58 Chairman of the Board, Liberty Media Corporation . . . . . . . . . . . . 3-99 David C. Nagel . . . . . . . 54 President, AT&T Labs & Chief Technology Officer . . . . . . . . . . . . . 3-97 John C. Petrillo . . . . . . 49 Executive Vice President, Corporate Strategy and Business Development . . 1-96 Richard Roscitt . . . . . . . 47 Executive Vice President and President & CEO, AT&T Solutions . . . . . . 9-97 D. H. Schulman . . . . . . . 40 Executive Vice President and President, AT&T Consumer Long Distance and Segment Marketing . . . . . . . . . . . . . . . . . . . . . . . 12-98 Daniel E. Somers . . . . . . 51 Senior Executive Vice President and Chief Financial Officer . . . . . . . 5-97 John D. Zeglis**. . . . . . . 51 President, AT&T; Chairman and Chief Executive Officer, AT&T Consumer Services Company . . . . . . . . . . . . . . . . . . . . . . . . . . 9-86 *Chairman of the Board of Directors and Chairman of the Executive and Proxy Committees. **Member of the Board of Directors.
All of the above executive officers have held high level managerial positions with AT&T or its affiliates for more than the past five years, except Messrs. Armstrong, Cicconi, Hindery, Lockhart, Malone, Nagel and Somers. Prior to joining AT&T in October 1997, Mr. Armstrong was Chairman and Chief Executive Officer of Hughes Electronics from 1991. Prior to joining AT&T in September 1998 as Senior Vice President-Law and Government Affairs, Mr. Cicconi was a Partner at the law firm of Akin, Gump, Strauss, Houer and Feld, L.L.P. from 1991. Prior to joining AT&T, Mr. Hindery was President of TCI from March 1997 and from 1988 to 1997 was Managing General Partner of InterMedia Partners, the nation's ninth largest MSO, which he founded in 1988. Prior to joining AT&T Mr. Lockhart was President of BankAmerica Corporation's Global Retail Bank from 1997 to 1998 and from 1994 to 1997 was President and Chief Executive Officer of MasterCard International, Inc. Prior to joining AT&T, Dr. Malone was President, Chairman and Chief Executive Officer of TCI from 1994. In addition, Dr. Malone served as director of TCI Pacific Communications, Inc. since 1996. Prior to joining AT&T in April 1996, Mr. Nagel was with Apple Computer, serving as Senior Vice President from 1995 and General Manager from 1988 through 1995. Prior to joining AT&T in May 1997, Mr. Somers was Chairman and Chief Executive Officer for Bell Cablemedia, plc, of London for two years and from 1992 to 1995, Mr. Somers was Executive Vice President and Chief Financial Officer for Bell Canada International. PART II Items 5. through 8. The information required by these items is included in pages 28 through 72 and the inside back cover of the Company's annual report to shareholders for the year ended December 31, 1998. Such information is incorporated herein by reference, pursuant to General Instruction G(2). The referenced information from the Company's annual report to share holders has been filed as Exhibit 13 to this document. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. There have been no changes in independent accountants and no disagreements with independent accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure during the last two years. PART III Items 10. through 13. Information regarding executive officers required by Item 401 of Regulation S-K is furnished in a separate disclosure in Part I of this report because the Company did not furnish such information in its definitive proxy statement prepared in accordance with Schedule 14A. The other information required by Items 10 through 13 is included in the Company's definitive proxy statement dated March 25, 1999, the third and fourth paragraphs on page 7, the first and second paragraphs on page 8, the first full paragraph on page 9 through the final footnote on page 15 and the second paragraph on page 33 through page 58. Such information is incorporated herein by reference, pursuant to General Instruction G(3). PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K. (a) Documents filed as a part of the report: (1) Financial Statements: Pages ----- Report of Management ....................... * Report of Independent Accountants .......... * Statements: Consolidated Statements of Income .......... * Consolidated Balance Sheets ................ * Consolidated Statements of Changes in Shareowners' Equity ................... * Consolidated Statements of Cash Flows ...... * Notes to Consolidated Financial Statements . * (2) Financial Statement Schedule: Report of Independent Accountants .......... 48 Schedule: II -- Valuation and Qualifying Accounts .... 49 Separate financial statements of subsidiaries not consolidated and 50 percent or less owned persons are omitted since no such entity constitutes a "significant subsidiary" pursuant to the provisions of Regulation S-X, Article 3-9. (3) Exhibits: Exhibits identified in parentheses below, on file with the Securities and Exchange Commission ("SEC"), are incorporated herein by reference as exhibits hereto. Exhibit Number: (3)a Restated Certificate of Incorporation of the registrant filed January 10, 1989, Certificate of Correction of the registrant filed June 8, 1989, Certificate of Change of the registrant filed March 18, 1992, Certificate of Amendment of the registrant filed June 1, 1992, Certificate of Amendment of the registrant filed April 20, 1994, Certificate of Amendment filed June 8, 1998 and Certificate of Amendment filed March 9, 1999. - ------------ *Incorporated herein by reference to the appropriate portions of the Company's annual report to shareholders for the year ended December 31, 1998. (See Part II.) (3)b By-Laws of the registrant, as amended March 17, 1999. (4) No instrument which defines the rights of holders of long term debt, of the registrant and all of its consolidated subsidiaries, is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, the registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request. (10)(i)1 Form of Separation and Distribution Agreement by and among AT&T Corp., Lucent Technologies Inc. and NCR Corporation, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit (10)(i)1 to Form 10-K for 1996, File No. 1-1105). (10)(i)2 Form of Distribution Agreement, dated as of November 20, 1996, by and between AT&T Corp. and NCR Corporation (Exhibit (10)(i)2 to Form 10-K for 1996, File No. 1-1105). (10)(i)3 Tax Sharing Agreement by and among AT&T Corp., Lucent Technologies Inc. and NCR Corporation, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit (10)(i)3 to Form 10-K for 1996, File No. 1-1105). (10)(i)4 Employee Benefits Agreement by and between AT&T Corp. and Lucent Technologies Inc., dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit (10)(i)4 to Form 10-K for 1996, File No. 1-1105). (10)(i)5 Form of Employee Benefits Agreement, dated as of November 20, 1996, between AT&T Corp. and NCR Corporation (Exhibit (10)(i)5 to Form 10-K for 1996, File No. 1-1105). (10)(ii)(B)1 General Purchase Agreement between AT&T Corp. and Lucent Technologies Inc., dated February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit (10)(ii)(B)1 to Form 10-K for 1996, File No. 1-1105). (10)(ii)(B)2 Form of Volume Purchase Agreement, dated as of November 20, 1996, by and between AT&T Corp. and NCR Corporation (Exhibit (10)(ii)(B)2 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)1 AT&T Short Term Incentive Plan as amended March, 1994 (Exhibit (10)(iii)(A)1 to Form 10-K for 1994, File No. 1-1105). (10)(iii)(A)2 AT&T 1987 Long Term Incentive Program as amended December 17, 1997 (Exhibit 10)(iii)(A)2 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)3 AT&T Senior Management Individual Life Insurance Program as amended March 3, 1998 (Exhibit (10)(iii)(A)3 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)4 AT&T Senior Management Long Term Disability and Survivor Protection Plan, as amended and restated effective January 1, 1995 (Exhibit (10)(iii)(A)4 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)5 AT&T Senior Management Financial Counseling Program dated December 29, 1994 (Exhibit (10)(iii)(A)5 to Form 10-K for 1994, File No. 1-1105). (10)(iii)(A)6 AT&T Deferred Compensation Plan for Non-Employee Directors, as amended December 15, 1993 (Exhibit (10) (iii)(A)6 to Form 10-K for 1993, File No. 1-1105). (10)(iii)(A)7 The AT&T Directors Individual Life Insurance Program as amended March 2, 1998 (Exhibit (10)(iii)(A)1 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)8 AT&T Plan for Non-Employee Directors' Travel Accident Insurance (Exhibit (10)(iii)(A)8 to Form 10-K for 1990, File No. 1-1105). (10)(iii)(A)9 AT&T Excess Benefit and Compensation Plan, as amended and restated effective October 1, 1996 (Exhibit (10)(iii)(A)9 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)10 AT&T Non-Qualified Pension Plan, as amended and restated January 1, 1995 (Exhibit (10)(iii)(A)10 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)11 AT&T Senior Management Incentive Award Deferral Plan, as amended January 21, 1998. (10)(iii)(A)12 AT&T Mid-Career Hire Program revised effective January 1, 1988 (Exhibit (10)(iii)(A)4 to Form SE, dated March 25, 1988, File No. 1-1105) including AT&T Mid-Career Pension Plan, as amended and restated October 1, 1996, (Exhibit (10)(iii)(A)12 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)13 AT&T 1997 Long Term Incentive Program as amended December 17, 1997 (Exhibit (10)(iii)(A)13 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)14 Form of Indemnification Contract for Officers and Directors (Exhibit (10)(iii)(A)6 to Form SE, dated March 25, 1987, File No. 1-1105). (10)(iii)(A)15 Pension Plan for AT&T Non-Employee Directors revised February 20, 1989 (Exhibit 10)(iii)(A)15 to Form 10-K for 1993, File No. 1-1105). (10)(iii)(A)16 AT&T Corp. Senior Management Basic Life Insurance Program, as amended February 27, 1998 (Exhibit (10)(iii)(A)16 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)17 Form of AT&T Benefits Protection Trust Agreement as amended and restated as of November 1993, including the first amendment thereto dated December 23, 1997. (10)(iii)(A)18 AT&T Senior Officer Severance Plan effective October 9, 1997, as amended October 30, 1997 (Exhibit (10)(iii)(A)18 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)19 Form of Pension Agreement between AT&T Corp. and Frank Ianna dated October 30, 1997 (Exhibit (10)(iii)(A)19 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)20 Form of Pension Agreement between AT&T Corp. and John C. Petrillo dated October 30, 1997 (Exhibit (10)(iii)(A)21 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)21 Form of Pension Agreement between AT&T Corp. and John Zeglis dated May 7, 1997 (Exhibit (10)(iii)(A)22 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)22 Form of Employment Agreement between AT&T Corp. and C. Michael Armstrong dated October 17, 1997 (Exhibit (10)(iii)(A)23 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)23 Form of Employment Agreement between AT&T Corp. and Daniel E. Somers dated April, 1997. (10)(iii)(A)24 Amended and Restated Tele-Communications, Inc. 1994 Stock Incentive Plan. (Incorporated herein by reference to Tele-Communications, Inc.'s Registration Statement on Form S-8 (Commission File No. 333-40141)). (10)(iii)(A)25 Amended and Restated Tele-Communications, Inc. 1995 Employee Stock Incentive Plan. (Incorporated herein by reference to Tele-Communications, Inc.'s Registration Statement on Form S-8 (Commission File No. 333-40141)). (10)(iii)(A)26 Amended and Restated Tele-Communications, Inc. 1996 Incentive Plan. (Incorporated herein by reference to Tele-Communications, Inc.'s Registration Statement on Form S-8 (Commission File No. 333-40141)). (10)(iii)(A)27 TCI 401(k) Stock Plan, restated effective January 1, 1998. (Incorporated herein by reference to Tele-Communications, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997, as amended by Form 10-K/A (Commission File No. 0-20421)). (10)(iii)(A)28 Form of 1998 Incentive Plan of Tele-Communications, Inc., effective December 16, 1997. (Incorporated herein by reference to Tele-Communications, Inc.'s Definitive Proxy Statement on Schedule 14A, dated April 30, 1998 (Commission File No. 0-20421)). (10)(iii)(A)29 The Tele-Communications International, Inc. 1995 Stock Incentive Plan. (Incorporated herein by reference to Tele-Communications International, Inc. Registration Statement on Form S-1 (Commission File No. 33-91876)). (10)(iii)(A)30 Tele-Communications, Inc. 1994 Non-employee Director Stock Option Plan (Incorporated herein by reference to Exhibit 4.5 to the Registration Statement on Form S-8 of Tele-Communications, Inc. (Commission File No. 333-06179) filed on June 18, 1996). (10)(iii)(A)31 Tele-Communications International, Inc. 1996 Non-employee Director Stock Option Plan (Incorporated herein by reference to Appendix II to the Definitive Proxy Statement on Schedule 14A of Tele-Communications International, Inc. (Commission File No. 0-26264) filed on August 13, 1996). (10)(iii)(A)32 Liberty Media 401(K) Savings Plan (Incorporation herein by reference to Exhibit 99.1 to Post-Effective Amendment No. 2 on Form S-8 to the Registration Statement on Form S-4 of AT&T Corp. (Commission File No. 333-70279) filed March 10, 1999. (12) Computation of Ratio of Earnings to Fixed Charges. (13) Specified portions (pages 28 through 72 and the inside back cover) of the Company's Annual Report to Shareholders for the year ended December 31, 1998. (21) List of subsidiaries of AT&T. (23) Consent of Pricewaterhouse Coopers, LLP (24) Powers of Attorney executed by officers and directors who signed this report. (27) Financial Data Schedules. AT&T will furnish, without charge, to a shareholder upon request a copy of the annual report to shareholders and the proxy statement, portions of which are incorporated herein by reference thereto. AT&T will furnish any other exhibit at cost. (b) Reports on Form 8-K: During the fourth quarter 1998, Form 8-K dated October 16, 1998 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits) on October 16, 1998, Form 8-K dated October 21, 1998 was filed pursuant to Item 5 (Other Events) on October 21, 1998 and Form 8-K dated December 8, 1998 was filed pursuant to Item 5 (Other Events) on December 8, 1998. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of AT&T Corp.: Our report on the consolidated financial statements of AT&T Corp. and subsidiaries has been incorporated by reference in this Form 10-K from page 51 of the 1998 Annual Report to the Shareowners of AT&T Corp. In connection with our audits of such financial statements, we have also audited the related consolidated financial statement schedule listed in the index of this Form 10-K. In our opinion, the consolidated financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. PRICEWATERHOUSECOOPERS, LLP 1301 Avenue of the Americas New York, New York March 19, 1999
Schedule II--Sheet 1 AT&T CORP. AND ITS CONSOLIDATED SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (Millions of Dollars) - ------------------------------------------------------------------------------------------------------------------ COL. A COL. B COL. C COL. D COL. E - ------------------------------------------------------------------------------------------------------------------ Balance at Charged to Balance Beginning Costs and at End Description of Period Expenses Deductions(a) of Period - ------------------------------------------------------------------------------------------------------------------ Year 1998 Allowances for doubtful accounts (b) $1,037 $1,389 $1,320 $1,106 Reserves related to business restructuring, including force and facility consolidation (c) $ 907 $ 275 $ 665 $ 517 Deferred tax asset valuation allowance (d) $ 361 $ 23 $ 106 $ 278 Year 1997 Allowances for doubtful accounts (b) $1,000 $1,522 $1,485 $1,037 Reserves related to business restructuring, including force and facility consolidation (c) $1,388 $ -- $ 481 $ 907 Deferred tax asset valuation allowance (d) $ 220 $ 142 $ 1 $ 361 The Notes on Sheet 2 are an integral part of this Schedule.
Schedule II--Sheet 2 AT&T CORP. AND ITS CONSOLIDATED SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (Millions of Dollars) - ------------------------------------------------------------------------------------------------------------------ COL. A COL. B COL. C COL. D COL. E - ------------------------------------------------------------------------------------------------------------------ Balance at Charged to Balance Beginning Costs and at End Description of Period Expenses Deductions(a) of Period - ------------------------------------------------------------------------------------------------------------------ Year 1996 Allowances for doubtful accounts (b) $ 833 $1,518 $1,351 $1,000 Reserves related to business restructuring, including force and facility consolidation (c) $2,092 $ -- $ 704 $1,388 Deferred tax asset valuation allowance (d) $ 151 $ 71 $ 2 $ 220 (a) Amounts written off as uncollectible, net of recoveries. (b) Includes allowances for doubtful accounts on long-term receivables of $46, $49 and $52 at December 31, 1998, 1997 and 1996, respectively (included in long-term receivables in the Consolidated Balance Sheets). (c) Included primarily in other current liabilities and in other long-term liabilities and deferred credits in the Consolidated Balance Sheets. (d) End of period balances include $18, $14 and $9 which represent the current portion of the deferred tax valuation allowance at December 31, 1998, 1997 and 1996, respectively.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AT&T Corp. /s/ M. J. Wasser ------------------------------ By: M. J. Wasser Vice President - Law and Secretary March 19, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Principal Executive Officers: # # C. Michael Armstrong Chairman of the Board and # Chief Executive Officer # # John Zeglis President and Director # # Principal Financial Officer: # # Daniel E. Somers Senior Executive Vice President # Chief Financial Officer # # Principal Accounting Officer: # # Nicholas S. Cyprus Vice President and Controller ## By M. J. Wasser # (attorney-in-fact)* Directors: # # March 19, 1999 Kenneth T. Derr # M. Kathryn Eickhoff # Walter Y. Elisha # George M. C. Fisher # Donald V. Fites # Ralph S. Larsen # John C. Malone # Donald F. McHenry # Michael I. Sovern # Sanford I. Weill # Thomas H. Wyman # EX-3.(I) 2 RESTATED CERTIFICATE OF INCORPORATION AMERICAN TELEPHONE AND TELEGRAPH COMPANY ---------- RESTATED CERTIFICATE OF INCORPORATION OF AMERICAN TELEPHONE AND TELEGRAPH COMPANY FILED JANUARY 10, 1989 ---------- WITH AMENDMENTS DATED JUNE 8, 1989, MARCH 18, 1992, JUNE 1, 1992, APRIL 20, 1994 AND JUNE 8, 1998 RESTATED CERTIFICATE OF INCORPORATION OF AMERICAN TELEPHONE AND TELEGRAPH COMPANY UNDER SECTION 807 OF THE BUSINESS CORPORATION LAW We, the undersigned, being a Vice President and the Secretary, respectively, of American Telephone and Telegraph Company, do hereby certify as follows: 1. The name of the corporation is "American Telephone and Telegraph Company." 2. The Certificate of Incorporation of the corporation was filed in the office of the Secretary of State of New York on March 3, 1885. 3. The text of the Certificate of Incorporation (1) is hereby amended pursuant to authority vested in the Board of Directors by the Certificate of Incorporation of the corporation, as heretofore amended, and in accordance with Section 502 of the Business Corporation Law to delete in its entirety Article EIGHTH thereof stating the number, designation, relative rights, preferences, and limitations pertaining to four series of preferred shares, all of which shares have been redeemed by the corporation, and renumber the articles subsequent thereto sequentially following Article SEVENTH; and (2) as so amended and as amended heretofore is hereby restated to read as herein set forth in full: "We do hereby associate ourselves together for the purpose of constructing, buying, owning, leasing, or otherwise obtaining, lines of electric telegraph partly within and party beyond the limits of the State of New York, and of equipping, using, operating, or otherwise maintaining, the same; and of becoming a body politic and corporate under and by virtue of the provisions of an act of the Legislature of the State of New York entitled `An Act to provide for the incorporation and regulation of telegraph companies,' passed April 12, 1848, and the various acts amendatory thereof or supplemental thereto; and of having and exercising all and every of the powers, privileges, franchises and immunities in and by said acts conferred. And in pursuance of the requirements of the various acts aforesaid, and for the purposes above set forth, we do hereby declare and certify as follows, "FIRST. The name assumed to distinguish such association and to be used in its dealings, and by which it may sue and be sued, is the American Telephone and Telegraph Company. "SECOND. The general route of the lines of telegraph of said association will be from a point or points in the city of New York along all rail roads, bridges, highways and other practicable, suitable and convenient ways or courses, leading thence to the cities of Albany, Boston, and the intermediate cities, towns and places, also from a point or points in and through the city of New York, and thence through and across the Hudson and East rivers and the bay and harbor of New York, to Jersey City, Long Island City and Brooklyn, and along all rail roads, bridges, highways and other practicable, suitable and convenient ways and courses to the cities of Philadelphia, Baltimore, Washington, Richmond, Charleston, Mobile and New Orleans, and to all intermediate cities, towns and places; and in like manner to the cities of Buffalo, Pittsburgh, Cleveland, Cincinnati, Louisville, Memphis, Indianapolis, Chicago, Saint Louis, Kansas City, Keokuk, Des Moines, Detroit, Milwaukee, Saint Paul, Minneapolis, Omaha, Cheyenne, Denver, Salt Lake City, San Francisco and Portland, and to all intermediate cities, towns and places, and also along all rail roads, bridges, highways and other practicable, suitable and convenient ways and courses as may be necessary or proper for the purpose of connecting with each other one or more points in said city of New York, and in each of the cities, towns and places hereinabove specifically or generally designated. "And it is further declared and certified that the general route of the lines of this association, in addition to those hereinbefore described or designated, will connect one or more points in each and every city, town or place in the State of New York with one or more points in each and every other city, town or place in said State, and in each and every other of the United States, and in Canada and Mexico, and each and every of said cities, towns and places is to be connected with each and every other city, town or place in said States and Countries, and also by cable and other appropriate means with the rest of the known world as may hereafter become necessary or desirable in conducting the business of this association. "THIRD. The aggregate number of shares which the corporation is authorized to issue is 1,600,000,000 shares, consisting of 1,500,000,000 common shares having a par value of $1 pre share and 100,000,000 preferred shares having a par value of $1 per share. "The preferred shares may be issued from time to time in one or more series. All preferred shares of all series shall rank equally and be identical in all respects except that the Board of Directors is authorized to fix the number of shares in each series, the designation thereof and, subject to the provisions of this Article Third, the relative rights, preferences and limitations of each series and the variations in such rights, preferences and limitations as between series and specifically is authorized to fix with respect to each series: "(a) the dividend rate on the shares of such series and the date or dates from which dividends shall be cumulative; "(b) the times when, the prices at which, and all other terms and conditions upon which, shares of such series shall be redeemable; "(c) the amounts which the holders of shares of such series shall be entitled to receive upon the liquidation, dissolution or winding up of the corporation, which amounts may vary depending on whether such liquidation, dissolution or winding up is voluntary or involuntary and, if voluntary, may vary at different dates; "(d) whether or not the shares of such series shall be subject to the operation of a purchase, retirement or sinking fund and, if so, the extent to and manner n which such purchase, retirement or sinking fund shall be applied to the purchase or redemption of the shares of such series for retirement or for other corporate purposes and the terms and provisions relative to the operation of the said fund or funds; "(e) whether or not the shares of such series shall be convertible into or exchangeable for shares of any other class or series and, if so, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same; "(f) the restrictions, if any, upon the payment of dividends or making of other distributions on, and upon the purchase or other acquisition of, common shares; "(g) the restrictions, if any, upon the creation of indebtedness, and the restrictions, if any, upon the issue of any additional shares ranking on a parity with or prior to the shares of such series in addition to the restrictions provided for in this Article Third; "(h) the voting powers, if any, of the shares of such series in addition to the voting powers provided for in this Article Third; and "(i) such other rights, preferences and limitations as shall not be inconsistent with this Article Third. "All shares of any particular series shall rank equally and be identical in allrespects except that shares of any one series issued at different times may differ as to the date from which dividends shall be cumulative. "Dividends on preferred shares of each series shall be cumulative from the date or dates fixed with respect to such series and shall be paid or declared or set apart for payment for all past dividend periods and for the current dividend period before any dividends (other than dividends payable in common shares) shall be declared or paid or set apart for payment on common shares. Whenever, at any time, full cumulative dividends for all past dividend periods and for the current dividend period shall have been paid or declared and set apart for payment on all then outstanding preferred shares and all requirements with respect to any purchase, retirement or sinking fund or funds for all series of preferred shares shall have been complied with, the Board of Directors may declare dividends on the common shares and the preferred shares shall not be entitled to share therein. "Upon any liquidation, dissolution or winding up of the corporation, the holders of preferred shares of each series shall be entitled to receive the amounts to which such holders are entitled as fixed with respect to such series, including all dividends accumulated to the date of final distribution, before any payment or distribution of assets of the corporation shall be made to or set apart for the holders of common shares and after such payments shall have been made in full to the holders of preferred shares, the holders of common shares shall be entitled to receive any and all assets remaining to be paid or distributed to shareholders and the holders of preferred shares shall not be entitled to share therein. For the purposes of this paragraph, the voluntary sale, conveyance, lease, exchange or transfer of all or substantially all the property or assets of the corporation or a consolidation or merger of the corporation with one or more other corporations (whether or not the corporation is the corporation surviving such consolidation or merger) shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary. "The aggregate amount which all preferred shares outstanding at any time shall be entitled to receive on involuntary liquidation, dissolution or winding up shall not exceed $8,000,000,000. "So long as any preferred shares are outstanding, the corporation will not (a) without the affirmative vote or consent of the holders of at least 66-2/3% of all the preferred shares at the time outstanding, (i) authorize shares of stock ranking prior to the preferred shares, or (ii) change any provision of this Article Third so as to affect adversely the preferred shares; (b) without the affirmative vote or consent of the holders of at least 66-2/3% of any series of preferred shares at the time outstanding, change any of the provisions of such series so as to affect adversely the shares of such series; (c) without the affirmative vote or consent of the holders of at least a majority of all the preferred shares at the time outstanding, (i) increase the authorized number of preferred shares or (ii) authorize shares of any other class of stock ranking on a parity with the preferred shares. "Whenever, at any time or times, dividends payable on preferred shares shall be in default in an aggregate amount equivalent to six full quarterly dividends on any series of preferred shares at the time outstanding, the number of directors then constituting the Board of Directors of the corporation shall ipso facto be increased by two, and the outstanding preferred shares shall, in addition to any other voting rights, have the exclusive right, voting separately as a class and without regard to series, to elect two directors of the corporation to fill such newly created directorships and such right shall continue until such time as all dividends accumulated on all preferred shares to the latest dividend payment date shall have been paid or declared and set apart for payment. "No holder of preferred shares of any series, irrespective of any voting or other rights of shares of such series, shall have, as such holder, any preemptive right to purchase any other shares of the corporation or any securities convertible into or entitling the holder to purchase such other shares. "If in any case the amounts payable with respect to any requirements to retire preferred shares are not paid in full in the case of all series with respect to which such requirements exist, the number of shares to be retired in each series shall be in proportion to the respective amounts which would be payable on account of such requirements if all amounts payable were paid in full. "FOURTH. The number of directors shall be as provided for in the By-Laws. "FIFTH. The duration of the corporation shall be perpetual. "SIXTH. The office of the corporation is located in the Borough of Manhattan, City and County of New York, State of New York. "SEVENTH. The Secretary of State of the State of New York is designated as agent of the corporation upon whom process against it may be served. The post office address to which the Secretary of State shall mail a copy of any process served upon him as agent of the corporation is American Telephone and Telegraph Company, 550 Madison Avenue, New York, New York 10022. "EIGHTH. No holder of common shares shall have, as such holder, any preemptive right to purchase any shares or other securities of the corporation. "NINTH. No director shall be personally liable to the Corporation or any of its shareholders for damages for any breach of duty as a director; provided, however, that the foregoing provision shall not eliminate or limit (i) the liability of a director if a judgment or other final adjudication adverse to him or her establishes that his or her acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law or that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled or that his or her acts violated Section 719 of the New York Business Corporation Law; or (ii) the liability of a director for any act or omission prior to the adoption of this Article NINTH by the shareholders of the Corporation. 4. The manner in which this restatement of the Certificate of Incorporation was authorized was by a resolution of the Board of Directors of the corporation. In Witness Whereof, we have signed and verified this Restated Certificate of Incorporation of American Telephone and Telegraph Company this 9th day of January 1989. /s/ S. L. Prendergast ------------------------------ By: S. L. Prendergast Corporate Vice President and Treasurer /s/ R. E. Scannell ------------------------------ By: R. E. Scannell Corporate Vice President - Law and Secretary State of New York ss.: County of New York R. E. Scannell, being duly sworn, deposes and says that he is the Corporate Vice President - Law and Secretary of American Telephone and Telegraph Company, that he signed the foregoing Certificate as Corporate Vice President - Law and Secretary of such corporation, that he knows the contents thereof, and that the statements therein contained are true. /s/ R. E. Scannell ------------------------------ By: R. E. Scannell Corporate Vice President - Law and Secretary Subscribed and sworn to before me this 9th day of January 1989. Janet M. Kirpan Notary Public Janet M. Kirpan Notary Public, State of New York No. 31-4624682 Qualified in New York County Commission expires March 30, 1990 CERTIFICATE OF CORRECTION OF THE RESTATED CERTIFICATE OF INCORPORATION OF AMERICAN TELEPHONE AND TELEGRAPH COMPANY UNDER SECTION 105 OF THE BUSINESS CORPORATION LAW We, the undersigned, Robert E. Scannell and B. Ward White, being respectively the Corporate Vice President - Law and Secretary and the Assistant Secretary of American Telephone and Telegraph Company for the purpose of correcting the date appearing in the citation to `An Act to provide for the incorporation and regulation of telegraph companies,' passed April 12, 1848 (stated correctly as 1948) which appears on the face of the Restated Certificate of Incorporation of American Telephone and Telegraph Company under Section 807 of the Business Corporation Law hereby certify: 1. The name of the corporation is American Telephone and Telegraph Company. 2. The Restated Certificate of Incorporation of American Telephone and Telegraph Company under Section 807 of the Business Corporation Law was filed by the Department of State on January 10, 1989. 3. The last paragraph of the first page of the certificate is corrected to read as follows: "We do hereby associate ourselves together for the purpose of constructing, buying, owning, leasing, or otherwise obtaining, lines of electric telegraph partly within and partly beyond the limits of the State of New York, and of equipping, using, operating, or otherwise maintaining, the same; and of becoming a body politic and corporate under and by virtue of the provisions of an act of the Legislature of the State of New York entitled `An Act to provide for the incorporation and regulation of telegraph companies.' passed April 12, 1848, and the various acts amendatory thereof or supplemental thereto; and of having and exercising all and every of the powers, privileges, franchises and immunities in and by said acts conferred. And in pursuance of the requirements of the various acts aforesaid, and for the purposes above set forth, we do hereby declare and certify as follows, IN WITNESS WHEREOF, we have signed and verified this certificate on the 31st day of May, 1989 and we affirm the statements contained herein as true under penalties of perjury. AMERICAN TELEPHONE AND TELEGRAPH COMPANY /s/ Robert E. Scannell ------------------------------ By: Robert E. Scannell Corporate Vice President - Law and Secretary /s/ B. Ward White ------------------------------ By: B. Ward White Assistant Secretary CERTIFICATE OF CHANGE OF THE RESTATED CERTIFICATE OF INCORPORATION OF AMERICAN TELEPHONE AND TELEGRAPH COMPANY UNDER SECTION 805-A OF THE BUSINESS CORPORATION LAW 1. The name of the corporation is "American Telephone and Telegraph Company." 2. The Certificate of Incorporation was filed in the office of the Secretary of State of the State of New York on March 3, 1885. 3. The change in the Certificate of Incorporation effected by this Certificate of Change is as follows: To change the post office address to which the Secretary of State of the State of New York shall mail a copy of any process against the corporation served upon said Secretary of State. 4. To accomplish the foregoing change, Article SEVENTH of the Certificate of Incorporation, relating to service of process, is hereby stricken out in its entirety, and the following new Article SEVENTH is substituted in lieu thereof: "SEVENTH. The Secretary of State of the State of New York is designated as agent of the corporation upon whom process against it may be served. The post office address to which the Secretary of State shall mail a copy of any process served upon him as agent of the corporation is American Telephone and Telegraph Company, 32 Avenue of the Americas, New York, New York, 10013. 5. The manner in which this Certificate of Change was authorized was by resolution of the Board of Directors of the corporation. IN WITNESS WHEREOF, we have signed and verified this Certificate of Change of American Telephone and Telegraph Company this 16th day of March 1992. /s/ S. L. Prendergast ------------------------------ By: S. L. Prendergast Corporate Vice President and Treasurer /s/ R. E. Scannell ------------------------------ By: R. E. Scannell Vice President - Law and Secretary State of New York ss.: County of New York R. E. Scannell, being duly sworn, deposes and says that he is the Vice President - Law and Secretary of American Telephone and Telegraph Company, that he signed the foregoing Certificate as Vice President - Law and Secretary of such corporation, that he knows the contents thereof, and that the statements therein contained are true. /s/ R. E. Scannell ------------------------------ By: R. E. Scannell Vice President - Law and Secretary Subscribed and sworn to before me this 16th day of March 1992. Janet M. Kirpan Notary Public Janet M. Kirpan Notary Public, State of New York No. 31-4624682 Qualified in New York County Commission expires March 30, 1994 CERTIFICATE OF AMENDMENT OF THE RESTATED CERTIFICATE OF INCORPORATION OF AMERICAN TELEPHONE AND TELEGRAPH COMPANY UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW We, the undersigned, being a Vice President and Secretary, respectively, of American Telephone and Telegraph Company, do hereby certify as follows: 1. The name of the corporation is "American Telephon and Telegraph Company." 2. The Certificate of Incorporation of the corporation was filed in the office of the Secretary of State of the State of New York on March 3, 1885. 3. Said Certificate of Incorporation is amended to increase the authorized number of common shares of the capital stock of the corporation having a par value of $1 from 1,500,000,000 to 2,000,000,000 shares. 4. To effect the foregoing, the first paragraph of Article THIRD of said Certificate of Incorporation, relating to the aggregate number of shares the corporation is authorized to issue, the par value thereof, and the classes into which the shares are divided is hereby stricken out in its entirety, and the following new first paragraph of Article THIRD is substituted in lieu thereof: "THIRD. The aggregate number of shares which the corporation is authorized to issue is 2,100,000,000 shares, consisting of 2,000,000,000 common shares having a par value of $1 per share and 100,000,000 preferred shares having a par value of $1 per share. 5. The manner in which the foregoing amendment of said Certificate of Incorporation was authorized was by vote of the holders of a majority of all outstanding shares of the corporation entitled to vote thereon at a meeting of shareholders, subsequent to the unanimous vote of the Board of Directors. IN WITNESS WHEREOF, we have signed and verified this Certificate of Amendment of said Certificate of Incorporation of American Telephone and Telegraph Company this 13th day of May, 1992. /s/ S. L. Prendergast ------------------------------ By: S. L. Prendergast Vice President and Treasurer /s/ R. E. Scannell ------------------------------ By: R. E. Scannell Vice President - Law and Secretary Certificate of Amendment of the Certificate of Incorporation of American Telephone and Telegraph Company Under Section 805 of the Business Corporation Law We, the undersigned, being a Vice President and an Assistant Secretary respectively, of American Telephone and Telegraph Company, do hereby certify as follows: FIRST: The name of the corporation is American Telephone and Telegraph Company. SECOND: The Certificate of Incorporation of the corporation was filed by the Department of State on March 3, 1885. THIRD: The Certificate of Incorporation of the corporation is hereby amended by changing the name of the corporation to AT&T Corp. FOURTH: To accomplish the foregoing amendment, Article FIRST of the Certificate of Incorporation of the corporation is amended to read as follows: "FIRST. The name of the corporation is AT&T Corp." FIFTH: The manner in which the foregoing amendment of said Certificate of Incorporation of the corporation was authorized was by vote of the holders of a majority of all outstanding shares of the corporation entitled to vote thereon at a meeting of shareholders, subsequent to the unanimous vote of the Board of Directors. IN WITNESS WHEREOF, we have subscribed this document on April 20, 1994 and do hereby affirm, under the penalties of perjury, that the statements contained therein have been examined by us and are true and correct. /s/ Jim G. Kilpatric ------------------------------ By: Jim G. Kilpatric Senior Vice President - Law /s/ Robert A. Maynes ------------------------------ By: Robert A. Maynes Assistant Secretary CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF AT&T CORP. UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW We, the undersigned, being a Vice President and Assistant Secretary, respectively, of AT&T Corp., do hereby certify as follows: 1. The name of the corporation is AT&T Corp. The name under which the Corporation was formed is American Telephone and Telegraph Company. 2. The Certificate of Incorporation of the corporation was filed in the office of the Secretary of State of the State of New York on March 3, 1885. 3. Said Certificate of Incorporation is amended to increase the authorized number of common shares of the capital stock of the corporation having a par value of $1 from 2,000,000,000 shares to 6,000,000,000 shares. 4. To effect the foregoing, the first paragraph of Article THIRD of said Certificate of Incorporation, relating to the aggregate number of shares the corporation is authorized to issue, the par value thereof, and the classes into which the shares are divided is hereby stricken out in its entirety, and the following new first paragraph of Article THIRD is substituted in lieu thereof: "THIRD. The aggregate number of shares which the corporation is authorized to issue is 6,100,000,000 shares, consisting of 6,000,000,000 common shares having a par value of $1 per share and 100,000,000 preferred shares having a par value of $1 per share. 5. The manner in which the foregoing amendment of said Certificate of Incorporation was authorized was by vote of the holders of a majority of all outstanding shares of the corporation entitled to vote thereon at a meeting of shareholders, subsequent to the unanimous vote of the Board of Directors. IN WITNESS WHEREOF, we have signed this Certificate of Amendment of said Certificate of Incorporation of AT&T Corp. this 22th day of May, 1998 and we affirm the statements contained therein as true under penalties of perjury. /s/ Marilyn J. Wasser ------------------------------ By: M. J. Wasser Vice President-Law and Secretary /s/ Robert A. Maynes ------------------------------ By: R. A. Maynes Assistant Secretary Certificate of Amendment of the Certificate of Incorporation Under Section 805 of the Business Corporation Law We, the undersigned, being a Vice President and an Assistant Secretary respectively, of AT&T Corp., do hereby certify as follows: FIRST: The name of the corporation is AT&T Corp. SECOND: The Certificate of Incorporation of the corporation was filed by the Department of State on March 3, 1885 under the name American Telephone and Telegraph Company. THIRD: (a) The Certificate of Incorporation of the corporation is hereby amended to create two new classes of common stock, Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, each having the number, designation, relative rights, preferences, and limitations as set forth herein. (b) To effect the foregoing, Article THIRD is hereby amended and restated in its entirety as follows: ARTICLE THIRD CAPITAL STOCK PART A--AUTHORIZED SHARES The aggregate number of shares which the corporation is authorized to issue is eight billion eight hundred fifty million (8,850,000,000) shares, consisting of one hundred million (100,000,000) preferred shares having a par value of $1.00 per share ("Preferred Stock") and eight billion seven hundred fifty million (8,750,000,000) common shares, of which six billion (6,000,000,000) common shares shall be Common Stock having a par value of $1.00 per share ("Common Stock"), two billion five hundred million (2,500,000,000) common shares shall be Class A Liberty Media Group Common Stock having a par value of $1.00 per share ("Class A Liberty Media Group Common Stock") and two hundred fifty million (250,000,000) common shares shall be Class B Liberty Media Group Common Stock having a par value of $1.00 per share ("Class B Liberty Media Group Common Stock"). The Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock are collectively referred to herein as the "Liberty Media Group Common Stock". The authorized shares of Class B Liberty Media Group Common Stock will only be issued (i) pursuant to the Agreement and Plan of Restructuring and Merger, dated June 23, 1998 (the "Merger Agreement"), among Tele-Communications, Inc., Italy Merger Corp. and the corporation, (ii) upon conversion, exercise or exchange of Pre-Merger Convertible Securities, (iii) in a subdivision (by stock split or otherwise) of outstanding shares of Class B Liberty Media Group Common Stock, or (iv) as a stock dividend or share distribution (as defined in paragraph 4 of Part B of this Article Third). PART B--COMMON STOCK AND LIBERTY GROUP COMMON STOCK Each share of Common Stock, each share of Class A Liberty Media Group Common Stock and each share of Class B Liberty Media Group Common Stock shall, except as otherwise provided in this Article Third, be identical in all respects and shall have equal rights, powers and privileges. 1. Voting Rights. (a) Holders of Common Stock shall be entitled to one vote for each share of such stock held, holders of Class A Liberty Media Group Common Stock shall be entitled to one-tenth of a vote for each share of such stock held, and holders of Class B Liberty Media Group Common Stock shall be entitled to one vote for each share of such stock held, on all matters presented to such shareholders. (b) Except as may otherwise be required by the laws of the State of New York or, with respect to additional or special voting rights (which may include, without limitation, rights of any such holders of any such class or series to elect one or more directors voting separately as a class) of any class or series of Preferred Stock or any other class of common shares, in the Certificate of Incorporation of the corporation as the same may be amended from time to time (this "Certificate") (including the terms of any class or series of Preferred Stock and any resolution or resolutions providing for the establishment of such class or series pursuant to authority vested in the Board of Directors by this Certificate and the terms of any other class of common shares), the holders of shares of Common Stock, the holders of shares of each other class of common shares, if any, entitled to vote thereon, the holders of shares of Class A Liberty Media Group Common Stock and the holders of shares of Class B Liberty Media Group Common Stock, and the holders of shares of each class or series of Preferred Stock, if any, entitled to vote thereon, shall vote as one class with respect to all matters to be voted on by shareholders of the corporation, and no separate vote or consent of the holders of shares of Common Stock, the holders of shares of Class A Liberty Media Group Common Stock, the holders of shares of Class B Liberty Media Group Common Stock or the holders of shares of any such class of common shares or any such class or series of Preferred Stock shall be required for the approval of any such matter, except that: (i) any amendment, alteration or repeal of any of the provisions of this Certificate which would (x) increase or decrease the aggregate number of authorized shares of Liberty Media Group Common Stock, (y) increase or decrease the par value of the shares of Liberty Media Group Common Stock or (z) alter or change the powers, preferences, privileges or special rights of the shares of Liberty Media Group Common Stock so as to affect them adversely shall require the approval of both (A) the holders of a majority of the combined voting power of the shares of Common Stock, Liberty Media Group Common Stock and any other class of common shares entitled to vote with respect to such matter and any class or series of Preferred Stock entitled to vote with respect to such matter then outstanding, voting together as a single class, and (B) the holders of a majority of the combined voting power of the shares of Liberty Media Group Common Stock, voting separately as a class (without any vote of the holders of the Common Stock, any other class of common shares or any class or series of Preferred Stock of the corporation); (ii) a Covered Disposition shall require, in addition to any other approval that may be required pursuant to law or this Certificate, the approval of the holders of a majority of the combined voting power of the shares of Liberty Media Group Common Stock, voting separately as a class; and (iii) any merger, consolidation, combination, binding share exchange, reclassification, reorganization or other transaction in or pursuant to which the Liberty Media Group Common Stock is converted, reclassified or changed into or otherwise exchanged for any consideration (other than a conversion described in paragraph 2 of this Part B of this Article Third or a redemption described in paragraph 5 of this part B of this Article Third) shall be subject to approval by both (x) the holders of a majority of the combined voting power of the shares of Common Stock, Liberty Media Group Common Stock, any other class of common shares entitled to vote with respect to such matter and any class or series of Preferred Stock entitled to vote with respect to such matter then outstanding, voting together as a single class, and (y) the holders of a majority of the combined voting power of the shares of Liberty Media Group Common Stock then outstanding, voting separately as a class (without any vote of the holders of the Common Stock, any other class of common shares or any class or series of Preferred Stock of the corporation), unless each of the following requirements is met (in which event the approval set forth in subclause (y) of this clause (iii) shall not be required): (A) the consideration into which the Liberty Media Group Common Stock is converted, reclassified or changed or for which it is exchanged in such transaction includes shares of a class of the common stock of the surviving, resulting or acquiring corporation in such transaction or of the corporation, if applicable, (it being understood that if the Common Stock will be converted in such transaction into any class or series of common shares of any Person, then the term "acquiring corporation" shall mean such Person if such Person directly or indirectly owns the assets comprising the Liberty Media Group after giving effect to such transaction), (B) such class of common stock is intended to reflect the separate performance of the businesses, assets and liabilities comprising the Liberty Media Group (as it existed prior to such transaction and no other material businesses, assets or liabilities) and has powers, preferences, privileges and special rights equivalent to those of the shares of Liberty Media Group Common Stock, (C) such businesses, assets and liabilities comprising the Liberty Media Group are owned directly or indirectly by the issuer of the shares of such class of common stock and if prior to such transaction all of the businesses, assets and liabilities comprising the Liberty Media Group were held, directly or indirectly, by one or more Qualifying Subsidiaries of the corporation (or by Subsidiaries that are not held directly by the corporation but would be Qualifying Subsidiaries if they were held directly by the corporation) that hold no other material assets or liabilities, then immediately following such transaction, such businesses, assets and liabilities comprising the Liberty Media Group are owned, directly or indirectly, by one or more Qualifying Subsidiaries of the issuer of the shares of such class of common stock (or by Subsidiaries of such issuer that are not held directly by such issuer but would be Qualifying Subsidiaries if they were held directly by such issuer) that hold no other material assets or liabilities, and (D) the shares of such class of common stock immediately after such transaction are held only by Persons that were holders of shares of Liberty Media Group Common Stock (or Convertible Securities that were convertible into or exercisable or exchangeable for Liberty Media Group Common Stock) immediately prior to such transaction. (c) If the corporation shall in any manner subdivide (by stock split or otherwise) or combine (by reverse stock split or otherwise) the outstanding shares of Common Stock or Liberty Media Group Common Stock, or pay a stock dividend in shares of any class to holders of that class or shall otherwise effect a share distribution (as defined in paragraph 4 of this Part B of this Article Third) of Common Stock or Liberty Media Group Common Stock, the per share voting rights specified in paragraph 1(a) of this Part B of this Article Third of Liberty Media Group Common Stock relative to Common Stock shall be appropriately adjusted so as to avoid any dilution in the aggregate voting rights of any class. 2. Conversion Rights of Liberty Media Group Common Stock. Each share of Class B Liberty Media Group Common Stock shall be convertible, at the option of the holder thereof, into one share of Class A Liberty Media Group Common Stock. Any such conversion may be effected by any holder of Class B Liberty Media Group Common Stock by surrendering such holder's certificate or certificates for the Class B Liberty Media Group Common Stock to be converted, duly endorsed, at the office of the corporation or any transfer agent for the Class B Liberty Media Group Common Stock, together with a written notice to the corporation at such office that such holder elects to convert all or a specified number of shares of Class B Liberty Media Group Common Stock represented by such certificate and stating the name or names in which such holder desires the certificate or certificates for Class A Liberty Media Group Common Stock to be issued. If so required by the corporation, any certificate for shares surrendered for conversion shall be accompanied by instruments of transfer, in form satisfactory to the corporation, duly executed by the holder of such shares or the duly authorized representative of such holder. Promptly thereafter, the corporation shall issue and deliver to such holder or such holder's nominee or nominees, a certificate or certificates for the number of shares of Class A Liberty Media Group Common Stock to which such holder shall be entitled as herein provided. Such conversion shall be deemed to have been made at the close of business on the date of receipt by the corporation or any such transfer agent of the certificate or certificates, notice and, if required, instruments of transfer referred to above, and the person or persons entitled to receive the Class A Liberty Media Group Common Stock issuable on such conversion shall be treated for all purposes as the record holder or holders of such Class A Liberty Media Group Common Stock on that date. A number of shares of Class A Liberty Media Group Common Stock equal to the number of shares of Class B Liberty Media Group Common Stock outstanding from time to time shall be set aside and reserved for issuance upon conversion of shares of Class B Liberty Media Group Common Stock. Shares of Class A Liberty Media Group Common Stock shall not be convertible into shares of Class B Liberty Media Group Common Stock. 3. Dividends. (a) Dividends on Common Stock. Dividends on the Common Stock may be declared and paid only to the extent of (i) the assets of the corporation legally available therefor minus (ii) the Liberty Media Group Available Dividend Amount (such amount, the "Common Stock Available Dividend Amount"). (b) Dividends on Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock. Dividends on the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock may be declared and paid only out of the lesser of (i) assets of the corporation legally available therefor and (ii) the Liberty Media Group Available Dividend Amount. Subject to paragraph 4 of this Part B of this Article Third, whenever a dividend is paid to the holders of Class A Liberty Media Group Common Stock, the corporation shall also pay to the holders of Class B Liberty Media Group Common Stock a dividend per share equal to the dividend per share paid to the holders of Class A Liberty Media Group Common Stock, and whenever a dividend is paid to the holders of Class B Liberty Media Group Common Stock, the corporation shall also pay to the holders of Class A Liberty Media Group Common Stock a dividend per share equal to the dividend per share paid to the holders of Class B Liberty Media Group Common Stock. (c) Discrimination Between or Among Classes of Common Shares. The Board of Directors, subject to the provisions of paragraphs 3(a) and 3(b) of this Part B of this Article Third, shall have the sole authority and discretion to declare and pay dividends on (i) the Common Stock, (ii) any other class of common shares or (iii) the Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, in equal or unequal amounts (including declaring and paying no dividends on the Liberty Media Group Common Stock while declaring and paying dividends on the Common Stock or any other class of common shares and declaring and paying no dividends on the Common Stock or any other class of common shares while declaring and paying dividends on the Liberty Media Group Common Stock), notwithstanding the relationship between the Common Stock Available Dividend Amount and the Liberty Media Group Available Dividend Amount, the respective amounts of prior dividends declared on, or the liquidation rights of, the Common Stock, any other class of common shares or the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock, or any other factor. 4. Share Distributions. The corporation may declare and pay a distribution consisting of shares of Common Stock, Class A Liberty Media Group Common Stock, Class B Liberty Media Group Common Stock or any other securities of the corporation or any other Person (hereinafter sometimes called a "share distribution") to holders of the Common Stock, Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock only in accordance with the provisions of this paragraph 4 of this Part B of this Article Third. (a) Distributions on Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock. If at any time a share distribution is to be made with respect to the Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, such share distribution may be declared and paid only as follows (or as permitted by paragraph 5 of this Part B of this Article Third with respect to the redemptions and other distributions referred to therein): (i) a share distribution consisting of shares of Class A Liberty Media Group Common Stock (or Convertible Securities convertible into or exercisable or exchangeable for shares of Class A Liberty Media Group Common Stock) to holders of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, on an equal per share basis; or consisting of shares of Class A Liberty Media Group Common Stock (or Convertible Securities convertible into or exercisable or exchangeable for shares of Class A Liberty Media Group Common Stock) to holders of Class A Liberty Media Group Common Stock and, on an equal per share basis, shares of Class B Liberty Media Group Common Stock (or like Convertible Securities convertible into or exercisable or exchangeable for shares of Class B Liberty Media Group Common Stock) to holders of Class B Liberty Media Group Common Stock; (ii) a share distribution consisting of shares of Common Stock or any other class of common shares of the corporation (other than Liberty Media Group Common Stock), or Convertible Securities convertible into or exercisable or exchangeable for shares of Common Stock or any other class of common shares of the corporation (other than Liberty Media Group Common Stock), to holders of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, on an equal per share basis; (iii) a share distribution consisting of any class or series of securities of the corporation or any other Person other than Class A Liberty Media Group Common Stock, Class B Liberty Media Group Common Stock, Common Stock or any other class of common shares of the corporation (or Convertible Securities convertible into or exercisable or exchangeable for shares of Class A Liberty Media Group Common Stock, Class B Liberty Media Group Common Stock or Common Stock or any other class of common shares of the corporation), (x) if a single class or series of securities is to be distributed, on the basis of a distribution of identical securities, on an equal per share basis, to holders of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and (y) if more than one class or series of securities is to be distributed, then, if and to the extent practicable, in accordance with the following provisions of this clause (y) and, otherwise, in accordance with clause (x) above: on the basis of a distribution of one class or series of securities to holders of Class A Liberty Media Group Common Stock and another class or series of securities to holders of Class B Liberty Media Group Common Stock, provided that the securities so distributed (and, if the distribution consists of Convertible Securities, the securities into which such Convertible Securities are convertible or for which they are exercisable or exchangeable) do not differ in any respect other than their relative voting rights and related differences in designation, conversion, redemption and share distribution provisions, with holders of shares of Class B Liberty Media Group Common Stock receiving the class or series having the higher relative voting rights (without regard to whether such rights differ to a greater or lesser extent than the corresponding differences in voting rights, designation, conversion, redemption and share distribution provisions between the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock), provided that if the securities so distributed constitute capital stock of a Subsidiary of the corporation, such rights shall not differ to a greater extent than the corresponding differences in voting rights, designation, conversion, redemption and share distribution provisions between the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock, and provided in each case that such distribution is otherwise made on an equal per share basis. The corporation shall not reclassify, subdivide or combine the Class A Liberty Media Group Common Stock without reclassifying, subdividing or combining the Class B Liberty Media Group Common Stock, on an equal per share basis, and the corporation shall not reclassify, subdivide or combine the Class B Liberty Media Group Common Stock without reclassifying, subdividing or combining the Class A Liberty Media Group Common Stock, on an equal per share basis. The corporation shall not effect a share distribution to the holders of Liberty Media Group Common Stock of any class or series of securities of a Subsidiary of the corporation or any other Person unless such share distribution is tax-free to the holders of Liberty Media Group Common Stock (except with respect to cash received by such holders in lieu of fractional shares). (b) Distributions on Common Stock. The corporation shall not declare and pay a share distribution with respect to the Common Stock or any other class of common shares (other than the Liberty Media Group Common Stock) consisting of Class A Liberty Media Group Common Stock, Class B Liberty Media Group Common Stock, any class or series of Preferred Stock attributed to the Liberty Media Group or securities of any Person included in the Liberty Media Group (or Convertible Securities convertible into or exercisable or exchangeable for shares of Class A Liberty Media Group Common Stock, Class B Liberty Media Group Common Stock, any such class or series of Preferred Stock or securities of any such Person). Except as set forth in the immediately preceding sentence, the corporation may declare and pay a share distribution to holders of Common Stock or any other class of common shares (other than Liberty Media Group Common Stock) consisting of any securities of the corporation, any Subsidiary of the corporation, or any other Person, including without limitation a share distribution consisting of shares of any class or series of Preferred Stock or shares of Common Stock or any other class of common shares (other than Liberty Media Group Common Stock) (or Convertible Securities convertible into or exercisable or exchangeable for shares of any class or series of Preferred Stock or shares of Common Stock or any other class of common shares (other than Liberty Media Group Common Stock)). 5. Redemption and Other Provisions Relating to the Liberty Media Group Common Stock. (a) Redemption in Exchange for Stock of Qualifying Subsidiaries. At any time at which all of the assets and liabilities included in the Liberty Media Group are held directly or indirectly by one or more Qualifying Subsidiaries of the corporation that hold no other material assets or liabilities (the "Liberty Media Group Subsidiaries"), the Board of Directors may, subject to the availability of assets of the corporation legally available therefor, redeem, on a pro rata basis, all of the outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock in exchange for an aggregate number of outstanding fully paid and nonassessable shares of common stock of a Liberty Media Group Subsidiary that is the beneficial owner of all other Liberty Media Group Subsidiaries (or, if applicable, of each Liberty Media Group Subsidiary that is not a Subsidiary of one or more other Liberty Media Group Subsidiaries) equal to the number of outstanding shares of common stock of such Liberty Media Group Subsidiary (or Liberty Media Group Subsidiaries, as the case may be) held by the corporation; provided that no such redemption pursuant to this paragraph 5(a) of this Part B of this Article Third may occur unless the redemption is tax-free to the holders of Liberty Media Group Common Stock (except with respect to cash received by such holders in lieu of fractional shares). Any such redemption shall occur on a Redemption Date set forth in a notice to holders of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and Convertible Securities convertible into or exercisable or exchangeable for shares of either such series (unless provision for notice is otherwise made pursuant to the terms of such Convertible Securities) pursuant to paragraph 5(d)(v) of this Part B of this Article Third. In effecting such a redemption, the corporation shall (i) if and to the extent practicable, redeem shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock in exchange for shares of separate classes or series of common stock of each Liberty Media Group Subsidiary with relative voting rights and related differences in designation, conversion, redemption and share distribution provisions not greater than the corresponding differences in voting rights, designation, conversion, redemption and share distribution provisions between the Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, with holders of shares of Class B Liberty Media Group Common Stock receiving the class or series having the higher relative voting rights, and (ii) to the extent redemption in accordance with clause (i) above is not practicable, redeem shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock in exchange for shares of a single class of common stock of each Liberty Media Group Subsidiary without distinction between the shares distributed to the holders of the Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock. (b) Mandatory Dividend or Redemption in Case of Disposition of Liberty Media Group Assets. In the event of the Disposition, in one transaction or a series of related transactions, by the corporation and its subsidiaries of all or substantially all of the properties and assets of the Liberty Media Group to one or more Persons or groups (other than (w) in connection with the Disposition by the corporation of all of the corporation's properties and assets in one transaction or a series of related transactions in connection with the liquidation, dissolution or winding up of the corporation within the meaning of paragraph 6 of this Part B of this Article Third, (x) a dividend, other distribution or redemption in accordance with any provision of paragraph 3, paragraph 4, paragraph 5(a) or paragraph 6 of this Part B of this Article Third, (y) to any Person or group which the Liberty Media Group, directly or indirectly, after giving effect to the Disposition, controls and which is included in the Liberty Media Group or (z) in connection with a Related Business Transaction), the corporation shall, on or prior to the 85th Trading Day following the consummation of such Disposition, either: (i) subject to paragraph 3(b) of this Part B of this Article Third, declare and pay a dividend in cash and/or in securities or other property (determined as provided below) to the holders of the outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock equally on a share for share basis (subject to the last sentence of this paragraph 5(b) of this Part B of this Article Third), in an aggregate amount equal to the Liberty Media Group Net Proceeds of such Disposition (provided that if such Disposition involves all (not merely substantially all) of the properties and assets of the Liberty Media Group, then the aggregate amount of such dividend shall equal the product of the Liberty Media Group Full Dilution Fraction and the Liberty Media Group Net Proceeds of such Disposition and the difference between the aggregate amount of such dividend and such Liberty Media Group Net Proceeds shall be reserved by the corporation for payment or delivery to holders of Pre-Merger Convertible Securities on conversion, exercise or exchange thereof); or (ii) provided that there are assets of the corporation legally available therefor and to the extent the Liberty Media Group Available Dividend Amount would have been sufficient to pay a dividend in lieu thereof pursuant to clause (i) of this paragraph 5(b) of this Part B of this Article Third, then: (A) if such Disposition involves all (not merely substantially all) of the properties and assets of the Liberty Media Group, redeem all outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock in exchange for cash and/or securities or other property (determined as provided below) in an aggregate amount equal to the product of the Liberty Media Group Full Dilution Fraction and the Liberty Media Group Net Proceeds, such aggregate amount to be allocated (subject to the last sentence of this paragraph 5(b) of this Part B of this Article Third) to shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock in the ratio of the number of shares of each such series outstanding (so that the amount of consideration paid for the redemption of each share of Class A Liberty Media Group Common Stock and each share of Class B Liberty Media Group Common Stock is the same); or (B) if such Disposition involves substantially all (but not all) of the properties and assets of the Liberty Media Group, apply an aggregate amount of cash and/or securities or other property (determined as provided below) equal to the Liberty Media Group Net Proceeds to the redemption of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, such aggregate amount to be allocated (subject to the last sentence of this paragraph 5(b) of this Part B of this Article Third) to shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock in the ratio of the number of shares of each such series outstanding, and the number of shares of each such series to be redeemed to equal the lesser of (x) the whole number nearest the number determined by dividing the aggregate amount so allocated to the redemption of such series by the average Market Value of one share of Class A Liberty Media Group Common Stock during the ten-Trading Day period beginning on the 16th Trading Day following the consummation of such Disposition and (y) the number of shares of such series outstanding (so that the amount of consideration paid for the redemption of each share of Class A Liberty Media Group Common Stock and each share of Class B Liberty Media Group Common Stock is the same); such redemption to be effected in accordance with the applicable provisions of paragraph 5(d) of this Part B of this Article Third; For purposes of this paragraph 5(b): (x) as of any date, "substantially all of the properties and assets of the Liberty Media Group" shall mean a portion of such properties and assets that represents at least 80% of the then-current market value (as determined by the Board of Directors) of the properties and assets of the Liberty Media Group as of such date; (y) in the case of a Disposition of properties and assets in a series of related transactions, such Disposition shall not be deemed to have been consummated until the consummation of the last of such transactions; and (z) the corporation shall pay the dividend or redemption price referred to in clause (i) or (ii) of this paragraph 5(b) of this Part B of this Article Third in the same form as the proceeds of the Disposition were received. If the dividend or redemption price is paid in the form of securities of an issuer other than the corporation, the corporation shall (1) if more than one class or series of securities is to be distributed, if and to the extent practicable, pay the dividend or redemption price in the form of separate classes or series of securities, with one class or series of such securities to holders of Class A Liberty Media Group Common Stock and another class or series of securities to holders of Class B Liberty Media Group Common Stock, provided that such securities (and, if such securities are convertible into or exercisable or exchangeable for shares of another class or series of securities, the securities so issuable upon such conversion, exercise or exchange) do not differ in any respect other than their relative voting rights and related differences in designation, conversion, redemption and share distribution provisions, with holders of shares of Class B Liberty Media Group Common Stock receiving the class or series having the higher relative voting rights (without regard to whether such rights differ to a greater or lesser extent than the corresponding differences in voting rights, designation, conversion, redemption and share distribution provisions between the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock), provided that if such securities constitute capital stock of a Subsidiary of the corporation, such rights shall not differ to a greater extent than the corresponding differences in voting rights, designation, conversion, redemption and share distribution provisions between the Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, and otherwise such securities shall be distributed on an equal per share basis, and (2) otherwise pay the dividend or redemption price in the form of a single class of securities without distinction between the shares received by the holders of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock. (c) Certain Provisions Respecting Convertible Securities. Unless the provisions of any class or series of Pre-Merger Convertible Securities provide specifically to the contrary, after any Redemption Date on which all outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock were redeemed, any share of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock that is issued on conversion, exercise or exchange of any Pre-Merger Convertible Securities shall, immediately upon issuance pursuant to such conversion, exercise or exchange and without any notice or any other action on the part of the corporation or its Board of Directors or the holder of such share of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, be redeemed in exchange for the kind and amount of shares of capital stock, cash and/or other securities or property that a holder of such Pre-Merger Convertible Securities would have been entitled to receive pursuant to the terms of such securities had such terms provided that the conversion, exercise or exchange privilege in effect immediately prior to any such redemption of all outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock would be adjusted so that the holder of any such Pre-Merger Convertible Securities thereafter surrendered for conversion, exercise or exchange would be entitled to receive the kind and amount of shares of capital stock, cash and/or other securities or property such holder would have received as a result of such redemption had such securities been converted, exercised or exchanged immediately prior thereto. Unless the provisions of any class or series of Convertible Securities (other than Pre-Merger Convertible Securities) which are or become convertible into or exercisable or exchangeable for shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock provide specifically to the contrary, after any Redemption Date on which all outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock were redeemed, any share of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock that is issued on conversion, exercise or exchange of any such Convertible Securities shall, immediately upon issuance pursuant to such conversion, exercise or exchange and without any notice or any other action on the part of the corporation or its Board of Directors or the holder of such share of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, be redeemed in exchange for, to the extent assets of the corporation are legally available therefor, the amount of $.01 per share in cash. (d) General. (i) Not later than the 10th Trading Day following the consummation of a Disposition referred to in paragraph 5(b) of this Part B of this Article Third, the corporation shall announce publicly by press release (A) the Liberty Media Group Net Proceeds of such Disposition, (B) the number of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, (C) the number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock into or for which Convertible Securities are then convertible, exercisable or exchangeable and the conversion, exercise or exchange prices thereof (and stating which, if any, of such Convertible Securities constitute Pre-Merger Convertible Securities), and (D) if the Disposition is of all (not merely substantially all) of the properties and assets of the Liberty Media Group, the Liberty Media Group Full Dilution Fraction as of a recent date preceding the date of such notice. Not earlier than the 26th Trading Day and not later than the 30th Trading Day following the consummation of such Disposition, the corporation shall announce publicly by press release which of the actions specified in clauses (i) or (ii) of paragraph 5(b) of this Part B of this Article Third it has irrevocably determined to take. (ii) If the corporation determines to pay a dividend pursuant to clause (i) of paragraph 5(b) of this Part B of this Article Third, the corporation shall, not later than the 30th Trading Day following the consummation of such Disposition, cause to be given to each holder of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, and to each holder of Convertible Securities convertible into or exercisable or exchangeable for shares of either such series (unless provision for notice is otherwise made pursuant to the terms of such Convertible Securities), a notice setting forth (A) the record date for determining holders entitled to receive such dividend, which shall be not earlier than the 40th Trading Day and not later than the 50th Trading Day following the consummation of such Disposition, (B) the anticipated payment date of such dividend (which shall not be more than 85 Trading Days following the consummation of such Disposition), (C) the kind of shares of capital stock, cash and/or other securities or property to be distributed in respect of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, (D) the Liberty Media Group Net Proceeds of such Disposition, (E) if the Disposition is of all (not merely substantially all) the properties and assets of the Liberty Media Group, the Liberty Media Group Full Dilution Fraction as of a recent date preceding the date of such notice, (F) the number of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and the number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock into or for which outstanding Convertible Securities are then convertible, exercisable or exchangeable and the conversion, exercise or exchange prices thereof, (G) in the case of a notice to holders of Convertible Securities (other than Pre-Merger Convertible Securities, in the case of a Disposition of all (not merely substantially all) the properties and assets of the Liberty Media Group), a statement to the effect that holders of such Convertible Securities shall be entitled to receive such dividend only if they appropriately convert, exercise or exchange such Convertible Securities prior to the record date referred to in clause (A) of this sentence, and (H) if the Disposition is of all (not merely substantially all) the properties and assets of the Liberty Media Group, in the case of a notice to holders of Pre-Merger Convertible Securities, a statement to the effect that the holders of such Pre-Merger Convertible Securities shall be entitled to receive such dividend (without interest) upon conversion, exercise or exchange of such Pre-Merger Convertible Securities. Such notice shall be sent by first-class mail, postage prepaid, at such holder's address as the same appears on the transfer books of the corporation. (iii) If the corporation determines to undertake a redemption of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock following a Disposition of all (not merely substantially all) of the properties and assets of the Liberty Media Group pursuant to clause (ii) (A) of paragraph 5(b) of this Part B of this Article Third, the corporation shall cause to be given to each holder of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and to each holder of Convertible Securities convertible into or exercisable or exchangeable for shares of either such series (unless provision for notice is otherwise made pursuant to the terms of such Convertible Securities), a notice setting forth (A) a statement that all shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock outstanding on the Redemption Date shall be redeemed, (B) the Redemption Date (which shall not be more than 85 Trading Days following the consummation of such Disposition), (C) the kind of shares of capital stock, cash and/or other securities or property to be paid as a redemption price in respect of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock outstanding on the Redemption Date, (D) the Liberty Media Group Net Proceeds of such Disposition, (E) the Liberty Media Group Full Dilution Fraction as of a recent date preceding the date of such notice, (F) the place or places where certificates for shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, properly endorsed or assigned for transfer (unless the corporation waives such requirement), are to be surrendered for delivery of certificates for shares of such capital stock, cash and/or other securities or property, (G) the number of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and the number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock into or for which outstanding Convertible Securities are then convertible, exercisable or exchangeable and the conversion, exercise or exchange prices thereof (and stating which, if any, of such Convertible Securities constitute Pre-Merger Convertible Securities), and (H) in the case of a notice to holders of Convertible Securities (other than Pre-Merger Convertible Securities), a statement to the effect that holders of such Convertible Securities shall be entitled to participate in such redemption only if such holders appropriately convert, exercise or exchange such Convertible Securities on or prior to the Redemption Date referred to in clause (B) of this sentence and a statement as to what, if anything, such holders shall be entitled to receive pursuant to the terms of such Convertible Securities or, if applicable, paragraph 5(c) of this Part B of this Article Third if such holders convert, exercise or exchange such Convertible Securities following such Redemption Date. Such notice shall be sent by first-class mail, postage prepaid, not less than 35 Trading Days nor more than 45 Trading Days prior to the Redemption Date, at such holder's address as the same appears on the transfer books of the corporation. (iv) If the corporation determines to undertake a redemption of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock following a Disposition of substantially all (but not all) of the properties and assets of the Liberty Media Group pursuant to clause (ii)(B) of paragraph 5(b) of Part B of this Article Third, the corporation shall, not later than the 30th Trading Day following the consummation of such Disposition, cause to be given to each holder of record of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, and to each holder of Convertible Securities convertible into or exercisable or exchangeable for shares of either such series (unless provision for notice is otherwise made pursuant to the terms of such Convertible Securities), a notice setting forth (A) a date not earlier than the 40th Trading Day and not later than the 50th Trading Day following the consummation of such Disposition which shall be the date on which shares of the Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock then outstanding shall be selected for redemption, (B) the anticipated Redemption Date (which shall not be more than 85 Trading Days following the consummation of such Disposition), (C) the kind of shares of capital stock, cash and/or other securities or property to be paid as a redemption price in respect of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock selected for redemption, (D) the Liberty Media Group Net Proceeds of such Disposition, (E) the number of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and the number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock into or for which outstanding Convertible Securities are then convertible, exercisable or exchangeable and the conversion or exercise prices thereof, and (F) in the case of a notice to holders of Convertible Securities, a statement to the effect that holders of such Convertible Securities shall be entitled to participate in such selection for redemption only if such holders appropriately convert, exercise or exchange such Convertible Securities on or prior to the date referred to in clause (A) of this sentence and a statement as to what, if anything, such holders shall be entitled to receive pursuant to the terms of such Convertible Securities if such holders convert, exercise or exchange such Convertible Securities following such date. Promptly following the date referred to in clause (A) of the preceding sentence, but not earlier than the 40th Trading Day and not later than the 50th Trading Day following the consummation of such Disposition, the corporation shall cause to be given to each holder of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock to be so redeemed, a notice setting forth (A) the number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock held by such holder to be redeemed, (B) a statement that such shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock shall be redeemed, (C) the Redemption Date (which shall not be more than 85 Trading Days following the consummation of such Disposition), (D) the kind and per share amount of shares of capital stock, cash and/or other securities or property to be received by such holder with respect to each share of such Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock to be redeemed, including details as to the calculation thereof, and (E) the place or places where certificates for shares of such Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, properly endorsed or assigned for transfer (unless the corporation waives such requirement), are to be surrendered for delivery of certificates for shares of such capital stock, cash and/or other securities or property. The notices referred to in this clause (iv) shall be sent by first-class mail, postage prepaid, at such holder's address as the same appears on the transfer books of the corporation. The outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock to be redeemed shall be redeemed by the corporation pro rata among the holders of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock or by such other method as may be determined by the Board of Directors to be equitable. (v) If the corporation determines to redeem shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock pursuant to paragraph 5(a) of this Part B of this Article Third, the corporation shall promptly cause to be given to each holder of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and to each holder of Convertible Securities convertible into or exercisable or exchangeable for shares of either such series (unless provision for such notice is otherwise made pursuant to the terms of such Convertible Securities), a notice setting forth (A) a statement that all outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock shall be redeemed in exchange for shares of common stock of the Liberty Media Group Subsidiaries, (B) the Redemption Date, (C) the place or places where certificates for shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, properly endorsed or assigned for transfer (unless the corporation shall waive such requirement), are to be surrendered for delivery of certificates for shares of common stock of the Liberty Media Group Subsidiaries, (D) the number of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and the number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock into or for which outstanding Convertible Securities are then convertible, exercisable or exchangeable and the conversion, exercise or exchange prices thereof (and stating which, if any, of such Convertible Securities constitute Pre-Merger Convertible Securities) and (E) in the case of a notice to holders of Convertible Securities (other than Pre-Merger Convertible Securities), a statement to the effect that holders of such Convertible Securities shall be entitled to participate in such redemption only if such holders appropriately convert, exercise or exchange such Convertible Securities on or prior to the Redemption Date referred to in clause (B) of this sentence and a statement as to what, if anything, such holders shall be entitled to receive pursuant to the terms of such Convertible Securities or, if applicable, paragraph 5(c) of this Part B of this Article Third if such holders convert, exercise or exchange such Convertible Securities following the Redemption Date. Such notice shall be sent by first-class mail, postage prepaid, not less than 35 Trading Days nor more than 45 Trading Days prior to the Redemption Date, at such holder's address as the same appears on the transfer books of the corporation. (vi) Neither the failure to mail any notice required by this paragraph 5(d) to any particular holder of Class A Liberty Media Group Common Stock, Class B Liberty Media Group Common Stock or of Convertible Securities nor any defect therein shall affect the sufficiency thereof with respect to any other holder of outstanding shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock or of Convertible Securities, or the validity of any redemption. (vii) The corporation shall not be required to issue or deliver fractional shares of any class of capital stock or any fractional securities to any holder of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock upon any redemption, dividend or other distribution pursuant to this paragraph 5. In connection with the determination of the number of shares of any class of capital stock that shall be issuable or the amount of securities that shall be deliverable to any holder of record upon any such redemption, dividend or other distribution (including any fractions of shares or securities), the corporation may aggregate the number of shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock held at the relevant time by such holder of record. If the number of shares of any class of capital stock or the amount of securities remaining to be issued or delivered to any holder of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock is a fraction, the corporation shall, if such fraction is not issued or delivered to such holder, pay a cash adjustment in respect of such fraction in an amount equal to the fair market value of such fraction on the fifth Trading Day prior to the date such payment is to be made (without interest). For purposes of the preceding sentence, "fair market value" of any fraction shall be (A) in the case of any fraction of a share of capital stock of the corporation, the product of such fraction and the Market Value of one share of such capital stock and (B) in the case of any other fractional security, such value as is determined by the Board of Directors. (viii) No adjustments in respect of dividends shall be made upon the redemption of any shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock; provided, however, that if the Redemption Date with respect to the Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock shall be subsequent to the record date for the payment of a dividend or other distribution thereon or with respect thereto, the holders of shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock at the close of business on such record date shall be entitled to receive the dividend or other distribution payable on or with respect to such shares on the date set for payment of such dividend or other distribution, notwithstanding the redemption of such shares or the corporation's default in payment of the dividend or distribution due on such date. (ix) Before any holder of shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock shall be entitled to receive certificates representing shares of any kind of capital stock or cash and/or securities or other property to be received by such holder with respect to shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock pursuant to this paragraph 5 of this Part B of this Article Third, such holder shall surrender at such place as the corporation shall specify certificates for such shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, properly endorsed or assigned for transfer (unless the corporation shall waive such requirement). The corporation shall as soon as practicable after such surrender of certificates representing shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock deliver to the person for whose account shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock were so surrendered, or to the nominee or nominees of such person, certificates representing the number of whole shares of the kind of capital stock or cash and/or securities or other property to which such person shall be entitled as aforesaid, together with any payment for fractional securities contemplated by paragraph 5(d)(vii) of this Part B of this Article Third. If less than all of the shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock represented by any one certificate are to be redeemed, the corporation shall issue and deliver a new certificate for the shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock not redeemed. The corporation shall not be required to register a transfer of any shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock selected or called for redemption. (x) From and after any applicable Redemption Date, all rights of a holder of shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock that were redeemed shall cease except for the right, upon surrender of the certificates representing shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, to receive certificates representing shares of the kind and amount of capital stock or cash and/or securities or other property for which such shares were redeemed, together with any payment for fractional securities contemplated by paragraph 5(d)(vii) of this Part B of this Article Third and such holder shall have no other or further rights in respect of the shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock so redeemed, including, but not limited to, any rights with respect to any cash, securities or other properties which are reserved or otherwise designated by the corporation as being held for the satisfaction of the corporation's obligations to pay or deliver any cash, securities or other property upon the conversion, exercise or exchange of any Convertible Securities that were convertible into or exercisable or exchangeable for Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock and outstanding as of the date of such redemption. No holder of a certificate that, immediately prior to the applicable Redemption Date for the Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, represented shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock shall be entitled to receive any dividend or other distribution with respect to shares of any kind of capital stock into or in exchange for which the Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock was redeemed until surrender of such holder's certificate for a certificate or certificates representing shares of such kind of capital stock. Upon such surrender, there shall be paid to the holder the amount of any dividends or other distributions (without interest) which theretofore became payable with respect to a record date after the Redemption Date but that were not paid by reason of the foregoing, with respect to the number of whole shares of the kind of capital stock represented by the certificate or certificates issued upon such surrender. From and after a Redemption Date for any shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, the corporation shall, however, be entitled to treat the certificates for shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock that have not yet been surrendered for redemption as evidencing the ownership of the number of whole shares of the kind or kinds of capital stock for which the shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock represented by such certificates shall have been redeemed, notwithstanding the failure to surrender such certificates. (xi) The corporation shall pay any and all documentary, stamp or similar issue or transfer taxes that may be payable in respect of the issue or delivery of any shares of capital stock and/or other securities on redemption of shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock pursuant to this Part B of this Article Third. The corporation shall not, however, be required to pay any tax that may be payable in respect of any transfer involved in the issue and delivery of any shares of capital stock in a name other than that in which the shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock so redeemed were registered and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the corporation the amount of any such tax, or has established to the satisfaction of the corporation that such tax has been paid. 6. Liquidation. In the event of a liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the corporation and subject to the prior payment in full of the preferential amounts to which any class or series of Preferred Stock is entitled, (a) the holders of the shares of Common Stock and (on the basis that may be set forth in this Certificate with respect to any such shares) the holders of any other class of common shares (other than the Liberty Media Group Common Stock) shall share in the aggregate in a percentage of the funds of the corporation remaining for distribution to its common shareholders equal to 100% multiplied by the average daily ratio (expressed as a decimal) of X/Z for the 20-Trading Day period ending on the Trading Day prior to the date of the public announcement of such liquidation, dissolution or winding up, and (b) the holders of the shares of Class A Liberty Media Group Common Stock and the holders of the shares of Class B Liberty Media Group Common Stock shall share equally, on a share for share basis, in a percentage of the funds of the corporation remaining for distribution to its common shareholders equal to 100% multiplied by the average daily ratio (expressed as a decimal) of Y/Z for such 20-Trading Day period, where X is the aggregate Market Capitalization of the Common Stock and any other class of common shares (other than the Liberty Media Group Common Stock), Y is the aggregate Market Capitalization of the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock, and Z is the aggregate Market Capitalization of the Common Stock, any other class of common shares (other than the Liberty Media Group Common Stock), the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock. Neither the consolidation or merger of the corporation with or into any other corporation or corporations nor the sale, transfer or lease of all or substantially all of the assets of the corporation shall itself be deemed to be a liquidation, dissolution or winding up of the corporation within the meaning of this paragraph 6 of this Part B of this Article Third. Notwithstanding the foregoing, any transaction or series of related transactions which results in all of the assets and liabilities included in the Liberty Media Group being held by one or more Liberty Media Group Subsidiaries, and the distribution of such Liberty Media Group Subsidiaries (and no other material assets or liabilities) to the holders of the outstanding Liberty Media Group Common Stock shall not constitute a voluntary or involuntary liquidation, dissolution or winding up of the corporation for purposes of this paragraph 6 of this Part B of this Article Third, but shall be subject to paragraph 5(a) of this Part B of this Article Third. 7. Determinations by the Board of Directors. Any determinations made by the Board of Directors under any provision in this Part B of this Article Third shall be final and binding on all shareholders of the corporation, except as may otherwise be required by law. The corporation shall prepare a statement of any such determination by the Board of Directors respecting the fair market value of any properties, assets or securities and shall file such statement with the Secretary of the corporation. 8. Relationship Between the Liberty Media Group and the Common Stock Group. (a) In furtherance and not in limitation of the provisions of Article Ninth, neither the Liberty Media Group on the one hand, nor the Common Stock Group on the other hand, shall have any duty, responsibility or obligation to refrain from (and none of the directors or officers of the corporation, the Liberty Media Group or the Common Stock Group shall have any duty, responsibility or obligation to cause the Liberty Media Group or the Common Stock Group to refrain from) (i) engaging in the same or similar activities or lines of business as any member of the other Group, (ii) doing business with any potential or actual supplier or customer of any member of any other Group or (iii) engaging in, or refraining from, any other activities whatsoever relating to any of the potential or actual suppliers or customers of any member of the other Group. (b) In furtherance and not in limitation of the provisions of Article Ninth, neither the Liberty Media Group on the one hand, nor the Common Stock Group on the other hand, shall have any duty, responsibility or obligation (and none of the directors or officers of the corporation, the Liberty Media Group or the Common Stock Group shall have any duty, responsibility or obligation to cause the Liberty Media Group or the Common Stock Group) (i) to communicate or offer any business or other corporate opportunity to any other Person (including any business or other corporate opportunity which may arise which either Group may be financially able to undertake, and which is, from its nature, in the line of more than one Group's business and is of practical advantage to more than one Group), (ii) to provide financial support to the other Group (or any member thereof) or (iii) otherwise to assist the other Group. (c) In furtherance and not in limitation of the provisions of Article Ninth, no director or officer of the corporation shall be liable to the corporation or any holder of any securities of the corporation in respect of any failure or alleged failure of such officer or director to offer to (or to cause the Liberty Media Group or the Common Stock Group to offer to) either Group any corporate opportunity of any kind or nature that is pursued by the other Group. (d) Nothing in this paragraph 8 of this Part B of this Article Third shall prevent any members of the Liberty Media Group from entering into written agreements with the Common Stock Group to define or restrict any aspect of the relationship between the Groups. 9. Certain Definitions. Unless the context otherwise requires, the terms defined in this Part B of this Article Third shall have, for all purposes of this Part B of this Article Third, the meanings herein specified: "Common Stock Group" shall mean, as of any date, the interest of the corporation or any of its subsidiaries in all of the businesses in which the corporation or any of its subsidiaries (or any of their predecessors or successors) is or has been engaged, directly or indirectly, and the respective assets and liabilities of the corporation or any of its subsidiaries, other than any businesses, assets or liabilities of the Liberty Media Group. "Convertible Securities" shall mean any securities of the corporation (other than the Liberty Media Group Common Stock) or any Subsidiary thereof that are convertible into, exchangeable for or evidence the right to purchase any shares of Common Stock or of any series of Liberty Media Group Common Stock, whether upon conversion, exercise, exchange, pursuant to antidilution provisions of such securities or otherwise. "Covered Disposition" shall mean (x) any direct or indirect sale, transfer or conveyance by the corporation of any of its equity interest in Liberty Media Corporation or any Covered Entity or (y) any grant of any pledge or other security interest in the equity interest of the corporation in Liberty Media Corporation or any Covered Entity; provided, however, that the foregoing shall not apply to (i) any issuance or sale by the corporation of its own securities, (ii) any issuance or sale by Liberty Media Corporation of its own securities or any sale, transfer or conveyance by Liberty Media Corporation or any other Person included in the Liberty Media Group of any securities of any Person included in the Liberty Media Group, (iii) with respect to any Covered Entity, any transaction duly authorized by the board of directors of such Covered Entity, or (iv) any merger, consolidation, exchange of shares or other business combination transaction involving the corporation in which the corporation (or its successors) continues immediately following such transaction to hold the same direct or indirect interest in the business, assets and liabilities comprising the Liberty Media Group that it held immediately prior to such transaction (other than as a result of any action by any Person included in the Liberty Media Group). If a contribution of assets of Liberty Media Corporation to Liberty Media Group LLC occurs (other than the initial contribution made on formation thereof), then from and after the date of such contribution all references in the preceding sentence of this definition of Covered Disposition to Liberty Media Corporation shall be deemed to refer to Liberty Media Group LLC. "Covered Entity" shall mean, as of any date of determination, each of the following Persons (and any successor to such Person, by merger, consolidation, sale of all or substantially all of its assets or otherwise, whether or not in connection with a Related Business Transaction) unless all of the Corporation's equity interest in such Person or all of the assets of such Person are held by (i) Liberty Media Corporation, if such date of determination is prior to the contribution of assets of Liberty Media Corporation to Liberty Media Group LLC (other than the initial contribution made on formation thereof) or (ii) Liberty Media Group LLC, if such date of determination is after the contribution referred to in clause (i): Tele-Communications International, Inc., TCI Wireless Holdings, Inc., TCIP, Inc., Silver Spur Land and Cattle Co., and TCI Interactive, Inc. "Disposition" shall mean the sale, transfer, assignment or other disposition (whether by merger, consolidation, sale or contribution of assets or stock or otherwise) by the corporation (or its successors) or any of its Subsidiaries of properties or assets. Disposition shall not include a merger, consolidation, exchange of shares or other business combination transaction involving the corporation in which the corporation (or its successors) continues immediately following such transaction to hold the same direct and indirect interest in the business, assets and liabilities comprising the Liberty Media Group that it held immediately prior to such transaction (other than as a result of any action by any Person included in the Liberty Media Group). "Group" shall mean either the Common Stock Group or the Liberty Media Group. "Liberty Media Group" shall mean, as of any date that any shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock have been issued and continue to be outstanding, each of the following, without duplication: (a) the proceeds of any issuances or sales of Class A Liberty Media Group Common Stock, Class B Liberty Media Group Common Stock or any Convertible Securities that are convertible into or exercisable or exchangeable for Liberty Media Group Common Stock or of any Preferred Stock that is attributed to the Liberty Media Group; (b) the interest of the corporation or any of its subsidiaries in the Associated Group, Inc., a Delaware corporation, and the proceeds of any disposition thereof; (c) the interest of the Corporation or any of its subsidiaries in each Covered Entity or any subsidiary of a Covered Entity and their respective properties and assets (including, without limitation, the Sprint PCS Investment) and the proceeds of any disposition thereof; and (d) the interest of the corporation or of any of its subsidiaries in Liberty Media Corporation or any of its subsidiaries (including any successor thereto by merger, consolidation or sale of all or substantially all of its assets, whether or not in connection with a Related Business Transaction) and their respective properties and assets and the proceeds of any disposition thereof; provided, however, that if a contribution of assets of Liberty Media Corporation to Liberty Media Group LLC occurs (other than the initial contribution made on formation thereof), then from and after the date of such contribution, the Liberty Media Group shall mean, as of any date that any shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock continue to be outstanding, in addition to the assets referred to in clauses (a), (b) and (c) above and in clause (e) below, the interest of the corporation or any of its subsidiaries in (i) the Retained Business and (ii) Liberty Media Group LLC or any of its subsidiaries (including any successor thereto by merger, consolidation or sale of all or substantially all of its assets, whether or not in connection with a Related Business Transaction) and their respective properties and assets and the proceeds of any disposition thereof; and (e) the interest of the corporation in all dividends and distributions from Liberty Media Group LLC to Liberty Media Corporation or any of its subsidiaries (including any such successor) or from Liberty Media Corporation (or any such successor) to its shareholders or from any Covered Entity to its shareholders. For purposes hereof, "Retained Businesses" means the businesses, assets and liabilities of Liberty Media Corporation immediately following the contribution referred to in the preceding sentence (or, if there is more than one such contribution after the initial contribution made on formation, then the first of such contributions). "Liberty Media Group Available Dividend Amount," as of any date, shall mean the excess of (i) the amount by which the total assets of the Liberty Media Group exceed the total liabilities of the Liberty Media Group as of such date over (ii) the sum of (A) the par value of all issued shares of Liberty Media Group Common Stock and each class or series of Preferred Stock attributed to the Liberty Media Group, (B) the amount of the consideration received for any shares of Preferred Stock attributed to the Liberty Media Group without par value that have been issued, except such part of the consideration therefor as may have been allocated to surplus in a manner permitted by law, and (C) any amount not included in clauses (A) and (B) that the corporation (by appropriate action of its Board of Directors) has transferred to stated capital specifically in respect of Liberty Media Group Common Stock, minus (D) all reductions from such sums set forth in clauses (A), (B) and (C) as have been effected in a manner permitted by law; provided, however, that in the event that the law governing the corporation changes from that governing the corporation on the date of the adoption of the Amendment to this Certificate pursuant to which the Liberty Media Group Common Stock was authorized (whether because of amendment of the applicable law or because of a change in the jurisdiction of incorporation of the corporation through merger or otherwise), the Liberty Media Group Available Dividend Amount shall mean that amount of dividends, as determined by the Board of Directors, that could be paid by a corporation (governed under such applicable law) having the assets and liabilities of the Liberty Media Group, an amount of outstanding common stock (and having an aggregate par value) equal to the amount (and aggregate par value) of the outstanding Liberty Media Group Common Stock and of each class or series of Preferred Stock attributed to the Liberty Media Group and having an amount of earnings or loss or other relevant corporate attributes as reasonably determined by the Board of Directors in light of all factors deemed relevant by the Board. "Liberty Media Group Full Dilution Fraction" shall mean, as of any date, a fraction the numerator of which is the aggregate number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock outstanding on such date and the denominator of which is the sum of (a) such aggregate number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock outstanding on such date and (b) the aggregate number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock issuable, determined as of such date, upon conversion, exercise or exchange of Pre-Merger Convertible Securities. "Liberty Media Group LLC" shall mean Liberty Media Group LLC, a Delaware limited liability company, of which Liberty Media Corporation and Liberty Management LLC are the members, and any successor thereto (by merger, consolidation, sale of all or substantially all of its assets or otherwise, whether or not in connection with a Related Business Transaction). "Liberty Media Group Net Proceeds" shall mean, as of any date, with respect to any Disposition of any of the properties and assets of the Liberty Media Group, an amount, if any, equal to the gross proceeds of such Disposition after any payment of, or reasonable provision for, (a) any taxes payable by the corporation in respect of such Disposition or in respect of any resulting dividend or redemption pursuant to clause (i) or (ii), respectively, of paragraph 5(b) of this Part B of this Article Third (or which would have been payable but for the utilization of tax benefits attributable to the Common Stock Group) reduced by any offset to such liability of the Liberty Media Group allowed pursuant to the Tax Sharing Agreement entered into pursuant to the Merger Agreement, (b) any transaction costs borne by the Common Stock Group in connection with such Disposition, including, without limitation, any legal, investment banking and accounting fees and expenses borne by the Common Stock Group in connection with such Disposition, (c) any liabilities and other obligations (contingent or otherwise) of the Liberty Media Group borne by the Common Stock Group in connection with such Disposition, including, without limitation, any indemnity or guarantee obligations incurred by the Common Stock Group in connection with the Disposition or any liabilities assumed by the Common Stock Group for future purchase price adjustments, and (d) any preferential amounts, accumulated and unpaid dividends and other obligations (other than with respect to Pre-Merger Convertible Securities) in respect of Preferred Stock attributed to the Liberty Media Group; provided, however, that the net amount determined in accordance with the foregoing provisions of this sentence shall, without duplication, be increased by the net amount, if any, payable by the Common Stock Group to the Liberty Media Group, or decreased by the net amount, if any, payable by the Liberty Media Group to the Common Stock Group, pursuant to the Tax Sharing Agreement referred to above, as applicable, as a result of the deconsolidation of the properties and assets of the Liberty Media Group disposed of in such Disposition. For purposes of this definition, any properties and assets of the Liberty Media Group remaining after such Disposition shall constitute "reasonable provision" for such amount of taxes, costs and liabilities (contingent or otherwise) as can be supported by such properties and assets. To the extent the proceeds of any Disposition include any securities or other property other than cash, the Board of Directors shall determine the value of such securities or property. "Liberty Media Corporation" shall mean Liberty Media Corporation, a Delaware corporation, and any successor thereto (by merger, consolidation, sale of all or substantially all of its assets or otherwise, whether or not in connection with a Related Business Transaction). "Market Capitalization" of any class or series of capital stock of the corporation on any Trading Day shall mean the product of (i) the Market Value of one share of such class or series on such Trading Day and (ii) the number of shares of such class or series outstanding on such Trading Day. "Market Value" of any class or series of capital stock of the corporation on any day shall mean the average of the high and low reported sales prices regular way of a share of such class or series on such day (if such day is a Trading Day, and if such day is not a Trading Day, on the Trading Day immediately preceding such day) or in case no such reported sale takes place on such Trading Day the average of the reported closing bid and asked prices regular way of a share of such class or series on such Trading Day, in either case on the New York Stock Exchange or, if the shares of such class or series are not quoted on the New York Stock Exchange on such Trading Day, on the Nasdaq National Market, or if the shares of such class or series are not quoted on the Nasdaq National Market on such Trading Day, the average of the closing bid and asked prices of a share of such class or series in the over-the-counter market on such Trading Day as furnished by any New York Stock Exchange member firm selected from time to time by the corporation, or if such closing bid and asked prices are not made available by any such New York Stock Exchange member firm on such Trading Day (including without limitation because such securities are not publicly held), the market value of a share of such class or series as determined by the Board of Directors; provided that for purposes of determining the ratios set forth in paragraph 6 of this Part B of this Article Third, (a) the "Market Value" of any share of Common Stock or of any class of Liberty Media Group Common Stock on any day prior to the "ex" date or any similar date for any dividend or distribution paid or to be paid with respect to the Common Stock or such class of Liberty Media Group Common Stock, as applicable, shall be reduced by the fair market value of the per share amount of such dividend or distribution as determined by the Board of Directors and (b) the "Market Value" of any share of Common Stock or of any class of Liberty Media Group Common Stock on any day prior to (i) the effective date of any subdivision (by stock split or otherwise) or combination (by reverse stock split or otherwise) of outstanding shares of Common Stock or of such class of Liberty Media Group Common Stock, as applicable, or (ii) the "ex" date or any similar date for any dividend or distribution with respect to the Common Stock or any such class of Liberty Media Group Common Stock in shares of the Common Stock or such class of Liberty Media Group Common Stock, as applicable, shall be appropriately adjusted to reflect such subdivision, combination, dividend or distribution. "Person" shall mean any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization, government or agency or political subdivision thereof, or other entity, whether acting in an individual, fiduciary or other capacity. "Pre-Merger Convertible Securities" shall mean Convertible Securities that were outstanding immediately following the Effective Time (as such term is defined in the Merger Agreement) and were, at such date convertible into or exercisable or exchangeable for shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock. "Qualifying Subsidiary" of a Person shall mean a Subsidiary of such Person in which such Person's ownership and voting interest is sufficient to satisfy the ownership and voting requirements of the Internal Revenue Code and the regulations thereunder for a distribution of such Person's interest in such Subsidiary to the holders of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock to be tax free to such holders. "Redemption Date" shall mean any date fixed for a redemption or purchase of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock as set forth in a notice to holders of such series pursuant to this Certificate. "Related Business Transaction" shall mean any Disposition of all or substantially all of the properties and assets of the Liberty Media Group in which the corporation receives as proceeds of such Disposition primarily equity securities (including, without limitation, capital stock, convertible securities, partnership or limited partnership interests, limited liability company membership interests and other types of equity securities, without regard to the voting power or contractual or other management or governance rights related to such equity securities) of the purchaser or acquiror of such assets and properties of the Liberty Media Group, any entity which succeeds (by merger, formation of a joint venture enterprise or otherwise) to such assets and properties of the Liberty Media Group, or a third party issuer, which purchaser, acquiror or other issuer is engaged or proposes to engage primarily in one or more businesses similar or complementary to the businesses conducted by the Liberty Media Group prior to such Disposition, as determined in good faith by the Board of Directors, and upon consummation of such transaction is included in the Liberty Media Group. "Sprint PCS Investment" shall mean the common equity securities (and securities convertible into or exercisable or exchangeable for such common equity securities) of Sprint Corporation acquired by Tele-Communications, Inc. ("TCI") and its affiliates pursuant to that certain Restructuring and Merger Agreement, dated as of May 26, 1998, among TCI, Sprint Corporation, Comcast Corporation and Cox Communications, Inc. (the "PCS Restructuring Agreement") (as well as any indebtedness of Sprint Corporation or any of its affiliates to TCI or any of its affiliates remaining following the consummation of the transactions contemplated by the PCS Restructuring Agreement). "Subsidiary" shall mean, with respect to any Person, any corporation, limited liability company or partnership 50% or more of whose outstanding voting securities or membership or partnership interests, as the case may be, are directly or indirectly owned by such Person. "Trading Day" shall mean each weekday other than any day on which any relevant class or series of capital stock of the corporation is not traded on the New York Stock Exchange or the Nasdaq National Market or in the over-the-counter market. PART C--PREFERRED STOCK The Preferred Stock may be issued from time to time in one or more series. All shares of Preferred Stock of all series shall rank equally and be identical in all respects except that the Board of Directors is authorized to fix the number of shares in each series, the designation thereof and, subject to the provisions of this Article Third, the relative rights, preferences and limitations of each series and the variations in such rights, preferences and limitations as between series and specifically is authorized to fix with respect to each series: (a) the dividend rate on the shares of such series and the date or dates from which dividends shall be cumulative; (b) the times when, the prices at which, and all other terms and conditions upon which, shares of such series shall be redeemable; (c) the amounts which the holders of shares of such series shall be entitled to receive upon the liquidation, dissolution or winding up of the corporation, which amounts may vary depending on whether such liquidation, dissolution or winding up is voluntary or involuntary and, if voluntary, may vary at different dates; (d) whether or not the shares of such series shall be subject to the operation of a purchase, retirement or sinking fund and, if so, the extent to and manner in which such purchase, retirement or sinking fund shall be applied to the purchase or redemption of the shares of such series for retirement or for other corporate purposes and the terms and provisions relative to the operation of the said fund or funds; (e) whether or not the shares of such series shall be convertible into or exchangeable for shares of any other class or series or for any class of common shares and, if so, the price of prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same; (f) the restrictions, if any, upon the payment of dividends or making of other distributions on, and upon the purchase or other acquisition of, common shares; (g) the restrictions, if any, upon the creation of indebtedness, and the restrictions, if any, upon the issue of any additional shares ranking on a parity with or prior to the shares of such series in addition to the restrictions provided for in this Article Third; (h) the voting powers, if any, of the shares of such series in addition to the voting powers provided for in this Article Third; and (i) such other rights, preferences and limitations as shall not be inconsistent with this Article Third. All shares of any particular series shall rank equally and be identical in all respects except that shares of any one series issued at different times may differ as to the date from which dividends shall be cumulative. Dividends on shares of Preferred Stock of each series shall be cumulative from the date or dates fixed with respect to such series and shall be paid or declared or set apart for payment for all past dividend periods and for the current dividend period before any dividends (other than dividends payable in common shares) shall be declared or paid or set apart for payment on common shares. Whenever, at any time, full cumulative dividends for all past dividend periods and for the current dividend period shall have been paid or declared and set apart for payment on all then outstanding shares of Preferred Stock and all requirements with respect to any purchase, retirement or sinking fund or funds for all series of Preferred Stock shall have been complied with, the Board of Directors may declare dividends on the common shares and the shares of Preferred Stock shall not be entitled to share therein. Upon any liquidation, dissolution or winding up of the corporation, the holders of shares of Preferred Stock of such series shall be entitled to receive the amounts to which such holders are entitled as fixed with respect to such series, including all dividends accumulated to the date of final distribution, before any payment or distribution of assets of the corporation shall be made to or set apart for the holders of common shares and after such payments shall have been made in full to the holders of shares of Preferred Stock, the holders of common shares shall be entitled to receive any and all assets remaining to be paid or distributed to shareholders and the holders of shares of Preferred Stock shall not be entitled to share therein. For the purposes of this paragraph, the voluntary sale, conveyance, lease, exchange or transfer of all or substantially all the property or assets of the corporation or a consolidation or merger of the corporation with one or more other corporations (whether or not the corporation is the corporation surviving such consolidation or merger) shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary. The aggregate amount which all shares of Preferred Stock outstanding at any time shall be entitled to receive on involuntary liquidation, dissolution or winding up shall not exceed $8,000,000,000. So long as any shares of Preferred Stock are outstanding, the corporation will not (a) without the affirmative vote or consent of the holders of at least 66 2/3% of all the shares of Preferred Stock at the time outstanding, (i) authorize shares of stock ranking prior to the shares of Preferred Stock, or (ii) change any provision of this Article Third so to affect adversely the shares of Preferred Stock; (b) without the affirmative vote or consent of the holders of at least 66 2/3% of any series of Preferred Stock at the time outstanding, change any of the provisions of such series so as to affect adversely the shares of such series; (c) without the affirmative vote or consent of the holders of at least a majority of all the shares of Preferred Stock at the time outstanding, (i) increase the authorized number of shares of Preferred Stock or (ii) increase the authorized number of shares of any class of stock ranking on a parity with the Preferred Stock. Whenever, at any time or times, dividends payable on shares of Preferred Stock shall be in default in an aggregate amount equivalent to six full quarterly dividends on any series of Preferred Stock at the time outstanding, the number of directors then constituting the Board of Directors of the corporation shall ipso facto be increased by two, and the outstanding shares of Preferred Stock shall, in addition to any other voting rights, have the exclusive right, voting separately as a class and without regard to series, to elect two directors of the corporation to fill such newly created directorships and such right shall continue until such time as all dividends accumulated on all shares of Preferred Stock to the latest dividend payment date shall have been paid or declared and set apart for payment. No holder of shares of Preferred Stock of any series, irrespective of any voting or other right of shares of such series, shall have, as such holder, any preemptive right to purchase any other shares of the corporation or any securities convertible into or entitling the holder to purchase such other shares. If in any case the amounts payable with respect to any requirements to retire shares of Preferred Stock are not paid in full in the case of all series with respect to which such requirements exist, the number of shares to be retired in each series shall be in proportion to the respective amounts which would be payable on account of such requirements if all amounts payable were paid in full. **** FOURTH: The manner in which the foregoing amendment of said Certificate of Incorporation of the corporation was authorized was by the vote of the holders of a majority of all outstanding shares of the corporation entitled to vote thereon at a meeting of shareholders, subsequent to the unanimous vote of the Board of Directors. IN WITNESS WHEREOF, we have subscribed this document on March 9, 1999 and do hereby affirm, under the penalties of perjury, that the statements contained herein have been examined by us and are true and correct. By: Name: Marilyn J. Wasser Title: Vice President By: Name: Robert S. Feit Title: Assistant Secretary EX-3.(II) 3 BY-LAWS BY-LAWS as amended by BOARD OF DIRECTORS, March 1, 1999 Article I Meeting of Shareholders Section 1. The annual meeting of the shareholders shall be held in May each year on such day, at such time and at such place as shall be designated in the notice of the meeting. A notice of the annual meeting as approved by the Board of Directors shall be mailed not less than ten nor more than sixty days before the meeting, directed to each shareholder entitled to vote at said meeting at his address as it appears on the record of shareholders unless he shall have filed with the Secretary a written request that notices intended for him be mailed to some other address, in which case it shall be directed to him at such other address. Section 2. The Board of Directors may fix, in advance, a date not more than sixty nor less than ten days before the date of any meeting of the shareholders as the record date for determination of shareholders entitled to notice of or to vote at such meeting, and only shareholders of record on such date shall be entitled to notice of or to vote at such meeting. Section 3. Special meetings of the shareholders may be called at any time by either the Chairman of the Board or the Board of Directors, and shall be called upon a request to the Chairman of the Board or Secretary, signed by shareholders representing at least one-third of the shares. Any such request shall specify the time and the purpose or purposes of the proposed meeting. The meeting shall be held at such place within or without the State of New York as may be designated in the notice of the meeting. A notice of not less than ten nor more than sixty days shall be given by mail for each special meeting, in the manner provided for notice of the annual meeting. Such notice shall state the purpose or purposes for which the meeting is called and the time when and the place where it is to be held and shall indicate that the notice is being issued by or at the direction of the person or persons calling the meeting. Section 4. Failure to receive notice of any meeting shall not invalidate the meeting. Section 5. Notice of shareholders business at annual meetings of shareholders shall be governed by the provisions of this By-Law. (1) The proposal of business to be considered by the shareholders may be made at an annual meeting of shareholders (a) pursuant to the company's notice of meeting pursuant to Section 3 of this Article I of these By-Laws, (b) by or at the direction of the Board of Directors or (c) by any shareholder of the company who was a shareholder of record at the time of giving notice provided for in this By-Law, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. (2) For business to be properly brought before an annual meeting by a shareholder pursuant to clause (c) of paragraph (1) of this By-Law, the shareholder must have given timely notice thereof in writing to the Secretary of the company and such business must otherwise be a proper matter for shareholder action. To be timely, a shareholder's notice shall be delivered to the Secretary at the principal executive offices of the company not later than the close of business on the 90th calendar day nor earlier than the close of business on the 120th calendar day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 calendar days before or more than 60 calendar days after such anniversary date, notice by the shareholder to be timely must be so delivered not earlier than the close of business on the 120th calendar day prior to such annual meeting but not later than the close of business on the later of the 90th calendar day prior to such annual meeting or the 10th calendar day following the calendar day on which public announcement of the date of such meeting is first made by the company. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a shareholder's notice as described above. Such shareholder's notice shall set forth (a) as to any description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and beneficial owner, if any, on whose behalf the proposal is made; and (b) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such shareholder, as they appear on the company's books, and of such beneficial owner and (ii) the class and number of shares of the company which are owned beneficially and of record by such shareholder and such beneficial owner. Section 6. The items of business at all meetings of the stockholders shall be, insofar as applicable, as follows: - Call to order - Proof of notice of meeting or of waiver thereof - Appointment of inspectors of election, if necessary - A quorum being present - Reports - Election of directors - Other business specified in the notice of the meeting - Voting - Adjournment Any items of business not referred to in the foregoing may be taken up at the meeting as the chair of the meeting shall determine. The chair of the meeting shall determine all matters relating to the efficient conduct of the meeting, including but not limited to the maintenance of order and decorum. ARTICLE II. The Conduct of Shareholders' Meetings At all meetings of the shareholders, the holders of forty per centum of the shares entitled to vote thereat shall constitute a quorum, except as otherwise required by law; but the shareholders present may adjourn the meeting to another time or place despite the absence of a quorum. Every shareholder entitled to vote shall be entitled to one vote for each share standing in his name on the record of shareholders; and every shareholder entitled to vote may vote in person or by proxy. At all meetings of shareholders, a shareholder, or such person's duly authorized attorney in fact, may vote by proxy, executed in writing or granted or authorized in such other manner as is prescribed by the Business Corporation Law of the State of New York. All proxies, ballots and other voting materials, including Internet or telephonic voting, that identify the vote of a shareholder, shall be kept confidential and shall not be disclosed to the company or its officers and directors, except (i) to meet applicable legal requirements, (ii) if a shareholder requests disclosure or has made a comment in connection with such voting material, or (iii) in the event of a contested proxy solicitation. ARTICLE III. Inspectors The Board of Directors, in advance of any shareholders' meeting, shall appoint three Inspectors to act at the meeting or any adjournment thereof. In case any person appointed fails to appear or act, the vacancy may be filled by appointment made by the Board in advance of the meeting or at the meeting by the person presiding thereat. ARTICLE IV. The Board of Directors Section 1. The business of the company shall be managed under the direction of its Board of Directors, who shall be elected by the shareholders at the annual meeting. Section 2. The number of Directors shall be not less than ten nor more than twenty-five, the exact number of Directors within such minimum and maximum limits to be fixed and determined by the vote of a majority of the entire Board. In case of any increase in the number of Directors, the additional Directors may be elected by a majority of the Directors then in office. Section 3. Any vacancy in the Board may be filled by a majority vote of the remaining Directors, though less than a quorum. ARTICLE V. Meetings of Directors Section 1. Regular meetings shall be held at such times and places as the Board may determine. Section 2. Special meetings of the Directors may be called at any time by the Chairman of the Board, or by two members of the Executive Committee, and shall be called by the Chairman of the Board, or by the Secretary, forthwith upon request in writing signed by two Directors and specifying the object of the meeting. At least three days' notice of a special meeting shall be given in the manner provided for herein. Section 3. Any notice of a meeting of Directors required to be given may be given to each Director by mail or telegraph, addressed to him at his residence or usual place of business, or in person or by telephone, stating the time and place of the proposed meeting. Section 4. One-third of the entire Board shall constitute a quorum. Section 5. Meetings of the Directors may be held within or without the State of New York. Section 6. Any one or more members of the Board may participate in a meeting of the Board by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. Any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents thereto by the members of the Board shall be filed with the minutes of the proceedings of the Board. ARTICLE VI. Executive Committee and Other Committees The Board of Directors, by resolution adopted by a majority of the entire Board, may designate from their number an Executive Committee and other committees, and may determine the quorum thereof. Any such committee shall consist of three or more members and shall serve at the pleasure of the Board. The Chairman of the Board, one or more Vice Chairmen of the Board and the President, if any, shall be members of the Executive Committee. The Executive Committee shall, except as otherwise provided by law or by resolution of the Board, have all the authority of the Board of Directors during the intervals between the meetings of the Board. The Executive Committee shall keep a record of its proceedings, which shall from time to time be reported to the Board of Directors. The Chairman of the Board shall preside at the meetings of the Executive Committee. Committees other than the Executive Committee shall, except as otherwise provided by law, have such authority as shall be provided by resolution of the Board. The Board may designate from time to time one or more Directors as alternate members of the Executive Committee or of any other committee, who may replace any absent member or members at any meeting of the committee. Any one or more members of the Executive Committee or any other committee established by the Board pursuant to this Article VI may participate in a meeting of such committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at the meeting. Any action required or permitted to be taken by the Executive Committee or any other committee established by the Board pursuant to this Article VI may be taken without a meeting if all members of the committee consent in writing to the adoption of a resolution authorizing the action. The resolution and written consents thereto shall be filed with the minutes of the proceedings of the committee. The Board of Directors, by resolution adopted by a majority of the entire Board, may form a Capital Stock Committee, which committee shall consist of one director elected pursuant to Section 7.15 of the Agreement and Plan of Restructuring and Merger, dated June 23, 1998, among the company, Italy Merger Corp. and Tele-Communications, Inc. and up to two directors who are not current or former officers, directors or employees of the company or any of its affiliates, or otherwise affiliated with the company (other than as members of the Board of Directors or any committee thereof). The Capital Stock Committee shall have the authority of the Board of Directors to (i) interpret, make determinations under, and oversee the implementation of the policies set forth in the policy statement regarding Liberty Media Group tracking stock matters adopted by resolution of a majority of the entire Board, and (ii) to the extent permitted by law, to take all actions required to be taken by the Board of Directors of the company in connection with authorization of the issuance of shares of Liberty Media Group tracking stock. ARTICLE VII. Officers of the Company Section l. The officers of the company shall be elected by the Board of Directors, and may consist of a Chairman of the Board, one or more Vice Chairmen of the Board, a President, such number of Executive Vice Presidents and Senior Vice Presidents as the Board of Directors shall from time to time determine, a Secretary, a Treasurer and a Controller. The officers shall hold office until their successors have been elected. Section 2. The Board of Directors may appoint one or more Assistant Secretaries, one or more Assistant Treasurers, one or more Assistant Controllers, and such other officers and agents as the Board may consider necessary. ARTICLE VIII. Duties of the Chairman of the Board, President, Vice Chairmen of the Board, Executive Vice Presidents and Senior Vice Presidents Section 1. The Chairman of the Board shall be the chief executive officer of the company and shall have such authority and perform such duties as usually appertain to the chief executive office in business corporations. He shall preside at the meetings of the Board of Directors and he, or such officer as he may designate from time to time, shall preside at meetings of the shareholders. Section 2. The President, Vice Chairmen of the Board, Executive Vice Presidents and Senior Vice Presidents shall perform such duties as the Board of Directors or Chairman of the Board may from time to time determine. Section 3. In case of absence or inability of the Chairman of the Board, the President shall possess all the authority of the Chairman of the Board. ARTICLE IX. Duties of the Treasurer and Assistant Treasurers Section 1. The Treasurer shall receive all the funds of the company, and shall disburse them under the direction of the Board of Directors. All disbursement instruments shall be signed by such person or persons and in such manner as the Board may from time to time provide. Section 2. The Treasurer shall keep full and regular books, showing all his receipts and disbursements, which books shall be open at all times to the inspection of the Chairman of the Board or of any member of the Board of Directors; and he shall make such reports and perform such other duties as the Chairman of the Board or Board of Directors may require. Section 3. The Treasurer shall deposit all moneys received by him, in the corporate name of the company, with such depositories as shall be approved from time to time by the Board of Directors or by the Chairman of the Board, the President, a Vice Chairman of the Board or the Treasurer. Section 4. Assistant Treasurers shall have such of the authority and perform such of the duties of the Treasurer as may be provided in these By-Laws or assigned to them by the Board of Directors or the Chairman of the Board or by the Treasurer upon the approval of the Chairman of the Board, the President or a Vice Chairman of the Board. During the Treasurer's absence or inability, his authority and duties shall be possessed by such Assistant Treasurer or Assistant Treasurers as the Board of Directors, the Chairman of the Board, the President or a Vice Chairman of the Board may designate. Section 5. The Board of Directors may require the Treasurer and Assistant Treasurers to give such security for the faithful performance of their duties as the Board shall from time to time determine. ARTICLE X. Duties of the Secretary and Assistant Secretaries Section 1. The Secretary shall send notice to the shareholders of all annual and special meetings, and to the Directors of meetings of the Board where notice is required to be given; and he shall perform such other duties as may be required of him by the Chairman of the Board or Board of Directors, and such as usually appertain to the office of Secretary. Section 2. The Secretary or in his absence an Assistant Secretary shall keep an accurate record of the proceedings of the Board of Directors and of the Executive Committee, and of all meetings of shareholders, and shall have the custody of the seal of the company and affix it to all instruments requiring the seal. Section 3. Assistant Secretaries shall have such of the authority and perform such of the duties of the Secretary as may be provided in these By-Laws or assigned to them by the Board of Directors or the Chairman of the Board or by the Secretary upon the approval of the Chairman of the Board, the President or a Vice Chairman of the Board. During the Secretary's absence or inability, his authority and duties shall be possessed by such Assistant Secretary or Assistant Secretaries as the Board of Directors, the Chairman of the Board, the President or a Vice Chairman of the Board may designate. ARTICLE XI. Duties of the Controller The Controller shall be the principal accounting officer of the company and shall perform such duties as may be required of him by the Chairman of the Board or Board of Directors. ARTICLE XII. Transfer of Shares Section 1. Certificates for shares shall be issued by the Treasurer. Shares shall be transferable only on the record of shareholders of the company by the holder thereof in person or by attorney, upon surrender of the outstanding certificate therefor. This requirement shall be embodied in each certificate. Section 2. In case of the loss of a certificate, a new certificate may be issued upon such terms as the Board of Directors may prescribe. ARTICLE XIII. Indemnification of Directors and Officers The company is authorized, by (i) a resolution of shareholders, (ii) a resolution of Directors, or (iii) 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 the company or at the request of the company in any capacity with any other enterprise. ARTICLE XIV. Seal The common seal of the company shall be in the following form. ARTICLE XV. Amendments These By-Laws may be amended by the shareholders at any meeting; or by the Board of Directors at any meeting by a majority vote of the full Board, or at two successive meetings of the Board by a majority vote of a quorum present, provided that the third paragraph of Article II shall not be rescinded, amended or waived except at a shareholders meeting in accordance with applicable state law. The notice of a special meeting of the Board at which such action is to be taken shall set forth the substance of the proposed amendment. EX-10 4 (10)(III)(A)(11) AT&T SENIOR MANAGEMENT INCENTIVE AWARD DEFERRAL PLAN (as amended January 21, 1998) 1. ELIGIBILITY Any Senior Manager (as defined in the AT&T 1997 Long Term Incentive Program [the "1997 Plan"]) of AT&T Corp. ("AT&T") or an Affiliate (as defined in the 1997 Plan) who is eligible for an award under the AT&T Short Term Incentive Plan (the "Short Term Incentive Plan") and/or who has been granted a Performance Award or a Stock Unit Award under the AT&T Senior Management Long Term Incentive Plan (the "Long Term Incentive Plan") the 1987 Long Term Incentive Plan (the "1987 Plan") or the 1997 Plan shall be eligible to participate in this AT&T Senior Management Incentive Award Deferral Plan (the "Plan"). For purposes of the Plan, AT&T and any Affiliate shall be referred to as a "Participating Company". Prior to January 1, 1984, the Plan was named the Bell System Senior Management Incentive Award Deferral Plan. 2. PARTICIPATION (a) Prior to the beginning of any calendar year, any Senior Manager may elect to participate in the Plan by directing that (i) all or part of an award under the Short Term Incentive Plan, or a Performance Award or a Stock Unit Award under the Long Term Incentive Plan, the 1987 Plan or the 1997 Plan and/or (ii) all or part of the dividend equivalent payments under the Long Term Incentive Plan, the 1987 Plan or the 1997 Plan, that such employee's Participating Company would otherwise pay currently to such employee in such calendar year, shall be credited to a deferred account subject to the terms of the Plan. However, in no event shall the part of an award under any plan credited during any calendar year be less than $1,000 (based on a valuation at the time the award would otherwise be paid). There shall be no such minimum limitation on amounts credited during any calendar year that are related to dividend equivalent payments. In addition, prior to the beginning of any calendar year, any Senior Manager may elect to participate in the Plan by directing that all or part of the compensation related to the exercise (more than six months following such election and prior to the employee's retirement or other termination of employment) of an Option awarded under the 1987 Plan or the 1997 Plan shall be credited to a deferred account subject to the terms of the Plan. The exercise of an Option shall be considered as an exercise described in the preceding sentence only if the exercise would otherwise satisfy the requirements for a stock-for-stock exercise under the stock option award agreement pertaining to such Option. In addition, prior to the beginning of any calendar year, the Chairman of the Board and any other Senior Manager designated by the Chairman of the Board may elect to participate in the Plan by directing that all or part of such Senior Manager's salary that such employee's Participating Company would otherwise pay currently to such employee in such calendar year shall be credited to a deferred account subject to the terms of the Plan. In addition, provided such participation shall have been approved by the Compensation and Employee Benefits Committee of the AT&T Board of Directors (the "Committee"), prior to the beginning of any calendar year, any Senior Manager may elect to participate in the Plan as to other awards under the 1987 Plan or 1997 Plan, or other amounts of compensation of such Senior Manager, by directing that all or part of such awards or compensation that such Senior Manager's Participating Company would otherwise pay currently to such Senior Manager in such calendar year be credited to a deferred account subject to the terms of the Plan. (b) Such an election to participate in the Plan shall be in the form of a document executed by the employee and filed with the employee's Participating Company. An election related to awards, dividend equivalent payments, salary and/ or other compensation otherwise payable currently in any calendar year shall become irrevocable on the last day prior to the beginning of such calendar year. (c) Notwithstanding anything to the contrary contained in this Section 2, in the case of a Senior Manager who is newly eligible to participate in the Plan, or in the case of any Senior Manager with respect to awards or compensation newly eligible to be deferred under the Plan, a deferral election may be made with respect to compensation otherwise receivable in the same calendar year and subsequent to such election, provided such election is made within ninety (90) days of such eligibility. 3. DEFERRED ACCOUNTS (a) (i) Except as provided in Section 3(b)(iii), deferred amounts related to awards, dividend equivalent payments which would otherwise have been distributed in cash by a Participating Company and deferred amounts related to salary and/or other cash compensation shall be credited to the employee's account and shall bear interest from the date the awards, dividend equivalent payments, salary and/or other cash compensation would otherwise have been paid. The interest credited to the account will be compounded at the end of each calendar quarter, and the annual rate of interest applied at the end of any calendar quarter shall be determined by the Committee from time to time, provided however, that the interest rate to be applied, for any subsequent quarter, to an employee's (or former employee's) deferred account balance as of December 31, 1998, plus any additions to such account after December 31, 1998 that result from deferral elections made by an employee prior to December 31, 1998, (reduced by any distributions attributable to such account balance) shall not be less than the applicable 10 Year U.S. Treasury Note Rate for the prior calendar quarter, plus five (5) percent. (ii) Furthermore, if an employee made an election described in Section 2, which election was effective on December 31, 1983, then such employee's account shall also be credited during 1984 with an amount equal to the deferred amounts which would have been credited to the employee's account during 1984 had the company which employed the employee on December 31, 1983 continued to be a Participating Company during 1984, and such amount shall bear interest in accordance with (a)(i) above from the date such amount would have been credited had such company continued to be a Participating Company during 1984. (b)(i) Deferred amounts related to awards that would otherwise have been distributed in AT&T common shares by a Participating Company shall be credited to the employee's account as deferred AT&T shares. Furthermore, if an employee made an election described in Section 2, which election was effective on December 31, 1983, then such employee's account shall also be credited during 1984 with the deferred AT&T shares which would have been credited to the employee's account had the company which employed the employee on December 31, 1983 continued to be a Participating Company in the Plan and in the Long Term Incentive Plan during 1984. (ii) Deferred amounts related to the compensation on the exercise of an Option also shall be credited to the employee's account as deferred AT&T shares. The number of deferred AT&T shares credited under the preceding sentence shall equal the number of additional AT&T shares the employee would have received on the actual stock-for-stock exercise of such Option. (iii) Prior to the beginning of any calendar year, the Chairman of the Board and any other Senior Manager designated by the Chairman of the Board may elect that deferred amounts related to dividend equivalent payments, which would otherwise have been distributed in cash by a Participating Company during such calendar year, shall be credited to the employee's account as deferred AT&T shares. The number of deferred AT&T shares credited, with respect to each dividend equivalent, shall be determined in accordance with the conversion formula set forth in the following paragraph, as if such dividend equivalent were the amount to be converted to a number of additional deferred AT&T shares. (iv) The employee's account shall also be credited on each dividend payment date for AT&T shares with an amount equivalent to the dividend payable on the number of AT&T common shares equal to the number of deferred AT&T shares in the employee's account on the record date for such dividend. Such amount shall then be converted to a number of additional deferred AT&T shares determined by dividing such amount by the price of AT&T common shares, as determined in the following sentence. The price of AT&T common shares related to any dividend payment date shall be the average of the daily high and low sale prices of AT&T common shares on the New York Stock Exchange ("NYSE") for the period of five trading days ending on such dividend payment date, or the period of five trading days immediately preceding such dividend payment date if the NYSE is closed on the dividend payment date. (c) In the event of any change in outstanding AT&T common shares by reason of any stock dividend or split, recapitalization, merger, consolidation, combination or exchange of shares or other similar corporate change, the Committee shall make such adjustments, if any, that it deems appropriate in the number of deferred AT&T shares then credited to employees' accounts. Any and all such adjustments shall be conclusive and binding upon all parties concerned. 4. DISTRIBUTION (a) At the time an eligible employee makes an election to participate in the Plan, the employee shall also make an election with respect to the distribution (during the employee's lifetime or in the event of the employee's death) of the amounts credited to the employee's deferred account. Such an election related to the distribution during the employee's lifetime, of amounts otherwise payable currently in any calendar year, shall become irrevocable on the last day prior to the beginning of such calendar year. The election related to the distribution in the event of the employee's death, including the designation of a beneficiary or beneficiaries, may be changed by the employee at any time by filing the appropriate document with the Secretary of the Company. Amounts credited as cash plus accumulated interest shall be distributed in cash; amounts credited as deferred AT&T shares shall be distributed in the form of an equal number of AT&T shares. (b)(i) With respect to amounts related to deferred cash credited to the employee's account under Section 3(a), and to deferred AT&T shares credited to the employee's account under Section 3(b)(i) or (iii), an employee may elect to receive such amounts in one payment or in some other number of approximately equal annual installments (not exceeding 20), provided however, that the number of annual installments may not extend beyond the life expectancy of the employee, determined as of the date the first installment is paid. The employee's election shall also specify that the first installment (or the single payment if the employee has so elected) shall be paid either (1) as soon as practicable after the first day of the calendar quarter next following the end of the month in which the employee attains the age specified in such election, which age shall not be earlier than age 55 or later than age 70-1/2, or (2) as soon as practicable after the first day of the calendar quarter next following the end of the month in which the employee retires from a Participating Company or otherwise terminates employment with a Participating Company (except for a transfer to another Participating Company); provided, however, that the Committee may, in its sole discretion, direct that the first installment (or the single payment) shall be paid on the first day of the first calendar quarter in the calendar year next following the year of retirement or other termination of employment. In addition any Senior Manager eligible to defer salary may specify that the first installment (or the single payment if the employee has so elected) shall be paid as soon as practicable after the first day of the first calendar quarter in the calendar year next following the calendar year in which the employee retires from a Participating Company or otherwise terminates employment with a Participating Company (except for a transfer to another Participating Company). (ii) With respect to deferred AT&T shares credited to the employee's account under Section 3(b)(ii), an employee may elect to receive the deferred AT&T shares in one payment or in some other number of approximately equal annual installments (not exceeding 20), provided however, that the number of annual installments may not extend beyond the life expectancy of the employee, determined as of the date the first installment is paid. The employee's election shall also specify that the first installment (or the single payment if the employee has so elected) shall be paid as soon as practicable after the first day of the calendar quarter next following the later of (1) the end of the month that is five years following the month in which the related deferred AT&T shares were initially credited, and (2)(A) the end of the month in which the employee attains the age specified in such election, which age shall not be earlier than age 55 or later than age 70-1/2, or (B) the end of the month in which the employee retires from a Participating Company or otherwise terminates employment with a Participating Company (except for a transfer to another Participating Company); provided, however, that the Committee may, in its sole discretion, direct that the first installment (or the single payment) shall be paid on the first day of the first calendar quarter in the calendar year next following the year of retirement or other termination of employment. (c) Notwithstanding an election pursuant to Paragraph (b) of this Section 4, the entire amount then credited to an employee's account shall be paid immediately in a single payment (1) if the employee is discharged for cause by his or her Participating Company, (2) if the such Participating Company determines that the employee engaged in misconduct in connection with the employee's employment with the Participating Company, (3) if the employee without the consent of his or her Participating Company, while employed by such Participating Company or after the termination of such employment, establishes a relationship with a competitor of the Company or engages in activity which is in conflict with or adverse to the interest of the Company as determined under the AT&T Non-Competition Guideline, or (4) the employee becomes employed by a governmental agency having jurisdiction over the activities of a Participating Company or any of its subsidiaries. (d) An employee may elect that, in the event the employee should die before full payment of all amounts credited to the employee's account, the balance of the deferred amounts shall be distributed in one payment or in some other number of approximately equal annual installments (not exceeding 10) to the beneficiary or beneficiaries designated in writing by the employee, or if no designation has been made, to the estate of the employee. The first installment (or the single payment if the employee has so elected) shall be paid on the first day of the calendar quarter next following the month of death; provided, however, that the Committee may, in its sole discretion, direct that the first installment (or the single payment) shall be paid on the first day of the first calendar quarter in the calendar year next following the year of death. (e) Installments subsequent to the first installment to the employee, or to a beneficiary or to the employee's estate, shall be paid on the first day of the applicable calendar quarter in each succeeding calendar year until the entire amount credited to the employee's deferred account shall have been paid. Deferred amounts held pending distribution shall continue to be credited with interest or additional deferred AT&T shares, as applicable, determined in accordance with Section 3(a) and (b). (f) In the event an employee, or the employee's beneficiary after the employee's death, incurs a severe financial hardship, the Committee, in its sole discretion, may accelerate or otherwise revise the payment schedule from the employee's account to the extent reasonably necessary to eliminate the severe financial hardship. For the purpose of this subsection (f), a severe financial hardship must have been caused by an accident, illness, or other event beyond the control of the employee or, if applicable, the beneficiary. (g) The obligation to make a distribution of deferred amounts credited to an employee's account during any calendar year plus the additional amounts credited on such deferred amounts pursuant to Section 3(a) and (b) shall be borne by the Participating Company which otherwise would have paid the related award or salary currently. However, the obligation to make distribution with respect to deferred amounts which are related to amounts credited to an employee's account under Section 3(a)(ii) and under the second sentence of Section 3(b)(i), and with respect to which no Participating Company would otherwise have paid the related award currently, shall be borne by the Participating Company which employed the employee on January 1, 1984. (h) Nothwithstanding any provision to the contrary, the amount credited to an employee's account shall be reduced by the amount specified in an Election to Forego Compensation Form executed by the employee under the AT&T Corp. Estate Enhancement Program, and the reduction shall be effective as of the effective date of such election. 5. MISCELLANEOUS (a) The deferred amounts shall be held in the general funds of the Participating Companies. The Participating Companies shall not be required to reserve, or otherwise set aside, funds for the payment of such amounts. (b) The rights of an employee to any deferred amounts plus the additional amounts credited pursuant to Section 3(a) and (b) shall not be subject to assignment by the employee. (c) The Executive Vice President - Human Resources of AT&T shall have the authority to administer the Plan. (d) The Committee may at any time amend the Plan or terminate the Plan, but such amendment or termination shall not adversely affect the rights of any employee, without his or her consent, to any benefit under the Plan to which such employee may have previously become entitled prior to the effective date of such amendment or termination. The Executive Vice President - Human Resources of AT&T with the concurrence of the General Counsel of AT&T shall be authorized to make minor or administrative changes to the Plan, as well as amendments required by applicable federal or state law (or authorized or made desirable by such statutes). EX-10 5 EXHIBIT (10)(III)(A)(17) AMERICAN TELEPHONE AND TELEGRAPH COMPANY BENEFITS PROTECTION TRUST WITH WACHOVIA BANK OF NORTH CAROLINA, N.A., AS TRUSTEE Amended and Restated AMERICAN TELEPHONE AND TELEGRAPH COMPANY TRUST AGREEMENT TABLE OF CONTENTS ARTICLE PAGE Article I: Establishment of Trust...................................6 Article II: Funding of the Trust.....................................8 Article III: Trust Assets Subject to Creditors.......................18 Article IV: Trust Fund Administration...............................20 Article V: Notice to Trustee.......................................26 Article VI: Trust Investments.......................................28 Article VII: Trust Fees and Expenses.................................35 Article VIII: Records and Accounting..................................36 Article IX: Resignation, Removal or Replacement of Trustee..........38 Article X: Termination of Trust....................................41 Article XI: Amendment of Trust......................................42 Article XII: Miscellaneous...........................................43 Schedule A ...................................................47 THIS AGREEMENT, amended and restated as of the day of November, 1993, between American Telephone and Telegraph Company, a New York corporation (the "Company"), and Wachovia Bank of North Carolina, N.A., a national banking association (the "Trustee"). W I T N E S S E T H : WHEREAS, the Company and the Trustee had previously entered into an agreement (the "Agreement") to provide certain assurance to senior managers of the Company, effective May 1, 1992; and WHEREAS, the Company and the Trustee desire to make certain changes to the Agreement to address the funding and administration intended under the Agreement; and WHEREAS, the Company and the Trustee desire to amend and restate the terms of the Agreement to address the issues associated with such funding and administration; and WHEREAS, the Company has incurred and expects to continue to incur certain unfunded retirement income liabilities and benefit obligations to or with respect to all current employees who, as of December 18, 1991 or thereafter, were at an employment band of Senior Manager or above (or equivalent salary grade level), all future employees who are at any time at an employment band of Senior Manager or above) (or equivalent salary grade levels), all retired Senior Managers (or retired employees at equivalent salary grade levels) who are receiving a service or disability pension under the AT&T Management Pension Plan and were at equivalent salary grade levels at the time of their retirement, and all former employees who between December 18, 1991 and November 17, 1993, inclusive, were at an employment band of Senior Manager and above (or equivalent salary grade levels) (collectively, the "Participants") pursuant to the terms of certain retirement and nonqualified plans or arrangements presently or hereafter identified in Schedule A to this Agreement (hereinafter the "Plan" or "Plans"); and WHEREAS, the Company desires to provide additional assurance to such Participants and their surviving spouses, beneficiaries or estates under the Plans (collectively, the "Beneficiaries") that their unfunded retirement rights and benefit entitlements under the Plans will in the future be met or substantially met by application of the procedures set forth herein; and WHEREAS, the Company wishes to establish separate accounts which will include investment earnings and adjustments for charges, expenses and cash flow on assets attributable with respect to the contributions to each such account (hereinafter the "Accounts") with respect to each Plan or group of Plans (as identified in Schedule A) in order to provide a source of payments under the terms of such Plans; and WHEREAS, amounts credited to each Account, as determined by the Company from time to time in its sole discretion, other than during a Potential Change in Control Period and upon a Change in Control, and the earnings thereon shall be used by the Trustee solely in satisfaction of the liabilities of the Company with respect to the Participants and the Beneficiaries in the Plans covered under the respective Accounts, and expenses as provided herein, and such utilization shall be in accordance with the procedures set forth herein; and WHEREAS, the Company desires to grant additional powers to the Trustee during a Potential Change in Control Period and upon a Change in Control in order to provide the Participants and their Beneficiaries with some measure of security during those events; and WHEREAS, except as expressly provided in this Agreement, upon satisfaction of all liabilities of the Company with respect to Participants and their Beneficiaries payable from a particular Account, the balance, if any, remaining in such Account shall be allocated to other Accounts established under this Agreement in accordance with the procedures set forth herein; and WHEREAS, except as otherwise expressly provided in this Agreement, upon satisfaction of all liabilities of the Company with respect to all Participants, and their Beneficiaries under the Plans, the balance, if any, remaining in the Accounts shall revert to the Company, provided, however, that all amounts in such Accounts shall at all times be subject under this Agreement to the claims of the Company's creditors as hereinafter provided; NOW, THEREFORE, in consideration of the premises and mutual and independent promises herein, the parties hereto covenant and agree to amend and restate their Agreement as follows: ARTICLE I Establishment of Trust 1.1 The Company hereby establishes with the Trustee a Trust consisting of such sums of cash, marketable securities and such other property acceptable to the Trustee as shall, in accordance with Article II, be paid or delivered to the Trustee and the earnings and profits thereon. All such cash, marketable securities and other property, all investments made therewith and proceeds thereof, less the payments or other distributions which, at the time of reference, shall have been made by the Trustee, as authorized herein, are referred to herein as the "Trust Fund" and shall be held by the Trustee, IN TRUST, in accordance with the provisions of this Agreement. 1.2 The Trustee shall hold, manage, invest and otherwise administer the Trust Fund pursuant to the terms of this Agreement. The Trustee shall be responsible for contributions actually received by it and such other obligations as it undertakes hereunder. The amount of each contribution by the Company to the Trust Fund shall be determined in the sole discretion of the Company, subject to the terms of this Agreement requiring contributions during a Potential Change in Control Period and upon a Change in Control (as each term is defined in Section 2.7 of this Agreement). 1.3 Subject to the provisions of Article X of this Agreement, the Company and the Trustee agree that the Trust created herein shall not be revocable by the Company. The Trust established hereunder is intended to be a grantor trust within the meaning of Section 671 of the Internal Revenue Code of 1986, as thereafter amended, and all property contributed to the Trust and interest and other income earned on the investments of the Trust shall be held in trust in accordance with this Agreement, but shall be considered the property of, and taxable to, the Company. 1.4 To the extent provided in this Agreement, the Trustee shall maintain in an equitable manner a separate bookkeeping Account for each Plan or group of Plans, as provided in Schedule A hereto, in which it shall keep a separate record of the interest of such Participant or Beneficiary under each Plan and Account under the Trust Fund. For purposes of this Agreement, the interest of each Participant and Beneficiary payable from the Trust Fund with respect to any Plan shall be determined by multiplying the Participant's or Beneficiary's vested benefit under the Plan (as of the date the Participant and Beneficiary becomes entitled to payments under the Plan) by the ratio obtained by dividing the total assets for the Account (as determined in accordance with Article IV of this Agreement) in which the Plan is included by the total vested liabilities for all Plans included within such Account. The Company's Corporate Vice President - Investment Management, shall certify to the Trustee at the time of each contribution to the Trust Fund the amount of such contribution being made in respect of each Account established under this Agreement. If the Trust Fund receives contributions in excess of the amounts initially contributed pursuant to Section 2.1, the Trust Fund shall be revalued by the Trustee as of the last business day of each calendar quarter (or more frequently, at the request of the Company) at current market values, as determined by the Trustee. At the discretion of the Company, each Participant in each Plan with respect to which an Account has been established or his Beneficiary shall be entitled to receive from the Company, or such person as is designated by the Company ("delegate"), a semi-annual statement of his entitlement with respect to each such Plan and Account. During a Potential Change in Control Period and upon a Change in Control, such statements shall be provided on a quarterly basis and shall be required to be sent by the Trustee to such Participants (or their Beneficiaries, if applicable). ARTICLE II Funding of the Trust 2.1 Concurrently with the execution of this Trust, the Company is delivering to the Trustee, to be held in trust hereunder, the sum of one-hundred dollars ($100) in cash with respect to each of the Plans identified in Schedule A hereto to be administered and disposed of by the Trustee as provided herein. In addition, subject to Section 2.2, the Company may from time to time contribute additional cash, marketable securities (including securities of the Company) or other property reasonably acceptable to the Trustee to be allocated between and among the Accounts as designated by the Company's Corporate Vice President - Investment Management. 2.2 Concurrently with the execution of this Trust and thereafter in accordance with Section 4.3, the Company shall provide to the Trustee all reasonably required information necessary for the Trustee to determine the Company's (and its affiliates') liabilities and obligations under the Plans and shall update such information from time to time as requested by the Trustee. If the Company does not provide updated information to the Trustee within a reasonable period of time following any request, the Trustee shall use its best estimate to determine the Company's (and its affiliates') obligations and liabilities under the Plans. The Trustee shall be protected in determining the amount of the Company's (and its affiliates') obligations and liabilities under the Plans so long as the Trustee acts in good faith in arriving at its best estimate. The Trustee shall not perform any calculations with respect to such information unless directed to do so by the Company, but shall be required to perform such calculations during a Potential Change in Control Period and upon a Change in Control as provided herein. Upon the occurrence of a Potential Change in Control and a Change in Control, the Trustee shall determine, in accordance with Section 2.5 hereof, based upon the last valuation available to the Trustee with respect to the vested and nonvested liabilities of the Company (and its affiliates) under the Plans, the aggregate amount which will be sufficient to fund the Company's (and its affiliates') obligations and liabilities to pay the vested and nonvested benefits due to Participants or Beneficiaries pursuant to the Plans, plus the amount of one million dollars ($1,000,000) to provide for expenses, including, but not limited to, legal expenses, administrative expenses, and other costs of maintaining the Trust Fund (the aggregate amount necessary to fund the Company's and its affiliates' liabilities under the Plans and the expense amount shall collectively be referred to herein as the "Full Funding Amount" and is more fully defined in Section 2.5 of this Agreement). The determination by the Trustee shall include reasonable estimates and adjustments for events occurring subsequent to such last valuation. The Trustee shall give notice to the Company of such Full Funding Amount as soon as possible but in any event not later than fifteen (15) days after each occurrence of a Potential Change in Control and a Change in Control. Not later than thirty (30) days after each occurrence of a Potential Change in Control and a Change in Control, the Company shall deliver to the Trustee an amount of cash (or marketable securities acceptable to the Trustee and having a fair market value equal to such amount as determined by the Trustee, or some combination thereof) equal to the Full Funding Amount. 2.3 During a Potential Change in Control Period and upon a Change in Control, the Trustee shall, every three months from the last day of the month in which occurs each such Potential Change in Control and Change in Control, whichever is applicable, unless the Full Funding Amount shall theretofore have been returned to the Company pursuant to Article III hereof, recalculate the Full Funding Amount as of the end of the month immediately preceding such three-month interval date as if the Potential Change in Control or Change in Control had occurred at the end of such month. Not later than thirty (30) days after each three-month interval date, the Trustee shall give notice to the Company as to the fair market value of assets then held in the Trust as of the end of such three-month interval date. As soon as possible following completion of the recalculation but in any event not later than forty-five (45) days after each three-month interval date, the Trustee shall give notice to the Company of (i) such recalculated Full Funding Amount, (ii) the additional payment to the Trustee (if any) required from the Company by the following sentence, (iii) the distribution to the Company (if any) required from the Trustee upon the Company's written request pursuant to the last sentence of Section 2.4 hereof, and (iv) all information required to be set forth in any currently-required Payment Schedule described in Section 2.6 hereof. If such recalculated Full Funding Amount exceeds the fair market value of the assets then held in the Trust as determined by the Trustee, the Company shall promptly (and in no event later than ten (10) days from the date of notice of any underfunding from the Trustee) pay to the Trustee an amount in cash (or marketable securities (including securities of the Company) reasonably acceptable to the Trustee or any combination thereof) equal to such underfunding. The Trustee shall have the duty, obligation and authority, by whatever means necessary, including, without limitation, by means of commencing a lawsuit against the Company, to collect any part of such amount which the Company fails to contribute to the Trust Fund in a timely manner. 2.4 Notwithstanding the foregoing, if, other than during a Potential Change in Control Period and prior to a Change in Control, the fair market value of the assets then held in the Trust, as determined by the Trustee in its sole discretion, is more than 125 percent of any such recalculated Full Funding Amount, exclusive of the $1,000,000 for expenses as more fully described in Section 2.2 hereof, the Trustee, upon receipt of a written request from the Company's Corporate Vice President - Investment Management, shall distribute to the Company such requested amount in excess of 125 percent of the Full Funding Amount, exclusive of the $1,000,000 for expenses ("Excess Funds"). During a Potential Change in Control Period and upon the occurrence of a Change in Control, Excess Funds, if any, shall be used and applied by the Trustee to expenses and other costs of maintaining the Trust Fund and shall not be returned to the Company. 2.5 The Full Funding Amount, based on the best information available (including, when necessary, estimates and forecasts) to the Trustee, shall be an amount equal to the net present value of the amount of any vested and nonvested payments, including any payments that would be accelerated by reason of any potential or actual change in control (as defined in the respective Plans), under the Plans determined, to the extent applicable, as if the potential or actual change in control referred to therein had occurred on the date as of which the Full Funding Amount is calculated, and shall include an additional sum of one million dollars ($1,000,000) as described in Section 2.2 of this Agreement. For the purpose of calculating the Full Funding Amount (other than the one million dollar ($1,000,000) portion for expenses), all Participants who have previously retired or terminated from the active employment of the Company and its affiliates shall be assumed to have retired (if eligible) or terminated employment on the date of the Potential Change in Control or Change in Control. Net present value and liabilities under the Plans shall be determined in a manner consistent with the assumptions utilized by the Company under the Company's qualified defined benefit pension plan applicable to management employees (the "Pension Plan"), unless the terms of a specific Plan direct use of different assumptions, in which case such different assumptions shall be used solely with respect to the Plan to which they pertain. During a Potential Change in Control Period and upon a Change in Control, the Pension Plan or Plan assumptions utilized immediately prior to the Potential Change in Control or Change in Control, as the case may be, shall remain in effect for the duration of this Agreement, unless assumptions resulting in a greater benefit to Participants under the Plans are uniformly adopted with respect to the Pension Plan or Plans, in which case the latter assumptions shall be utilized for purposes of this Agreement. 2.6 Contemporaneously with each payment by the Company pursuant to Section 2.1, or 2.3 hereof (other than the initial payment of one-hundred dollars ($100) for each of the Plans), the Company shall deliver Payment Schedules (containing information with respect to a Participant's or Beneficiary's entitlement under the Plans, as described in Section 2.5 hereof) to each Participant, Beneficiary (if applicable) and the Trustee; provided, however, that at the request of the Company, or during a Potential Change in Control Period and upon a Change in Control, the Trustee shall prepare and deliver such Payment Schedules to Participants (or their Beneficiaries, if applicable) and to the Company. 2.7 For purposes of this Agreement, the terms set forth below shall be defined as follows: (a) "Change in Control" shall mean the occurrence of any of the following events: (1) an acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any "Person" (which shall mean any "person" or "group," in each case within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act") immediately after which such Person is a "Beneficial Owner" (within the meaning of Rule 13d-3 promulgated under the 1934 Act, provided, however, that such Person shall be deemed to be the "Beneficial Owner" of all shares that any such Person has the right to acquire pursuant to any agreement, arrangement or understanding or upon exercise of conversion rights, warrants, options or otherwise, without regard to the sixty day period referred to in such Rule) of twenty percent (20%) or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, in determining whether a Change in Control has occurred, Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (A) an employee benefit plan (or a trust forming a part thereof) maintained by (i) the Company or (ii) any corporation or other Person of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by the Company (a "Subsidiary"), (B) the Company or any Subsidiary, or (C) any Person in connection with a "Non-Control Transaction" (as defined below). For purposes of this Agreement, the entities identified in Subparagraphs "(A)", "(B)" and "(C)" of this Section 2.7(a)(1) shall be referred to as "Related Persons." (2) The date when the individuals who, as of the date hereof, are members of the Board of Directors (the "Board") of the Company (the "Incumbent Board"), cease for any reason to constitute at least two-thirds of the Board; provided, however, that if the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement be considered as a member of the Incumbent Board; provided, further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 of Regulation 14A promulgated under the 1934 Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or (3) Approval by stockholders of the Company of: (A) A merger, consolidation or reorganization involving the Company, unless (i) the stockholders of the Company immediately before such merger, consolidation or reorganization own, directly or indirectly immediately following such merger, consolidation or reorganization, at least seventy-five percent (75%) of the combined voting power of the outstanding voting securities of the corporation resulting from such merger, consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization; (ii) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least two-thirds of the members of the board of directors of the Surviving Corporation; (iii) no Person (other than the Company or any Subsidiary, any employee benefit plan or any trust forming a part thereof) maintained by the Company, the Surviving Corporation or any Subsidiary, or any Person who, immediately prior to such merger, consolidation or reorganization had Beneficial Ownership of fifteen percent (15%) or more of the then outstanding Voting Securities) has Beneficial Ownership of fifteen percent (15%) or more of the combined voting power of the Surviving Corporation's then outstanding voting securities; and (iv) for purposes of this Agreement, the immediately preceding Subparagraphs (i) through (iii), inclusive, shall be referred to as a "Non-Control Transaction". (B) A liquidation or dissolution of the Company; or (C) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary). Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company which, by reducing the number of Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional Voting Securities which increases the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur. (b) "Potential Change in Control" shall mean the occurrence of any of the following events: (1) when any Person (including the Company) publicly announces an intention (A) to acquire five percent (5%) or more of the then outstanding Voting Securities, provided such acquisition is not by a Related Person or (B) to merge or consolidate the Company with another entity, transfer or sell assets of the Company, or liquidate or dissolve the Company, in each case described in this clause (B) in a transaction that would, if completed, constitute a Change in Control; or (2) when any Person other than a Related Person, (A) acquires five percent (5%) or more of the then outstanding Voting Securities, other than as a holder whose investment in the Company is eligible to be reported on Schedule 13G pursuant to Rule 13d-1(b)(1) promulgated under the 1934 Act (hereinafter, the "Eligible Person"), or (B) initiates a tender or exchange offer to acquire such number of Voting Securities as would result in such Person holding twenty percent (20%) or more of the then outstanding Voting Securities, or (C) solicits proxies for votes to elect members of the Board of Directors at a shareholders' meeting of the Company. (c) "Potential Change in Control Period" shall mean the period commencing on the date that a Potential Change in Control has occurred and ending upon: (1) the date any Person who made an announcement referred to in Subparagraph (b)(1) of this Section 2.7 publicly announces he no longer intends to take or is no longer considering the taking of such actions; (2) the date the Person referred to in Subparagraph (b)(1)(A) of this Section 2.7 qualifies as an Eligible Person; (3) the date when any Person described in Subparagraph (b)(2) of this Section 2.7, (A) shall own less than five percent (5%) of the then outstanding Voting Securities, (B) shall have abandoned the tender or exchange offer, or (C) following a shareholders' meeting, shall not have elected a member of the Board, as the case may be; or (4) the date a Change in Control occurs. 2.8 The Board or the Chief Executive Officer of the Company shall notify the Trustee in writing of each occurrence of a Potential Change in Control and Change in Control. All such notices shall be provided promptly and in any event not later than five (5) days following the occurrence of such event. Notwithstanding the foregoing, the Trustee shall be responsible for ascertaining whether a Potential Change in Control and a Change in Control has occurred and the duration of the Potential Change in Control Period. The Trustee may rely on such methods as are available to obtain notice, including reference to periodicals of general circulation such as The Wall Street Journal and The New York Times to determine whether a Potential Change in Control or Change in Control has occurred and the duration of the Potential Change in Control Period and the Company will provide to the Trustee, in a timely manner, any Proxy Statements, Solicitation/Recommendation Statement on 14D-9 Schedules, and information statements pursuant to Rule 14(f) of the 1934 Act, to the extent that the Company has filed such documents pursuant to the federal securities laws and copies of any initial filings and amendments thereto that the Company receives pursuant to Sections 13(d) and 14(d) of the 1934 Act. 2.9 The Trustee shall be required to determine when the Potential Change in Control Period has ended. Such determination may be made in the same manner as provided in Section 2.8 of this Agreement. The determination as to the end of a Potential Change in Control Period shall result in the obligations of the parties hereto reverting to their pre-Potential Change in Control requirements. Nothing contained in this Section 2.9 shall relieve any person of any of its obligations under this Agreement upon a Change in Control. ARTICLE III Trust Assets Subject to Creditors 3.1 Notwithstanding any provision in this Agreement to the contrary, if at any time while the Trust is still in existence the Company becomes insolvent (as defined herein), the Trustee shall suspend the payment of all benefits from the Trust Fund and shall thereafter hold the Trust Fund in suspense until it receives a court order directing the disposition of the Fund; provided, however, the Trustee may deduct its fees and expenses and other expenses of the Trust, including taxes and the fees and expenses of any person retained by the Trustee in connection with its administration of the Trust Fund, pending the receipt of such court order. The Company shall be considered to be insolvent if (a) it is unable to pay its debts as they fall due or (b) bankruptcy or insolvency proceedings are initiated against it by its creditors or by the Company or any third party under the Bankruptcy Act of the United States or the bankruptcy laws of any State alleging that the Company is insolvent or bankrupt. By its approval and execution of this Agreement, the Company represents and agrees that its Board of Directors and Chief Executive Officer, as from time to time acting, shall have the fiduciary duty and responsibility on behalf of the Company's creditors to give to the Trustee prompt written notice of any event of the Company's insolvency and the Trustee shall be entitled to rely thereon to the exclusion of all directions or claims to pay benefits thereafter made. If, after an event of insolvency, the Company later becomes solvent without the entry of a court order concerning the disposition of the Trust Fund, the Company shall by written notice so inform the Trustee and the Trustee shall thereupon resume all its duties and responsibilities under this Agreement without regard for this Section 3.1 until and unless the Company again becomes insolvent as such term is defined herein. 3.2 The Company represents and agrees that the Trust established under this Agreement does not fund and is not intended to fund the Plans or any other employee benefit plan or program of the Company. Such Trust is intended to be a depository arrangement with the Trustee for the setting aside of cash and other assets of the Company for the meeting of part or all of its future retirement, death, disability or other obligations to the Participants and their Beneficiaries under the Plans. The purpose of this Trust is to provide a source of funds from which Plan Participants and their Beneficiaries may receive certain retirement, death, disability and deferred benefits under the Plans payable from the respective Accounts hereunder. Further, by following the procedures set forth herein, Plan Participants and Beneficiaries may have access to some or all of their benefits under the Plans as such benefits become due without having the payment of such benefits subject to the administrative control of the Company unless the Company becomes insolvent as defined in Section 3.1. Nothing in this Agreement shall in any way diminish the rights of any Participant or Beneficiary to pursue rights of a general creditor with respect to amounts payable pursuant to the Plans. The Company represents that the Plans are not qualified nor are they intended to qualify under Section 401 of the Internal Revenue Code of 1986 and therefore are not subject to any of the Internal Revenue Code requirements applicable solely to tax-qualified plans. ARTICLE IV Trust Fund Administration 4.1 Except for the records dealing solely with the Trust Fund and its investment, which shall be maintained by the Trustee, the Trustee shall be furnished by the Company with and shall maintain such Participant records necessary to perform its obligations under this Agreement; provided, however, that in the absence of such records, the Trustee shall be entitled under this Agreement to rely on the most recent information and data that is available or as may be provided by the Participant or Beneficiary. At the request of the Company, or, during a Potential Change in Control Period and upon a Change in Control, the Trustee shall also prepare and distribute Participants' statements and shall be responsible for providing information with respect to payments to Participants and their Beneficiaries and shall perform such other duties and responsibilities as set forth in this Agreement or as otherwise determined by the Trustee as necessary or advisable consistent with the purposes of this Trust. 4.2 Upon contribution by the Company to the Trust (other than for the initial contribution as provided in Section 2.1), or as soon thereafter as practicable but in any event not later than 30 days after a Potential Change in Control and a Change in Control, the Company shall furnish to the Trustee all information necessary for the Trustee to determine the Company's (and each of its affiliates') separate liabilities and obligations under the Plans with respect to each Participant in each Plan, including any benefits payable after the Participant's death and the recipient of same. During a Potential Change in Control Period and a Change in Control, the Company shall regularly, at least quarterly, furnish revised updated information to the Trustee. Based on the foregoing information, at the request of the Company or during a Potential Change in Control Period and upon a Change in Control, the Trustee shall prepare an annual estimated benefits statement in respect of each Participant and shall furnish a copy of same to the Participant or his Beneficiary and to the Company. In the event the Company refuses or neglects to provide updated Participant information, as contemplated herein, the Trustee shall be entitled to rely upon the most recent information furnished to it by the Company or a Participant (or Beneficiary) and may make appropriate adjustments for events occurring subsequent to the date with respect to which the most recent information pertains. 4.3 Upon the written direction of the Company's Executive Human Resources Department to the Trustee that a Participant's benefits under a Plan have become payable or, if the Company's Executive Human Resources Department fails to provide such notification within twenty (20) days of the event entitling the Participant to a distribution, upon the written direction to the Trustee and the Company by the Participant or Beneficiary of a deceased Participant, the Trustee, upon review of the Plans and such other information as it shall deem relevant and determination by the Trustee that such amount is properly payable under the Plans, shall prepare a certification to the Company and Participant that a Participant's benefits under a Plan have become payable. Such certification shall include the amount of such benefits, the manner of payment and the name, address and social security number of the recipient and, to the extent necessary, shall be updated quarterly or upon receipt by the Trustee of a notice of a benefit change under a Plan from the Company. Upon the Trustee's determination of the amount payable from the Trust Fund (in accordance with the method described in Section 1.4 of this Agreement) and the appropriate federal, state and local tax amount to be withheld from such amount, the Trustee shall commence distributions from the Trust Fund in accordance with the terms of the applicable Plan to the person or persons so indicated and to the Company with respect to taxes required to be withheld and the Trustee shall charge the Accounts established hereunder for the Participant's benefits and tax payments; provided, however, that in the event the Company notifies the Trustee that a Participant is entitled under one or more of the Plans to receive a distribution in the form of shares of stock of the Company, or the Trustee makes such determination, the Trustee shall distribute stock of the Company from the assets of the Trust Fund or may purchase, on the open market or from the Company, as determined by the Trustee, at fair market value, the requisite number of shares with the cash distribution to the Participant attributable to the Plan requiring distribution in shares of Company stock. The Trustee shall deliver the shares to the Participant as soon as practicable following the purchase and registration of such shares in the name of the Participant. The Company shall have full responsibility for the payment of all withholding taxes to the appropriate taxing authority and shall furnish each Participant or Beneficiary and the Trustee with the appropriate tax information form evidencing such payment and the amount thereof. The Trustee shall also furnish a copy of the tax withholding certification to the Participant or to the Beneficiary of a deceased Participant. 4.4 All benefits payable from the Trust Fund to a Participant or his Beneficiary under any Plan shall be paid solely from the Account within this Trust Fund in which such Plan has been assigned by the Company as described in Schedule A to this Agreement. Upon the satisfaction of all vested liabilities under a specific Account in respect of Participants and Beneficiaries for whom Plan benefits are payable from such Account, the Company's Corporate Vice President - Investment Management shall prepare a certification to the Trustee showing the balance, if any, remaining in the particular Account attributable to the Plans covered by or under such Account. Such balance shall thereupon be reallocated ratably by the Company's Corporate Vice President - Investment Management to the remaining Account under this Agreement in the ratio that unfunded vested liabilities in respect of each such Participant and Beneficiary payable from such other Account bear to the total unfunded vested liabilities to all such Participants and Beneficiaries payable from such other Account. Upon the satisfaction of all vested and nonvested liabilities of the Company (and its affiliates) under the Accounts for Participants and Beneficiaries, the Company's Corporate Vice President - Investment Management shall prepare a certification to the Trustee, verified by the Trustee, and the Trustee shall thereupon hold or distribute the Trust Funds in accordance with the written instructions of the Company's Vice President - Investment Management. The Company shall not be entitled to a return of assets contributed to the Trust Fund prior to the Company's insolvency, as defined in Section 3.1, except in the following limited circumstances: (a) upon termination of this Agreement pursuant to Article X; (b) upon the existence of Excess Funds, to the limited extent described in Section 2.4, and then only to the extent of such Excess Funds; (c) upon the satisfaction of all vested liabilities of the Company (and its affiliates') under the Plans in respect of Participants and Beneficiaries eligible for payment from the Accounts hereunder; or (d) upon conclusion of the Potential Change in Control Period (provided that a Change in Control has not occurred), but only to the extent of amounts contributed on or after the occurrence of the Potential Change in Control and any earnings thereon. The Trustee shall have no responsibility for determining whether any Participant or Beneficiary has died and shall be entitled to reasonably rely upon information furnished by the Company. All certifications and reallocations required to be performed by the Company under this Section 4.5 shall be performed by the Trustee during a Potential Change in Control Period and upon a Change in Control or at any time upon request of the Company. In the event the Trustee is to provide certifications or reallocations under this Section 4.5, all notices and information otherwise shall also be provided to the Company. 4.5 (a) The Company reserves the right to transfer to the Trust Fund paid-up life insurance, retirement income or annuity policies or contracts on or for the life or lives of any Participant or Participants eligible for benefits from an Account established hereunder, or to direct the Trustee to purchase any such policies or contracts on or for the life or lives of any such Participant or Participants out of the amounts credited under one or more of the Accounts. The Trustee shall hold such policies or contracts, and each Beneficiary designation under such policies or contracts shall indicate the name of the Trustee or its successors. Any such policy or contract shall be an asset of the Trust Fund subject to the claims of the Company's creditors in the event of insolvency, as specified in Section 3.1. The proceeds of any life insurance policy shall upon the death of the insured Participant be credited to the Accounts established under this Agreement ratably by the Trustee in the ratio that unfunded liabilities (as determined pursuant to Section 2.5) in respect to each such Participant and Beneficiary payable from an Account bear to the total unfunded liabilities to all such Participants and Beneficiaries payable from all such Accounts, or, upon direction by the Company's Corporate Vice President - Investment Management, may be used by the Trustee to purchase additional life insurance as described herein, and shall be an additional source of benefits, if any, available for payment to Participants and Beneficiaries or estates as provided under the respective Plan or Plans. If, upon the death of the Participant, the balance remaining to the credit of such Participant in an Account is not required to be paid to the Participant's Beneficiary or estate under the terms of the Plan, such balance shall be reallocated to other Participants eligible for benefits from the Accounts in accordance with Section 4.5. (b) Premium notices with respect to policies owned by the Trustee shall be delivered by the insurance carrier to the Trustee, with a copy to the Company. Premiums on policies owned by the Trustee may be paid out of contributions to the Trust Fund by the Company, or, at the request of the Company, paid directly by the Company. All policies and/or annuity contacts held by the Trustee shall be endorsed, to the extent available, to provide for an "Automatic Premium Loan" against the cash values thereof in the event of any default in the payment of premiums thereon. If any premium due on any insurance policy owned by the Trustee is not otherwise fully paid or waived by the premium due date, the Trustee may in its sole discretion pay that premium or any portion thereof ratably from funds available in the Trust Fund. If the Trustee determines that the amount in the Trust Fund is insufficient to pay the full premium or elects not to reduce the assets of the Trust Fund by the amount of premium required, the Trustee shall immediately notify the Company of the insufficiency or unpaid amount, and shall afford the Company the opportunity to pay such premium. If the Company fails to pay all of the insufficiency or unpaid amount within five days after the premium due date, the Trustee shall have no further obligation with respect to such policy. 4.6 Nothing provided in this Agreement shall relieve the Company of its liabilities to pay the retirement, death, disability, deferred or other benefits provided under the Plans except to the extent such liabilities are met by application of Trust Fund assets. It is the intent of the Company to provide that the assets attributable to each Account established hereunder shall satisfy in whole or in part the Company's legal liability under the Plans in respect of the Participant for whom such Account has been established. ARTICLE V Notices to Trustee 5.1 The Company shall provide the Trustee with a certified copy of the Plans at the time of execution of this Agreement and shall deliver copies of all amendments thereto and of the resolutions of the Board approving all amendments thereto, promptly upon their adoption. After the execution of this Agreement, the Company shall promptly file with the Trustee a certified list of the names and specimen signatures of the officers of the Company and any delegate authorized to act for it and the names of all Participants and Beneficiaries. The Company shall promptly notify the Trustee of the addition or deletion of any person's name to or from such list, respectively. Until receipt by the Trustee of notice that any person is no longer authorized so to act, the Trustee may continue to rely on the authority of the person. All certifications, notices and directions by any such person or persons to the Trustee shall be in writing signed by such person or persons. The Trustee may rely on any such certification, notice or direction purporting to have been signed by or on behalf of such person or persons that the Trustee believes to have been signed thereby. The Trustee may rely on any certification, notice or direction of the Company that the Trustee believes to have been signed by a duly authorized officer, agent of the Company or Participant (or Beneficiary of a deceased Participant). The Trustee shall have no responsibility for acting or not acting in reliance upon any notification believed by the Trustee to have been so signed by a duly authorized officer or agent of the Company. The Company shall be responsible for keeping accurate books and records with respect to the employees of the Company, their compensation and their rights and interests in the Trust Fund under the Plans. 5.2 The Company shall make its contributions to the Trust in accordance with the terms of this Agreement and the Trustee shall add such contributions to the Trust Fund, and subject to Section 6.6 hereof, the Trustee shall administer such additional assets in accordance with the terms of this Agreement, including crediting all investment earnings, income on assets and adjustments for charges, expenses and cash flows on assets to the Account in which the contributions subject to such earnings and adjustments have been credited. 5.3 Subject to the provisions of Sections 2.4 and 7.2, to the extent the Company's contribution for expenses of administering the Trust (as provided in Section 2.2) are inadequate to pay the Trustee's fees and expenses, the Company (and its affiliates) shall indemnify and hold harmless the Trustee from and against any and all claims, liabilities or expense, including without limitation, advances for or prompt reimbursement of reasonable fees and expenses of counsel and other agents retained by it, incurred by the Trustee with respect to holding, managing, investing, the taking or refraining from taking any actions hereunder or otherwise administering the Trust Fund, other than by its negligence or willful misconduct. ARTICLE VI Trust Investments 6.1 The Trustee shall not be liable in discharging its duties hereunder, including without limitation its duty to invest and reinvest the Fund, if it acts without negligence, in good faith and in accordance with the terms of this Agreement and any applicable Federal or state laws, rules or regulations. 6.2 Subject to appointment of an Investment Manager pursuant to Section 6.6, or the Company and the Trustee having mutually agreed in a separate writing that the Trustee shall have and exercise investment discretion with respect to Trust Fund assets, the Company's Corporate Vice President - Investment Management shall have complete discretion with respect to the investment of such assets at all times other than during a Potential Change in Control Period and upon a Change in Control, and shall direct the Trustee accordingly. During a Potential Change in Control Period and upon a Change in Control, the Trustee shall have and exercise sole investment discretion with respect to all assets of the Trust, including the power to appoint or terminate an Investment Manager (who may be an affiliate of the Trustee), as more fully described in Section 6.6. Subject to the foregoing, the Trustee (or the Company's Corporate Vice President - Investment Management or Investment Manager, to the extent applicable) shall have the power in investing and reinvesting the Trust Fund in its sole discretion: (a) To invest and reinvest in any property, real, personal or mixed, wherever situated and whether or not productive of income or consisting of wasting assets, including without limitation, common and preferred stocks, bonds, notes, debentures (including convertible stocks and securities but not including any stock or security of the Trustee, an Investment Manager (as provided in Section 6.6 of this Agreement) or any affiliate thereof), leaseholds, mortgages, certificates of deposit or demand or time deposits (including any such deposits with the Trustee), shares of investment companies and mutual funds, interests in partnerships and trusts, insurance policies and annuity contracts (in accordance with Section 4.6 hereof), and oil, mineral or gas properties, royalties, interests or rights, without being limited to the classes of property in which trustees are authorized to invest by any law or any rule of court of any state and without regard to the proportion any such property may bear to the entire amount of the Trust Fund; (b) To invest and reinvest all or any portion of the Trust Fund collectively through the medium of any common, collective or commingled trust fund that may be established and maintained by the Trustee, subject to the instrument or instruments establishing such trust fund or funds and with the terms of such instrument or instruments, as from time to time amended, being incorporated into this Agreement to the extent of the equitable share of the fund in any such common, collective or commingled trust fund; (c) To retain any property at any time received by the Trustee; (d) To sell or exchange any property held by it at public or private sale, for cash or on credit, to grant and exercise options for the purchase or exchange thereof, to exercise all conversion or subscription rights pertaining to any such property and to enter into any covenant or agreement to purchase any property in the future; (e) To participate in any plan of reorganization, consolidation, merger, combination, liquidation or other similar plan relating to property held by it and to consent to or oppose any such plan or any action thereunder or any contract, lease, mortgage, purchase, sale or other action by any person; (f) To deposit any property held by it with any protective, reorganization or similar committee, to delegate discretionary power thereto, and to pay part of the expenses and compensation thereof and any assessments levied with respect to any such property so deposited; (g) To extend the time of payment of any obligation held by it; (h) To hold uninvested any moneys received by it, without liability for interest thereon, until such moneys shall be invested, reinvested or disbursed; (i) To exercise all voting or other rights with respect to any property held by it and to grant proxies, discretionary or otherwise; (j) To manage, administer, operate, insure, repair, improve, develop, preserve, mortgage, lease or otherwise deal with, for any period, any real property or any oil, mineral or gas properties, royalties, interests or rights held by it directly or through any corporation, either alone or by joining with others, using other Trust assets for any such purposes, to modify, extend, renew, waive or otherwise adjust any provision of any such mortgage or lease and to make provision for amortization of the investment in or depreciation of the value of such property; (k) To employ suitable agents and counsel, who may be counsel to the Company or the Trustee, and to pay their reasonable expenses and compensation from the Trust Fund to the extent not paid by the Company; (l) To cause any property held by it to be registered and held in the name of one or more nominees, with or without the addition of words indicating that such securities are held in a fiduciary capacity, and to hold securities in bearer form; (m) To settle compromise or submit to arbitration any claims, debts or damages due or owing to or from the Trust, respectively, to commence or defend suits or legal proceedings to protect any interest of the Trust, and to represent the Trust in all suits or legal proceedings in any court or before any other body or tribunal; provided, however, that the Trustee shall not be required to take any such action unless it shall have been indemnified by the Company to its reasonable satisfaction against liability or expenses it might incur therefrom; (n) To organize under the laws of any state a corporation or trust for the purpose of acquiring and holding title to any property which it is authorized to acquire hereunder and to exercise with respect thereto any or all of the powers set forth herein; (o) To appoint or discharge an Investment Manager (as provided in Section 6.6); (p) Upon reasonable notice, to acquire the assets in the Trust Fund, in whole or in part, by substituting assets of equal or greater value and investment quality to such assets reacquired, provided such substitute assets may properly be held by the Trustee under the terms of this Agreement. No substitution of assets shall be permitted unless, immediately following such substitution, all Plans funded pursuant to Section 2.2 of this Agreement are funded at an amount equal to or greater than the funded amount immediately prior to such substitution of assets; (q) To use Trust Fund assets to purchase shares of Company stock; provided, that shares of Company Stock shall not become assets of the Trust Fund unless such shares would be treated as issued and outstanding under the laws of the Company's state of incorporation; and (r) To invest and reinvest all or any portion of the Trust Fund in futures and option contracts in accordance with applicable law; and (s) To purchase annuity contracts from a licensed insurance company as an investment for assets of the Trust Fund or for purposes of distributing annuity contracts to Participants and Beneficiaries as provided under the Plans; and (t) Generally, to do all acts, whether or not expressly authorized, that the Trustee (or the Company or Investment Manager, to the extent applicable) may deem necessary or desirable for the protection of the Trust Fund; and (u) To invest the assets of the Trust Fund in such other investments as may be permitted by applicable law, provided such investments are consistent with the intent and purpose of the Trust. 6.3 No person dealing with the Trustee shall be under any obligation to see to the proper application of any money paid or property delivered to the Trustee or to inquire into the Trustee's authority as to any transaction. 6.4 (a) The Trustee shall distribute cash or property from the Trust Fund in accordance with Article IV hereof. (b) The Trustee may make any distribution required hereunder by mailing its check for the specified amount, or delivering the specified property, to the person to whom such distribution or payment is to be made, at such address as may have been last furnished to the Trustee, or if no such address shall have been so furnished, if so directed by the Company, by crediting the account of such person or by transferring funds to such person's account by bank or wire transfer. 6.5 If at any time there is no person authorized to act under this Agreement in behalf of the Company, the Board or its delegate shall have the authority to act hereunder. 6.6 (a) The Company's Corporate Vice President - Investment Management (other than during a Potential Change in Control Period and upon a Change in Control) or the Trustee (during a Potential Change in Control Period and upon a Change in Control) may from time to time in the exercise of their fiduciary responsibilities under this Agreement appoint one or more Investment Managers to manage all or any portion of the Trust Fund and, with respect to such portion, to direct the Trustee with respect to effecting investment transactions on behalf of the Trust Fund and exercising such other powers as may be granted to Investment Managers hereunder. Other than during a Potential Change in Control Period and upon a Change in Control, the Company's Corporate Vice President - Investment Management shall give prompt written notice to the Trustee of any such appointment, upon which the Trustee shall rely until it receives from the Company's Corporate Vice President - Investment Management written notice of the termination of such appointment. In each case where such an appointment is made, the Company's Corporate Vice President - Investment Management or the Trustee, as the case may be, shall determine the assets of the Trust Fund to be allocated to the Investment Manager from time to time and the Company's Corporate Vice President - Investment Management, if applicable, shall issue appropriate instructions to the Trustee with respect thereto. (b) For the purpose of this Agreement, the term "Investment Manager" shall mean a person (who shall not be a participant in any of the Plans) or entity described as follows: An investment manager who has been appointed by the Company (or by the Trustee during a Potential Change in Control Period and upon a Change in Control) pursuant to this Agreement to serve as such hereunder and who is and has acknowledged in writing that he is (A) a fiduciary with respect to the Plans; and (B) either (1) an investment advisor registered under the Investment Advisors Act of 1940, (2) a bank, as defined in the Investment Advisors Act of 1940, (3) a state or federally chartered savings bank, savings and loan association or other thrift institution, or (4) an insurance company qualified under the laws of more than one state to manage, acquire or dispose of the assets of the Trust Fund. (c) The appointment of an Investment Manager by the Company's Corporate Vice President - Investment Management shall become effective on the date specified in such authorization but not before delivery of such authorization to the Trustee. (d) Any Investment Manager who is appointed hereunder must furnish the Trustee with a written acknowledgment of the facts set forth in Section 6.6(b). (e) To the extent that the Trust Fund or any portion thereof is subject to the control of an Investment Manager, the Trustee (i) shall not have exclusive management and control over that portion of the Trust Fund; (ii) shall not invest or otherwise manage and control that portion of the Trust Fund which is under the management and control of such Investment Manager; (iii) shall take investment action only upon the written instruction of such Investment Manager; and (iv) shall be subject to the directions of such Investment Manager properly given pursuant to this Agreement. Purchase and sale orders may be placed by such Investment Manager directly with brokers and/or dealers without the intervention of the Trustee, and, in such event, the Trustee's sole obligation shall be to make payment for purchased assets and deliver those assets that have been sold when advised of the transaction. To the extent that an Investment Manager has been appointed by the Company's Corporate Vice President - Investment Management prior to the earlier of a Potential Change in Control Period and a Change in Control, the Trustee shall not have any duty concerning the investment of the portion of the Trust Fund managed by such Investment Manager or to review or make any recommendation of its own with respect to the making or retention of any such investment prior to the earlier of a Potential Change in Control Period and a Change in Control. Thereafter, the Trustee shall have the duty to question the soundness of such Investment Manager's instructions and shall review and make recommendations with respect to investments. The Trustee shall have no liability to any person for any action taken or omitted in accordance with any directions given by the aforementioned Investment Manager, or for the failure of such Investment Manager to give such directions prior to the earlier of a Potential Change in Control Period and a Change in Control. Thereafter, the Trustee shall be liable for any such action or inaction. (f) All restrictions imposed by Article VI upon the Trustee concerning the Trustee's dealings in stock of the Company and the Company's right to direct investments and all duties of care and prudence also shall apply to any Investment Manager. ARTICLE VII Trust Fees and Expenses 7.1 The Company shall pay any Federal, state or local taxes on the Trust Fund, or any part thereof, and on the income therefrom. 7.2 The Company shall pay to the Trustee its reasonable expenses for the management and administration of the Trust Fund, including, without limitation, advances for or prompt reimbursement of reasonable expenses of counsel and other agents employed by the Trustee, and reasonable compensation for its services as Trustee hereunder, the fee schedules of which shall be agreed upon in advance from time to time by the Company's Corporate Vice President - Investment Management and the Trustee in writing. Except as provided below, the Trustee shall not deduct such fees and expenses from the assets of the Trust Fund. During a Potential Change in Control Period or upon a Change in Control, upon failure of the Company to pay such compensation and expenses of the Trustee, the Trustee may satisfy such obligations out of the assets of the Trust Fund, but only to the extent of the assets specifically contributed for the payment of expenses pursuant to Section 2.2 or otherwise allocated for such purpose pursuant to Section 2.4. The Trustee shall not be entitled or permitted to reduce any Participant's benefits payable from an Account for the payment of Trustee expenses. The Company shall remain responsible for all fees and expenses incurred by the Trustee and not otherwise reimbursed from the Trust Fund. ARTICLE VIII Records and Accounting 8.1 The Trustee shall maintain records with respect to the Trust Fund that show all its receipts and disbursements hereunder. The records of the Trustee with respect to the Trust Fund shall be open to inspection by the Company, or its representatives, at all reasonable times during normal business hours of the Trustee and may be audited not more frequently than once each fiscal year by an independent certified public accountant engaged by the Company. 8.2 Within a reasonable time after the close of each fiscal year of the Company (or, in the Company's discretion, at more frequent intervals), or of any termination of the duties of the Trustee hereunder, the Trustee shall prepare and deliver to the Company a statement of transactions reflecting its acts and transactions as Trustee during such fiscal year, portion thereof or during such period from the close of the last fiscal year or last statement period to the termination of the Trustee's duties, respectively, including a statement of the then current value of the Trust Fund. At the request of the Company's Corporate Vice President - Investment Management, the Trustee shall prepare and furnish to the Company a statement of the then current value of each Account and benefit entitlement of each Participant and Beneficiary of any Plan covered by such Account. Any such statement by the Trustee shall be deemed an account stated and accepted and approved by the Company, and the Trustee shall be relieved and discharged, as if such account had been settled and allowed by a judgment or decree of a court of competent jurisdiction, unless protested by written notice to the Trustee within sixty (60) days of receipt thereof by the Company. 8.3 The Trustee shall have the right to apply at any time to a court of competent jurisdiction for judicial settlement of any account of the Trustee not previously settled as herein provided or for the determination of any question of construction or for instructions. In any such action or proceeding it shall be necessary to join as parties only the Trustee and the Company (although the Trustee may also join such other parties as it may deem appropriate), and any judgment or decree entered therein shall be conclusive. ARTICLE IX Resignation, Removal or Replacement of Trustee 9.1 Provided that a Potential Change in Control or a Change in Control has not occurred, the Trustee may resign at any time by delivering written notice thereof to the Company; provided, however, that no such resignation shall take effect until the earlier of (i) sixty (60) days after the date of delivery of such notice to the Company or (ii) the appointment of a successor trustee. 9.2 Provided that a Potential Change in Control or a Change in Control has not occurred, the Trustee may be removed at any time by the Company's Corporate Vice President - Investment Management, upon delivery to the Trustee of a certified copy of such resolution and sixty (60) days' written notice; provided, however, that advance written notice will not be required if (a) such notice period is waived in whole or in part by the Trustee, (b) there has been a breach of fiduciary duty by the Trustee, or (c) there has been a material breach by the Trustee of the terms of this Agreement. 9.3 Provided that a Potential Change in Control or a Change in Control has not occurred, upon the resignation or removal of the Trustee, a successor trustee shall be appointed by the Company's Corporate Vice President - Investment Management. Such successor trustee shall be a bank or trust company (i) established under the laws of the United States or a State within the United States, (ii) authorized to exercise trust powers, (iii) is among the 100 largest banks in the United States, as measured by deposits or assets, (iv) which is not an affiliate of the Company, and (v) which satisfies all minimum capital and surplus requirements imposed by any federal or state law or regulatory agency. Such appointment shall take effect upon the delivery to the Trustee of (a) a written appointment of such successor trustee, duly executed by the Company, and (b) a written acceptance by such successor trustee, duly executed thereby. Any successor trustee shall have all rights, powers and duties granted the Trustee hereunder. 9.4 If, within sixty (60) days after the delivery of the Trustee's written notice of resignation pursuant to Section 9.1 hereof, a successor trustee shall not have been appointed, the Trustee may apply to any court of competent jurisdiction for the appointment of a successor trustee. The date of appointment of a successor trustee shall take effect as provided in Section 9.3. 9.5 During a Potential Change in Control Period and upon a Change in Control, the Company's Corporate Vice President Investment Management shall have no power to remove the Trustee, but following such occurrence the Trustee may be removed and a successor trustee appointed pursuant to the procedures hereinafter set forth in this Section 9.5 or may resign by delivering written notice thereof to the Company; provided, however, that no such removal shall take effect until the effective date of appointment of a successor trustee in accordance with Section 9.3 and no such resignation shall take effect until the later of (i) sixty (60) days after the date of delivery of written notice to the Company or (ii) the effective date of appointment of a successor trustee. The appointment of a successor trustee following the Trustee's resignation or the removal of the Trustee and appointment of a successor trustee, as described above, shall be accomplished by the written agreement of at least sixty-five percent (65%) of the Participants and Beneficiaries (existing at the commencement of a Potential Change in Control Period or on the date of a Change in Control, whichever is applicable) entitled to benefits payable (at that time or in the future) from the Trust Fund and written notice to the Trustee. For purposes of the preceding sentence, a Beneficiary shall be considered in calculating the sixty-five percent (65%) requirement only after the death of the corresponding Participant. An independent bank selected by the Trustee shall tabulate all votes under this Section 9.5 and, upon completion of such tabulation and forwarding of certified results satisfactory to the Trustee that the written agreement of at least sixty-five percent (65%) of all Participants and Beneficiaries has been obtained, the Trustee shall be removed. 9.6 In the event that a successor trustee shall not be appointed pursuant to Section 9.5 hereof within ninety (90) days following the date of delivery of written notice of removal to the Trustee or the date of delivery of written notice of resignation to the Company, the Trustee, in its discretion, either shall appoint a successor trustee or shall apply to a court of competent jurisdiction requesting that such appointment be made. Any successor trustee appointed pursuant to Section 9.5 or this Section 9.6 shall satisfy the successor trustee requirements set forth in Section 9.3 hereof, and such appointment shall take effect upon the delivery to the Trustee and the Company of a written acceptance by such successor trustee, duly executed thereby. Any such successor trustee shall have all the rights, powers and duties granted the Trustee hereunder. 9.7 Upon the removal or resignation of the Trustee and the appointment of a successor trustee, and after the acceptance and approval of the Trustee's account, the Trustee shall transfer and deliver the Trust Fund to such successor together with all records pertaining to the Trust Fund and benefits payable from the Trust Fund. Under no circumstances shall the Trustee transfer or deliver the Trust Fund to any successor which does not satisfy the successor trustee requirements set forth in Section 9.3 hereof. ARTICLE X Termination of Trust 10.1 The Trust established pursuant to this Agreement may not be terminated by the Company prior to the first to occur of (a) satisfaction of all vested and nonvested liabilities with respect to all Participants in the Plans and their Beneficiaries or (b) the twenty-first anniversary of the death of the last survivor of the Participants or Beneficiaries who are in being on the date of this Agreement. A written certification from the Trustee that all liabilities have been satisfied with respect to all Participants in the Plans and their Beneficiaries shall be required prior to termination of the Trust. The Board of Directors may terminate the Trust upon receipt of the Trustee's certification and delivery by the Board of Directors to the Trustee of (a) a certified copy of a resolution of the Board of Directors terminating the Trust, and (b) a written instrument of termination duly executed and acknowledged in the same form as this Agreement. 10.2 Upon the termination of the Trust in accordance with Section 10.1, the Trustee shall, after the acceptance and approval of its account, distribute the Trust Fund to the Company. Upon completing such distribution, the Trustee shall be relieved and discharged. The powers and duties of the Trustee shall continue as long as any part of the Trust Fund remains in its possession. ARTICLE XI Amendment of Trust 11.1 Other than during a Potential Change in Control Period and upon a Change in Control, this Agreement may be amended, in whole or in part, at any time and from time to time, by the Company's Corporate Vice President - Investment Management, with the consent of the Trustee, which consent shall not be withheld unreasonably, pursuant to a written instrument executed by the Company's Corporate Vice President - Investment Management and the Trustee. Notwithstanding the foregoing, prior to a termination of the Trust as and to the extent currently provided for under Article X hereof and subject to the current provisions of Article III hereof, no amendment of this Agreement may be made (either prior to or following a Change in Control) which would have the effect of (i) eliminating or reducing the Company's obligation to make contributions to the Trust Fund in the event of a Potential Change in Control and a Change in Control as set forth under Article II hereof, (ii) except to the extent currently permitted under this Agreement, permitting the use of the assets of the Trust Fund for any purpose other than providing benefits to Participants and Beneficiaries and defraying the reasonable expenses of the Trust as currently contemplated hereunder, or (iii) changing the current definitions of Potential Change in Control, Potential Change in Control Period and Change in Control or altering the current provisions of this Article XI, in each case in a manner which is adverse to the interests of the Participants and Beneficiaries; unless, in each such instance, any such amendment is approved in writing by at least sixty-five percent (65%) of the Participants and Beneficiaries entitled to benefits payable (at that time or in the future) from the Trust Fund. During a Potential Change in Control Period and upon a Change in Control, this Agreement may be amended only by the Trustee with the written agreement of at least sixty-five percent (65%) of the Participants and Beneficiaries (existing at the commencement of a Potential Change in Control Period or on the date of a Change in Control, whichever is applicable) entitled to benefits payable (at that time or in the future) from the Trust Fund. For purposes of the preceding sentences, a Beneficiary shall be considered in calculating the sixty-five percent (65%) requirement only after the death of the corresponding Participant. The Trustee shall tabulate all votes under this Section 11.1 and, upon completion of such tabulation and forwarding of certified results to the Company, the Agreement shall be amended. ARTICLE XII Miscellaneous 12.1 This Agreement shall be construed and interpreted under, and the Trust hereby created shall be governed by the laws of the State of New Jersey without regard to the conflicts of law principles insofar as such laws do not contravene any applicable Federal laws, rules or regulations. 12.2 Neither the gender not the number (singular or plural) of any word shall be construed to exclude another gender or number when a different gender or number would be appropriate. 12.3 No right or interest of any Participant under the Plans in the Trust Fund shall be transferable or assignable or shall be subject to alienation, anticipation or encumbrance, and no right or interest of any Participant or Beneficiary in the Plans or in the Trust Fund shall be subject to any garnishment, attachment or execution. The Trust Fund shall at all times remain subject to claims of creditors of the Company in the event the Company becomes insolvent as provided in Section 3.1. 12.4 The Company agrees that by the establishment of this Trust it hereby foregoes any judicial review of certifications by the Trustee as to the benefit payable to any persons hereunder. If a dispute arises between the Trustee and the Company as to the amounts or timing of any such benefits or the persons entitled thereto under the Plans or this Agreement, the Company agrees that such dispute shall be resolved by binding arbitration proceedings initiated in accordance with the rules of the American Arbitration Association and that the results of such proceedings shall be conclusive and shall not be subject to judicial review. It is expressly understood that pending the resolution of any such dispute payment of benefits shall be made and continued by the Trustee in accordance with the certification of the Trustee and that the Trustee shall have no liability with respect to such payments, provided that such payments under the Plans were reasonable based on all of the facts and circumstances. The Company also agrees to pay the entire cost of any arbitration or legal proceeding initiated under the Trust Fund including the legal fees of the Trustee and the Plan Participant or the Beneficiary of any deceased Plan Participant regardless of the outcome of any such proceeding. 12.5 This Agreement shall be binding upon and inure to the benefit of any successor to the Company or its business as the result of merger, consolidation, reorganization, transfer of assets or otherwise and any subsequent successor thereto shall promptly notify the Trustee in writing of its successorship and furnish the Trustee with the information specified in Section 5.1 of this Agreement. In no event shall any such transaction described herein suspend or delay the rights of Plan Participants or the Beneficiaries of deceased participants to receive benefits hereunder. 12.6 This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which shall together constitute only one Agreement. 12.7 Communications to the Trustee shall be sent to Wachovia Bank of North Carolina, N.A., Employee Benefit Trust Services, 301 North Main Street, Winston-Salem, NC 27150-3099 - Attention: Senior Vice President-Manager of Legal Administration or to such other address as the Trustee may specify in writing. No communication shall be binding upon the Trustee until it is received by the Trustee. Communications to the Company shall be sent to the offices of the Company's Corporate Vice President - Investment Management or to such other address or person as the Company may specify in writing. 12.8 In the event any Participant or his Beneficiary is determined to be subject to Federal income tax on any amount to the credit of his Account under this Agreement prior to the time of payment hereunder, the entire amount determined to be so taxable shall be distributed by the Trustee to such Participant or Beneficiary. An amount to the credit of a Participant's Account shall be determined to be subject to Federal income tax upon the earlier of: (a) a final determination by the United States Internal Revenue Service addressed to the Participant or his Beneficiary which is not appealed to the courts; or (b) a final determination by the United States Tax Court or any other Federal Court affirming any such determination by the Internal Revenue Service. The Company may undertake at its sole expense to defend any tax claims described in this Section which are asserted by the Internal Revenue Service against any Participant or Beneficiary, including attorneys' fees and costs of appeal, and, if the Company undertake to defend, the Company shall have the sole authority to determine whether or not to appeal any determination made by the Internal Revenue Service or by a lower court. The Company shall reimburse any Participant or Beneficiary for any interest or penalties in respect of tax claims hereunder upon receipt of documentation of same. Any distributions from the Trust Fund to a Participant or Beneficiary under this Section 12.8 shall be applied to reduce Company liabilities to such Participant and/or Beneficiary under the Plans. IN WITNESS WHEREOF, the parties hereto have caused this amended and restated Trust Agreement to be duly executed and their respective corporate seals to be hereto affixed this day of , 1993. Attest: WACHOVIA BANK OF NORTH CAROLINA, N.A., As Trustee By Its Senior Vice President Attest: AMERICAN TELEPHONE AND TELEGRAPH COMPANY By Its Corporate Vice President - Investment Management STATE OF NORTH CAROLINA ) ) ss.: COUNTY OF STOKES ) Personally appeared Joe O. Long, Senior Vice President of Wachovia Bank of North Carolina, N.A., signer and sealer of the foregoing instrument, and acknowledged the same to be his free act and deed as such Senior Vice President and the free act and deed of said Company, before me. Notary Public STATE OF NEW JERSEY ) ) ss.: COUNTY OF ) Personally appeared David P. Feldman, Corporate Vice President - Investment Management of American Telephone and Telegraph Company, signer and sealer of the foregoing instrument, and acknowledged the same to be his free act and deed as such Corporate Vice President - Investment Management and the free act and deed of said Company, before me. Notary Public Account A 1. American Telephone and Telegraph Company Non-Qualified Pension Plan 2. American Telephone and Telegraph Company Mid-Career Pension Plan 3. American Telephone and Telegraph Company Excess Benefit Plan 4. American Telephone and Telegraph Company Senior Management Long-Term Disability and Survivor Protection Plan Account B 1. American Telephone and Telegraph Company Senior Management Incentive Award Deferral Plan AMERICAN TELEPHONE AND TELEGRAPH COMPANY BENEFITS PROTECTION TRUST FIRST AMENDMENT WHEREAS, effective May 1, 1992, AT&T Corp. (formerly American Telephone and Telegraph Company) (the "Company") entered into an agreement which was subsequently amended and restated effective January 13, 1994 (the "Agreement") with Wachovia Bank, N.A. (formerly Wachovia Bank of North Carolina, N.A.), as Trustee ("Trustee"), to provide certain assurances to senior managers of AT&T Corp. in connection with its nonqualified benefit plans and programs; and WHEREAS, Lucent Technologies Inc. has entered into an Employee Benefits Agreement with the Company wherein Lucent Technologies Inc. has agreed to contribute cash to a generally comparable successor trust ("Lucent Trust") established by Lucent Technologies Inc. in order to ensure that neither this amendment nor the allocation of trust assets will adversely affect senior managers whose nonqualified benefit plan liabilities were transferred to Lucent Technologies Inc.; and WHEREAS, the Company has completed a tax-free reorganization under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended, whereby the Company's ownership interest in its subsidiary, Lucent Technologies Inc., was transferred to shareholders of the Company; and WHEREAS, the Company and the Trustee desire to transfer certain trust assets to the Lucent Trust; and WHEREAS, the Company and the Trustee have agreed to amend the Trust to expressly provide for this result, and to provide for certain administrative changes to the Agreement. NOW, THEREFORE, the Company and the Trustee (each for itself) agree as follows, effective as of the date of this First Amendment. 1. The name "American Telephone and Telegraph Company Benefits Protection Trust with Wachovia Bank of North Carolina, N.A., as Trustee" shall be amended each and every place it appears to read as follows: "AT&T Corp. Benefits Protection Trust." 2. Except as otherwise expressly provided in this First Amendment, the name "American Telephone and Telegraph Company" shall be replaced by the name "AT&T Corp.", and the name "Wachovia Bank of North Carolina, N.A." shall be replaced by the name "Wachovia Bank, N.A.", where applicable, each and every place they respectively appear. 3. Article IX of the Trust is amended by adding a new Section 9.8 to read as follows: (a) The Company shall determine, as of September 30, 1996, on a reasonable actuarial basis, the liabilities of the Company related to senior managers whose employment was assigned from the Company to Lucent Technologies Inc., under the plans and arrangements (other than the AT&T Senior Management Incentive Award Deferral Plan) covered under the Trust. Subject to subparagraph (b) of this Section 9.8, following completion of this actuarial determination and the reporting of such information to the Trustee, and upon written direction by the Chairman and Chief Executive Officer of the AT&T Investment Management Corporation (or his delegate), the Trustee shall transfer or assign to the Lucent Technologies Inc. Benefits Protection Trust, a successor trust ("Lucent Trust"), and the Trustee hereby agrees to so transfer or assign (1) one trust-owned life insurance policy, Group Policy No. G-23334 (regardless of the entity to which the insured individuals have been assigned), and (2) all cash in the Trust, as determined by the Company in a manner consistent with subparagraph (b) below, provided, however, that no assets shall be transferred to the Lucent Trust until the Trustee has satisfied itself that contributions required by Lucent Technologies Inc. to the Lucent Trust (as described in subparagraph (b) below) have been made prior to or concurrent with this transfer or assignment. (b) Notwithstanding the foregoing, the Trustee shall be permitted to transfer or assign assets from the Trust to the Lucent Trust only if the transfer and assignment are consistent with the purpose and intent of the Trust and provided that, prior to or concurrent with the transfer or assignment of assets from the Trust to the Lucent Trust, and including any additional cash contributions by Lucent Technologies Inc. to the Lucent Trust, the ratio of the value of the assets in the Lucent Trust (determined as of the date of the asset transfer or assignment) to the liabilities under the executive benefit plans covered under the Lucent Trust (other than liabilities under the Lucent Technologies Inc. Officers Incentive Award Deferral Plan) (determined as of September 30, 1996), as determined by the actuary for the Company, will immediately thereafter not be less than the ratio of assets (determined as of the date of the asset transfer or assignment) to liabilities under the Trust (other than liabilities associated with the AT&T Senior Management Incentive Award Deferral Plan)(determined as of September 30, 1996) immediately before the allocation of such assets to the Lucent Trust. For purposes of this Section 9.8, liabilities shall be determined based upon the "Full Funding Amount" as defined in Section 2.5 of the Trust. (c) Following the Trustee's receipt of written notice from the Chairman and Chief Executive Officer of the AT&T Investment Management Corporation (or his delegate), the Trustee shall effect the transfers and assignments as so directed pursuant to the Company's instructions and the terms of this Agreement. In all other respects, the Trust Agreement shall remain in full force and effect. IN WITNESS WHEREOF, AT&T Corp. has caused this First Amendment to the Trust Agreement to be signed by the Chairman and Chief Executive Officer of AT&T Investment Management Corporation and AT&T Corp. Vice President, thereunto duly authorized, and its corporate seal to be affixed hereunto and the same to be attested by its Secretary or an Assistant Secretary; and the Trustee has caused this First Amendment to the Trust Agreement to be signed by one of its authorized officers, thereunto duly authorized, and its association seal to be affixed hereunto and the same to be attested by an Assistant Secretary or by one of its officers, thereunto duly authorized, all as of this ___ day of _____________, 1997. AT&T CORP. BY: _______________________________ S. Lawrence Prendergast Chairman and Chief Executive Officer AT&T Investment Management Corporation, and Vice President of AT&T Corp. Attest: _________________________ WACHOVIA BANK, N.A., AS TRUSTEE BY: _________________________________ Title: ______________________________ Attest: _________________________ Acknowledgment STATE OF NEW JERSEY ) ) ss.: COUNTY OF SOMERSET ) On this ____ day of ________, in the year 1997, before me personally came S. Lawrence Prendergast, to me known, who, being by me duly sworn, did depose and say that he resides at _____________________________________________________________that he is Chairman and Chief Executive Office of the AT&T Investment Management Corporation and a Vice President of AT&T Corp., that he has been delegated authority to execute this First Amendment on behalf of AT&T Corp., the corporation described in and which executed the above instrument; that he knows the corporate seal of said corporation; that the seal affixed to the said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. _________________________ Acknowledgment STATE OF NORTH CAROLINA ) ) ss.: COUNTY OF STOKES ) On this ____ day of ______________, in the year 1997, before me personally came _______________________________, to me known, who, being by me duly sworn, did depose and say that he resides at ________________________________________________________, that he is _______________________________ of Wachovia Bank, N.A., the trust company described in and which executed the above instrument; that he knows the association seal of said trust company; that the seal affixed to the said instrument is such association seal; that it was so affixed by authority of the Board of Directors of said trust company, and that he signed his name thereto by like authority. _________________________ EX-10 6 (10)(III)(A)(20) EMPLOYMENT AGREEMENT This Agreement, dated as of April ___, 1997, by and between AT&T Corp., a New York Corporation with its headquarters at 32 Avenue of the Americas, New York, New York 10013 (hereinafter called the "Company" or "AT&T"), and Daniel E. Somers (hereinafter called the "Employee"). WHEREAS Employee is currently employed as a senior executive with another company; and WHEREAS Employee has accepted employment with the Company; and WHEREAS the Company has assigned and appointed Employee to a Senior Management position as Senior Executive Vice President and Chief Financial Officer, reporting to the Chairman of the Board and Chief Executive Officer of the Company. WHEREAS, it is of special importance for the Company to mitigate the negative financial impact on Employee of his early departure from Employee's current employer; NOW, therefore, and in consideration of the promises and the mutual agreements as set forth above and hereinafter contained, the Company and Employee do hereby agree as follows: 1. Employment. Subject to the provisions set forth elsewhere in this Agreement, the Company hereby employs the Employee, and the Employee hereby accepts employment with the Company, as Senior Executive Vice President and Chief Financial Officer of AT&T reporting to the Chairman of the Board and Chief Executive Officer of the Company, during the employment term set forth in Section 2 of this Agreement. Employee represents and warrants that, there are no agreements or arrangements in effect, whether written or oral, which would prevent him from rendering exclusive services to the Company during the term hereof, and that he has not made and will not make any commitment, agreement or arrangement, or do any act, in conflict with this Agreement and that entering into this Agreement will not be in violation of any other agreement. Such employment shall be upon the terms and conditions hereinafter contained. Employee has provided the Company with a copy of his service agreement with Bell Cablemedia PLC. The Company and Employee agree that no provision of such service agreement is inconsistent with the representations made in this Section 1. 2. Term of Employment. The term of employment hereunder ("the Employment Term") shall commence on the later of May 9, 1997 or the date Employee's Federal immigration visa is effective (hereinafter the "Effective Date") and will terminate at the will of either party to this Agreement upon written notice to the other and shall be subject to the terms and conditions of the Agreement. 3. Employee's Compensation and Benefits. Subject to this Agreement and as more fully set forth hereinbelow, during the Employment Term, the Employee shall be treated in the same manner as, and be entitled to such benefits and other perquisites and terms and conditions of employment no less favorable than Senior Managers of the Company at a similar level and with comparable responsibilities. Employee shall receive no additional compensation for serving as an officer or director of any subsidiary or affiliate. (a) Base Salary. The Company agrees to pay and Employee agrees to accept for services to be rendered hereunder during the Employment Term, a base salary of not less than $500,000 a year, payable in installments on a monthly or other periodic basis in accordance with the prevailing payroll practices of the Company. Employee will be eligible for consideration by the Company of base salary increases as appropriate from time to time. Employee's next base salary consideration will be applicable to a March 1, 1998 effective date. (b) Perquisites. During the Employment Term, the Company shall (i) provide Employee with perquisites of employment as are commonly provided to a Senior Manager of the Company at a similar level and with comparable responsibilities, and (ii) reimburse Employee for reasonable and necessary business expenses incurred in connection with his employment, in accordance with employee business expense practices applicable to employees of the Company at a similar level and with comparable responsibilities. (c) Benefits. During the Employment Term, Employee shall be entitled to coverage under or benefits in accordance with those employee, mid career hire and Senior Management benefit plans and programs as are made available, or which may subsequently become applicable, to other Senior Managers of the Company at a comparable level. Attachment A is a very brief summary outlining the Company's current employee and mid-career benefits as well as special Senior Management benefits and perquisites. Employee shall be entitled to five (5) weeks of annual vacation applicable to 1997 and subsequent years. Employee may commence taking his 1997 vacation any time after the Effective Date. Employee shall also be entitled to relocate under the terms of the AT&T Management Relocation Plan (briefly outlined in Attachment B) which includes a Miscellaneous Allowance equal to an uncapped cash amount of one month's base salary as well as a provision to offset costs that may be incurred by Employee in connection with the premature cancellation of the lease on his current residence. (However, the Mortgage Interest, High Housing and Real Estate cost differentials outlined in Attachment B will not apply for a Europe to U.S. relocation). The Company will also reimburse Employee for reasonable US/UK visits (via business class airfare) for him, his spouse and children during a home search transition period and provide a tax gross up (in accordance with Senior Management tax gross-up practices) to the extent such reimbursement results in taxable income to Employee. (d) Incentive Plans. During the Employment Term, Employee will be eligible for consideration for both long term and annual incentive awards pursuant to the terms of the Company's 1997 Long Term Incentive Program and the Company's Annual Incentive/Short-Term Incentive Plan, respectively or replacements thereof, as are in effect from time to time, at levels and on terms and conditions consistent with target awards to other Senior Managers with comparable responsibilities. Annual incentives for AT&T Senior Managers currently take the form of AT&T Performance Awards (APA) and Merit Awards (MA). Award levels under the APA program are predicated on overall corporate performance and award levels under the MA program are determined by individual and team contributions. The Company cannot make any representations regarding the continuation of the APA/MA incentive format, the size of Employee's APA and MA awards in any given year, if any. Notwithstanding the foregoing, Employee's target (not actual) Annual Incentive opportunity for 1997 (payable in 1998) shall be 80% of Employee's base salary as of the Effective Date and such opportunity will be prorated to reflect Employee's Effective Date; provided, however, that (assuming continued employment through December 31, 1997) in no event will Employee's 1997 actual Annual Incentive be less than the prorated target 1997 Annual Incentive. Historically, (1) the Company has utilized multiple long-term incentive vehicles for compensating Senior Managers e.g., AT&T Stock Options and AT&T Performance Shares, (2) such annual grants have been made in January of each year and (3) approximately half of such long-term incentive value was delivered in Stock Options and half in Performance Shares. (Based on market value of AT&T Common Stock to value the Performance Shares and the Black Scholes method to value Stock Options). For 1997 only, Employee will receive a AT&T Stock Option grant that is more than double the value of awards that would have been made had the historical annual pattern of long-term incentive grants been implemented in 1997. AT&T 1987 Long Term Incentive Plan expired April 15, 1997 and, subject to shareowner approval of the AT&T 1997 Long Term Incentive Plan, new awards are scheduled to commence June 1, 1997. Accordingly, assuming such shareowner approval is forthcoming, effective the later of June 1, 1997 or the Effective Date, the Compensation Committee of the Board will award 11,600 Performance Shares to the Employee under the Company's 1997 Long Term Incentive Program covering the 1997 - 1999 performance period. Distributions of Long Term Performance Shares will be in accordance with the applicable 1997 Long Term Incentive Program and award provisions e.g., assuming continued Company employment, payout from 0% to 150% of such Performance Shares is made in the form of cash and/or AT&T shares at the end of the performance period based on a measure of A&T's Total Shareholder Return vs. Total Shareholder Return for a peer group of companies, (where Total Shareholder Return is defined as share price appreciation and dividends), or such other measure of financial performance as the Board may determine, during the three year performance period. Dividend equivalents are paid quarterly on all undistributed Performance Shares. As of the later of June 1, 1997 or the Effective Date, a Stock Option Award with respect to 86,000 shares of AT&T Common Stock will be granted to Employee under the Company's 1997 Long Term Incentive Program. Such Award is subject to the terms and conditions set forth in the Non-statutory Stock Option agreement. For example; the term of the stock option grant is ten years. Assuming continued Company employment, stock options vest as follows: one-third of the options will vest on the first anniversary of the date of grant, one-third on the second anniversary, and one-third on the third anniversary of the date of grant. The option price is 100% of market price on the date of grant. As with the Annual Incentive Award, Long Term Incentives are closely linked with the Company's strategy to meet the challenges of an ever changing marketplace. Accordingly, other than the grants made under this Agreement, and notwithstanding the historical long-term incentive information provided above, the Company cannot guarantee continuation of the Long Term Incentive Plan in its current format, nor can it guarantee annual grant levels to individual participants. (e) Hiring Bonus. To recognize certain forfeitures Employee will incur when he leaves his current employer and to incent him to join the Company, the Company will provide the following one-time special arrangements to Employee: (i) In lieu of certain 1997 payments from his current employer upon completion of a certain transition event in 1997, Employee is eligible to receive payments aggregating $400,000 (hereinafter "Completion Bonus") some time in 1997. Although the transition event in question is substantially complete as of the date of this Agreement, because of his premature departure from his current employer to accept AT&T's offer of employment, it is unclear if his current employer will pay Employee this Completion Bonus. It is understood and specifically agreed that Employee will make a reasonable effort to secure such Completion Bonus, (but not including litigation or other legal action). In the event, however, such endeavors are unsuccessful or only partially successful, the Company will pay Employee a $400,000 cash amount (if Employee is totally unsuccessful) or (if Employee partially successful), a cash amount equal to the difference between the actual Completion Bonus paid and $400,000. Such Company payment, if any, will be made within twenty business days of the Company's receipt of Employee's written notification of the final outcome of his efforts to secure the Completion Bonus from his current employer. (ii) Employee may forfeit the bargain spread (currently about $337,000) (hereinafter the "Bargain Spread") on stock options granted to Employee by his current employer and the parent of such employer. Because of his premature departure to accept AT&T's offer of employment, it is unclear if his current employer will permit Employee to retain and exercise these options and thereby gain the $337,000 Bargain Spread. It is understood and specifically agreed that Employee will make a reasonable effort to secure such Bargain Spread, (but not including litigation or other legal action). In the event, however such endeavors are unsuccessful or only partially successful, the Company will provide a $337,000 cash amount (if Employee is totally unsuccessful) or (if Employee is partially successful), a cash amount equal to the difference between the actual Bargain Spread secured and $337,000. Such Company payment, if any, will be made within twenty business days of the Company's receipt of Employee's written notification of the final outcome of his efforts to secure the Bargain Spread from his current employer. (iii) The Company will pay Employee a non-forfeiture related cash bonus of $200,000 within twenty business days subsequent to the Effective Date. (iv) Effective as of the later of June 1, 1997 or the Effective Date, two awards, each of 11,600 "Seasoned" AT&T Performance Shares/Stock Units for the 1995-1997 and 1996-1998 performance periods (i.e., Performance Shares/Stock Units which would have been granted to Employee had he been with the Company in 1995 and 1996) under the AT&T 1997 Long Term Incentive Program, as set forth in the Stock Unit Award Agreement provided to Employee with this Agreement. As a result of Company's restructuring and the difficulty of setting long-term financial targets while the restructure is in progress, the performance criteria established for the 1995 - 1997 and 1996-1998 cycles are not applicable and for these performance periods, the criteria are deemed to have been met at the target level. However, the opportunity to earn a payout above 100% is eliminated, and all other terms and conditions of the award continue to apply. (f) Special Post-Retirement Benefits. In the event employee terminates his Company employment for any reason (including Long Term Disability) other than death or Company initiated termination for Cause, with a minimum of ten years of Company service, he will be entitled to the following post-termination Senior Management benefits, administered in a manner consistent with the then-current treatment of Service Pension eligible Senior Managers and in accordance with the terms and conditions applicable to each such Senior Management plan, program or practice (or replacement therefor) as they may exist from time to time. (i) One times base salary Senior Management Basic Life Insurance (ii) One and one-half times base salary Senior Management Individual Life Insurance (iii) Company sponsored medical coverage The Company will adopt a cash balance pension arrangement under the AT&T Management Pension Plan and AT&T Non-Qualified Pension Plan effective January 1, 1998. Because of this change, the AT&T Mid-Career Pension Plan (hereinafter AT&T MCPP) is expected to be either cancelled or revised significantly. In such event (i.e., cancellation or significant change), Employee will be accorded treatment (including possible "grandfathered" treatment) applicable to similarly situated (i.e., age and service) Senior Managers who were participants in the AT&T MCPP prior to the adoption of the cash balance arrangement. 4. Definitions. For purposes of this Agreement: (a) "Long Term Disability" shall mean termination of Employee's employment with the Company with eligibility to receive a disability allowance under the AT&T Senior Management Long Term Disability and Survivor Protection Plan or a replacement plan. (b) "Cause" shall mean: (i) The Employee is convicted (including a plea of guilty or nolo contendere) of a felony involving theft or moral turpitude, other than a felony predicated on Employee's vicarious liability. Vicarious liability means, and only means, any liability which is based on acts of the Company for which the Employee is charged solely as a result of his offices with the Company and in which he was not directly involved or did not have prior knowledge of such actions or intended actions. (ii) The Employee engages in conduct that constitutes willful gross neglect or willful gross misconduct in carrying out his duties under this Agreement, resulting, in either case, in material economic harm to the Company. (c) "Good Reason" shall mean any termination of Employee's Company employment, initiated by Employee, resulting from any of the following events which are not cured by the Company within 20 days of Employee giving the Company written notice thereof: (i) A reduction in Employee's annual total compensation (i.e., annual base salary rate, target annual incentive and "Long Term Incentive" (as valued below) to less than $1,775,000. For purposes of the prior sentence, the dollar value of your annual "Long Term Incentive" grants shall be determined by valuing Performance Shares, Performance Units, Stock Units, Restricted Stock, Restricted Stock Units, etc., at the market price when the Compensation Committee approves such grants, and assuming 100% performance achievement if such grants include performance criteria, and Stock Options and SARs will be valued at 30% of the market price of the shares or related shares when the Compensation Committee approves such grants, as applicable. (ii) The assignment to Employee, without his expressed written consent, of any duties inconsistent with, or, any substantial alteration in, his status or responsibilities as in effect as of the Effective Date. (iii) A change in Employee' s reporting relationship; provided, however that subject to Employee's written consent, he may be reassigned to an operating position of status comparable to his position as of the Effective Date reporting to the Chief Operating Officer of the Company. (iv) A breach of Section 10(b). 5. Powers and Duties. The Employee shall devote his full business time and best efforts and abilities to the performance of duties under this Agreement, it being understood in connection therewith that he may, in his discretion and subject to not interfering with his duties and responsibilities hereunder, devote time to civic, public and professional activities and may serve as a director of other business corporations not engaged in competition with the Company or any subsidiary or affiliate of the Company; provided, however, that he shall not accept directorships on more than three boards of other business corporations; and provided, further, that for purposes of the immediately preceding clause, directorships on the boards of two or more companies with at least 50% common ownership shall count as a single company. Furthermore, so long as it does not interfere with his Company duties and subject to the AT&T Non-Competition Guideline, Employee may continue to manage his passive investments. 6. Taxes. It is understood that certain payments and benefits provided under this Agreement are subject to withholding for applicable federal, state and local income and employment (or similar) taxes, as determined by the Company. 7. Restrictive Convenants. (a) Competition. Notwithstanding any other provisions of this Agreement, any and all payments (except those made from Company-sponsored Tax Qualified Retirement or Welfare Plans), benefits or other entitlements to which the Employee may be eligible in accordance with the terms hereof, may be forfeited, whether or not in pay status, at the discretion of the Company, if the Employee at any time without the consent of the Company "establishes a relationship with a competitor" or "engages in an activity" which is in conflict with or adverse to the interest of the Company, all within the meaning of the Non-Competition Guidelines referred to below (a "Competitive Activity"). The payments, benefits and other entitlements hereunder are being made in part in consideration of the obligations of this Section 7 and in particular the post-employment payments, benefits and other entitlements are being made in consideration of, and dependent upon, compliance with this Section 7(a) and, to the extent set forth in Section 8, the Release and Agreement referred to in Section 8. Attachment C is a copy of the Non-Competition Guideline. (b) Confidentiality. The Employee agrees that he will not, at any time during his employment pursuant to this Agreement or thereafter, disclose or use any trade secret, proprietary or confidential information of the Company or any subsidiary or affiliate of the Company, obtained during the course of his employment, except as required in the course of such employment or with the written permission of the Company or, as applicable, any subsidiary or affiliate of the Company or as may be required by law, provided that, if Employee receives legal process with regard to disclosure of such information, he shall promptly notify the Company and cooperate with the Company in seeking a protective order. The Employee agrees that at the time of the termination of his employment with the Company, whether at the instance of the Employee or the Company, and regardless of the reasons therefore, he will deliver to the Company, and not keep or deliver to anyone else, any and all notes, files, memoranda, papers and, in general, any and all physical matter containing information, including any and all documents significant to the conduct of the business of the Company or any subsidiary or affiliate of the Company which are in his possession, except for any documents for which the Company or any subsidiary or affiliate of the Company has given written consent to removal at the time of the termination of the Employee's employment and his personal rolodex, phone book and similar items. Employee agrees that the Company's remedies at law would be inadequate in the event of a breach or threatened breach of this Paragraph (b); accordingly, the Company shall be entitled, in addition to its rights at law, to an injunction and other equitable relief without the need to post a bond. (c) Any Competitive Activity by the Employee not permitted by the provisions of Section 7(a) above shall result, at the discretion of the Company, in the cancellation of all rights and entitlements of the Employee hereunder (including but not limited to those for payments or benefits) provided that: (i) no forfeiture or cancellation shall take place with respect to any payments, benefits or entitlements hereunder or under any other award agreement, plan or practices unless the Company shall have first given the Employee written notice of its intent to so forfeit, or cancel or pay out and Employee has not, within thirty (30) days of giving such notice ceased such unpermitted Competitive Activity, provided that the foregoing prior notice procedure shall not be required with respect to (x) a Competitive Activity which Employee initiated after the Company had informed the Employee in writing that it believed such Competitive Activity Section violated 7(a) or the AT&T Non-Competition Guidelines, (y) any Competitive Activity regarding local, regional or long distance telephone services or other products or services which are part of a line of business which represents more than 5% percent of the Company's consolidated gross revenues for its most recent completed fiscal year at the time the Competitive Activity commences. 8. Termination Provision. (a) If, at any time during the period beginning with the Effective Date and ending on the fifth anniversary of the Effective Date, Employee is terminated by the Company for any reason other than Cause or Long Term Disability, or Employee elects to terminate his Company employment for Good Reason, Employee will be entitled to: (i) Monthly payments for a 12 month period following such termination, each such payment in an amount equal to one twelfth of the greater of (1) $900,000 or (2) 100% of the sum of Employee's annual base salary rate plus target (not actual) annual incentive award in effect as of the date of Employee's termination. (ii) An annual incentive award for the year of termination payable at the target amount for such year of termination but prorated to the nearest half month based on actual service in the final performance year and payable to Employee within twenty (20) business days after such termination. (iii) Continuation after termination of all regular and "Seasoned" Performance Shares/Stock Units granted under this Agreement as of the later of June 1, 1997 or the Effective Date under the terms and conditions applicable to a Service Pension eligible Senior Manager. (iv) Payment within 20 business days of termination of any then unpaid cash amounts due under Sections 3(e) (i), (ii) and (iii) of the Agreement. (b) If, at any time after the Effective Date, Employee is terminated by the Company for any reason other than Cause or Long Term Disability, or Employee elects to terminate his Company employment for Good Reason, Employee will be entitled to: (i) Immediate (or, if later, six months from the date of grant) vesting, exercisability and continuation of all outstanding Stock Options granted under this Agreement as of the later of June 1, 1997 or the Effective Date under the terms and conditions applicable to Service Pension eligible Senior Managers. (ii) Continuation of vesting and/or exercisability of long term incentive awards granted in 1998 and subsequent years under any long-term incentive plan, but only to the extent and under the same terms and conditions applicable to Service Pension eligible Senior Managers, all as set forth in the applicable long-term award agreements. (c) In the event Employee's employment terminates voluntarily for other than "Good Reason," or as the result of a Company-initiated termination for Cause, at any time during the period beginning with the Effective Date and ending on the third anniversary of the Effective Date, Employee shall not receive any benefits provided by this Agreement. Employee, however, may be eligible for certain benefits under the Company's tax qualified plans. (d) Any payments or benefits made pursuant to this Section 8 are: (1) subject to the provisions, restrictions and limitations of Section 7(a) and 7(c) above, but not otherwise subject to offset or mitigation, (2) subject to Employee signing a Release and Agreement not to sue the Company. The form of such Release and Agreement will be that then currently in use for departing Company Senior Managers and (3) receipt of Employee's resignation from all offices, directorships and fiduciary positions with the Company, its affiliates and their respective benefit plans. 9. Dispute Resolution. At the option of Employee or the Company, any dispute, controversy, or question arising under, out of or relating to this Agreement or the breach thereof, other than that for injunctive relief under Section 7(b), shall be referred for decision by arbitration in the State of New Jersey by a neutral arbitrator selected by the parties hereto. The proceeding shall be governed by the Rules of the American Arbitration Association then in effect or such rules last in effect (in the event such Association is no longer in existence). If the parties are unable to agree upon such a neutral arbitrator within thirty (30) days after either party has given the other written notice of the desire to submit the dispute, controversy or question for decision as aforesaid, then either party may apply to the American Arbitration Association for an appointment of a neutral arbitrator, or if such Association is not then in existence or does not act in the matter within 30 days of application, either party may apply to the Presiding Judge of the Superior Court of any county in New Jersey for an appointment of a neutral arbitrator to hear the parties and settle the dispute, controversy or question, and such Judge is hereby authorized to make such appointment. In the event that either party exercises the right to submit a dispute arising hereunder to arbitration, the decision of the neutral arbitrator shall be final, conclusive and binding on all interested persons and no action at law or equity shall be instituted or, if instituted, further prosecuted by either party other than to enforce the award of the neutral arbitrator. The award of the neutral arbitrator may be entered in any court that has jurisdiction. In the event that the Employee is successful in pursuing any material claim or dispute arising out of this Agreement, the Company shall pay all of the Employee's attorneys' fees and costs, including the compensation and expenses of any Arbitrator. In any other case, the Employee and the Company shall each bear all their own costs and attorneys fees, except the Company shall pay the costs of any arbitrator appointed hereunder. 10. Assignment. (a) Employee. This Agreement is a personal contract and the rights and interests of Employee hereunder may not be sold, transferred, assigned, pledged or hypothecated by him, but shall be binding upon and inure to the benefit of his heirs, administrators, and executors. (b) Company. This Agreement shall inure to the benefit of and be binding upon the Company, its successors and assigns, provided that the Company may not assign this Agreement except in connection with an assignment of all or substantially all of the assets of the Company or by law as a result of a merger or consolidation. In the event of such assignment, a failure by the successor to specifically assume in writing, delivered to the Employee, the obligations and liabilities of the Company hereunder shall be deemed a material breach of this Section. 11. Other. The Company reserves the right to discontinue or modify its compensation, incentive, benefit and perquisite plans, programs and practices. Moreover, the very brief summaries contained herein are subject to the terms of such plans, programs and practices. For purposes of the employee benefit plans, the definition of compensation is as stated in the plans. Currently, pensions are based on base salary and annual incentives. Other benefits are based on either base salary or base salary plus annual incentives. All other compensation and payments included in this Agreement are not included in the base for calculation of employee benefits. The amounts paid under this Agreement upon a termination of employment are in lieu of and inclusive of any amounts payable under any other plan, program or practice of the Company with regard to termination of employment. 12. Entire Agreement; Amendments. This Agreement, which may be executed in two or more counterparts, comprises 18 pages, 16 Sections and 4 Attachments and represents the entire Agreement between Employee and the Company in respect of the subject matter contained herein and supersedes all prior agreements, promises, convenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto. No amendments or modifications to this Agreement may be made except in writing signed by the Company and Employee. 13. Survivorship. The respective rights and obligations of the parties hereunder shall survive any termination of Employee's employment to the extent necessary to the intended preservation of such rights and obligations. 14. Notices. Any notice given to a party shall be in writing and shall be deemed to have been given when delivered personally or two days after mailing if sent by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the party concerned at the address indicated below or to such changed address as such party may subsequently give such notice of: If to the Company: AT&T 295 North Maple Ave. Basking Ridge, NJ 07920 Attn: Executive Vice President, Human Resources If to the Employee: Daniel E. Somers 15. Indemnification. The Company and Employee shall promptly enter into the Indemnity Agreement annexed hereto as Attachment D. 16. Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of New Jersey. without consideration of conflict of law principles. In Witness Whereof, the parties hereto have executed this Agreement and Company has affixed its corporate seal as of the day and year first above written. Company: By: ________________________ H. W. Burlingame Subject to Final Approval by the Compensation Committee of the AT&T Board of Directors Date: ________________________ Witnessed: ________________________ Date: ________________________ Employee: _______________________ Daniel E. Somers Date: ________________________ Witnessed: ________________________ Date: ________________________ EX-12 7 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AT&T Corp. Computation of Ratio of Earnings to Fixed Charges (Dollars in Millions) (Unaudited) For the years ended December 31, 1998 1997 1996 1995 1994 Income from continuing operations before income taxes $8,307 $6,972 $8,697 $4,925 $6,989 Less interest capitalized during the period 197 254 193 107 39 Add equity investment losses, net of distributions of less than 50% owned affiliates 288 144 155 205 91 Add fixed charges 872 846 855 730 777 Total Earnings from Continuing operations before income taxes and fixed charges $9,270 $7,708 $9,514 $5,753 $7,818 Fixed Charges: Total interest expense including capitalized interest $ 624 $ 562 $ 610 $ 508 $ 540 Interest portion of rental expense 248 284 245 222 237 Total fixed charges $ 872 $ 846 $ 855 $ 730 $ 777 Ratio of earnings to fixed charges 10.6 9.1 11.1 7.9 10.1 EX-21 8 LIST OF SUBSIDIARIES OF AT&T CORP. AS OF 3/17/99 List of Subsidiaries of AT&T Corp. As of 3/17/99 Jurisdiction of Incorporation ACC Corp............................................Delaware Alascom, Inc........................................Alaska AT&T Canada Corp....................................Canada AT&T Communications, Inc............................Delaware AT&T Communications of California, Inc..............California AT&T Communications of Delaware, Inc................Delaware AT&T Communications of Hawaii, Inc..................Hawaii AT&T Communications of Illinois, Inc................Illinois AT&T Communications of Indiana, Inc.................Indiana AT&T Communications of Maryland, Inc................Maryland AT&T Communications of Michigan, Inc................Michigan AT&T Communications of the Midwest, Inc.............Iowa AT&T Communications of the Mountain States, Inc.....Colorado AT&T Communications of Nevada, Inc..................Nevada AT&T Communications of New England, Inc.............New York AT&T Communications of New Hampshire, Inc...........New Hampshire AT&T Communications of New Jersey, Inc..............New Jersey AT&T Communications of New York, Inc................New York AT&T Communications of Ohio, Inc....................Ohio AT&T Communications of the Pacific Northwest, Inc...Washington AT&T Communications of Pennsylvania, Inc............Pennsylvania AT&T Communications of the South Central States,Inc.Delaware AT&T Communications of the Southern States, Inc.....New York AT&T Communications of the Southwest, Inc...........Delaware AT&T Communications of Virginia, Inc................Virginia AT&T Communications of Washington D.C., Inc.........New York AT&T Communications of West Virginia, Inc...........West Virginia AT&T Communications of Wisconsin, Inc...............Wisconsin AT&T Communications Services International Inc......Delaware AT&T Communications (UK) LTD........................United Kingdom AT&T Global Communications Services Inc.............Delaware AT&T Istel..........................................United Kingdom AT&T Solutions Inc..................................Delaware AT&T of Puerto Rico, Inc............................New York AT&T Wireless Services, Inc.........................Delaware LIN Broadcasting Corporation........................Delaware Lucky Dog Phone Company Inc.........................Delaware Teleport Communications Group Inc...................Delaware Tele-Communications, Inc............................Delaware EX-23 9 CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of AT&T Corp. ("AT&T" or the "Company") on Form S-3 for the Shareowner Dividend Reinvestment and Stock Purchase Plan (Registration No. 333-00573), Form S-8 for the AT&T Long Term Savings and Security Plan (Registration Nos. 333-47257 and 33-34265), Form S-8 for the AT&T Long Term Savings Plan for Management Employees (Registration Nos. 33-34264, 33-29256 and 33-21937), Form S-8 for the AT&T Retirement Savings and Profit Sharing Plan (Registration No. 33-39708), Form S-8 for Shares Issuable Under the Stock Option Plan of the AT&T 1987 Long Term Incentive Program (Registration Nos. 33-47251 and 33-56643), Form S-8 for the AT&T of Puerto Rico, Inc. Long Term Savings Plan for Management Employees (Registration No. 33-50819), Form S-8 for the AT&T of Puerto Rico, Inc. Long Term Savings and Security Plan (Registration No. 33-50817), and Post-Effective Amendment No. 1 on Form S-8 to Form S-8 Registration Statement (Registration No. 33-54797) for the AT&T 1996 Employee Stock Purchase Plan, Form S-8 for the AT&T Shares for Growth Program (Registration No. 33-47255), Form S-8 for the AT&T 1997 Long Term Incentive Program (Registration No. 33-28665), Form S-3 for the AT&T $2,600,000,000 Notes and Warrants to Purchase Notes (Registration No. 33-49589), Form S-3 for the AT&T $3,000,000,000 Notes and Warrants to Purchase Notes (Registration No. 33-59495), Form S-4 for the AT&T 5,000,000 Common Shares (Registration No. 33-57745), and in Post-Effective Amendment Nos. 1, 2 and 3 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-42150) for the NCR Corporation 1989 Stock Compensation Plan (Registration No. 33-42150-01), the NCR Corporation 1984 Stock Option Plan (Registration No. 33-42150-02) and the NCR Corporation 1976 Stock Option Plan (Registration No. 33-42150-03), respectively, and the Post-Effective Amendment Nos. 1, 2, 3 and 5 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-52119) for the McCaw Cellular Communications, Inc. 1983 Non-Qualified Stock Option Plan (Registration No. 33-52119-01), the McCaw Cellular Communications, Inc. 1987 Stock Option Plan (Registration No. 33-52119-02), the McCaw Cellular Communications, Inc. Equity Purchase Plan (Registration No. 33-52119-03) and the McCaw Cellular Communications, Inc. Employee Stock Purchase Plan (Registration No. 33-52119-05), respectively, and Post-Effective Amendment No. 1 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-45302) for the Teradata Corporation 1987 Incentive and Other Stock Option Plan (Registration No. 33-45302-01), Form S-8 for the AT&T Amended and Restated 1969 Stock Option Plan for LIN Broadcasting Corp. (Registration No. 33-63195), and in Post Effective Amendment Nos. 1, 2, 3, 4 and 5 on Form S-8 to Amendment No. 1 to Form S-4 Registration Statement (Registration No. 333-49419) for the Teleport Communications Group Inc. 1993 Stock Option Plan (Registration No. 333-49419-01), Teleport Communications Group Inc. 1996 Equity Incentive Plan (Registration No. 333-49419-02), ACC Corp. Employee Long Term Incentive Plan (Registration No. 333-49419-03), ACC Corp. Non-Employee Directors' Stock Option Plan (Registration No. 333-49419-04) and ACC Corp. 1996 UK Sharesave Scheme (Registration No. 333-49419-05), and Form S-8 for AT&T Wireless Services, Inc. Employee Stock Purchase Plan (Registration No. 333-52757), Form S-3 for the $10,000,000,000 Debt Securities and Warrants to purchase debt securities (Registration No. 333-71167) of our report dated January 25, 1999, on our audits of the consolidated financial statements of the Company and its subsidiaries at December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996, which report is included in this Annual Report on Form 10-K. PRICEWATERHOUSECOOPERS L.P. 1301 Avenue of the Americas New York, New York March 19, 1999 EX-27 10 FINANCIAL DATA SCHEDULE - DECEMBER 31, 1998
5 This schedule contains summary financial information extracted from the consolidated balance sheet of AT&T Corp. at December 31, 1998 and the consolidated statement of income for the twelve-month period ended December 31, 1998 and is qualified in its entirety by reference to such financial statements. 1,000,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 3,160 0 9,712 1,060 0 14,118 52,277 25,374 59,550 15,442 5,556 0 0 1,754 23,768 59,550 0 53,223 0 45,736 0 1,389 427 8,307 3,072 5,235 1,300 (137) 0 6,398 3.59 3.55
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