-----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, FM//xlOi3WBqMxt1nr0HSHJCtRKRSCGfZfirLDlnRcUyMASgI+6U5rReUmpEnLkf by3WLiOEfQeaACTFubAiIQ== 0000005907-99-000037.txt : 19991117 0000005907-99-000037.hdr.sgml : 19991117 ACCESSION NUMBER: 0000005907-99-000037 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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-Q SEC ACT: SEC FILE NUMBER: 001-01105 FILM NUMBER: 99752579 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-Q 1 AT&T THIRD QUARTER FORM 10-Q REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q ..X.. QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR ..... TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________to _____________ Commission file number 1-1105 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 - Area Code 212-387-5400 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 ... At October 31, 1999, the following shares of stock were outstanding: AT&T common stock - 3,195,346,865 shares Liberty Media Group Class A tracking stock - 1,156,753,606 shares Liberty Media Group Class B tracking stock - 108,421,114 shares AT&T Form 10-Q - Part I PART I - FINANCIAL INFORMATION CONSOLIDATED STATEMENTS OF INCOME (Dollars in Millions Except Per Share Amounts) (Unaudited)
For the Three For the Nine Months Ended Months Ended September 30, September 30, 1999 1998 1999 1998 Revenues................................... $16,270 $13,653 $46,057 $39,695 Operating Expenses Access and other interconnection........... 3,654 3,819 11,054 11,649 Network and other communications services.. 3,869 2,648 10,515 7,746 Amortization of goodwill, franchise costs and other purchased intangibles........... 358 62 900 188 Depreciation and other amortization........ 1,558 1,139 4,408 3,213 Selling, general and administrative........ 3,442 3,146 10,060 9,771 Restructuring and other charges, net....... - (517) 702 2,827 Total operating expenses................... 12,881 10,297 37,639 35,394 Operating income .......................... 3,389 3,356 8,418 4,301 Equity losses from Liberty Media Group..... 217 - 818 - Other income (expense)..................... (409) 156 (334) 1,169 Interest expense........................... 459 114 1,108 322 Income from continuing operations before income taxes....................... 2,304 3,398 6,158 5,148 Provision for income taxes................. 888 1,275 2,679 1,901 Income from continuing operations.......... 1,416 2,123 3,479 3,247 Income from discontinued operations (net of taxes of $6)...................... - - - 10 Gain on sale of discontinued operations (net of taxes of $799).................... - - - 1,290 Income before extraordinary loss .......... 1,416 2,123 3,479 4,547 Extraordinary loss (net of taxes of $80)... - 137 - 137 Net income................................. $ 1,416 $ 1,986 $ 3,479 $ 4,410 Per AT&T common share - basic: Income from continuing operations......... $ 0.51 $ 0.79 $ 1.41 $ 1.21 Income from discontinued operations....... - - - - Gain on sale of discontinued operations... - - - 0.48 Extraordinary loss........................ - 0.05 - 0.05 Net income................................ $ 0.51 $ 0.74 $ 1.41 $ 1.64 Per AT&T common share - diluted: Income from continuing operations......... $ 0.50 $ 0.78 $ 1.39 $ 1.20 Income from discontinued operations....... - - - - Gain on sale of discontinued operations... - - - 0.47 Extraordinary loss........................ - 0.05 - 0.05 Net income................................ $ 0.50 $ 0.73 $ 1.39 $ 1.62 Dividends declared per AT&T common share... $ 0.22 $ 0.22 $ 0.66 $ 0.66 Liberty Media Group loss per share: Basic and diluted......................... $ 0.17 $ - $ 0.65 $ -
See Notes to Consolidated Financial Statements AT&T Form 10-Q - Part I CONSOLIDATED BALANCE SHEETS (Dollars in Millions Except Share Amounts) (Unaudited)
September 30, December 31, 1999 1998 ASSETS Cash and cash equivalents ........................... $ - $ 3,160 Receivables, less allowances of $1,488 and $1,060.... 10,629 9,055 Deferred income taxes................................ 1,638 1,310 Other current assets................................. 773 593 TOTAL CURRENT ASSETS................................. 13,040 14,118 Property, plant and equipment, net of accumulated depreciation of $28,886 and $25,374................ 36,475 26,903 Franchise costs, net of accumulated amortization of $509............................................ 32,122 - Licensing costs, net of accumulated amortization of $1,430 and $1,266............................... 8,353 7,948 Goodwill, net of accumulated amortization of $304 and $226...................................... 7,214 2,205 Investment in Liberty Media Group and related receivables, net................................... 35,519 - Other investments.................................... 20,211 4,434 Prepaid pension costs................................ 2,364 2,074 Other assets......................................... 6,508 1,868 TOTAL ASSETS......................................... $161,806 $59,550
(CONT'D) AT&T Form 10-Q - Part I CONSOLIDATED BALANCE SHEETS (CONT'D) (Dollars in Millions Except Share Amounts) (Unaudited)
September 30, December 31, 1999 1998 LIABILITIES Accounts payable..................................... $ 5,915 $ 6,226 Payroll and benefit-related liabilities.............. 2,278 1,986 Debt maturing within one year........................ 8,856 1,171 Dividends payable.................................... 703 581 Other current liabilities............................ 5,763 5,478 TOTAL CURRENT LIABILITIES............................ 23,515 15,442 Long-term debt....................................... 22,073 5,556 Long-term benefit-related liabilities................ 4,248 4,255 Deferred income taxes................................ 24,708 5,453 Other long-term liabilities and deferred credits..... 3,752 3,213 TOTAL LIABILITIES ................................... 78,296 33,919 Minority Interest in Equity of Consolidated Subsidiaries....................................... 2,401 109 Company-Obligated Convertible Quarterly Income Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T........ 4,697 - Subsidiary-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Subordinated Debt Securities of an AT&T Subsidiary......................................... 1,649 - SHAREOWNERS' EQUITY Common Stock: AT&T Common Stock, $1 par value, authorized 6,000,000,000 shares; issued and outstanding 3,195,633,438 shares (net of 287,528,136 treasury shares) at September 30, 1999 and 2,630,391,784 shares (net of 80,222,341 treasury shares) at December 31, 1998.................................. 3,196 2,630 Liberty Media Group Class A Tracking Stock, $1 par value, authorized 2,500,000,000 shares; issued and outstanding 1,156,751,950 shares at September 30, 1999................................. 1,157 - Liberty Media Group Class B Tracking Stock, $1 par value, authorized 250,000,000 shares; issued and outstanding 108,421,708 shares at September 30, 1999................................. 108 - Additional Paid-in Capital: AT&T Common Stock.................................. 27,506 15,195 Liberty Media Group Stock.......................... 32,663 - Guaranteed ESOP obligation........................... (17) (44) Retained Earnings (Accumulated Deficit): AT&T Common Stock.................................. 8,409 7,800 Liberty Media Group Stock.......................... (818) - Accumulated other comprehensive income............... 2,559 (59) TOTAL SHAREOWNERS' EQUITY............................ 74,763 25,522 TOTAL LIABILITIES & SHAREOWNERS' EQUITY.............. $161,806 $59,550
See Notes to Consolidated Financial Statements AT&T Form 10-Q - Part I
Consolidated Statement of Shareowners' Equity (Dollars in Millions) For the nine months ended September 30, 1999 (Unaudited) Accumulated Total Total Additional Guaranteed Other Comp- Share- Compre- Paid-in ESOP Retained rehensive owners hensive Common Shares Capital Obligation Earnings Income Equity Income AT&T Liberty Liberty AT&T Liberty AT&T Liberty Common Media Group Media Group Common Media Group Common Media Group Stock Class A Class B Stock Stock Stock Stock Tracking Tracking Stock Stock Balance at Jan. 1, 1999 $2,630 - - 15,195 - (44) 7,800 - (59) $25,522 Shares issued (acquired), net: For employee plans - - - 37 - - - - - 37 For acquisitions* 565 1,140 110 11,359 32,265 - - - - 45,439 Other 1 17 (2) - 339 355 Common stock warrants issued - - - 306 - - - - - 306 Gain on issuance of common stock by affiliates - - - 484 50 - - - - 534 Amortization - - - - - 27 - - - 27 Net income (loss) - - - - - - 4,297 (818) - 3,479 $3,479 Dividends declared - - - - - - (2,104) - - (2,104) Treasury shares issued at less than cost - - - - - - (1,584) - - (1,584) Other - - - 125 9 - - - 134 Other comprehensive income (net of taxes of $1,695)** - - - - - - - - 2,618 2,618 2,618 Balance at September 30, 1999 $3,196 1,157 108 27,506 32,663 (17) 8,409 (818) 2,559 $74,763 $6,097 * AT&T accounts for treasury stock as retired stock, and at September 30, 1999, had 288 million treasury shares of which 216 million shares were owned by Tele-Communications, Inc. (TCI) subsidiaries and 70 million shares related to the purchase of AT&T shares previously held by Liberty Media Group. ** Includes $2,408 ($3,974 pretax) of other comprehensive income for Liberty Media Group.
See Notes to Consolidated Financial Statements AT&T Form 10-Q - Part I
Consolidated Statement of Shareowners' Equity (Dollars in Millions) For the nine months ended September 30, 1998 (Unaudited) AT&T AT&T Accumulated AT&T Additional Guaranteed AT&T Other Total Total Common Paid-in ESOP Retained Comprehensive Shareowners' Comprehensive Stock Capital Obligation Earnings Income Equity Income Balance at Jan. 1, 1998 $2,684 17,121 (70) 3,981 (38) $23,678 Shares issued (acquired), net: For employee plans 3 65 - - - 68 For acquisition (56) (2,110) - - - (2,166) Amortization - - 26 - - 26 Net income - - - 4,410 - 4,410 $4,410 Dividends declared - - - (1,651) - (1,651) Treasury shares issued at less than cost - - - (289) - (289) Other changes - 94 - 21 - 115 Other comprehensive income (net of taxes of $57) - - - - (28) (28) (28) Balance at September 30, 1998 $2,631 15,170 (44) 6,472 (66) $24,163 $4,382
See Notes to Consolidated Financial Statements AT&T Form 10-Q - Part I CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Millions) (Unaudited)
For the Nine Months Ended September 30, 1999 1998 Operating Activities Net income................................... $ 3,479 $ 4,410 Deduct: Income from discontinued operations......................... - 10 Gain on sale of discontinued operations......................... - 1,290 Add: Extraordinary loss on retirement of debt............................ - 137 Income from continuing operations............ 3,479 3,247 Adjustments to reconcile net income to net cash provided by operating activities of continuing operations: Restructuring and other charges, net...... 581 2,732 Gains on sales............................ (351) (770) Depreciation and amortization............. 5,308 3,401 Provision for uncollectibles.............. 1,077 1,050 Equity losses from Liberty Media Group.... 818 - Increase in accounts receivable........... (2,529) (1,414) Decrease in accounts payable.............. (318) (366) Net decrease in other operating assets and liabilities......................... (1,535) (78) Other adjustments........................... 707 (804) Net cash provided by operating activities of continuing operations........ 7,237 6,998 Investing Activities Capital expenditures....................... (8,770) (5,136) Proceeds from sale or disposal of property, plant and equipment............ 192 56 Decrease in other receivables.............. 11 6,403 Net dispositions (acquisitions) of licenses................................. 1 (53) Sales of marketable securities............. - 2,003 Purchases of marketable securities......... - (1,696) Equity investment distributions and sales.. 936 1,272 Equity investment contributions and purchases................................ (6,878) (86) (Acquisitions) dispositions of businesses including cash acquired in acquisitions.. (6,830) 4,119 Other investing activities, net............ (15) (74) Net cash (used in) provided by investing activities of continuing operations........ (21,353) 6,808
(CONT'D) AT&T Form 10-Q - Part I CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D) (Dollars in Millions) (Unaudited)
For the Nine Months Ended September 30, 1999 1998 Financing Activities Proceeds from long-term debt issuance..... 8,396 17 Retirements of long-term debt............. (2,124) (2,230) Issuance of convertible securities........ 4,638 - Issuance of common shares................. - 32 Acquisition of treasury shares............ (4,476) (3,235) Dividends paid on common stocks........... (2,009) (1,608) Increase (decrease) in short-term borrowings, net......................... 6,313 (3,030) Other financing activities, net........... 218 28 Net cash provided by (used in) financing activities of continuing operations....... 10,956 (10,026) Net cash provided by discontinued operations................................ - 92 Net (decrease) increase in cash and cash equivalents.......................... (3,160) 3,872 Cash and cash equivalents at beginning of year...................... 3,160 318 Cash and cash equivalents at end of period.......................... $ - $ 4,190
See Notes to Consolidated Financial Statements AT&T Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) (a) BASIS OF PRESENTATION The consolidated financial statements have been prepared by AT&T Corp. (AT&T) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and, in the opinion of management, include all adjustments necessary for a fair statement of the consolidated results of operations, financial position and cash flows for each period presented. The consolidated results for interim periods are not necessarily indicative of results for the full year. These financial results should be read in conjunction with AT&T's Form 10-K/A for the year ended December 31, 1998, and AT&T's previously filed Forms 10-Q. AT&T's Form 10-Q for the period ended June 30, 1999, includes the financial results of Liberty Media Group (LMG) and Tele-Communications Inc. (TCI) for the period ended June 30, 1999, attached as exhibits thereto. AT&T's Form 10-Q for the period ended March 31, 1999, includes the financial results of LMG for the period ended March 31, 1999, attached as an exhibit thereto. These financial statements should also be read in conjunction with TCI's Form 10-K for the year ended December 31, 1998, TCI's Form 10-Q for the quarter ended March 31, 1999, the financial statements of LMG for the year ended December 31, 1998, included in AT&T's Form 8-K filed on March 22, 1999, and the financial statements of LMG and TCI for the quarter and year-to-date periods ended September 30, 1999, included as Exhibits 99.1 and 99.2, respectively, to this AT&T quarterly report on Form 10-Q. We have reclassified certain prior period amounts to conform to our current presentation and have restated share and per share information to reflect the first quarter three for two split of AT&T's common stock and the second quarter two for one stock split of Liberty Media Group tracking stock. (b) MERGER WITH TCI The merger with TCI (renamed AT&T broadband and Internet services or "AB&IS") was completed on March 9, 1999, in an all-stock transaction valued at approximately $52 billion. AT&T issued approximately 664 million shares of AT&T common stock in the transaction, of which approximately 149 million were treasury shares. Also in the first quarter of 1999 in connection with the merger and the formation of LMG from TCI's former programming business and technology investments business, AT&T issued a separate tracking stock designed to reflect the separate economic performance of LMG. A total of 1,080 million shares of Class A Liberty Media Group Tracking Stock and 110 million shares of Class B Liberty Media Group Tracking Stock were issued by AT&T. AT&T also issued an additional 60 million shares of Class A Liberty Media Group Tracking Stock in connection with the conversion of certain convertible notes. AT&T Form 10-Q - Part I AT&T does not have a controlling financial interest for financial accounting purposes in LMG, therefore AT&T's investment in LMG has been reflected as an equity method investment in the accompanying consolidated financial statements. The amounts attributable to LMG are reflected in separate line items "Equity losses from Liberty Media Group" and "Investment in Liberty Media Group and related receivables, net", in the accompanying consolidated financial statements. As a separate tracking stock, all of the earnings or losses related to LMG are excluded from the earnings available to the holders of AT&T common stock. AB&IS' cable and certain other operations, including its ownership interest in At Home Corporation were combined with the existing AT&T operations to form the AT&T common stock group (AT&T Group). The merger was recorded as a purchase. Accordingly, the operating results of AB&IS have been included in the accompanying consolidated financial statements since March 1, 1999, the deemed effective date of acquisition for accounting purposes. The impact of the results from March 1, 1999, through March 9, 1999, is deemed immaterial to our consolidated results. The $52 billion aggregate value assigned to AB&IS' net assets was comprised of AT&T common stock of $27 billion, Liberty Media Group tracking stock of $23 billion, and assumption of convertible notes and preferred stock of $2 billion. As a result of the ongoing appraisal process, in the third quarter of 1999 approximately $19 billion of the purchase price of $52 billion has been allocated to a franchise intangible and is being amortized on a straight-line basis over 40 years. Pursuant to Financial Accounting Standards Board (SFAS) No. 109, "Accounting for Income Taxes", AT&T recorded an approximate $12 billion deferred tax liability in connection with this franchise intangible which resulted in an increase to franchise costs. We do not expect that this deferred tax liability will ever be paid. This deferred tax liability is being amortized on a straight-line basis over 40 years and is included in the provision for income taxes. Prior quarters' amortization and income tax expense have been reclassified for this change which caused a decrease to AT&T's previously reported 1999 effective tax rates. The benefit to the provision for income taxes is offset by an increase in amortization of franchise costs which is recorded as a component of amortization of goodwill, franchise costs and other purchased intangibles, resulting in no impact to net income. Also, approximately $11 billion of goodwill related to LMG was recorded as part of our investment and is being amortized on a straight-line basis over 20 years as a component of equity earnings (losses) from Liberty Media Group. Approximately $2 billion of goodwill related to our investment in Excite@Home was recorded in other investments and is being amortized on a straight-line basis over 7 years. AT&T Form 10-Q - Part I Following is a summary of the pro forma results of AT&T as if the merger had closed effective January 1, 1998:
Nine Months Ended September 30, 1999 1998 Revenues $46,998 $44,370 Income from continuing operations 2,896 1,732 Income from continuing operations, available to AT&T Group shareowners 3,937 2,687 Income from continuing operations, available to Liberty Media Group shareowners (1,041) (955) Net income 2,896 2,895 Income available to AT&T Group shareowners 3,937 3,850 Income available to Liberty Media Group shareowners (1,041) (955) Weighted-average AT&T common shares (millions) 3,177 3,144 Weighted-average AT&T common shares and potential common shares (millions) 3,288 3,248 Weighted-average Liberty Media Group shares (millions) 1,257 1,190 Basic earnings per AT&T common share: Income from continuing operations $ 1.24 $ 0.85 Total income $ 1.24 $ 1.22 Diluted earnings per AT&T common share: Income from continuing operations $ 1.22 $ 0.83 Total income $ 1.22 $ 1.19 Basic and diluted loss per Liberty Media Group share $ 0.82 $ 0.80
Pro forma data may not be indicative of the results that would have been obtained had these events actually occurred at the beginning of the periods presented, nor does it intend to be a projection of future results. AT&T Form 10-Q - Part I (c) OTHER MERGERS, ACQUISITIONS AND VENTURES On April 30, 1999, AT&T completed its acquisition of the IBM Global Network business (renamed AT&T Global Network Services or "AGNS") and its assets in the United States. The acquisition is occurring in phases throughout 1999 as legal and regulatory requirements are met in each of the 59 countries in which the business operates. As of the end of the third quarter, we had completed acquisitions representing approximately 95% of the revenues generated by businesses which comprise AGNS. The acquisition has been accounted for as a purchase. Accordingly, the operating results of AGNS have been included in the accompanying consolidated financial statements since the date of acquisition. Intangible assets of approximately $4.1 billion including customer lists and the excess of the purchase price over the fair value of net assets acquired are being amortized on a straight-line basis over periods ranging from five to 30 years. The pro forma impact of AGNS on historical AT&T results are not material. On May 28, 1999, At Home Corporation consummated a merger agreement with Excite, Inc. (Excite), a global Internet media company that offers consumers and advertisers comprehensive Internet navigation services with extensive personalization capabilities. Under the terms of the merger agreement, At Home Corporation issued approximately 116 million shares of its common stock for all of the outstanding common stock of Excite. As a result, AT&T's economic interest in At Home Corporation (Excite@Home) decreased from 38% to 26% following the merger. Due to the resulting increase in Excite@Home's equity after the merger, net of the dilution of AT&T's ownership interest in Excite@Home, AT&T recorded an increase to additional paid-in capital of $488 at September 30, 1999. In the fourth quarter of 1999, Excite@Home agreed to acquire an online greeting card company. Upon completion of that merger, AT&T will record additional amounts to its additional paid-in capital as the share of its ownership of Excite@Home is diluted. At September 30, 1999, AT&T owned 94.5 million shares of Excite@Home common stock and has an approximate 58% voting interest on certain matters. AT&T Form 10-Q - Part I On August 2, 1999, AT&T completed its acquisition of Honolulu Cellular Telephone Company from BellSouth. In August 1999, AT&T and British Telecommunications plc (BT) jointly acquired a 33.3% stake in Rogers Cantel Mobile Communications Inc. (Rogers Cantel) in Canada for approximately $934 in cash. The investment is owned equally by AT&T and BT. Rogers Cantel is Canada's largest mobile company serving two million customers from coast to coast. Rogers Cantel provides a complete range of wireless solutions including cellular, paging and interactive messaging, digital PCS and wireless data services marketed under the co-brand Cantel AT&T. Also in August 1999, AT&T sold 30% of its 31% ownership interest in AT&T Canada to BT for approximately $402 resulting in a $110 pretax gain and a 22% beneficial ownership by AT&T. AT&T and BT both contributed their ownership interest of AT&T Canada to a joint venture that is 70% owned by AT&T and 30% owned by BT. On September 2, 1999, AT&T and BT acquired a 30% stake in Japan Telecom for $1.83 billion. The previously announced global venture between AT&T and BT has received approval from the Federal Communications Commission (FCC), the U.S. Justice Department and the European Commission. The venture, which will be called Concert, will combine transborder assets and operations of each company and will be equally owned by both companies when operations begin. The venture is expected to be completed in the fourth quarter of 1999 and to begin operations on January 1, 2000. AT&T Form 10-Q - Part I (d) DEBT OFFERING On September 14, 1999, we completed a $450 all-minority led and underwritten bond offering in connection with a registration statement filed with the SEC on January 26, 1999. The bond offering consisted of three-year notes due September 15, 2002, with a coupon rate of 6.5%. The proceeds were utilized for general corporate purposes. On October 30, 1999, we redeemed $350 of long-term debt which was funded with cash from operations. The early redemption did not have a material impact on our financial results. (e) RESTRUCTURING AND OTHER CHARGES, NET Restructuring and other charges, net for the three months ended September 30, 1998 were a net benefit of $517 pretax. The benefit was primarily related to a $602 pretax gain related to the settlement of pension obligations for former employees who accepted AT&T's voluntary retirement incentive program (VRIP) offer, partially offset by $85 of expenses associated with the merger with Teleport Communications Group Inc. (TCG), which closed in the third quarter of 1998. Restructuring and other charges for the nine months ended September 30, 1999, were $702 pretax. Included in the $702 was an in-process research and development charge of $594 related to AB&IS as well as a $128 net charge primarily related to the exit of certain joint ventures that would have competed directly with Concert. Additionally, a $50 charge was recorded in the second quarter related to a contribution agreement AB&IS entered into with Phoenixstar, Inc. (formerly Primestar, Inc.). To the extent necessary, AB&IS is required to satisfy certain liabilities of Phoenixstar owed by Phoenixstar and its subsidiaries. These charges were partially offset by a $70 gain related to the settlement of pension obligations for former employees who accepted AT&T's VRIP offer. Restructuring and other charges, net, for the nine months ended September 30, 1998, were $2,827 pretax. The charge is comprised of a first quarter 1998 pretax charge of $601 which resulted from the decision not to pursue Total Service Resale as a local-service strategy, a second quarter $2,743 net pretax charge primarily related to AT&T's VRIP offer, and the third quarter net pretax benefit as noted above. AT&T Form 10-Q - Part I (f) EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE Basic earnings per share (EPS) for AT&T Group for the three and nine months ended September 30, 1999 and 1998, were computed by dividing income attributable to AT&T Group common shareowners by the weighted-average number of common shares outstanding of AT&T Group during the period. Diluted EPS for AT&T Group for the three and nine months ended September 30, 1999 and 1998, was computed by dividing the income attributable to AT&T Group common shareowners, adjusted for the conversion of securities, by the weighted-average number of common shares and dilutive potential common shares outstanding of AT&T Group during the period, assuming conversion of the potential common shares at the beginning of the periods presented. Shares issuable upon conversion of preferred stock of subsidiaries, convertible debt securities of subsidiary, quarterly income preferred securities, stock options and other performance awards have been included in the diluted calculation of weighted-average shares to the extent that the assumed issuance of such shares would have been dilutive, as illustrated below. Income from continuing operations for the three and nine-month periods ended September 30, 1999, of $1,416 and $3,479, respectively, include income from continuing operations attributable to AT&T Group of $1,633 and $4,297, respectively, as well as losses from LMG of $217 and $818 respectively. A reconciliation of the income and share components for the basic and diluted EPS calculations with respect to AT&T Group continuing operations is as follows:
Three Nine Months Ended Months Ended Sept. 30, Sept. 30, 1999 1998 1999 1998 Income from continuing operations attributable to AT&T Group $1,633 $2,123 $4,297 $3,247 Income impact of assumed conversion: Preferred stock of subsidiary 8 - 18 - quarterly income preferred securities 40 - 47 - Income from continuing operations attributable to AT&T Group adjusted for conversion of securities $1,681 $2,123 $4,362 $3,247 AT&T Group weighted-average common shares (millions) 3,195 2,686 3,045 2,692 Stock options 32 20 37 23 Preferred stock of subsidiary 40 - 30 - Convertible quarterly income preferred securities 67 - 26 - Convertible debt securities of subsidiary - - 2 - AT&T Group weighted-average common shares and potential common shares (millions) 3,334 2,706 3,140 2,715
AT&T Form 10-Q - Part I Basic EPS for LMG for the third quarter of 1999 and date of acquisition through September 30, 1999, was computed by dividing the income attributable to LMG shareowners by the weighted-average number of shares outstanding of LMG of 1.265 billion and 1.257 billion, respectively, for these periods. Since LMG had a loss for both periods, the impact of any potential shares would have been antidilutive, and therefore are not factored into the diluted calculations. There were 52 million potentially dilutive securities outstanding at September 30, 1999. On September 27, 1999, LMG announced that the Board of Directors of AT&T approved the repurchase from time to time of up to 135 million shares of Liberty Media Group Class A or Class B tracking stock. (g) FINANCIAL INSTRUMENTS In the normal course of business we use various financial instruments, including derivative financial instruments, for purposes other than trading. We do not use derivative financial instruments for speculative purposes. These instruments include letters of credit, guarantees of debt, interest rate swap agreements and foreign currency exchange contracts. Interest rate swap agreements and foreign currency exchange contracts are used to mitigate interest rate and foreign currency exposures. Collateral is generally not required for these types of instruments. AT&T Form 10-Q - Part I For debt excluding capital leases, the carrying amounts and fair values were $30.6 billion and $29.6 billion, respectively, at September 30, 1999. (h) SEGMENT REPORTING AT&T's results are segmented according to the way we manage our business: business services, consumer services, wireless services and broadband & Internet services. Our existing segments reflect certain managerial changes since the publication of our 1998 annual results. The business services segment was expanded to include the results of TCG and the business portion of AT&T WorldNet Service; the consumer services segment was expanded to include the residential portion of AT&T WorldNet Service and the costs associated with the development of fixed wireless technology. All prior results have been restated to reflect these changes. In addition, we established a new segment called broadband & Internet services. Broadband & Internet services includes the results associated with traditional analog video service as well as new services such as Digital Cable and AT&T@Home, a high-speed cable Internet service. Also included in this segment are the operations associated with developing and refining the infrastructure that will support broadband telephony. Reflecting the dynamics of our business, we continuously review our management model and structure, which may result in additional changes to our operating segments in the future. REVENUES
Three Nine Months Ended Months Ended Sept. 30, Sept. 30, 1999 1998 1999 1998 Business services external revenues $ 5,849 $ 5,746 $17,663 $16,985 Business services internal revenues 427 229 1,110 656 Total business services revenues 6,276 5,975 18,773 17,641 Consumer services external revenues 5,614 5,889 16,604 17,264 Wireless services external revenues 2,050 1,420 5,490 3,897 Broadband & Internet services external revenues 1,442 - 3,344 - Total reportable segments 15,382 13,284 44,211 38,802 Other and corporate revenues (a) 888 369 1,846 893 Total revenues $16,270 $13,653 $46,057 $39,695 (a) Included in other and corporate revenues are revenues from AT&T Solutions, international operations and ventures, other smaller units and the elimination of internal revenues.
AT&T Form 10-Q - Part I RECONCILIATION OF SEGMENT EARNINGS BEFORE INTEREST AND TAXES (EBIT) TO INCOME BEFORE INCOME TAXES
Three Nine Months Ended Months Ended Sept. 30, Sept. 30, 1999 1998 1999 1998 Business services $1,537 $1,359 $ 4,563 $ 3,602 Consumer services 2,176 1,764 5,893 4,609 Wireless services 69 47 93 261 Broadband & Internet services (530) - (1,763) - Total reportable segments' EBIT 3,252 3,170 8,786 8,472 Other and corporate EBIT (272) 342 (702) (3,002) Liberty Media Group equity losses (217) - (818) - Interest expense 459 114 1,108 322 Total income before income taxes $2,304 $3,398 $ 6,158 $ 5,148 ASSETS At Sept. 30, At Dec. 31, 1999 1998 Business services $ 23,378 $21,415 Consumer services 6,907 6,561 Wireless services 21,938 19,115 Broadband & Internet services 55,941 - Total reportable segments 108,164 47,091 All other segments 10,521 4,165 Corporate assets: Investment in Liberty Media Group and related receivables, net 35,519 - Prepaid pension costs 2,364 2,074 Deferred taxes 1,188 1,156 Other corporate assets 4,050 5,064 Total assets $161,806 $59,550
AT&T Form 10-Q - Part I (i) SUBSEQUENT EVENTS On October 6, 1999, AT&T and Dobson Communications Corporation (Dobson) announced the signing of a definitive agreement to acquire American Cellular Corporation through a newly created joint venture for $2.32 billion. Dobson will be responsible for day to day management of the joint venture, which will be equally owned and jointly controlled by Dobson and AT&T. The acquisition will be funded with non-recourse bank debt by the joint venture and cash equity contributions of up to $370 from each of the two partners. The Board of Directors of AT&T, Dobson and American Cellular have approved the transaction. The acquisition, which is expected to close in the first quarter of 2000, is subject to approval by American Cellular's shareowners, as well as federal regulatory and certain other conditions. On October 21, 1999, shareowners of MediaOne Group, Inc. (MediaOne) unanimously voted in favor of the proposed merger between AT&T and MediaOne, pursuant to a definitive merger agreement entered into on May 6, 1999. In accordance with the agreement, AT&T will purchase each share of MediaOne common stock for $85.00 per share consisting of 0.95 of a share of AT&T common stock plus $30.85 in cash. In addition, the agreement provides for an increase in the amount of cash received per share of MediaOne common stock to the extent that AT&T's stock price was less than $57.00 per share. The additional amount of cash which may be received is limited to $5.42 per share. AT&T plans to issue approximately 613 million shares in the transaction. Upon receipt of regulatory and other approvals, the merger is expected to close in the first quarter of 2000. On November 1, 1999, AT&T announced its plans to form a new public company, to be named AT&T Latin America, that will merge the operations of Netstream, the competitive local exchange company AT&T is acquiring in Brazil, and FirstCom, a publicly traded company with competitive telecommunications operations in Chile, Columbia and Peru. AT&T, together with Promon Tecnologia, its Brazilian partner, will contribute Netstream and $70 in cash. AT&T will own approximately 60% of the company, owning Class B shares, with 10 votes per share. The transaction has been approved by both AT&T's and FirstCom's Board of Directors. Upon approval by FirstCom shareowners as well as regulatory and other approvals, the transaction is expected to close in the first quarter of 2000. AT&T Latin America intends to apply for listing on the NASDAQ stock market. On November 5, 1999, WORLDxCHANGE Communications announced the acquisition of ACC in Europe (ACC) from AT&T. The agreement includes ACC's principal operations in the United Kingdom, as well as ACC's operating companies in France, Germany and Italy. AT&T believes it will record a pretax loss in the range of $150 to $200 on the sale. AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW The merger with Tele-Communications, Inc. (TCI, renamed AT&T broadband and Internet services or "AB&IS") was completed on March 9, 1999, in an all stock transaction valued at approximately $52 billion. AT&T issued approximately 664 million shares of AT&T common stock in the transaction, of which approximately 149 million shares were treasury shares. Also in connection with the merger and the formation of Liberty Media Group (LMG) from TCI's former programming business and technology investments business, AT&T issued a separate tracking stock designed to reflect the separate economic performance of LMG. A total of 1,080 million shares of Class A Liberty Media Group Tracking Stock and 110 million shares of Class B Liberty Media Group Tracking Stock were issued by AT&T. AT&T issued an additional 60 million shares in connection with the conversion of certain convertible notes. AT&T does not have a controlling financial interest for financial accounting purposes in LMG, therefore AT&T's investment in LMG has been reflected as an equity method investment in the accompanying consolidated financial statements. The amounts attributable to LMG are reflected in separate line items "Equity losses from Liberty Media Group" and "Investment in Liberty Media Group and related receivables, net" in the accompanying consolidated financial statements. As a separate tracking stock, all of the earnings or losses related to LMG are excluded from the earnings available to the holders of AT&T common stock. The merger was recorded as a purchase. Accordingly, the operating results of AB&IS have been included in the accompanying consolidated financial statements since the date of acquisition. For accounting purposes the deemed effective date of the acquisition is March 1, 1999, since the impact of the results from March 1, 1999, through March 9, 1999, is deemed immaterial to our consolidated results. AB&IS' cable and certain other operations, including its ownership interest in At Home Corporation (Excite@Home), but excluding LMG, were combined with the existing operations of AT&T to form the AT&T Common Stock Group (AT&T Group). We segment our results based on how we manage our business. The following businesses comprise AT&T Group: business services, consumer services, broadband & Internet services and wireless services. A fifth group, other and corporate, includes the results of AT&T Solutions, international operations and ventures, other corporate operations, overhead and eliminations. Results are discussed for these five groups as well as for combined AT&T Group. The discussion for the other and corporate group is further broken out to include information for AT&T Solutions (which includes the results of the Solutions outsourcing unit, the internal AT&T Information Technology Services unit, and the results of portions of the IBM Global Network which were acquired in the second and third quarters of 1999 and renamed AT&T Global Network Services (AGNS), and international operations and ventures. AT&T Form 10-Q - Part I Operating results are discussed separately for AT&T Group and LMG. All lines of the accompanying consolidated statements of income except for "Equity losses from Liberty Media Group", "Income from continuing operations" and "Net income" reflect the results of AT&T Group only. All lines of the accompanying consolidated balance sheet, except for the "Investment in Liberty Media Group and related receivables, net" and the components of shareowners' equity labeled as relating to LMG are attributable to AT&T Group only. The liquidity, financial condition, risk management and year 2000 discussion pertain to consolidated AT&T, including our investment in LMG. AT&T Form 10-Q - Part I FORWARD-LOOKING STATEMENTS Except for the historical statements and discussions contained herein, statements contained in this Report on Form 10-Q 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/A, Annual Report to Shareowners, Form 10-Q or Form 8-K of AT&T may include forward-looking statements, including statements concerning future operating performance, year 2000 compliance, AT&T's share of new and existing markets, AT&T's short- and long-term revenue and earnings growth rates, 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 adoption and implementation of balanced and effective rules and regulations by the Federal Communications Commission (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. For a more complete discussion of the factors that could cause actual results to differ materially from such forward-looking statements, see the discussion thereof contained under the heading "Forward-Looking Statements" in AT&T's Form 10-K/A for the year ended December 31, 1998. Readers should also consider the factors discussed under the headings "Results of Operations" and "Financial Condition" included in this Form 10-Q. 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. AT&T Form 10-Q - Part I CONSOLIDATED RESULTS OF OPERATIONS
For the Three For the Nine Months Ended Months Ended Sept. 30, Sept. 30, 1999 1998 1999 1998 Dollars in millions (except per share amounts) Income (loss) from continuing operations attributable to common shareowners: AT&T Group......................... $1,633 $2,123 $4,297 $3,247 Liberty Media Group................ (217) - (818) - Income (loss) attributable to common shareowners: AT&T Group......................... $1,633 $1,986 $4,297 $4,410 Liberty Media Group................ (217) - (818) - Per AT&T common share - basic: Income from continuing operations... $ 0.51 $ 0.79 $ 1.41 $ 1.21 Income from discontinued operations. - - - - Gain on sale of discontinued operations......................... - - - 0.48 Extraordinary loss.................. - 0.05 - 0.05 Total income........................ $ 0.51 $ 0.74 $ 1.41 $ 1.64 Per AT&T common share - diluted: Income from continuing operations... $ 0.50 $ 0.78 $ 1.39 $ 1.20 Income from discontinued operations. - - - - Gain on sale of discontinued operations......................... - - - 0.47 Extraordinary loss.................. - 0.05 - 0.05 Total income........................ $ 0.50 $ 0.73 $ 1.39 $ 1.62 Liberty Media Group loss per share: Basic and diluted................... $ 0.17 $ - $ 0.65 $ -
Earnings per share (EPS) from continuing operations attributable to AT&T common shareowners were $0.50 on a diluted basis for the third quarter of 1999, down from $0.78 in the third quarter of 1998. Earnings per share from continuing operations attributable to AT&T common shareowners were $1.39 on a diluted basis in the first nine months of 1999, compared with $1.20 on a diluted basis in the first nine months of 1998. For the quarterly period, the decrease was due primarily to the impacts of AB&IS and AGNS, the 1998 benefit for restructuring and other charges, net, and equity losses related to Excite@Home and Cablevision Systems Corp. (Cablevision), partially offset by increased income from core operations and a gain on the sale of a business in 1999. For the year to date period, the increase was due to increased income from core operations and lower restructuring and other charges, net, partially offset by the impacts of AB&IS and AGNS, the equity losses for the nine months ended September 30, 1999, related to Excite@Home and Cablevision and lower gains on the sales of businesses in 1999. AT&T Form 10-Q - Part I AT&T Group's operational earnings, which excluded certain nonoperational items, were $0.54 per diluted share for the third quarter of 1999, a decrease of 20.6%, or $0.14, over the prior year period. Nonoperational items for the third quarter were: ..Restructuring and other charges, net benefit of $0.10 in 1998 ..Gain on sale of a business of $0.02 in 1999 ..A loss of $0.06 reflecting the earnings impact of our investments in Excite@Home and Cablevision in 1999. The decrease in operational earnings for the third quarter was due primarily to the impact of AB&IS. Excluding the impacts of both AB&IS and AGNS, operational EPS for the third quarter of 1999 was $0.81, an increase of 19.1%, or $0.13, compared with the third quarter of 1998. The increase was primarily due to higher revenues combined with improving margins. AT&T Group's operational earnings, which excluded certain nonoperational items, were $1.63 per diluted share for the nine months ended September 30, 1999, a decrease of 2.4%, or $0.04, over the prior year period. Nonoperational items for the first nine months were: ..Restructuring and other charges, net, of $0.21 in 1999 and $0.64 in 1998 ..Gains on sales of businesses of $0.07 in 1999 and $0.17 in 1998 ..A $0.02 benefit in 1999 from changes in tax rules with respect to the utilization of acquired net operating losses ..A loss of $0.12 in 1999 reflecting the earnings impact of our investment in Excite@Home and Cablevision. The decrease in operational earnings for the nine months ended September 30, 1999 was due primarily to the impact of AB&IS. Excluding the impacts of both AB&IS and AGNS, operational EPS for the nine months ended September 30, 1999, was $2.23, an increase of 33.5%, or $0.56, compared with the prior year period primarily due to higher revenues combined with improving margins. LMG's loss per share was $0.17 for the quarter ended September 30, 1999, and $0.65 for the period from the date of acquisition through September 30, 1999. The results of AT&T Group and our investment in LMG are discussed in further detail below. AT&T Form 10-Q - Part I AT&T GROUP RESULTS OF OPERATIONS REVENUES
For the Three Months Ended September 30, Change 1999 1998 $ % Dollars in millions Business services.......................... $ 6,276 $ 5,975 $ 301 5.0% Consumer services.......................... 5,614 5,889 (275) (4.7%) Wireless services.......................... 2,050 1,420 630 44.2% Broadband & Internet services.............. 1,442 - 1,442 - Other and corporate........................ 888 369 519 141.9% Total revenues............................. $16,270 $13,653 $2,617 19.2% For the Nine Months Ended September 30, Change 1999 1998 $ % Dollars in millions Business services.......................... $18,773 $17,641 $ 1,132 6.4% Consumer services.......................... 16,604 17,264 (660) (3.8%) Wireless services.......................... 5,490 3,897 1,593 40.9% Broadband & Internet services.............. 3,344 - 3,344 - Other and corporate........................ 1,846 893 953 107.2% Total revenues............................. $46,057 $39,695 $ 6,362 16.0%
Total revenues on a reported basis increased 19.2% to $16,270 million and increased 16.0% to $46,057 million for the three and nine-month periods ended September 30, 1999, respectively, compared with the corresponding prior year periods. Excluding AB&IS and AGNS, revenues increased 5.3% to $14,372 million for the third quarter of 1999 and increased 5.9% to $42,042 million for the nine months ended September 30, 1999, compared with the comparable prior year periods. The increases for both periods were due to growth in wireless services, business services and AT&T Solution's outsourcing services, partially offset by lower consumer services revenues. Revenues on a pro forma basis, which include the results of AB&IS (adjusted to exclude all closed cable partnerships and Excite@Home) and the impact of the closed portions of AGNS for a full period in both 1999 and 1998, increased 5.6% for the third quarter of 1999 and increased 6.2% for the nine months ended September 30, 1999, compared with the corresponding prior year periods. OPERATING EXPENSES Three Nine Months Ended Months Ended September 30, September 30, Dollars in millions 1999 1998 1999 1998 Access and other interconnection..... $3,654 $3,819 $11,054 $11,649 Access and other interconnection expenses decreased $165 million, or 4.3%, to $3,654 million in the third quarter of 1999 compared with the third quarter of 1998. Access and other interconnection expenses decreased $595 million, or 5.1%, to $11,054 million in the first nine months of 1999 compared with the first nine months of 1998. The declines were primarily driven by mandated reductions in per-minute access charges and lower negotiated international settlement rates. These declines were partially offset by total long distance volume growth of 8.9% for the quarter and 8.5% on a year-to-date basis. For the quarterly period, increased per-line charges (Primary Interexchange Carrier Charges or "PICC") also partially offset the declines. AT&T Form 10-Q - Part I Three Nine Months Ended Months Ended September 30, September 30, Dollars in millions 1999 1998 1999 1998 Network and other communications services........................... $3,869 $2,648 $10,515 $7,746 Network and other communications services expenses increased $1,221 million, or 46.1%, to $3,869 million in the third quarter of 1999 compared with the same period last year. Network and other communications services expenses increased $2,769 million, or 35.7%, to $10,515 million in the first nine months of 1999 compared with the same period last year. Excluding the impacts of AB&IS and AGNS, network and other communications services expenses increased 3.6% and 6.2% for the three and nine-month periods ended September 30, 1999, respectively, compared with the same periods last year. These increases were primarily driven by the growing wireless subscriber base largely attributable to the success of AT&T Digital One Rate service which resulted in higher off-network roaming charges, higher costs and volume of handsets and an increased provision for uncollectibles. A portion of the increase was also due to growth in AT&T Solutions. These increases were partially offset by network cost control initiatives, lower per call compensation expense due to a favorable FCC ruling in the first quarter of 1999, and a lower provision for uncollectibles in consumer services. For the year to date period, the increases were also partially offset by lower nonincome taxes and a lower provision for uncollectibles in business services. Three Nine Months Ended Months Ended September 30, September 30, Dollars in millions 1999 1998 1999 1998 Amortization of goodwill, franchise costs and other purchased intangibles..........................$ 358 $ 62 $ 900 $ 188 Amortization of goodwill, franchise costs and other purchased intangibles increased $296 million, or 471.4%, from the third quarter of 1998 and increased $712 million, or 378.0%, for the nine months ended September 30, 1999, compared with the same periods last year. Franchise costs represent the value attributable to the agreement with local authorities that allow access to homes in AB&IS' service areas. Other purchased intangibles arising from business combinations primarily include customer lists and licenses. The increases were primarily driven by AB&IS. AT&T also has amortization of goodwill associated with nonconsolidated investments recorded as a component of other income (expense) amounting to $164 million and $356 million for the three and nine-month periods ended September 30, 1999, respectively, and $14 million and $43 million for the three and nine-month periods ended September 30, 1998, respectively. AT&T Form 10-Q - Part I Three Nine Months Ended Months Ended September 30, September 30, Dollars in millions 1999 1998 1999 1998 Depreciation and other amortization.. $1,558 $1,139 $4,408 $3,213 Depreciation and other amortization expenses increased $419 million, or 36.9%, in the third quarter of 1999 and increased $1,195 million, or 37.2%, in the first nine months of 1999 compared with the corresponding prior year periods. Excluding AB&IS and AGNS, depreciation and other amortization expenses increased 14.7% and 19.2% for the three and nine-month periods ended September 30, 1999, respectively, compared with the corresponding prior year periods. The increases were primarily due to growth in AT&T Group's depreciable asset base resulting from the continued infrastructure investment throughout 1998 and 1999. Capital expenditures, including AB&IS and AGNS, were $3.6 billion for the three months ended September 30, 1999, and $7.9 billion for the nine months ended September 30, 1999. The capital expenditures for both periods focused on cable operations, data services, wireless services and business local services. Three Nine Months Ended Months Ended September, September, Dollars in millions 1999 1998 1999 1998 Selling, general and administrative.. $3,442 $3,146 $10,060 $9,771 Selling, general and administrative (SG&A) expenses increased $296 million, or 9.4%, to $3,442 million in the third quarter of 1999 and increased $289 million, or 3.0%, to $10,060 million for the nine months ended September 30, 1999, compared with the corresponding prior year periods. Excluding AB&IS and AGNS, SG&A expenses declined 2.4% for the third quarter of 1999 and declined 5.3% for the nine months ended September 30, 1999, versus the corresponding prior year periods. These reductions reflect reduced marketing and sales expenses resulting primarily from reductions in consumer acquisition program spending and other cost-control initiatives. These reductions were partially offset by increased spending in the company's growth businesses, including wireless services due to increased subscribers and customer care spending, and for the quarterly period, the AT&T Solutions outsourcing unit. Including AB&IS and AGNS, SG&A expenses as a percentage of revenues were 21.2% and 21.8% for the three and nine-month periods ended September 30, 1999, respectively, compared with 23.0% and 24.6% in the prior year periods. SG&A expenses excluding wireless services and the consumer local business as a percentage of revenues were 18.8% and 19.7% for the three and nine-month periods ended September 30, 1999. AT&T Form 10-Q - Part I Three Nine Months Ended Months Ended September 30, September 30, Dollars in millions 1999 1998 1999 1998 Restructuring and other charges, net. $ - $(517) $ 702 $2,827 Restructuring and other charges, net for the three months ended September 30, 1998, were a net benefit of $517 million pretax. The benefit was primarily related to a $602 million pretax gain related to the settlement of pension obligations for former employees who accepted AT&T's voluntary retirement incentive program (VRIP) offer, partially offset by $85 million of expenses associated with the merger with Teleport Communications Group Inc. (TCG), which closed in the third quarter of 1998. Restructuring and other charges for the nine months ended September 30, 1999, were $702 million pretax. Included in the $702 million was an in-process research and development charge of $594 million related to AB&IS as well as a $128 million net charge primarily related to the exit of certain joint ventures that would have competed directly with Concert, the global venture that AT&T is forming with British Telecommunications plc (BT). Additionally, a $50 million charge was recorded in the second quarter related to a contribution agreement AB&IS entered into with Phoenixstar, Inc. (formerly Primestar, Inc.). To the extent necessary, AB&IS is required to satisfy certain liabilities of Phoenixstar owed by Phoenixstar and its subsidiaries. These charges were partially offset by a $70 million gain related to the settlement of pension obligations for former employees who accepted AT&T's VRIP offer. The in-process research and development projects related to AB&IS' efforts to offer voice over Internet protocol, cost savings efforts for cable telephony implementation and product integration efforts for advanced set-top devices that would enable AB&IS to offer next-generation digital services. Although there are significant technological issues to overcome in order to successfully complete the acquired in-process research and development, AT&T expects successful completion. AT&T currently anticipates that (i) it will deploy equipment to offer voice over Internet protocol to two cities in the year 2001, (ii) field deployable devices will be available by the end of the year with respect to AT&T's cost savings efforts for cable telephony implementation, and (iii) field trials will begin in mid-year 2000 for next-generation digital services. If, however, AT&T is unable to establish technological feasibility and produce a commercially viable product/service, then anticipated incremental future cash flows attributable to expected profits from such new product/service may not be realized. Restructuring and other charges, net for the nine months ended September 30, 1998, were $2,827 million pretax. The charge is comprised of a first quarter 1998 pretax charge of $601 million which resulted from the decision not to pursue Total Service Resale as a local-service strategy, the second quarter $2,743 million net pretax charge primarily related to AT&T's VRIP offer, and the third quarter net pretax benefit as noted above. AT&T Form 10-Q - Part I Three Nine Months Ended Months Ended September 30, September 30, Dollars in millions 1999 1998 1999 1998 Other income (expense)............... $ (409) $ 156 $ (334) $1,169 For the three months ended September 30, 1999, other income (expense) decreased $565 million, or 360.7%, to an expense of $409 million compared with $156 million of income in the third quarter of 1998. The decrease primarily resulted from higher equity losses and goodwill amortization associated with our nonconsolidated investments, largely due to Excite@Home and Cablevision. Also contributing to the decrease were distributions on trust preferred securities, as well as higher interest income in 1998 on the proceeds received from the sale of Universal Card Services (UCS). Partially offsetting these decreases was a 1999 third quarter pretax gain of $110 million on the sale of a portion of AT&T's ownership interest in AT&T Canada. Other income (expense) decreased $1,503 million, or 128.6%, to an expense of $334 million for the nine months ended September 30, 1999, compared with $1,169 million of income in the first nine months of 1998. The decrease primarily resulted from higher equity losses and goodwill amortization associated with our nonconsolidated investments, largely due to Excite@Home and Cablevision. Also contributing to the decrease were first quarter 1998 pretax gains on the sales of AT&T Solutions Customer Care (ASCC) of $350 million, LIN Television Corp. (LIN-TV) of $317 million, and a second quarter 1998 gain on the sale of SmarTone Telecommunications Holdings Limited (SmarTone) of $103 million. In addition, the decline reflects higher interest income in 1998 on the proceeds received from the sale of UCS. Partially offsetting these decreases was a first quarter 1999 pretax gain on the sale of the AT&T Language Line Services business (Language Line) of $153 million, a second quarter 1999 pretax gain on the sale of WOOD-TV of $88 million, and a third quarter 1999 pretax gain on the sale of a portion of our ownership interest in AT&T Canada of $110 million. AT&T Form 10-Q - Part I Three Nine Months Ended Months Ended September 30, September 30, Dollars in millions 1999 1998 1999 1998 Earnings Before Interest and Taxes (EBIT)...............................$2,980 $3,512 $8,084 $5,470 EBIT decreased $532 million, or 15.2%, to $2,980 million, for the third quarter of 1999 compared with the third quarter of 1998 and increased $2,614 million, or 47.8%, to $8,084 million for the nine months ended September 30, 1999, compared with the nine months ended September 30, 1998. Excluding AB&IS and AGNS, as well as restructuring and other charges, net, and certain gains on the sales of businesses, EBIT increased $464 million, or 15.5%, to $3,459 million, for the third quarter of 1999 compared with the third quarter of 1998 and increased $2,124 million, or 28.2%, to $9,651 million for the nine months ended September 30, 1999, compared with the nine months ended September 30, 1998. These increases were due primarily to revenue increases combined with an improving cost structure, partially offset by lower interest income and distributions on trust preferred securities issued in 1999. AT&T remains committed to reducing the cost of doing business by cutting $2 billion in costs by the end of 2000. However, as we continue to invest in growth businesses, total operating expenses are expected to increase. AT&T calculates EBIT as operating income plus other income and is a measure used by our chief operating decision-makers to measure AT&T's consolidated operating results and to measure segment profitability. Interest and taxes are generally not allocated to our segments because debt is managed and serviced and taxes are managed and calculated on a centralized basis. Trends in interest and taxes are discussed separately on a consolidated basis. Management believes EBIT is a meaningful measure to disclose to investors because it provides investors with an analysis of operating results using the same measures used by the chief operating decision-makers of AT&T, provides a return on total capitalization measure, and allows investors a means to evaluate the financial results of each segment in relation to consolidated AT&T. Our calculation of EBIT may or may not be consistent with the calculation of EBIT by other public companies, and EBIT should not be viewed by investors as an alternative to generally accepted accounting principles (GAAP) measures of income as a measure of performance or to cash flows from operating, investing and financing activities as a measure of liquidity. Three Nine Months Ended Months Ended September 30, September 30, Dollars in millions 1999 1998 1999 1998 Interest expense..................... $ 459 $ 114 $1,108 $ 322 Interest expense increased $345 million, or 301.4%, in the third quarter of 1999 compared with the third quarter of 1998. For the nine months ended September 30, 1999, interest expense increased $786 million, or 244.1%, compared with the nine months ended September 30, 1998. These increases were primarily driven by a higher level of average debt outstanding associated with our acquisitions. For the quarterly period, the increase was partially offset by a lower average interest rate. AT&T Form 10-Q - Part I Three Nine Months Ended Months Ended September 30, September 30, Dollars in millions 1999 1998 1999 1998 Provision for income taxes............ $ 888 $1,275 $2,679 $1,901 The provision for income taxes decreased $387 million, or 30.4%, to $888 million in the third quarter of 1999 compared with the third quarter of 1998 due to lower earnings before income taxes and a lower effective tax rate. Effective tax rates for the third quarter of 1999 and 1998 were 35.2% and 37.5%, respectively. The decrease in the effective tax rate was due primarily to the pooling of TCG's historical operating results which did not include tax benefits on pre-acquisition losses in 1998 and certain foreign legal entity restructurings in 1999. The provision for income taxes increased $778 million, or 40.9%, to $2,679 million for the nine months ended September 30, 1999, compared with the nine months ended September 30, 1998, due primarily to higher income before income taxes. Effective tax rates for the nine months ended September 30, 1999 and 1998 were 38.4% and 36.9%, respectively. In the first quarter of 1999, AT&T Group recorded a non-tax deductible in-process research and development charge, and accordingly, no tax benefit was recorded. During the second quarter of 1999, a change in the net operating loss utilization tax rules resulted in a $75 million reduction in the second quarter income tax provision. Excluding the impacts of the in-process research and development charge and the change in the net operating loss utilization tax rules in 1999, the effective tax rate for the nine months ended September 30, 1999, was 36.4%. The change in the effective tax rate was impacted by the pooling of TCG's historical operating results which did not include tax benefits on pre-acquisition losses in 1998, the impacts of certain 1998 investment dispositions and certain foreign legal entity restructurings in both periods. Other Items In April 1998 AT&T sold UCS for $3,500 million, resulting in an after-tax gain of $1,290 million, or $0.47 per diluted share, reflected as "Gain on Sale of Discontinued Operations" in the accompanying consolidated statements of income. In August 1998, AT&T extinguished $1,046 million of TCG's debt. The $217 million early extinguishment of debt was recorded as an extraordinary loss. The after-tax impact was $137 million, or $0.05 per diluted share. AT&T Form 10-Q - Part I Three Nine Months Ended Months Ended September 30, September 30, Dollars in millions 1999 1998 1999 1998 Income available to AT&T shareowners. $1,633 $1,986 $4,297 $4,410 Income available to AT&T shareowners decreased $353 million, or 17.7%, to $1,633 million in the third quarter of 1999, driven primarily by the impacts of AB&IS and AGNS, the 1998 benefit in restructuring and other charges, net, and equity losses for the third quarter of 1999 related to Excite@Home and Cablevision, partially offset by increased income from core operations, an extraordinary loss on the extinguishment of debt recognized in the third quarter of 1998 and the gain on the sale of a business in 1999. Income available to AT&T shareowners decreased $113 million, or 2.6%, to $4,297 million for the first nine months of 1999 driven primarily by the 1998 gain on the sale of discontinued operations, the impacts of AB&IS and AGNS, the equity losses for the nine months ended September 30, 1999, related to Excite@Home and Cablevision and lower gains on the sales of businesses in 1999. These declines were partially offset by increased income from core operations, lower restructuring and other charges and an extraordinary loss on the extinguishment of debt recognized in the third quarter of 1998. AT&T Form 10-Q - Part I AT&T GROUP SEGMENT RESULTS Business Services The business services segment results reflect sales of long distance and local voice and data services to business customers, including: domestic and international; inbound and outbound; intra-LATA toll; calling card and operator-handled services, and other network enabled services. This segment also includes electronic commerce and Internet-protocol (IP) for business customers such as Web site hosting and AT&T WorldNet business Internet access. Consumer Services The consumer services segment includes the results of providing telecommunications services to residential customers including domestic and international long distance services, intra-LATA toll services, calling-card and operator-handled calling services, and prepaid calling cards. In addition, this segment includes AT&T WorldNet residential Internet access service, noncable local services provided to residential customers and the costs associated with the development of fixed wireless technology. Wireless Services The results of this segment are comprised primarily of sales of wireless services and products to customers in AT&T Group's 850 MHz (cellular) and 1900 MHz (PCS) markets. The results of AT&T's former messaging business are included in 1998 results through October 2, when the unit was sold. Broadband & Internet Services AB&IS includes the results associated with traditional analog video service, as well as new services, such as Digital Cable and AT&T@Home, a high-speed cable Internet access service. AT&T@Home, along with several other large cable operators, has a contract with Excite@Home, the operator of an Internet "backbone", over which we can provide high-speed cable Internet service. Also included in this segment are the operations associated with developing and refining the infrastructure that will support broadband telephony. Other and Corporate This group includes the results of AT&T Solutions (including AGNS), international operations and ventures, other corporate operations, overhead and eliminations. The above segments reflect certain changes since the publication of our annual results due to changes in the way we manage our business. The business services segment was expanded to include the results of TCG and the business portion of AT&T WorldNet Service; the consumer services segment was expanded to include the residential portion of AT&T WorldNet Service and the costs associated with the development of fixed wireless technology. All prior results have been restated to reflect these changes. AT&T Form 10-Q - Part I The discussion of segment results for AT&T Group generally includes revenues; earnings before interest and taxes, including other income (EBIT); earnings before interest, taxes, depreciation and amortization, including other income (EBITDA); capital additions and total assets. The discussion of EBITDA for AT&T Group's wireless services and broadband & Internet services segments is modified to exclude other income. AT&T calculates EBIT as operating income plus other income and is a measure used by our chief operating decision-makers to measure AT&T's consolidated operating results and to measure segment profitability. Interest and taxes are generally not allocated to our segments because debt is managed and serviced and taxes are managed and calculated on a centralized basis. Trends in interest and taxes are discussed separately on a consolidated basis. Management believes EBIT is a meaningful measure to disclose to investors because it provides investors with an analysis of operating results using the same measures used by the chief operating decision-makers of AT&T, provides a return on total capitalization measure, and allows investors a means to evaluate the financial results of each segment in relation to consolidated AT&T. Our calculation of EBIT may or may not be consistent with the calculation of EBIT by other public companies, and EBIT should not be viewed by investors as an alternative to generally accepted accounting principles (GAAP) measures of income as a measure of performance or to cash flows from operating, investing and financing activities as a measure of liquidity. EBITDA is also used by management as a measure of segment performance and is defined as EBIT plus depreciation and amortization. We believe it is meaningful to investors as a measure of each segment's liquidity and allows investors to evaluate a segment's liquidity using the same measure that is used by the chief operating decision-makers of AT&T. Consolidated EBITDA is also provided for comparison purposes. Our calculation of EBITDA may or may not be consistent with the calculation of EBITDA by other public companies and should not be viewed by investors as an alternative to GAAP measures of income as a measure of performance or to cash flows from operating, investing and financing activities as a measure of liquidity. In addition, EBITDA does not take into effect changes in certain assets and liabilities which can affect cash flow. Total assets for each segment include all assets, except inter-entity receivables. Deferred taxes, prepaid pension assets, and corporate-owned or leased real estate are generally held at the corporate level and therefore are primarily included in the other and corporate group. Shared network assets are allocated to the segments and reallocated each January, based on the prior two years' volumes of minutes used. Capital additions for each segment include additions to property, plant and equipment and other long-lived assets including licenses, investments, franchise costs and capitalized software. AT&T Form 10-Q - Part I BUSINESS SERVICES
Three months ended September 30, Change Dollars in millions 1999 1998 $ % External revenues................... $ 5,849 $ 5,746 $ 103 1.8% Internal revenues................... 427 229 198 86.7% Total revenues...................... 6,276 5,975 301 5.0% EBIT................................ 1,537 1,359 178 13.0% EBITDA.............................. 2,257 1,983 274 13.8% OTHER ITEMS Capital additions................... $ 1,821 $ 1,509 $ 312 20.7% Nine months ended September 30, Change Dollars in millions 1999 1998 $ % External revenues................... $17,663 $16,985 $ 678 4.0% Internal revenues................... 1,110 656 454 69.1% Total revenues...................... 18,773 17,641 1,132 6.4% EBIT................................ 4,563 3,602 961 26.7% EBITDA.............................. 6,715 5,346 1,369 25.6% OTHER ITEMS Capital additions................... $ 4,316 $ 3,685 $ 631 17.1% At Sept. 30, At Dec. 31, Change 1999 1998 $ % Total assets........................ $23,378 $21,415 $1,963 9.2%
REVENUES Business services revenues increased 5.0% in the third quarter of 1999, and increased 6.4% for the nine months ended September 30, 1999, compared with the prior year. The increase for the quarter was primarily driven by continued strength in data services which includes Internet Protocol (IP) services, as well as increases in local voice services. The increase for the year-to-date period was primarily driven by data services, domestic long distance voice services and local voice services. Total calling volumes for both periods, including local services, increased about 25% over the prior year; excluding local services, volumes increased at a mid-teens growth rate for the quarter and year-to-date periods. Data services revenues grew at a mid-teens rate for the third quarter of 1999. The increase was led by continued growth in frame relay as well as growth in international and high-speed private line services. Data services for the 1999 year-to-date period grew in the high-teens, due primarily to continued growth in frame relay and high-speed private line services. The data revenues growth rates were negatively impacted by 1998 billing adjustments. The data services growth was augmented by significant growth in IP services, such as AT&T WorldNet, for both periods. Packet services (frame relay, ATM and IP) grew over 50% on a combined basis for the quarter and approximately 65% for the year-to-date period. AT&T Form 10-Q - Part I Long distance voice revenues grew at a low-single-digit rate for the third quarter and for the nine months ended September 30, 1999, compared with the prior year periods. Strong volume increases were partially offset by a declining average price per minute. The average price per minute has been negatively impacted by the competitive forces within the industry which we expect to continue. In addition, the price per minute has been negatively impacted by changes in product mix, largely attributable to an increase in wholesale, which has a lower rate per minute. Local voice service revenues, which included domestic ACC revenues since its acquisition in April 1998, grew nearly 70% in the third quarter and first nine months of 1999, compared with the corresponding prior year periods. AT&T's integrated business local operations, including AT&T Digital Link, added approximately 164 thousand access lines in the third quarter and total access lines in service as of September 30, 1999, reached approximately 1.1 million on a restated basis. The number of access lines was restated and now represents a more comprehensive view of our bundled strategy as it now includes all channels capable of providing local traffic. Prior period amounts have also been restated. AT&T serves 32,809 buildings in 87 metropolitan statistical areas (MSAs), with over 17% of the buildings on-network. Internal revenues increased 86.7% and 69.1% for the three and nine months ended September 30, 1999, respectively. The increases were due to higher sales of business long distance services to other AT&T units, primarily AT&T Solutions (including the impact of AGNS) and wireless services, for resale to AT&T Solutions and wireless services customers. EBIT/EBITDA EBIT and EBITDA for business services increased 13.0% to $1,537 million and 13.8% to $2,257 million, respectively, in the third quarter of 1999 compared with the prior year quarter. EBIT and EBITDA for business services increased 26.7% to $4,563 million and 25.6% to $6,715 million, respectively, for the nine months ended September 30, 1999, compared with the prior year. The improvements were driven by the growth in revenues and margin improvement. EBIT and EBITDA margins were positively impacted by an improved cost structure as a result of cost control initiatives in 1999. The EBIT and EBITDA growth rates have declined from the prior quarter due to increased costs associated with volume increases, price declines and strong third quarter 1998 results due to the reduced cost structure due to headcount reductions associated with VRIP. OTHER ITEMS Capital additions for business services were $1,821 million for the third quarter of 1999 and were $4,316 million for the nine months ended September 30, 1999. Capital additions were $1,509 million for the third quarter of 1998 and were $3,685 million for the nine months ended September 30, 1998. Spending in both 1999 and 1998 was primarily directed towards the long distance network, including SONET, as well as spending on the local network. In 1998 spending was also directed towards circuit switch equipment. Total assets increased $1,963 million, or 9.2%, to $23,378 million at September 30, 1999, compared with December 31, 1998, primarily due to an increase in property, plant and equipment as a result of capital additions. AT&T Form 10-Q - Part I CONSUMER SERVICES
Three months ended September 30, Change Dollars in millions 1999 1998 $ % Revenues............................. $ 5,614 $ 5,889 $ (275) (4.7)% EBIT................................. 2,176 1,764 412 23.3% EBITDA............................... 2,393 1,948 445 22.9% OTHER ITEMS Capital additions.................... $ 191 $ 130 $ 61 45.8% Nine months ended September 30, Change Dollars in millions 1999 1998 $ % Revenues............................. $16,604 $17,264 $ (660) (3.8)% EBIT................................. 5,893 4,609 1,284 27.9% EBITDA............................... 6,535 5,144 1,391 27.0% OTHER ITEMS Capital additions.................... $ 449 $ 329 $ 120 36.3% At Sept. 30, At Dec. 31, Change 1999 1998 $ % Total assets......................... $ 6,907 $ 6,561 $ 346 5.3%
REVENUES Consumer services revenues decreased 4.7% and 3.8% for the three and nine-month periods ended September 30, 1999, respectively, compared with the same periods last year. Excluding AT&T WorldNet Service, revenues were down 5.1% and 4.3% for the three and nine-month periods ended September 30, 1999, respectively. Long distance calling volumes declined at a mid-single-digit rate for both periods. These results reflect the competitive nature of the consumer long distance industry. Lower revenues reflect the company's strategy to migrate higher-usage customers to optional calling plans in order to optimize the customer base for future growth. In August 1999, AT&T introduced One Rate 7sm, a simple, convenient calling plan that allows consumers to make long distance calls 24 hours a day, seven days a week for seven-cents a minute. The plan requires a monthly fee of $5.95 that is reduced to $4.95 for customers who select AT&T as their intra-LATA provider. Initial customer response to One Rate 7 has exceeded expectations. In the first five weeks, nearly 2 million customers subscribed to the plan with over 60% choosing AT&T for intra-LATA service. New and existing Personal Network subscribers also receive the seven-cent rate on long distance calling as part of the bundled package. Consumer WorldNet Service revenues increased 44.3% in the third quarter of 1999 over the prior year quarter to $79 million. Revenues increased 46.7% for the nine months ended September 30, 1999, to $220 million compared with the nine months ended September 30, 1998. AT&T WorldNet Service now serves 1.5 million residential subscribers, an increase of 44.8% from a year ago. AT&T Form 10-Q - Part I EBIT/EBITDA EBIT and EBITDA for consumer services increased 23.3% and 22.9%, respectively, in the third quarter of 1999 compared with the third quarter of the prior year and increased 27.9% and 27.0%, respectively, for the nine months ended September 30, 1999, compared with the nine months ended September 30, 1998. EBIT and EBITDA for consumer services excluding the first quarter 1999 gain on the sale of Language Line increased 24.5% and 24.1%, respectively, for the nine months ended September 30, 1999, over the same period last year. The increase for the quarter was driven primarily by lower negotiated settlement rates and cost reduction efforts, primarily in marketing spending. The increase for the year-to-date period, excluding the gain on the sale of Language Line, was driven primarily by cost reduction efforts, primarily in marketing spending and lower negotiated settlement rates. OTHER ITEMS Capital additions for consumer services were $191 million for the third quarter of 1999 and were $449 million for the nine months ended September 30, 1999. Capital additions were $130 million for the third quarter of 1998 and were $329 million for the nine months ended September 30, 1998. Spending in both years was primarily directed towards the long distance network. Total assets increased $346 million, or 5.3%, to $6,907 million primarily associated with the purchase of SmarTalk in the first quarter of 1999. Also contributing to the increase was capital additions, partially offset by increased accumulated depreciation. AT&T Form 10-Q - Part I WIRELESS SERVICES
Three months ended September 30, Change Dollars in millions 1999 1998 $ % Revenues............................ $ 2,050 $ 1,420 $ 630 44.2% EBIT................................ 69 47 22 48.1% EBITDA excluding other income....... 404 264 140 53.3% OTHER ITEMS Capital additions................... $ 676 $ 208 $ 468 226.2% Nine months ended September 30, Change Dollars in millions 1999 1998 $ % Revenues............................ $ 5,490 $ 3,897 $1,593 40.9% EBIT................................ 93 261 (168) (64.3)% EBITDA excluding other income....... 935 750 185 24.7% OTHER ITEMS Capital additions................... $ 1,493 $ 603 $ 890 147.7% At Sept. 30, At Dec. 31, Change 1999 1998 $ % Total assets........................ $21,938 $19,115 $2,823 14.8%
REVENUES Wireless services' revenues increased $630 million, or 44.2%, in the third quarter of 1999, and increased $1,593 million, or 40.9%, for the nine months ended September 30, 1999, compared with same periods last year. Wireless services' 1999 results include Vanguard Cellular Systems (Vanguard) since its acquisition on May 3, 1999, and 1998 results include our messaging business until the sale date of October 2, 1998. Adjusted to exclude both Vanguard and our messaging business, revenues grew 40.9% and 41.1% for the three and nine-month periods ended September 30, 1999, respectively, compared with the prior year periods. The growth for both periods was driven by the continued successful execution of AT&T's wireless strategy of targeting and retaining high-value subscribers, expanding the national wireless footprint, focusing on digital service, and offering simple rate plans, which has resulted in increased subscribers and rising average revenue per subscriber. AT&T Form 10-Q - Part I AT&T continues to experience growth in wireless subscribers. Consolidated subscribers grew 34.8% from a year ago to approximately 9.2 million at September 30, 1999, including approximately 700 thousand subscribers from our acquisition of Vanguard and approximately 125 thousand subscribers from our acquisition of Honolulu Cellular Telephone Company (Honolulu) in August 1999. Net subscriber additions totaled 269 thousand during the third quarter, down 17.4% from the prior year quarter. Net subscriber additions declined as a result of a reduction in acquisition marketing efforts in some markets due to network capacity challenges and a supply shortage of digital multi-network phones in the quarter. Total subscribers, including partnership markets in which AT&T does not own a controlling interest, were nearly 12 million at the end of the third quarter of 1999. AT&T's focus on high-value subscribers has helped generate rising usage by customers and increased quarterly average revenue per user (ARPU). ARPU across all of AT&T's wireless markets was $67.9 in the third quarter, an increase of 14.9% from the third quarter of 1998 and a 2.6% increase from the second quarter of 1999. This represents the fourth consecutive quarter ARPU has increased over the prior year. The company continues to rapidly migrate customers to digital service, generating more efficient use of the network while also reducing customer churn compared to analog service. At the end of the third quarter of 1999, 73.2% of AT&T's nearly 9.2 million consolidated subscribers were on digital service, up from 52.7% one year ago and up from 69.0% one quarter ago. EBIT/EBITDA EXCLUDING OTHER INCOME EBIT was $69 million for the quarter, an increase of $22 million over the prior year period. The increase is primarily due to higher revenues, partially offset by increased costs from higher off-network roaming expenses, increased customer care and customer acquisition costs and lower equity earnings. EBIT was $93 million for the nine months ended September 30, 1999, a decrease of 64.3% over the prior year period. Excluding the second quarter 1998 gain on the sale of SmarTone, EBIT decreased 41.1% for the nine months ended September 30, 1999, compared with the prior year period. The EBIT decline for the period was primarily due to increased costs from higher off-network roaming expenses, and increased customer care and customer acquisition costs associated with the high growth of subscriber additions. In addition, EBIT was also impacted by higher depreciation and amortization as a result of a larger asset base and lower equity earnings in the current period. EBITDA excluding other income was $404 million and $935 million, for the three and nine months ended September 30, 1999, respectively, representing increases of 53.3% and 24.7% over the prior year periods. The improvement for both periods was the result of revenue growth and an improving cost structure. These improvements occurred despite increased costs from higher off-network roaming and increased customer care spending. AT&T Form 10-Q - Part I Off-network roaming expenses continued to negatively impact results, but at a declining rate compared to earlier quarters, as initiatives have been introduced to aggressively capture more minutes on the AT&T network as well as reduce intercarrier roaming rates. AT&T continues to address off-network usage through capital expansion, acquisitions and affiliate launches. Capital expansion is underway within existing and new markets, including Columbus, Ohio; Omaha, Nebraska; San Diego, California; and certain Connecticut cities. In April 1999, we acquired Bakersfield Cellular. In May 1999, AT&T completed its merger with Vanguard, adding more than 700 thousand subscribers and increasing AT&T's wireless coverage in suburban and rural markets in the Ohio Valley and Northeastern U.S. In August 1999, AT&T completed its acquisition of Honolulu, adding approximately 125 thousand customers and providing its mainland customers with wireless services in Honolulu and Maui. Partnership affiliations with Cincinnati Bell Wireless, Triton PCS Holdings, Inc., Telecorp PCS, Inc. and Tritel Inc. further expand AT&T's Time Division Multiple Access (TDMA) footprint. Intercarrier roaming rates have also declined significantly as a result of renegotiated roaming agreements and the deployment of Intelligent Roaming Database (IRDB) technology, which assists in identifying favorable roaming partners in areas not included in our wireless network. All of these efforts have resulted in a 20% and 10% reduction in average incollect rate per minute for the third quarter of 1999 and for nine months ended September 30, 1999, respectively, compared with the same periods last year. OTHER ITEMS Capital additions increased $468 million, or 226.2%, in the third quarter of 1999, compared with the third quarter of 1998. Capital additions increased $890 million, or 147.7%, for the nine months ended September 30, 1999, compared with the nine months ended September 30, 1998. These increases were the result of additional spending to upgrade and increase capacity in existing markets, as well as to expand our national footprint. Total assets increased $2,823 million, or 14.8%, to $21,938 million at September 30, 1999, from December 31, 1998, primarily due to increases in goodwill, licensing costs and property, plant and equipment associated with our acquisitions of Vanguard, Honolulu and Bakersfield Cellular. In addition, higher net property, plant and equipment as a result of capital expenditures and increased accounts receivable associated with higher revenues also contributed to the increase in assets. AT&T Form 10-Q - Part I BROADBAND & INTERNET SERVICES Date of Three months acquisition ended through September 30, September 30, Dollars in millions 1999 1999 Revenues............................ $1,442 $ 3,344 EBIT................................ (530) (1,763) EBITDA excluding other income....... 389 263 OTHER ITEMS Capital additions................... $1,007 $ 2,155 At September 30, 1999 Total assets........................ $55,941 REVENUES Revenues were $1,442 million for the third quarter of 1999 and were $3,344 million from the date of acquisition through September 30, 1999. Broadband & Internet services ended the third quarter of 1999 with 11.4 million basic cable customers passing 19.4 million homes. AT&T had approximately 1.7 million Digital Cable customers. The high-speed cable Internet service, AT&T@Home, had approximately 113,600 customers at the end of the third quarter compared with approximately 82,800 at the end of the second quarter. AT&T holds equity interests in Excite@Home and Cablevision. At September 30, 1999, AT&T owned 94.5 million shares of Excite@Home, representing an approximate 26% economic interest, and 48.9 million shares of Cablevision, representing an approximate 32% economic interest. In the fourth quarter of 1999, Excite@Home agreed to acquire an online greeting card company. Upon completion of the merger, it is expected that AT&T's economic interest in Excite@Home will be further diluted. EBIT/EBITDA EXCLUDING OTHER INCOME EBIT was a deficit of $530 million for the third quarter of 1999 and a deficit of $1,763 million since acquisition in early March of 1999. EBITDA excluding other income was $389 million for the third quarter of 1999 and $263 million since acquisition. Included in AB&IS year-to-date results was a $594 million first quarter 1999 charge for in-process research and development and a second quarter 1999 charge of $50 million related to a contribution agreement entered into by AB&IS to satisfy certain liabilities of Phoenixstar. OTHER ITEMS Total assets were $55,941 million at September 30, 1999. Capital additions of $1,007 million for the third quarter of 1999 and $2,155 million since the date of acquisition through September 30, 1999, comprised primarily of spending on cable distribution systems which focused primarily on upgrading the plant bandwidth. AT&T Form 10-Q - Part I OTHER AND CORPORATE
Three months ended September 30, Change Dollars in millions 1999 1998 $ % Revenues............................ $ 888 $ 369 $ 519 141.9% EBIT................................ (272) 342 (614) (179.2)% EBITDA.............................. (81) 462 (543) (117.5)% OTHER ITEMS Capital additions................... $ 944 $ 167 $ 777 471.2% Nine months ended September 30, Change Dollars in millions 1999 1998 $ % Revenues............................ $ 1,846 $ 893 $ 953 107.2% EBIT................................ (702) (3,002) 2,300 76.6% EBITDA.............................. (221) (2,646) 2,425 91.7% OTHER ITEMS Capital additions................... $ 1,489 $ 425 $1,064 250.6% At Sept. 30, At Dec. 31, Change 1999 1998 $ % Total assets........................ $18,209 $12,459 $5,750 46.1%
REVENUES Revenues increased $519 million, or 141.9%, in the third quarter of 1999 compared with the same quarter last year. Excluding the impacts of AGNS, revenues for the third quarter of 1999 were $432 million, an increase of 17.8% from the same quarter a year ago. Revenue growth was primarily driven by AT&T Solutions as a result of the continued strength of the outsourcing business. These increases were partially offset by an increase in the elimination of intercompany revenues. Revenues increased $953 million, or 107.2%, for the nine months ended September 30, 1999, compared with the same period last year. Excluding the impacts of AGNS, revenues increased $282 million, or 31.9%, for the nine months ended September 30, 1999, compared with the same period in the prior year. The increase was primarily driven by the growth in AT&T Solutions and international operations and ventures. These increases were partially offset by an increase in the elimination of intercompany revenues and the sale of ASCC in 1998. AT&T Form 10-Q - Part I The elimination of revenues and profit generated by the sale of services between segments is primarily a result of the sale of business long distance services to other AT&T units. Revenues eliminated in the quarter were $427 million, an increase of 93.6% from the third quarter of 1998. Revenues eliminated through September 30, 1999, year-to-date were $1,124 million, an increase of 57.0% from the prior year. The increase in eliminated revenues is primarily due to an increase in business services sales to AT&T Solutions, including the impact of AGNS, and wireless services. EBIT/EBITDA EBIT and EBITDA decreased $614 million, or 179.2%, and $543 million, or 117.5%, in the third quarter of 1999 compared with the prior year quarter. Excluding the third quarter 1999 gain on the sale of a portion of AT&T's equity interest in AT&T Canada and the third quarter 1998 restructuring and other charge benefit, EBIT and EBITDA decreased $207 million and $136 million, or 118.7% and 248.6%, respectively, from the third quarter of 1998. The decline was primarily driven by higher interest income in 1998 and distributions on trust preferred securities in 1999. In addition, EBIT was negatively impacted and EBITDA positively impacted by AGNS. EBIT and EBITDA improved $2,300 million, or 76.6% and $2,425 million, or 91.7%, respectively, for the nine months ended September 30, 1999, compared with the same period last year. Excluding the restructuring and other charges, the 1999 gains on the sales of a portion of AT&T's ownership in AT&T Canada and WOOD-TV and the first quarter 1998 gains on the sales of ASCC and LIN-TV, EBIT was flat for the nine months ended September 30, 1999, compared with the nine months ended September 30, 1998, and EBITDA improved $125 million, or 26.0%, for the same period. Savings from cost control initiatives and lower equity losses for international operations and ventures were offset by lower interest income and distributions on trust preferred securities. In addition, EBIT was negatively impacted and EBITDA was positively impacted by AGNS. AT&T Form 10-Q - Part I OTHER ITEMS Capital additions increased $777 million, or 471.2%, in the third quarter of 1999 compared with the third quarter of last year. Capital additions increased $1,064 million, or 250.6% for the nine months ended September 30, 1999, compared with the nine months ended September 30, 1998, primarily due to increased investment in international operations and ventures' nonconsolidated subsidiaries. Total assets at September 30, 1999, were $18,209 million compared with $12,459 million at December 31, 1998, which represents a 46.1% increase. The increase was primarily due to goodwill associated with AGNS. AT&T SOLUTIONS AT&T Solutions is our outsourcing, network-management and professional-services business. AT&T Solutions is comprised of the Solutions outsourcing unit, the internal AT&T Information Technology Services unit, and the recently acquired AGNS. During the third quarter of 1999, AT&T completed additional portions of the acquisition in Canada, New Zealand, Korea, Hong Kong, South Africa and Isreal. The results of AT&T Solutions are included in the other and corporate group.
Three months ended September 30, Change Dollars in millions 1999 1998 $ % Revenues............................ $ 983 $ 285 $ 698 245.1% EBIT................................ (23) 18 (41) (222.7)% EBITDA.............................. 117 88 29 32.3% OTHER ITEMS Capital additions................... $ 152 $ 51 $ 101 199.8% Nine months ended September 30, Change Dollars in millions 1999 1998 $ % Revenues............................ $1,989 $ 765 $1,224 159.9% EBIT................................ (30) 14 (44) (312.4)% EBITDA.............................. 296 219 77 35.1% OTHER ITEMS Capital additions................... $ 228 $ 108 $ 120 112.5% At Sept. 30, At Dec. 31, Change 1999 1998 $ % Total assets........................ $6,774 $1,023 $5,751 562.1%
REVENUES AT&T Solutions grew revenues 245.1% for the third quarter of 1999 and 159.9% for the nine months ended September 30, 1999, to $983 million and $1,989 million, respectively, compared with the corresponding prior year periods. Excluding the impact of AGNS, revenues grew 47.8% for the quarter and 49.5%, for the nine months ended September 30, 1999, to $421 million and $1,144 million, respectively. The growth for both periods was the result of new contracts signings and growth from existing clients. In addition, AT&T Solutions manages AT&T's internal network infrastructure and generated approximately $421 million in internal billings in the third quarter and $1,273 million for the nine months ended September 30, 1999, which were recorded as a reduction to AT&T Solutions' expenses (cost recovery). AT&T Form 10-Q - Part I AT&T Solutions, with more than 30,000 clients, including IBM, CitiGroup, McGraw-Hill, Bank One, United Health Group, Textron, J.P. Morgan, Merrill Lynch, and MasterCard International, has the potential for more than $11 billion in outsourcing revenues over the life of the signed contracts. EBIT/EBITDA EBIT and EBITDA were a deficit of $23 million and income of $117 million for the third quarter of 1999, respectively, including AGNS. For the nine months ended September 30, 1999, EBIT and EBITDA were a deficit of $30 million and income of $296 million, respectively. Excluding the impact of AGNS, EBIT and EBITDA were a positive $24 million and $94 million for the third quarter of 1999, respectively, an improvement over $18 million and $88 million, respectively, reported in the corresponding prior year quarter. EBIT and EBITDA were $45 million and $260 million on this basis for the nine months ended September 30, 1999, an improvement over $14 million and $219 million for the nine months ended September 30, 1998. Excluding AGNS, the improvement for both periods was primarily due to revenue growth in AT&T Solutions' outsourcing unit combined with improving margins. On a year-to-date basis, the improvement was partially offset by a lower EBIT margin on internal services billed. OTHER ITEMS Capital additions for the third quarter of 1999 were $152 million, an increase of 199.8% over the third quarter of 1998. Capital additions for the nine months ended September 30, 1999, were $228 million, an increase of 112.5% over the corresponding prior year period. The increases were primarily due to the addition of client support equipment. Total assets increased $5,751 million, or 562.1%, from December 31, 1998, due primarily to goodwill and other intangible assets associated with AGNS as well as higher accounts receivable. INTERNATIONAL OPERATIONS AND VENTURES International operations and ventures include consolidated foreign operations such as frame relay services in the UK, ACC, the company's international carrier services businesses and international online services. The equity earnings or losses of AT&T's nonconsolidated international joint ventures and alliances, such as Alestra in Mexico, AT&T Canada Corp., Rogers Cantel and Japan Telecom are also included. The results of international operations and ventures are included in the other and corporate group.
Three months ended September 30, Change Dollars in millions 1999 1998 $ % Revenues............................ $ 316 $ 288 $ 28 9.8% EBIT................................ 84 (48) 132 273.7% EBITDA.............................. 99 (31) 130 423.7% OTHER ITEMS Capital additions................... $ 690 $ 39 $651 NMF AT&T Form 10-Q - Part I Nine months ended September 30, Change Dollars in millions 1999 1998 $ % Revenues............................ $ 941 $ 739 $202 27.4% EBIT................................ (105) (174) 69 39.7% EBITDA.............................. (52) (119) 67 56.5% OTHER ITEMS Capital additions................... $1,047 $ 104 $943 NMF At Sept. 30, At Dec. 31, Change 1999 1998 $ % Total assets........................ $2,538 $1,915 $623 32.6%
REVENUES Revenues grew 9.8% in the third quarter of 1999 to $316 million and grew 27.4% to $941 million for the nine months ended September 30, 1999, compared with the corresponding periods in 1998. Revenue growth for both periods was led by international carrier services and frame relay services due to increased volumes. A decline in ACC revenues due to the merger of ACC Canada with AT&T Canada Corp., which is now accounted for as an equity investment, partially offset the increase in revenues for the quarter. Revenue growth rates have also been impacted by the divestment of certain nonstrategic businesses. EBIT/EBITDA EBIT and EBITDA improved in the third quarter of 1999 by $132 million and $130 million, respectively, compared with the same period in 1998 due primarily to a gain on the sale of a portion of AT&T's ownership interest of AT&T Canada to BT. Excluding this gain, EBIT and EBITDA improved in the third quarter of 1999 by $22 million and $20 million, respectively, due primarily to an improving financial performance in ventures and alliances. The divestment of certain nonstrategic businesses and improved performance in international carrier services and frame relay services also contributed to the improvement. These increases were partially offset by costs related to the preparation of Concert. AT&T Form 10-Q - Part I EBIT and EBITDA improved for the nine months ended September 30, 1999, by $69 million to a deficit of $105 million and by $67 million to a deficit of $52 million, respectively, compared with the same period in 1998. Excluding the third quarter gain on the sale of a portion of AT&T's ownership interest in AT&T Canada and the year-to-date net charge related to the exit of joint ventures that would have competed directly with Concert, EBIT and EBITDA improved during the period by $87 million and $85 million, respectively, primarily driven by an improving financial performance in ventures and alliances. The divestment of certain nonstrategic businesses and improved performance in frame relay and international carrier services also contributed to the improvement. These increases were partially offset by costs related to the preparation of Concert. OTHER ITEMS Capital additions increased $651 million to $690 million in the third quarter of 1999 and increased $943 million to $1,047 million for the nine months ended September 30, 1999, compared with the same periods last year. The increases were primarily due to increased investments in nonconsolidated subsidiaries. Total assets were $2,538 million at September 30, 1999, compared with $1,915 million at December 31, 1998. The increase was primarily driven by additional investments in nonconsolidated subsidiaries partially offset by the divestment of certain nonstrategic businesses. AT&T Form 10-Q - Part I LIBERTY MEDIA GROUP RESULTS LMG produces, acquires and distributes entertainment, educational and informational programming services through all available formats and media. LMG is also engaged in electronic retailing services, direct marketing services, advertising sales relating to programming services, infomercials and transaction processing. Although LMG is wholly owned by AT&T, it is accounted for as an equity investment in the accompanying consolidated financial statements since AT&T does not have a controlling financial interest for financial reporting purposes in LMG. Equity losses from LMG were $217 million for the third quarter of 1999 and $818 million for the period from the date of acquisition through September 30, 1999. On July 7, 1999, Liberty Media Corporation (a company in the Liberty Media Group) and The Associated Group, Inc. (Associated) signed a definitive merger agreement pursuant to which LMG will acquire Associated in an all-stock, tax-free transaction valued at approximately $3 billion. Under the agreement, Associated shareowners would receive an aggregate of approximately 51,778,920 shares of Class A Liberty Media Group tracking stock, subject to adjustment, and an aggregate of approximately 19,719,274 shares of AT&T common stock. The AT&T common stock issued is equal to the number of AT&T shares held by Associated that will be dividended to AT&T and will be retired. In addition, Associated also owns 23.4 million shares of LMG Class A tracking stock and 5.3 million shares of Class B tracking stock that will become treasury stock. A proxy statement/prospectus was filed with the SEC on October 29, 1999. Upon approval of the stockholders of Associated, as well as the FCC and other authorities, the transaction is expected to be completed during the first quarter of 2000. On September 28, 1999, LMG announced that the Board of Directors of AT&T approved the repurchase from time to time of up to 135 million shares of Liberty Media Group Class A or Class B tracking stock. AT&T Form 10-Q - Part I LIQUIDITY
Nine months ended September 30, Dollars in millions 1999 1998 CASH FLOW OF CONTINUING OPERATIONS: Provided by operating activities.............. $ 7,237 $ 6,998 (Used in) provided by investing activities.... (21,353) 6,808 Provided by (used in) financing activities.... 10,956 (10,026) EBITDA* ........................................ $ 13,748 $ 8,914 * Earnings before interest, taxes, depreciation and amortization (EBITDA) for the nine months ended September 30, 1999, includes restructuring and other charges, net, of $702 million, a $153 million pretax gain on the sale of Language Line, a $110 million pretax gain on the sale of a portion of AT&T's equity interest in AT&T Canada, an $88 million pretax gain on the sale of WOOD-TV and the equity losses associated with our nonconsolidated investments in Excite@Home and Cablevision. EBITDA for the nine months ended September 30, 1998, includes restructuring and other charges, net, of $2,827 million, pretax gains from the sales of ASCC of $350 million, LIN-TV of $317 million and SmarTone of $103 million. EBITDA excludes the results of LMG.
Net cash provided by operating activities of continuing operations for the nine months ended September 30, 1999, was $7,237 million. This represents an increase of $239 million compared with the nine months ended September 30, 1998. The increase was driven primarily by an increase in operating net income excluding depreciation and amortization, offset by an increase in the 1999 tax payment of approximately $1.4 billion primarily related to the gain on the sale of UCS and an increase in accounts receivable. AT&T's investing activities resulted in a net use of cash of $21,353 million for the nine months ended September 30, 1999, compared with a net source of cash of $6,808 million for the nine months ended September 30, 1998. During the nine months ended September 30, 1999, AT&T used $8.8 billion for capital expenditures, transferred $5.5 billion of cash to LMG, purchased portions of AGNS for $4.9 billion and loaned $1.5 billion to MediaOne Group, Inc. (MediaOne) to pay termination fees to Comcast Corporation (Comcast). During the nine months ended September 30, 1998, we received $5.7 billion as a settlement of a receivable in conjunction with the sale of UCS as well as $3.5 billion in proceeds from the sale. Also in 1998, we received a total of $1.6 billion in proceeds from the sales of LIN-TV, ASCC and SmarTone. Our capital spending of $5.1 billion was the primary use of cash during the nine months ended September 30, 1998. AT&T Form 10-Q - Part I During the nine months ended September 30, 1999, the net cash provided by financing activities was $10,956 million compared with cash used in financing activities of $10,026 million for the nine months ended September 30, 1998. During the first nine months of 1999, AT&T received $8.4 billion of cash from 1999 bond issuances, $6.3 billion from the issuance of commercial paper and short-term debt, and $5.0 billion from the issuance of convertible securities and warrants to Microsoft Corporation (Microsoft). Significant uses of cash were $3.9 billion to fund the share repurchase program, $2.1 billion to retire commercial paper and other short-term debt, and $2.0 billion to pay dividends on common stock. In the first nine months of 1998, cash used in financing activities was largely attributable to the pay down of commercial paper and debt, and the repurchase of approximately $3 billion of AT&T common stock. EBITDA is a measure of our ability to generate cash flow and should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with generally accepted accounting principles. EBITDA increased $333 million, or 7.0%, to $5,060 million for the third quarter of 1999 compared with the same period last year. EBITDA increased $4,834 million, or 54.2%, to $13,748 million for the nine months ended September 30, 1999, compared with the same period in 1998. Excluding AB&IS, AGNS, the restructuring and other charges, and gains on sales of businesses in 1999 and 1998, EBITDA increased 25.1% to $13,723 million in the first nine months of 1999 from $10,971 million for the first nine months of 1998. The increase was primarily due to increased revenues and improved margins in business services and cost reductions in consumer services. EURO CONVERSION On January 1, 1999, certain members of the European Union established fixed conversion rates between their existing currencies and the European Union's currency (Euro). The transition period is anticipated to extend through July 1, 2002. We have assessed the impact of the conversion on information-technology systems, currency exchange rate risk, derivatives and other financial instruments, continuity of material contracts as well as income tax and accounting issues. To date, the conversion has not had nor do we expect the conversion during the transition period to have a material effect on our consolidated financial statements. AT&T Form 10-Q - Part I FINANCIAL CONDITION Total assets increased $102,256 million, or 171.7%, to $161,806 million at September 30, 1999, compared with December 31, 1998. The increase in total assets was due primarily to the impact of AB&IS, which resulted in franchise costs, an investment in LMG, increased other investments including Cablevision, Excite@Home and Lenfest Communications, Inc., and the addition of over $6 billion to property, plant and equipment. In addition, we recognized goodwill related to AGNS. Other assets increased $1.5 billion representing the Comcast break-up fee loaned to MediaOne by AT&T. These increases were partially offset by a net decrease in cash, which was used to partially fund capital expenditures during the period and the first quarter share repurchase, as well as AGNS. Total liabilities increased $44,377 million, or 130.8%, to $78,296 million at September 30, 1999, compared with December 31, 1998. The increase was due primarily to AB&IS, particularly deferred income taxes and debt, the $8.5 billion in bond offerings and the issuance of $6.3 billion of short-term debt. These increases were partially offset by the retirement of $2.1 billion of long-term debt. Included within "Minority Interest in Equity of Consolidated Subsidiaries" is Class A Senior Cumulative Exchangeable Preferred Stock of TCI Pacific Communications, Inc. (Pacific) and TCI Class B Preferred Stock. At September 30, 1999, the amount of preferred stock and accumulated dividends of Pacific and Class B preferred, respectively, were an aggregate $2.1 billion and $149 million. In addition, AT&T issued $5.0 million of quarterly convertible income preferred securities (recorded net of a $0.3 million discount) to Microsoft. Total shareowners' equity increased $49,241 million, or 192.9%, to $74,763 million at September 30, 1999, compared with December 31, 1998. The increase was due primarily to the issuance of shares related to AB&IS, partially offset by shares repurchased. AT&T Form 10-Q - Part I AT&T Group's ratio of total debt to total capital at September 30, 1999, was 42.6% compared with 20.9% at December 31, 1998. Equity includes the $5 billion convertible securities issued to Microsoft and debt includes $1.6 billion of non-convertible securities issued by TCI's subsidiary trusts. The increase was primarily driven by an increase in debt associated with AB&IS and $8.5 billion of bond issuances in 1999, partially offset by a higher equity base. AT&T Group's net debt-to-operational EBITDA was 1.69X at September 30, 1999, compared with 0.24X at December 31, 1998. RISK MANAGEMENT We are exposed to market risk from changes in interest and foreign exchange rates. On a limited basis we use certain derivative financial instruments, including interest rate swaps, options, forwards and other derivative contracts to manage these risks. We do not use financial instruments for trading or speculative purposes. All financial instruments are used in accordance with board-approved policies. Assuming a 10% downward shift in interest rates at September 30, 1999, the potential loss for changes in fair value of unhedged debt would have been $1.0 billion. RECENT PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Among other provisions, it requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains and losses resulting from changes in the fair values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The effective date of this standard was delayed via the issuance of SFAS No. 137. The effective date for SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though earlier adoption is encouraged and retroactive application is prohibited. For AT&T this means that the standard must be adopted no later than January 1, 2001. Management does not expect the adoption of this standard to have a material impact on AT&T's results of operations, financial position or cash flows. AT&T Form 10-Q - Part I YEAR 2000 AT&T is preparing its systems and applications for the year 2000 (Y2K). The issue our Y2K program addresses is the use of a two-digit year field instead of a four-digit year field in computer systems. If computer systems cannot distinguish between the year 1900 and the year 2000, system failures or other computer errors could result. The potential for failures and errors spans all aspects of our business, including computer systems, voice and data networks, and building infrastructures. We are also faced with addressing interdependencies with our suppliers, connecting carriers and major customers, all of whom face the same issue. AT&T's company-wide Y2K program is focused on four interrelated categories which are critical to maintaining uninterrupted service to our customers: AT&T-developed applications and their external interfaces, AT&T networks, information-technology (IT) platforms that support the applications, and non-IT infrastructure. AT&T's progress in our Y2K program is measured by certain key milestones or phases common to each category of systems. These milestones are: assessment, repair/remediation, testing and certification. AT&T monitors and tracks the progress of our Y2K program through a series of scorecards that capture the activities related to the Y2K process phases. As of September 30, 1999, AT&T's network services and AT&T-developed applications and their external interfaces are year 2000 compliant. This means they have been assessed for year 2000 impacts, repaired if necessary, tested and fully deployed. Within the IT-infrastructure category, some non-critical desktops remain to be certified and a small number of sites remain to be certified in the non-IT infrastructure category. The certification of the remaining desktops and sites is expected to be completed in November 1999. The status of AB&IS' Y2K program is discussed separately from the existing AT&T program. All targets cited herein also exclude information regarding pending acquisitions, whose programs continue to be evaluated and planned for integration into the overall AT&T Y2K program. Program Status AT&T now has over 3,500 applications that (1) directly support AT&T's voice and data telecommunications services (including wired and wireless); (2) are critical to the provisioning, administration, maintenance and customer service/support related to our telecommunications services; and (3) support our sales and marketing organizations, other AT&T services and internal administrative functions. These applications represent over 385 million lines of code. As of September 30, 1999, these applications are 100% complaint. With respect to external (third-party) interface assessment, formal letters were sent to about 2,000 domestic telecommunications companies and international telecommunications authorities to request information on their Y2K plans and targets for compliance. We have identified over 1,000 different types of third-party interfaces and about 10,000 total instances of those types. As of September 30, 1999, AT&T is 100% complete with Y2K certification of external interfaces. AT&T Form 10-Q - Part I The AT&T network is critical to providing top-quality, reliable service to AT&T customers. As of September 30, 1999, the assessment, repair and certification phases of the operation-support systems (OS) were 100% complete and these systems are now fully deployed. In addition to the AT&T-developed applications supporting the network, AT&T has inventoried about 2,000 unique types (manufactured/model combinations) of externally purchased network elements (NE) including switches, routers, network-control points and signal-transfer points. Additional Y2K testing is conducted to independently verify supplier claims of compliance. All of the NEs are now certified. After OS/NE certification is complete, AT&T performs integration testing to verify Y2K certification of NEs in conjunction with the associated OS applications. Such integration testing is 100% completed, and all of the NEs are fully deployed. The IT infrastructure category addresses not only the computing platforms that are critical to the AT&T-developed applications, but also the common modules, communications protocols, the internal AT&T wide-area and local-area networks, desktop hardware/software and the internal voice network. As of September 30, 1999, AT&T was 100% compliant in computing platforms, about 95% compliant in desktops, 100% compliant in voice systems and adjuncts, and 100% compliant in data networks. The desktops that still remain to be validated as Y2K compliant are not in customer-affecting areas. Based on the experience with the desktops already verified as compliant, it is likely that many of the remaining desktops may only require software "patches" or minimal upgrades to be made compliant. We anticipate that we will complete the validation process by the end of November 1999. The non-IT infrastructure focuses on the energy- and environment-management systems that are critical to various computer systems, as well as safety, security and operations. This aspect of the Y2K program encompasses more than 18,000 sites, including thousands of repeater huts, radio towers and wireless cell sites. As of September 30, 1999, 100% of all sites completed inventory and assessment and about 97% are compliant (or not impacted). The small number of sites that still remain to be certified as compliant are anticipated to be completed by mid-November 1999. In addition, AT&T has virtually completed network interoperability tests with a variety of domestic and international testing partners, with the remaining two tests scheduled to be completed in November. These tests are designed to exercise the network across a range of our vendors, and across a range of AT&T voice, private line, and data services. We have also completed testing with key customer and industry segments, including the financial community, insurance, power utilities, the federal government and others. All test results to date have been positive. Similar to AT&T's Y2K program, the AB&IS program has a four-phased approach to determining the readiness of systems for Y2K, namely: assessment, remediation, testing and implementation. As of September 30, 1999, critical cable delivery systems and customer services are Y2K compliant. We anticipate completion of all remaining phases of AB&IS' program by mid-November. AB&IS is also continuing its efforts to verify the year 2000 readiness of its significant suppliers and vendors and continue to communicate with significant business partners and affiliates to assess such partners' and affiliates' Y2K status. AT&T Form 10-Q - Part I Costs We have expended approximately $675 million since inception in 1997 on all phases of the Y2K project. This figure included approximately $76 million of costs incurred during the third quarter of 1999, of which approximately $11 million represented capital spending for upgrading and replacing non-compliant computer systems and network components. Less than half of the 1999 costs incurred to date represent internal IT resources that have been redeployed from other projects and are expected to return to these projects upon completion of the Y2K project. We anticipate remaining Y2K costs for 1999, inclusive of approximately $25 million projected expenditures associated with completing the AB&IS program, will be approximately $64 million. This projection includes approximately $21 million of capitalized costs. The remaining projected expenditures will consist primarily of continued independent verification and validation; contingency planning testing; completion of document retention requirements and continued communications expansion and enhancement. Risk Assessment We have assessed our business exposure that would result from a failure of our Y2K program, as well as those of our suppliers, connecting carriers and major customers. Such failures would result in business consequences that could include failure to be able to serve customers, loss of network functionality, inability to render accurate bills, lost revenues, harm to the AT&T brand, legal and regulatory exposure, and failure of management controls. Although we believe that internal Y2K compliance will be achieved by December 31, 1999, there can be no assurance that the Y2K problem will not have a material adverse effect on our business, financial condition or results of operations. AT&T Form 10-Q - Part I Contingency Plans AT&T's contingency planning program focuses on 38 critical business processes and many more that are designated as "important" or "support". The plans address all facets of business continuity, including key suppliers, systems/applications, IT infrastructure and work centers. Specific examples of AT&T's contingency plan initiatives include the following: Plans are under way to engineer additional network capacity and to position AT&T personnel on site at critical locations to monitor operations and manage increases in work and call volumes. Agreements are being negotiated with contractors and vendors to ensure the availability of on-site technical support. This coverage includes, but is not limited to, network centers and sites, customer-care centers and data centers. We are planning to proactively stage supplemental power, fuel, water, heating, air-conditioning and ventilation sources to support critical business operations and personnel requirements. Alternate procedures and processes are being developed to support critical customer functions, including alternative procedures for rapid repair, recovery and restoration of critical technology components by business resumption teams. Procedures to perform database backups, hardcopy printouts, data retention and recovery are being established for business critical data. Risk Management In addition to the contingency planning program, AT&T has implemented an Independent Verification and Validation program for applications to validate the quality of application remediation and testing, as well as the continuing compliance of systems put back into production. We also continue to conduct independent audits across critical areas of the Y2K program. AT&T continues to monitor the progress of over 50 countries who represent a significant revenue source. Based on assessments aggregated by the Network Reliability and Interoperability Council, the outlook for Y2K readiness for these countries and their carriers continues to improve. Network interoperability testing results also support this view. To maintain a state of readiness and further protect against potential Y2K-related service disruptions, AT&T is instituting a special "quiet period" from December 1, 1999 through January 15, 2000. During this period, no new software or hardware will be introduced into the network or support systems. Provisioning and scheduled maintenance will also be limited. AT&T Form 10-Q - Part I OTHER MATTERS On April 30, 1999, AT&T completed its acquisition of the IBM Global Network business (renamed AT&T Global Network Services or "AGNS") and its assets in the United States. The acquisition is occurring in phases throughout 1999 as legal and regulatory requirements are met in each of the 59 countries in which the business operates. As of the end of the third quarter, we had completed acquisitions representing approximately 95% of the revenues generated by businesses which comprise AGNS. The acquisition has been accounted for as a purchase. Accordingly, the operating results of AGNS have been included in the accompanying consolidated financial statements since the date of acquisition. Intangible assets of approximately $4.1 billion including customer lists and the excess of the purchase price over the fair value of net assets acquired are being amortized on a straight-line basis over periods ranging from five to 30 years. The pro forma impact of AGNS on historical AT&T results are not material. On May 28, 1999, At Home Corporation consummated a merger agreement with Excite, Inc. (Excite), a global Internet media company that offers consumers and advertisers comprehensive Internet navigation services with extensive personalization capabilities. Under the terms of the merger agreement, At Home Corporation issued approximately 116 million shares of its common stock for all of the outstanding common stock of Excite. As a result, AT&T's economic interest in At Home Corporation (Excite@Home) decreased from 38% to 26% following the merger. Due to the resulting increase in Excite@Home's equity after the merger, net of the dilution of AT&T's ownership interest in Excite@Home, AT&T recorded an increase to additional paid-in capital of $488 million at September 30, 1999. In the fourth quarter of 1999, Excite@Home agreed to acquire an online greeting card company. Upon completion of that merger, AT&T will record additional amounts to its additional paid-in capital as the share of its ownership of Excite@Home is diluted. At September 30, 1999, AT&T owned 94.5 million shares of Excite@Home common stock and has an approximate 58% voting interest on certain matters. On August 2, 1999, AT&T completed its acquisition of Honolulu Cellular Telephone Company from BellSouth. In August 1999, AT&T and British Telecommunications plc (BT) jointly acquired a 33.3% stake in Rogers Cantel Mobile Communications Inc. (Rogers Cantel) in Canada for approximately $934 million in cash. The investment is owned equally by AT&T and BT. Rogers Cantel is Canada's largest mobile company serving two million customers from coast to coast. Rogers Cantel provides a complete range of wireless solutions including cellular, paging and interactive messaging, digital PCS and wireless data services marketed under the co-brand Cantel AT&T. Also in August 1999, AT&T sold 30% of its 31% ownership interest in AT&T Canada to BT for approximately $402 million resulting in a $110 million pretax gain and a 22% beneficial ownership by AT&T. AT&T and BT both contributed their ownership interest of AT&T Canada to a joint venture that is 70% owned by AT&T and 30% owned by BT. On September 2, 1999, AT&T and BT acquired a 30% stake in Japan Telecom for $1.83 billion. The previously announced global venture between AT&T and BT has received approval from the Federal Communication Commission (FCC), the U.S. Justice Department and the European Commission. The venture, which will be called Concert, will combine transborder assets and operations of each company and will be equally owned by both companies when operations begin. The venture is expected to be completed in the fourth quarter of 1999 and to begin operations on January 1, 2000. AT&T Form 10-Q - Part I SUBSEQUENT EVENTS On October 6, 1999, AT&T and Dobson Communications Corporation (Dobson) announced the signing of a definitive agreement to acquire American Cellular Corporation through a newly created joint venture for $2.32 billion. Dobson will be responsible for day to day management of the joint venture, which will be equally owned and jointly controlled by Dobson and AT&T. The acquisition will be funded with non-recourse bank debt by the joint venture and cash equity contributions of up to $370 million from each of the two partners. The Board of Directors of AT&T, Dobson and American Cellular have approved the transaction. The acquisition, which is expected to close in the first quarter of 2000, is subject to approval by American Cellular's shareowners, as well as federal regulatory and certain other conditions. On October 21, 1999, shareowners of MediaOne Group, Inc. (MediaOne) unanimously voted in favor of the proposed merger between AT&T and MediaOne, pursuant to a definitive merger agreement entered into on May 6, 1999. In accordance with the agreement, AT&T will purchase each share of MediaOne common stock for $85.00 per share consisting of 0.95 of a share of AT&T common stock plus $30.85 in cash. In addition, the agreement provides for an increase in the amount of cash received per share of MediaOne common stock to the extent that AT&T's stock price was less than $57.00 per share. The additional amount of cash which may be received is limited to $5.42 per share. AT&T plans to issue approximately 613 million shares in the transaction. Upon receipt of regulatory and other approvals, the merger is expected to close in the first quarter of 2000. On November 1, 1999, AT&T announced its plans to form a new public company, to be named AT&T Latin America, that will merge the operations of Netstream, the competitive local exchange company AT&T is acquiring in Brazil, and FirstCom, a publicly traded company with competitive telecommunications operations in Chile, Columbia and Peru. AT&T, together with Promon Tecnologia, its Brazilian partner, will contribute Netstream and $70 million in cash. AT&T will own approximately 60% of the company, owning Class B shares, with 10 votes per share. The transaction has been approved by both AT&T's and FirstCom's Board of Directors. Upon approval by FirstCom shareowners as well as regulatory and other approvals, the transaction is expected to close in the first quarter of 2000. AT&T Latin America intends to apply for listing on the NASDAQ stock market. On November 5, 1999, WORLDxCHANGE Communications announced the acquisition of ACC in Europe (ACC) from AT&T. The agreement includes ACC's principal operations in the United Kingdom, as well as ACC's operating companies in France, Germany and Italy. AT&T believes it will record a pretax loss in the range of $150 million to $200 million on the sale. LEGISLATIVE AND REGULATORY DEVELOPMENTS On October 8, 1999, the Federal Communications Commission (FCC) adopted amendments to its cable attribution rules which eased restrictions on its horizontal ownership limitations. In 1993 the FCC had adopted rules which limited the number of households passed by a single cable operator to 30% of households passed by all cable operators. The amendments affirmed the 30% limit but changed the applicable measurement from households passed to subscribers. In addition, the FCC expanded the base of total subscribers to include those served by alternative multichannel video programming distributors, such as direct broadcast satellite. The FCC stated that the 30% limit on total subscribers equated to 36.7% of cable subscribers. In addition, the FCC also exempted from a cable operator's attributable subscribers those served by systems that the cable operator overbuilds in an incumbent cable franchise territory after October 20, 1999. The FCC retained the 5% voting equity threshold for attribution, and adopted a rule which would treat as attributable any interest that exceeds 33% of the total asset value (equity plus debt) of the entity. The FCC stayed enforcement of the new rules until the D.C. Circuit Court of Appeals decides upon the pending challenge to the cable attribution rules. AT&T Form 10-Q - Part II PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit Number 12 Computation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedule 99.1 Liberty Media Group Financial Results for the Quarter and Year-to-Date Periods Ended September 30, 1999 99.2 Tele-Communications, Inc. Financial Results for the Quarter and Year-to-Date Periods Ended September 30, 1999 (b) Reports on Form 8-K Form 8-K dated September 2, 1999, was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits). AT&T Form 10-Q SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AT&T Corp. /s/ N. S. Cyprus ------------------------------ By: N. S. Cyprus Vice President and Controller (Principal Accounting Officer) Date: November 12, 1999 AT&T Form 10-Q Exhibit Index Exhibit Number 12 Computation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedule 99.1 Liberty Media Group Financial Results for the Quarter and Year-to-Date Periods Ended September 30, 1999 99.2 Tele-Communications, Inc. Financial Results for the Quarter and Year-to-Date Periods Ended September 30, 1999 EX-12 2 EXHIBIT 12 Form 10-Q For the nine Months Ended September 30, 1999 AT&T Corp. Computation of Ratio of Earnings to Fixed Charges (Dollars in Millions) (Unaudited) Income from Continuing Operations Before Income Taxes ................................. $6,158 Less Interest Capitalized during the Period........................................... 104 Add Equity Investment Losses, net of distributions of Less than 50% Owned Affiliates.................... 594 Add Fixed Charges...................................... 1,608 Total Earnings from Continuing Operations Before Income Taxes and Fixed Charges.................................... $8,256 Fixed Charges Total Interest Expense Including Capitalized Interest.. $1,212 Interest Portion of Rental Expense..................... 197 Dividend Requirements on Subsidiary Preferred Stock and Interest on Trust Preferred Securities................ 199 Total Fixed Charges.................................. $1,608 Ratio of Earnings to Fixed Charges..................... 5.1 EX-27 3 ART. 5 FDS FOR 3RD QUARTER 10-Q
5 This schedule contains summary financial information extracted from the unaudited consolidated balance sheet of AT&T Corp. at September 30, 1999, and the unaudited consolidated statement of income for the nine-month period ended September 30, 1999, and is qualified in its entirety by reference to such financial statements. 1,000,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 0 0 12,117 1,488 0 13,040 65,361 28,886 161,806 23,515 22,073 6,346 0 4,461 70,302 161,806 0 46,057 0 37,639 0 1,077 1,108 6,158 2,679 3,479 0 0 0 3,479 1.41 1.39
EX-99 4 EXHIBIT 99.1 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) Combined Balance Sheets (unaudited)
New Liberty Old Liberty (note 1) September 30, December 31, 1999 1998 ------------- ------------ Assets amounts in millions Current assets: Cash and cash equivalents $ 499 407 Marketable securities 2,949 124 Trade and other receivables, net 143 185 Prepaid expenses and committed program rights 407 263 Deferred income tax assets 380 216 Other current assets 5 21 ----------- ----------- Total current assets 4,383 1,216 ----------- ----------- Investments in affiliates, accounted for under the equity method, and related receivables (note 5) 15,939 3,079 Investment in Time Warner, Inc. ("Time Warner") (note 6) 6,968 7,083 Investment in AT&T Corp. ("AT&T") (note 2) -- 3,556 Investment in Sprint Corporation ("Sprint") (notes 2 and 5) 7,616 2,446 Other investments and related receivables 5,156 1,298 Property and equipment, at cost 123 935 Less accumulated depreciation 7 350 ----------- ----------- 116 585 ----------- ----------- Intangible assets 10,148 1,139 Less accumulated amortization 319 164 ----------- ----------- 9,829 975 ----------- ----------- Other assets, at cost, net of accumulated amortization 846 326 ----------- ----------- Total assets $ 50,853 20,564 =========== ===========
(continued) Combined Balance Sheets, continued (unaudited)
New Liberty Old Liberty (note 1) September 30, December 31, 1999 1998 ------------- ------------ Liabilities and Combined Equity amounts in millions Current liabilities: Accounts payable and accrued liabilities $ 192 416 Accrued stock compensation 1,119 126 Program rights payable 170 156 Current portion of debt 474 578 ------------- ------------- Total current liabilities 1,955 1,276 ------------- ------------- Long-term debt (note 8) 1,720 2,318 Deferred income taxes (note 9) 11,635 4,674 Other liabilities 23 423 ------------- ------------- Total liabilities 15,333 8,691 ------------- ------------- Minority interests in equity of attributed subsidiaries 1 545 Obligation to redeem common stock -- 17 Combined equity (note 10): Combined equity 33,025 6,896 Accumulated other comprehensive earnings, net of taxes 2,408 3,718 ------------- ------------- 35,433 10,614 Due to related parties 86 697 ------------- ------------- Total combined equity 35,519 11,311 ------------- ------------- Commitments and contingencies (note 11) Total liabilities and combined equity $ 50,853 20,564 ============= =============
See accompanying notes to combined financial statements. Combined Statements of Operations and Comprehensive Earnings (unaudited)
New Liberty Old Liberty (note 1) Three months ended September 30, 1999 1998 amounts in millions, Revenue $ 214 412 Operating costs and expenses: Operating, selling, general and administrative 168 339 Stock compensation (23) (2) Depreciation and amortization 164 62 ------------- -------------- 309 399 ------------- -------------- Operating income (loss) (95) 13 Other income (expense): Interest expense (41) (37) Dividend and interest income 66 32 Share of losses of affiliates, net (note 5) (238) (307) Minority interests in losses of attributed subsidiaries 3 20 Gain on dispositions (note 7) 12 2,305 Gains on issuance of equity by affiliates and subsidiaries (notes 5 and 7) -- 75 Other, net (4) (2) ------------- -------------- (202) 2,086 ------------- -------------- Earnings (loss) before income taxes (297) 2,099 Income tax benefit (expense) 80 (814) ------------- -------------- Net earnings (loss) $ (217) 1,285 ============= ============== Other comprehensive earnings, net of taxes: Foreign currency translation adjustments 131 11 Unrealized holding gains arising during the period, net of reclassification adjustments 308 32 ------------- -------------- Other comprehensive earnings 439 43 ------------- -------------- Comprehensive earnings $ 222 1,328 ============= ==============
(continued) Combined Statements of Operations and Comprehensive Earnings (unaudited)
New Liberty Old Liberty (note 1) (note 1) Seven months Two months Nine months ended ended ended September 30, February 28, September 30, 1999 1999 1998 amounts in millions Revenue $ 506 282 1,137 Operating costs and expenses: Operating, selling, general and administrative 408 227 975 Stock compensation 432 183 263 Depreciation and amortization 394 47 173 ------------ ------------ ------------ 1,234 457 1,411 ------------ ------------ ------------ Operating loss (728) (175) (274) Other income (expense): Interest expense (87) (28) (81) Dividend and interest income 172 12 66 Share of losses of affiliates, net (note 5) (597) (66) (861) Minority interests in losses of attributed subsidiaries 15 4 42 Gain on dispositions, net (notes 6 and 7) 10 14 2,862 Gains on issuance of equity by affiliates and subsidiaries (notes 5 and 7) -- 389 314 Other, net (8) -- (2) ------------ ------------ ------------ (495) 325 2,340 ------------ ------------ ------------ Earnings (loss) before income taxes (1,223) 150 2,066 Income tax benefit (expense) 405 (209) (828) ------------ ------------ ------------ Net earnings (loss) $ (818) (59) 1,238 ============ ============ ============ Other comprehensive earnings, net of taxes: Foreign currency translation adjustments 88 (15) 7 Unrealized holding gains arising during the period, net of reclassification adjustments 2,320 971 887 ------------ ------------ ------------ Other comprehensive earnings 2,408 956 894 ------------ ------------ ------------ Comprehensive earnings $ 1,590 897 2,132 ============ ============ ============
See accompanying notes to combined financial statements. "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) Combined Statement of Equity Nine months ended September 30, 1999 (unaudited)
Accumulated other Due to comprehensive (from) Total Combined earnings, related combined equity net of taxes parties equity amounts in millions Balance at January 1, 1999 6,896 3,718 697 11,311 Net loss (59) -- -- (59) Foreign currency translation adjustments -- (15) -- (15) Unrealized gains on available-for-sale securities -- 971 -- 971 Reversal of reclassification of redemption amount of common stock subject to put obligation 8 -- -- 8 Transfer of net liabilities to related party, net of taxes 99 -- -- 99 Excess paid on settlement of preferred stock conversion (18) -- -- (18) Other transfers to related parties, net -- -- (24) (24) ------- ------- ------- ------- Balance at February 28, 1999 $ 6,926 4,674 673 12,273 ======= ======= ======= ======= Balance at March 1, 1999 33,515 -- 213 33,728 Net loss (818) -- -- (818) Foreign currency translation adjustments -- 88 -- 88 Unrealized gains on available-for-sale securities -- 2,320 -- 2,320 AT&T Liberty Media Group Tracking Stock issued for conversion of debentures 354 -- -- 354 Reversal of reclassification of redemption amount of common stock subject to put obligation 9 -- -- 9 Gain in connection with the issuance of common stock of attributed subsidiary 50 -- -- 50 Utilization of net operating losses of Liberty Media Group by AT&T (note 9) (85) -- -- (85) Other transfers to related parties, net -- -- (127) (127) ------- ------- ------- ------- Balance at September 30, 1999 $33,025 2,408 86 35,519 ======= ======= ======= =======
See accompanying notes to combined financial statements. "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) Combined Statements of Cash Flows (unaudited)
New Liberty Old Liberty (note 1) (note 1) Seven months Two months Nine months ended ended ended September 30, February 28, September 30, 1999 1999 1998 amounts in millions (see note 4) Cash flows from operating activities: Net earnings (loss) $ (818) (59) 1,238 Adjustments to reconcile net earnings (loss) to net cash provided (used) by operating activities: Depreciation and amortization 394 47 173 Stock compensation 432 183 263 Payments of stock compensation (42) (126) (76) Share of losses of affiliates, net 597 66 861 Deferred income tax (benefit) expense (356) 205 804 Intergroup tax allocation (49) -- 1 Cash payment from AT&T pursuant to tax sharing agreement, net 19 -- -- Minority interests in losses of attributed subsidiaries (15) (4) (42) Gains on issuance of equity by affiliates and subsidiaries -- (389) (314) Gain on dispositions, net (10) (14) (2,862) Other noncash charges 6 9 4 Changes in current assets and liabilities, net of the effect of acquisitions and dispositions: Change in receivables (3) (19) (32) Change in prepaid expenses and committed program rights (120) (10) (14) Change in payables and accruals 70 4 (1) --------- --------- --------- Net cash provided (used) by operating activities 105 (107) 3 --------- --------- --------- Cash flows from investing activities: Capital expended for property and equipment (28) (21) (105) Investments in and loans to affiliates and others (1,952) (45) (1,243) Purchases of marketable securities (6,894) (132) -- Sales and maturities of marketable securities 3,923 34 -- Cash paid for acquisitions (3) -- (83) Cash proceeds from dispositions 90 43 343 Cash balances of deconsolidated subsidiaries -- (53) -- Other, net 1 (9) (9) --------- --------- --------- Net cash used in investing activities (4,863) (183) (1,097) --------- --------- ---------
(continued) Combined Statements of Cash Flows, continued (unaudited)
New Liberty Old Liberty (note 1) (note 1) Seven months Two months Nine months ended ended ended September 30, February 28, September 30, 1999 1999 1998 amounts in millions (see note 4) Cash flows from financing activities: Borrowings of debt 2,216 156 2,061 Repayments of debt (2,166) (148) (488) Cash transfers (to) from related parties (156) 132 (191) Net proceeds from issuance of stock by subsidiaries 27 -- 92 Repurchase of stock of subsidiary -- (45) (15) Repurchase of common stock -- -- (30) Payments for call agreements -- -- (140) Other, net 17 (1) (16) -------- -------- -------- Net cash (used) provided by financing activities (62) 94 1,273 -------- -------- -------- Net (decrease) increase in cash and cash equivalents (4,820) (196) 179 Cash and cash equivalents at beginning of period 5,319 407 224 -------- --------- -------- Cash and cash equivalents at end of period $ 499 211 403 ======== ========= ========
See accompanying notes to combined financial statements. "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in notes 1 and 2) Notes to Combined Financial Statements September 30, 1999 (unaudited) (1) Basis of Presentation The accompanying combined financial statements include the accounts of the subsidiaries and assets of Tele-Communications, Inc. ("TCI") that are attributed to Liberty Media Group, as defined below. On March 9, 1999, AT&T acquired TCI in a merger transaction (the "AT&T Merger"). See note 2. The AT&T Merger has been accounted for using the purchase method. Accordingly, Liberty Media Group's assets and liabilities have been recorded at their respective fair market values therefore creating a new cost basis. For financial reporting purposes the AT&T Merger and related restructuring transactions described in note 2 are deemed to have occurred on March 1, 1999. Accordingly, for periods prior to March 1, 1999 the assets and liabilities attributed to Liberty Media Group and the related combined financial statements are sometimes referred to herein as "Old Liberty", and for periods subsequent to February 28, 1999 the assets and liabilities attributed to Liberty Media Group and the related combined financial statements are sometimes referred to herein as "New Liberty". The "Company" and "Liberty Media Group" refer to both New Liberty and Old Liberty. The following table represents the summary balance sheet of Old Liberty at February 28, 1999 prior to the restructuring transactions and the consummation of the AT&T Merger and the opening summary balance sheet of New Liberty subsequent to the restructuring transactions and the consummation of the AT&T Merger. Certain pre-merger transactions occurring between March 1, 1999 and March 9, 1999 that affected Old Liberty's equity, gains on issuance of equity by subsidiaries and stock compensation have been reflected in the two-month period ended February 28, 1999.
Old Liberty New Liberty (amounts in millions) Assets Cash and cash equivalents $ 211 5,319 Other current assets 648 447 Investments in affiliates 3,971 17,116 Investment in Time Warner 7,361 7,832 Investment in Sprint 3,381 3,681 Investment in AT&T 3,856 -- Other investments 1,257 1,586 Property and equipment, net 532 125 Intangibles and other assets 817 11,228 --------- --------- $ 22,034 47,334 ========= ========= Liabilities and Equity Current liabilities $ 1,446 1,741 Debt 2,319 1,845 Deferred income taxes 5,369 9,953 Other liabilities 168 19 --------- --------- Total liabilities 9,302 13,558 --------- --------- Minority interests in equity of attributed subsidiaries 450 39 Obligation to redeem common stock 9 9 Equity 12,273 33,728 --------- --------- $ 22,034 47,334 ========= =========
(continued) The following table reflects the recapitalization resulting from the AT&T Merger (amounts in millions): Total combined equity of Old Liberty $ 12,273 Net contribution resulting from the restructuring transactions 2,334 Purchase accounting adjustments 19,121 Initial total combined equity of New Liberty subsequent to the AT&T Merger $ 33,728 =============== The following unaudited condensed results of operations for the nine months ended September 30, 1999 and 1998 were prepared assuming the AT&T Merger occurred on January 1, 1998. These pro forma amounts are not necessarily indicative of operating results that would have occurred if the AT&T Merger had occurred on January 1, 1998. Nine months ended September 30, 1999 1998 (amounts in millions) Revenue $ 742 1,022 Net loss $(1,041) (955) At September 30, 1999, Liberty Media Group consisted principally of the following: (i) AT&T's assets and businesses which provide programming services including production, acquisition and distribution through all available formats and media of branded entertainment, educational and informational programming and software, including multimedia products, (ii) AT&T's assets and businesses engaged in electronic retailing, direct marketing, advertising sales relating to programming services, infomercials and transaction processing, (iii) certain of AT&T's assets and businesses engaged in international cable, telephony and programming businesses and (iv) AT&T's holdings in a new class of tracking stock of Sprint (the "Sprint PCS Group Stock"). All significant intercompany accounts and transactions have been eliminated. The combined financial statements of Liberty Media Group are presented for purposes of additional analysis of the consolidated financial statements of AT&T and should be read in conjunction with such consolidated financial statements. The accompanying interim combined financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These combined financial statements should be read in conjunction with the combined financial statements and notes thereto contained in AT&T's Current Report on Form 8-K filed on March 22, 1999. (continued) The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Effective June 11, 1999, AT&T issued stock dividends to holders of AT&T Liberty Media Group Tracking Stock (the "1999 Liberty Stock Dividend"). The 1999 Liberty Stock Dividend consisted of one share of AT&T Liberty Media Group Tracking Stock for every one share of AT&T Liberty Media Group Tracking Stock owned. The 1999 Liberty Stock Dividend has been treated as a stock split, and accordingly, all share and per share amounts have been restated to reflect the 1999 Liberty Stock Dividend. Certain prior period amounts have been reclassified for comparability with the 1999 presentation. (2) Merger with AT&T As a result of the AT&T Merger, holders of shares of TCI's then outstanding Liberty Media Group Tracking Stock and TCI Ventures Group Tracking Stock were issued separate shares of new targeted stock of AT&T. Each share of TCI's then outstanding Liberty Media Group Series A Tracking Stock was converted into 2 shares of a newly created class of AT&T common stock, the AT&T Liberty Media Group Class A Tracking Stock, each share of TCI's then outstanding Liberty Media Group Series B Tracking Stock was converted into 2 shares of a newly created class of AT&T common stock, the AT&T Liberty Media Group Class B Tracking Stock, each share of TCI's then outstanding TCI Ventures Group Series A Tracking Stock was converted into 1.04 shares of AT&T Liberty Media Group Class A Tracking Stock and each share of TCI's then outstanding TCI Ventures Group Series B Tracking Stock was converted into 1.04 shares of AT&T Liberty Media Group Class B Tracking Stock. Effective with the AT&T Merger, each share of TCI's Convertible Preferred Stock Series C-Liberty Media Group was converted into 112.5 shares of AT&T Liberty Media Group Class A Tracking Stock and each share of TCI's Redeemable Convertible Liberty Media Group Preferred Stock, Series H was converted into 1.18125 shares of AT&T Liberty Media Group Class A Tracking Stock. In general, the holders of shares of AT&T Liberty Media Group Class A Tracking Stock and the holders of shares of AT&T Liberty Media Group Class B Tracking Stock will vote together as a single class with the holders of shares of AT&T Common Stock on all matters presented to such stockholders, with the holders being entitled to three-fortieths (3/40th) of a vote for each share of AT&T Liberty Media Group Class A Tracking Stock held, three-fourths (3/4th) vote per share of AT&T Liberty Media Group Class B Tracking Stock held and 1 vote per share of AT&T Common Stock held. (continued) The shares of AT&T Liberty Media Group Tracking Stock issued in the AT&T Merger are intended to reflect the separate performance of the businesses and assets attributed to Liberty Media Group. Immediately prior to the AT&T Merger, certain assets previously attributed to Old Liberty (including, among others, the shares of AT&T Common Stock received in the merger of AT&T and Teleport Communications Group, Inc. ("Teleport") (see note 7), Old Liberty's interests in At Home Corporation ("@Home"), the National Digital Television Center, Inc. ("NDTC") and Western Tele-Communications, Inc.) were attributed to "TCI Group" (a group of TCI's assets, which, prior to the AT&T Merger, was comprised primarily of TCI's domestic cable and communications business) in exchange for approximately $5.5 billion in cash (the "Asset Transfers"). Also, upon consummation of the AT&T Merger, through a new tax sharing agreement between the Company and AT&T, the Company is entitled to the benefit of approximately $2 billion in net operating loss carryforwards available to the entities included in TCI's consolidated income tax return as of the date of the AT&T Merger. Such net operating loss carryforwards are subject to adjustment by the Internal Revenue Service ("IRS") and are subject to limitations on usage which may affect the ultimate amount utilized. Additionally, certain warrants to purchase shares of General Instruments Corporation ("GI Warrants") previously attributed to TCI Group were attributed to the Company in exchange for approximately $176 million in cash. Certain agreements entered into at the time of the AT&T Merger provide, among other things, for preferred vendor status to the Company for digital basic distribution on AT&T's systems of new programming services created by the Company and for a renewal of existing affiliation agreements. Pursuant to amended corporate governance documents for the entities included in Liberty Media Group and certain agreements among AT&T and TCI, the business of Liberty Media Group will continue to be managed by certain persons who were members of TCI's management prior to the AT&T Merger. Pursuant to a proposed final judgment (the "Final Judgment") agreed to by TCI, AT&T and the United States Department of Justice (the "DOJ") on December 31, 1998, Liberty Media Group transferred all of its beneficially owned securities (the "Sprint Securities") of Sprint to a trustee (the "Trustee") prior to the AT&T Merger. 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 sufficient to cause Liberty Media Group to beneficially own no more than 10% of the outstanding Series 1 PCS Stock of Sprint on a fully diluted basis on such date. On or before May 23, 2004, the Trustee must divest the remainder of the Sprint Securities beneficially owned by Liberty Media Group. The Final Judgment would provide that the Trustee vote the Sprint Securities beneficially owned by Liberty Media Group in the same proportion as other holders of Sprint's PCS Stock so long as such securities are held by the trust. The Final Judgment would also prohibit the acquisition by Liberty Media Group of additional Sprint Securities, with certain exceptions, without the prior written consent of the DOJ. (continued) (3) Loss Per Common Share Basic earnings or loss per share ("EPS") is measured as the income or loss attributable to common stockholders divided by the weighted average outstanding common shares for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares as if they had been converted at the beginning of the periods presented. Potential common shares that have an anti-dilutive effect are excluded from diluted EPS. The basic and diluted loss attributable to Liberty Media Group common stockholders per common share for the three and seven months ended September 30, 1999 was computed by dividing the net loss attributable to Liberty Media Group common stockholders by the weighted average number of common shares outstanding of AT&T Liberty Media Group Tracking Stock during each period. Potential common shares were not included in the computations of weighted average shares outstanding because their inclusion would be anti-dilutive. At September 30, 1999, there were 52 million potential common shares consisting of fixed and nonvested performance awards, stock options and convertible securities that could potentially dilute future EPS calculations in periods of net earnings. No material changes in the weighted average outstanding shares or potential common shares occurred after September 30, 1999. Three months Seven months ended ended September 30, September 30, 1999 1999 amounts in millions, except per share amounts Basic and diluted EPS: Loss attributable to common stockholders $ (217) (818) ========== ========== Weighted average common shares 1,265 1,257 ========== ========== Basic and diluted loss per share attributable to common stockholders $ (0.17) (0.65) ========== ========== (continued) (4) Supplemental Disclosures to Combined Statements of Cash Flows Cash paid for interest was $75 million for the seven month period ended September 30, 1999, $32 million for the two month period ended February 28, 1999 and $79 million for the nine months ended September 30, 1998. Cash paid for income taxes for the seven month period ended September 30, 1999 and the two month period ended February 28, 1999 was not material. Cash paid for income taxes for the nine months ended September 30, 1998 was $19 million.
New Liberty Old Liberty Seven months Two months Nine months ended ended ended September 30, February 28, September 30, 1999 1999 1998 amounts in millions Cash paid for acquisitions: Fair value of assets acquired $ 5 -- 136 Net liabilities assumed (2) -- (25) Debt issued -- -- (65) Minority interest in equity of acquired subsidiary -- -- 39 Gain in connection with the issuance of shares by subsidiary -- -- (2) ------- ------- -------- Cash paid for acquisitions $ 3 -- 83 ======= ======= ========
During July 1999, attributed subsidiaries of Liberty Media Group were exchanged for a limited partnership interest having a fair value at the time of the transaction of $150 million. Liberty ceased to include TV Guide, Inc. ("TV Guide") in its combined financial results and began to account for TV Guide using the equity method of accounting, effective March 1, 1999 (see note 7). The effects of changing the method of accounting for Liberty Media Group's ownership interests in TV Guide from the consolidation method to the equity method are summarized below (amounts in millions): Assets (other than cash and cash equivalents) reclassified to investments in affiliates $ (572) Liabilities reclassified to investments in affiliates 190 Minority interests in equity of subsidiaries reclassified to investments in affiliates 63 Gain on issuance of equity by subsidiary 372 Decrease in cash and cash equivalents $ 53 =========== (continued) The following table reflects the change in cash and cash equivalents resulting from the AT&T Merger and related restructuring transactions (amounts in millions): Cash and cash equivalents prior to the AT&T Merger $ 211 Cash received in the Asset Transfers, net of cash balances transferred 5,284 Cash paid to TCI Group for GI Warrants (176) Cash and cash equivalents subsequent to the AT&T Merger $ 5,319 (5) Investments in Affiliates Accounted for Under the Equity Method Liberty Media Group has various investments accounted for under the equity method. The following table includes Liberty Media Group's carrying amount of the more significant investments at September 30, 1999 and December 31, 1998:
New Liberty Old Liberty September 30, December 31, 1999 1998 amounts in millions USA Networks, Inc. ("USAI") and related investments $ 2,710 1,042 Telewest Communications plc ("Telewest") 1,961 515 Discovery Communications, Inc. ("Discovery") 3,546 49 TV Guide 1,756 -- QVC, Inc. ("QVC") 2,505 197 Flextech plc ("Flextech") 757 320 Other foreign investments (other than Telewest and Flextech) 1,504 346 Other 1,200 610 ------- ------- 15,939 3,079 ======= =======
(continued) The following table reflects Liberty Media Group's share of earnings (losses) of affiliates:
New Liberty Old Liberty Seven months Two months Nine months ended ended ended September 30, February 28, September 30, 1999 1999 1998 amounts in millions USAI and related investments $ (13) 10 11 Telewest (154) (38) (90) Discovery (154) (8) (41) Fox/Liberty Networks LLC ("Fox Sports") (48) (1) (76) TV Guide (24) -- -- QVC (17) 13 38 Flextech (27) (5) (13) Other foreign investments (96) (22) (80) PCS Ventures -- -- (510) Teleport (note 7) -- -- (32) Other (64) (15) (68) ----- ----- ----- $(597) (66) (861) ===== ===== =====
Summarized unaudited combined financial information for affiliates is as follows:
New Liberty Old Liberty Seven months Two months Nine months ended ended ended September 30, February 28, September 30, 1999 1999 1998 amounts in millions Combined Operations Revenue $ 6,947 2,341 10,103 Operating expenses (5,901) (1,894) (9,548) Depreciation and amortization (929) (353) (1,891) ------- ------- ------- Operating income (loss) 117 94 (1,336) Interest expense (558) (281) (1,278) Other, net (322) (127) (83) ------- ------- ------- Net loss $ (763) (314) (2,697) ======= ======= =======
(continued) USAI owns and operates businesses in network and television production, television broadcasting, electronic retailing, ticketing operations, and internet services. At September 30, 1999, Liberty Media Group directly and indirectly held 33.3 million shares of USAI's common stock. Liberty Media Group also held shares directly in certain subsidiaries of USAI which are exchangeable into 39.5 million shares of USAI common stock. Liberty Media Group's direct ownership of USAI is currently restricted by FCC regulations. The exchange of these shares can be accomplished only if there is a change to existing regulations or if Liberty Media Group obtains permission from the FCC. If the exchange of Liberty Media Group's shares of such subsidiary stock, as well as certain securities owned by Universal Studios, Inc. and certain of its affiliates, into USAI common stock were completed at September 30, 1999, Liberty Media Group would own 72.8 million shares or approximately 21% of the then outstanding USAI common stock. USAI's common stock had a closing market price of $38-3/4 per share on September 30, 1999. Liberty Media Group accounts for its investments in USAI and related subsidiaries on a combined basis under the equity method. In February 1998, USAI paid cash and issued shares and one of its subsidiaries issued shares in connection with the acquisition of certain assets from Universal Studios, Inc. (the "Universal Transaction"). Liberty Media Group recorded an increase to its investment in USAI of $54 million and an increase to combined equity of $33 million (after deducting a deferred income taxes of $21 million) as a result of this share issuance. No gain was recognized in the combined statement of operations and comprehensive earnings for the Universal Transaction due primarily to Liberty Media Group's intention at such time to purchase additional equity interests in USAI. In connection with the Universal Transaction, Liberty Media Group was granted an antidilutive right with respect to any future issuance of USAI common stock, subject to certain limitations, that enables it to maintain its percentage ownership interests in USAI. Effective September 1, 1998, Telewest and General Cable PLC consummated a merger. In connection with the merger, Liberty Media Group's ownership interest in Telewest decreased to 22%. In connection with the increase in Telewest's equity, net of the dilution of Liberty Media Group's interest in Telewest, that resulted from the merger, Liberty Media Group recorded a non-cash gain of $58 million (before deducting deferred income tax expense of $20 million) during the third quarter of 1998. Telewest currently operates and constructs cable television and telephone systems in the UK. At September 30, 1999 Liberty Media Group indirectly owned 463 million of the issued and outstanding Telewest ordinary shares. The reported closing price on the London Stock Exchange of Telewest ordinary shares was (pound)2.23 ($3.67) per share at September 30, 1999. (continued) Liberty Media Group and The News Corporation Limited ("News Corp.") each held 50% of Fox Sports which operates national and regional sports networks. Prior to the first quarter of 1998, Liberty Media Group had no obligation, nor intention, to fund Fox Sports. During 1998, Liberty Media Group made the determination to provide funding to Fox Sports based on specific transactions consummated by Fox Sports. Consequently, Liberty Media Group's share of losses of Fox Sports for the nine months ended September 30, 1998 included previously unrecognized losses of Fox Sports of approximately $64 million. Losses for Fox Sports were not recognized in prior periods due to the fact that Liberty Media Group's investment in Fox Sports was less than zero. On July 15, 1999 News Corp. acquired Liberty Media Group's 50% interest in Fox Sports in exchange for 51.8 million News Corp. American Depository Receipts ("ADRs") representing preferred limited voting ordinary shares of News Corp. Of the 51.8 million ADRs received, 3.6 million were placed in an escrow (the "Escrow Shares") pending an independent third party valuation, as of the third anniversary of the transaction. The remainder of the 51.8 million ADRs received (the "Restricted Shares") are subject to a two-year lockup which restricts any transfer of the securities for a period of two years from the date of the transaction. Liberty Media Group recorded the ADRs at fair value, which included a discount from market value for the Restricted Shares due to the two-year restriction on transfer, resulting in a $13 million gain on the transaction. In a related transaction, Liberty Media Group acquired from News Corp. 28.1 million additional ADRs representing preferred limited voting ordinary shares of News Corp. for approximately $695 million. Liberty Media Group accounts for its investment in News Corp. as an available-for-sale security, with the exception of the Restricted Shares and the Escrow Shares. The class A common stock of TV Guide is publicly traded. At September 30, 1999, Liberty Media Group held 29 million shares of TV Guide Class A common stock and 37 million shares of TV Guide Class B common stock. See note 7. The TV Guide Class B common stock is convertible, one-for-one, into TV Guide Class A common stock. The closing price for TV Guide Class A common stock was $39-1/8 per share on September 30, 1999. Flextech develops and sells a variety of television programming in the UK. At September 30, 1999, Liberty Media Group indirectly owned 58 million Flextech ordinary shares. The reported closing price on the London Stock Exchange of the Flextech ordinary shares was (pound)9.45 ($15.56) per share at September 30, 1999. The PCS Ventures included Sprint Spectrum Holding Company, L. P. and MinorCo, L.P. (collectively, "Sprint PCS") and PhillieCo Partnership I, L.P. ("PhillieCo"). The partners of each of the Sprint PCS partnerships were subsidiaries of Sprint, Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and Liberty Media Group. The partners of PhillieCo were subsidiaries of Sprint, Cox and Liberty Media Group. Liberty Media Group had a 30% partnership interest in each of the Sprint PCS partnerships and a 35% partnership interest in PhillieCo. (continued) On November 23, 1998, Liberty Media Group, Comcast, and Cox exchanged their respective interests in Sprint PCS and PhillieCo (the "PCS Exchange") for shares of Sprint PCS Group Stock which tracks the performance of Sprint's newly created PCS Group (consisting initially of the PCS Ventures and certain PCS licenses which were separately owned by Sprint). The Sprint PCS Group Stock collectively represents an approximate 17% voting interest in Sprint. As a result of the PCS Exchange, Liberty Media Group holds the Sprint Securities which consists of shares of Sprint PCS Group Stock, as well as certain additional securities of Sprint exercisable for or convertible into such securities, representing approximately 24% of the equity value of Sprint attributable to its PCS Group and less than 1% of the voting interest in Sprint. Through November 23, 1998, Liberty Media Group accounted for its interest in the PCS Ventures using the equity method of accounting, however, as a result of the PCS Exchange and Liberty Media Group's less than 1% voting interest in Sprint, Liberty Media Group no longer exercises significant influence with respect to its investment in the PCS Ventures. Accordingly, Liberty Media Group accounts for its investment in the Sprint PCS Group Stock as an available-for-sale security. In September 1999, Liberty entered into a four and one-half year "cashless collar" with a financial institution with respect to 17.5 million shares of Sprint PCS Group common stock, secured by 17.5 million shares of such stock. This cashless collar provides Liberty Media Group with a put option that gives it the right to require its counterparty to buy 17.5 million Sprint PCS Group shares from Liberty Media Group in approximately four and one-half years for a weighted average price of $55.24 per share. Liberty Media Group simultaneously sold a call option giving the counterparty the right to buy the same number of Sprint PCS Group shares from Liberty Media Group in approximately four and one-half years for a weighted average price of $114.84 per share. The $14 billion aggregate excess of Liberty Media Group's aggregate carrying amount in its affiliates over Liberty Media Group's proportionate share of its affiliates' net assets is being amortized over an estimated useful life of 20 years. Certain of Liberty Media Group's affiliates are general partnerships and subsidiaries of Liberty Media Group that are general partners in such partnerships, are liable as a matter of partnership law for all debts (other than non-recourse debts) of that partnership in the event liabilities of that partnership were to exceed its assets. (6) Investment in Time Warner Liberty Media Group holds shares of a series of Time Warner's series common stock with limited voting rights (the "TW Exchange Stock") that are convertible into an aggregate of 114 million shares of Time Warner common stock. (continued) On June 24, 1997 Liberty Media Group granted Time Warner an option, expiring October 10, 2002, to acquire the business of Southern Satellite Systems, Inc. ("Southern") and certain of its subsidiaries (together with Southern, the "Southern Business") through a purchase of assets (the "Southern Option"). Liberty Media Group received shares of TW Exchange Stock which are convertible into 12.8 million shares of Time Warner common stock valued at $306 million in consideration for the grant. In September 1997, Time Warner exercised the Southern Option. Pursuant to the Southern Option, Time Warner acquired the Southern Business, effective January 1, 1998, for $213 million in cash. Liberty Media Group recognized a $515 million pre-tax gain in connection with such transactions in the first quarter of 1998. In March 1999, Liberty Media Group entered into a seven-year "cashless collar" with a financial institution with respect to 15 million shares of Time Warner common stock, secured by 15 million shares of its TW Exchange Stock. This cashless collar provides Liberty Media Group with a put option that gives it the right to require its counterparty to buy 15 million Time Warner shares from Liberty Media Group in approximately seven years for $67.45 per share. Liberty Media Group simultaneously sold a call option giving the counterparty the right to buy the same number of Time Warner shares from Liberty Media Group in approximately seven years for $158.33 per share. As these cashless collars are designated to 15 million shares of TW Exchange Stock and 17.5 million shares of Sprint PCS Group common stock (together the "Underlying Securities") held by Liberty Media Group and the changes in the fair value of the cashless collars are correlated with changes in the fair value of the Underlying Securities, the cashless collars function as hedges. Accordingly, changes in the fair value of the cashless collars are reported as a component of comprehensive earnings (in unrealized gains) along with the changes in the fair value of the Underlying Securities. (7) Acquisitions and Dispositions Effective February 1, 1998, Turner-Vision, Inc. ("Turner Vision") contributed the assets, obligations and operations of its retail C-band satellite business to Superstar/Netlink Group LLC ("SNG") in exchange for an approximate 20% interest in SNG. As a result of such transaction, Liberty Media Group's direct and indirect (through United Video Satellite Group, Inc. ("UVSG")) ownership interest in SNG, decreased to approximately 80%. In connection with the increase in SNG's equity, net of the dilution of Liberty Media Group's ownership interest in SNG, that resulted from such transaction, Liberty Media Group recognized a gain of $38 million (before deducting deferred income tax expense of $15 million). Turner Vision's contribution to SNG was accounted for as a purchase and the $61 million excess of the purchase price over the fair value of the net assets acquired was recorded as excess cost and is being amortized over five years. On April 22, 1998, Teleport completed a merger transaction with ACC Corp. As a result, Liberty Media Group's interest in Teleport was reduced to approximately 26%. In connection with the increase in Teleport's equity, net of the dilution of Liberty Media Group's interest in Teleport, that resulted from the merger, Liberty Media Group recorded a non-cash gain of $201 million (before deducting deferred income tax expense of $71 million). (continued) On July 24, 1998, Teleport was acquired by AT&T and Liberty Media Group received in exchange for all of its interest in Teleport, approximately 70.4 million shares of AT&T common stock. Liberty Media Group recognized a $2.3 billion gain (excluding related tax expense of $883 million) on such transaction during the third quarter of 1998 based on the difference between the carrying value of Liberty Media Group's interest in Teleport and the fair value of the AT&T common stock received. During the third quarter of 1998, At Home Corporation ("@Home") completed a public offering in which Liberty Media Group purchased additional shares of @Home common stock and Liberty Media Group's economic interest in @Home decreased to approximately 39%. In connection with the increase in @Home's equity, net of the dilution of Liberty Media Group's interest in @Home that resulted from @Home's public offering, Liberty Media Group recorded a gain of $17 million during the third quarter of 1998. On March 1, 1999, UVSG and News Corp. completed a transaction whereby UVSG acquired News Corp.'s TV Guide properties creating a broader platform for offering television guide services to consumers and advertisers and UVSG was renamed TV Guide. News Corp. received total consideration of $1.9 billion including $800 million in cash, 22.5 million shares of UVSG's Class A common stock and 37.5 million shares of UVSG's Class B common stock valued at an average of $18.65 per share. In addition, News Corp. purchased approximately 6.5 million additional shares of UVSG Class A common stock for $129 million in order to equalize its ownership with that of Liberty Media Group. As a result of these transactions, and another transaction completed on the same date, News Corp., Liberty Media Group and TV Guide's public stockholders own on an economic basis approximately 44%, 44% and 12%, respectively, of TV Guide. Following such transactions, News Corp. and Liberty Media Group each have approximately 49% of the voting power of TV Guide's outstanding stock. In connection with the increase in TV Guide's equity, net of the dilution of Liberty Media Group's ownership interest in TV Guide, Liberty Media Group recognized a gain of $372 million (before deducting deferred income tax expense of $147 million). Upon consummation, Liberty Media Group began accounting for its interest in TV Guide under the equity method of accounting. (continued) (8) Long-Term Debt Debt is summarized as follows:
New Liberty Old Liberty September 30, December 31, 1999 1998 amounts in millions Bank credit facilities $ 926 2,029 Senior Notes, net of unamortized discount of $9 million 741 -- Senior Debentures, net of unamortized discount of $6 million 494 -- Convertible Subordinated Debentures -- 229 4-1/2% Convertible Subordinated Debentures -- 345 Other 33 293 ------ ------ 2,194 2,896 Less current maturities 474 578 ------ ------ Total long-term debt $1,720 2,318 ====== ======
On April 8, 1999, Liberty Media Group redeemed all of its outstanding 4-1/2% Convertible Subordinated Debentures due February 15, 2005. See note 10. On July 7, 1999, Liberty Media Group received net cash proceeds of approximately $741 million and $494 million from the issuance of 7-7/8% Senior Notes due 2009 (the "Senior Notes") and 8-1/2% Senior Debentures due 2029 (the "Senior Debentures"), respectively. The Senior Notes have an aggregate principal amount of $750 million and the Senior Debentures have an aggregate principal amount of $500 million. Interest on the Senior Notes and the Senior Debentures is payable on January 15 and July 15 of each year. The proceeds were used to repay outstanding borrowings under certain of Liberty Media Group's credit facilities, which were subsequently canceled. At September 30, 1999, Liberty Media Group had approximately $133 million in unused lines of credit under its bank credit facilities. The bank credit facilities of Liberty Media Group generally contain restrictive covenants which require, among other things, the maintenance of certain financial ratios, and include limitations on indebtedness, liens and encumbrances, acquisitions, dispositions, guarantees and dividends. Additionally, Liberty Media Group pays fees ranging from .15% to .375% per annum on the average unborrowed portions of the total amounts available for borrowings under its bank credit facilities. With the exception of the Senior Notes and the Senior Debentures which had fair values of $754 million and $504 million, respectively, at September 30, 1999, Liberty Media Group believes that the carrying value of Liberty Media Group's debt approximated its fair value at September 30, 1999. (continued) (9) Income Taxes Subsequent to the AT&T Merger, Liberty Media Group is included in the consolidated federal income tax return of AT&T and party to a tax sharing agreement with AT&T (the "AT&T Tax Sharing Agreement"). Liberty Media Group calculates its respective tax liability on a separate return basis. The income tax provision for Liberty Media Group is calculated based on the increase or decrease in the tax liability of the AT&T consolidated group resulting from the inclusion of those items in the consolidated tax return of AT&T which are attributable to Liberty Media Group. Under the AT&T Tax Sharing Agreement, Liberty Media Group will receive a cash payment from AT&T in periods when it generates taxable losses and such taxable losses are utilized by AT&T to reduce the consolidated income tax liability. This utilization of taxable losses will be accounted for by Liberty Media Group as a current federal intercompany income tax benefit. To the extent such losses are not utilized by AT&T, such amounts will be available to reduce federal taxable income generated by Liberty Media Group in future periods, similar to a net operating loss carryforward and will be accounted for as a deferred federal income tax benefit. In periods when Liberty Media Group generates federal taxable income, AT&T has agreed to satisfy such tax liability on Liberty Media Group's behalf up to a certain amount. The reduction of such computed tax liabilities will be accounted for by Liberty Media Group as a credit to combined equity. The total amount of future federal tax liabilities of Liberty Media Group which AT&T will satisfy under the AT&T Tax Sharing Agreement is approximately $512 million, which represents the tax effect of the net operating loss carryforward reflected in TCI's final federal income tax return, subject to IRS adjustments. Thereafter, Liberty Media Group is required to make cash payments to AT&T for federal tax liabilities of Liberty Media Group. To the extent AT&T utilizes existing net operating losses of entities attributed to Liberty Media Group, such amounts will be accounted for by Liberty Media Group as a reduction of combined equity. During the seven month period ending September 30, 1999, AT&T utilized net operating losses of Liberty Media Group with a tax effected carrying value of $85 million. Liberty Media Group will generally make cash payments to AT&T related to states where it generates taxable income and receive cash payments from AT&T in states where it generates taxable losses. Liberty Media Group's obligation under the 1995 TCI Tax Sharing Agreement of approximately $139 million (subject to adjustment), which is included in "due to related parties," shall be paid at the time, if ever, that Liberty Media Group deconsolidates from the AT&T income tax return. Liberty Media Group's receivable under the 1997 TCI Tax Sharing Agreement of approximately $220 million was forgiven in the AT&T Tax Sharing Agreement and recorded as an adjustment to combined equity by Liberty Media Group in connection with the AT&T Merger. (continued) (10) Combined Equity Stock Repurchase and Issuances On April 8, 1999, Liberty Media Group redeemed all of its outstanding 4-1/2% Convertible Subordinated Debentures due February 15, 2005. The debentures were convertible into shares of AT&T Liberty Media Group Class A Tracking Stock at a conversion price of $23.54, or 42.48 shares per $1,000 principal amount. Certain holders of the debentures had exercised their rights to convert their debentures and 14.6 million shares of AT&T Liberty Media Group Tracking Stock were issued to such holders. In connection with such issuance of AT&T Liberty Media Group Tracking Stock, Liberty Media Group recorded a $354 million increase to combined equity. During the nine months ended September 30, 1998, pursuant to a stock repurchase program, Liberty Media Group repurchased 239,450 shares of TCI's then outstanding TCI Ventures Group Stock and 766,783 shares of TCI's then outstanding Liberty Media Group Stock at an aggregate cost of approximately $30 million. Such amount is reflected as a decrease to combined equity in the accompanying combined financial statements. In conjunction with a stock repurchase program or similar transaction, the issuer may elect to sell put options on its own common stock. Proceeds from any sales of puts with respect to TCI's then outstanding TCI Ventures Group Tracking Stock and TCI's then outstanding Liberty Media Group Tracking Stock have been reflected as an increase to combined equity, and an amount equal to the maximum redemption amount under unexpired put options with respect to such tracking stocks was reflected as an "obligation to redeem common stock" in the accompanying combined balance sheets. At September 30, 1999 no amounts were outstanding under such arrangements. Stock Issuances by Subsidiary On September 9, 1999, Liberty Media Group and TCI Music, renamed Liberty Digital, Inc. ("Liberty Digital"), completed a transaction (the "Liberty Digital Transaction") pursuant to which Liberty Media Group contributed to Liberty Digital substantially all of its directly held internet content and interactive television assets, its rights to provide interactive video services on AT&T's cable television systems and a combination of cash and notes receivable equal to $150 million. Liberty Digital issued common stock and convertible preferred stock to Liberty Media Group. As a result of the transaction and assuming conversion of the preferred stock, Liberty Media Group holds approximately 12 million shares of Liberty Digital Series A common stock and approximately 197.7 million shares of Series B common stock resulting in approximately 94.5% equity interest and 99% voting interest in Liberty Digital. (continued) Prior to the Liberty Digital Transaction, Liberty Digital issued approximately 4.8 million shares of common stock in connection with the conversion of its preferred stock and approximately 0.5 million shares of common stock in connection with the exercise of certain employee stock options. As a result, Liberty Media Group's interest in Liberty Digital was reduced to 86%. Following the Liberty Digital Transaction, Liberty Media Group's interest in Liberty Digital was increased to 94.5%. During the month of September, 1999, Liberty Digital issued approximately 0.5 million shares of common stock in connection with the exercise of certain employee stock options. As a result, Liberty Media Group's interest in Liberty Digital was reduced to 94.3%. In connection with the increase in Liberty Digital's equity, net of the dilution of Liberty Media Group's interest in Liberty Digital, that resulted from such stock issuances, Liberty Media Group recorded a $50 million increase to combined equity. No gain was recognized in the combined statement of operations and comprehensive earnings due to Liberty Media Group's continuing involvement in capital transactions of Liberty Digital. Transactions with AT&T (formerly TCI) and Other Related Parties Certain subsidiaries attributed to Liberty Media Group produce and/or distribute sports and other programming and other services to cable distribution operators (including AT&T) and others. Charges to AT&T are based upon customary rates charged to others. Amounts included in revenue for services provided to AT&T were $125 million, $43 million and $199 million for the seven month period ending September 30, 1999, the two month period ending February 28, 1999 and the nine months ended September 30, 1998, respectively. Certain AT&T corporate general and administrative costs are charged to Liberty Media Group and included in operating expenses in the accompanying combined statements of operations and comprehensive earnings. During the seven month period ended September 30, 1999, the two month period ended February 28, 1999 and the nine months ended September 30, 1998, Liberty Media Group was allocated less than $1 million, $2 million and $12 million, respectively, in corporate general and administrative costs by AT&T. Entities included in Liberty Media Group lease satellite transponder facilities from NDTC. In connection with the AT&T Merger, NDTC is no longer included in the combined financial results of Liberty Media Group. Charges by NDTC for such arrangements and other related operating expenses for the seven months ended September 30, 1999 aggregated $14 million and are included in operating expenses in the accompanying combined statements of operations and comprehensive earnings. (continued) In connection with the AT&T Merger, warrants to buy 3 million shares of common stock of CSG Systems International, Inc. ("CSG") and related registration rights were transferred to Liberty Media Group. On April 13, 1999, AT&T purchased these warrants from Liberty Media Group for an aggregate purchase price of $75 million along with the related registration rights. The vesting of the CSG warrants is contingent on AT&T meeting certain subscriber commitments to CSG. If any warrants do not vest, Liberty Media Group must repurchase the unvested warrants from AT&T, with interest at 6% from April 12, 1999. Accordingly, Liberty Media Group has recorded the unvested CSG warrants as deferred income until such time as the CSG warrants vest. A subsidiary of Liberty Media Group issued preferred stock in connection with a previous acquisition which was convertible at the option of the holders into 1,084,056 of TCI's then outstanding TCI Group Series A Common Stock. In July 1998, Liberty Media Group entered into an equity swap transaction with a commercial bank, which provided Liberty Media Group with the right but not the obligation to acquire 1,084,056 shares of TCI's then outstanding TCI Group Series A Stock for approximately $45 million on or before April 19, 1999. Liberty Media Group exercised its right under this equity swap transaction and used the TCI Group Series A Stock to satisfy the exchange requirements of the aforementioned preferred stock during the two months ended February 28, 1999. In connection with such transaction, Liberty Media Group recorded an $18 million decrease to combined equity for the difference between the exercise price of the right and the carrying amount of the preferred stock. Prior to the AT&T Merger, a limited liability company owned by Dr. John C. Malone (Liberty Media Group's Chairman) acquired, from certain subsidiaries of Liberty Media Group, for $17 million, working cattle ranches located in Wyoming. No gain or loss was recognized on such acquisition. The purchase price was paid by such limited liability company in the form of a 12-month note in the amount of $17 million having an interest rate of 7%. Such note is payable at any time without penalty and is personally guaranteed by Dr. Malone. In connection with the AT&T Merger, Liberty Media Group paid two directors of Liberty Media Corporation and one other individual, all three of whom are directors of TCI, an aggregate of $12 million for services rendered in connection with the AT&T Merger. Such amount is included in operating, selling, general and administrative expenses for the two months ended February 28, 1999 in the accompanying combined statements of operations and comprehensive earnings. (continued) On February 9, 1998, in connection with the settlement of certain legal proceedings relative to the Estate of Bob Magness (the "Magness Estate"), the late founder and former Chairman of the Board of TCI, TCI entered into a call agreement with Dr. Malone and Dr. Malone's wife (together with Dr. Malone, the "Malones"), and a call agreement with the Estate of Bob Magness, the Estate of Betsy Magness, Gary Magness (individually and in certain representative capacities) and Kim Magness (individually and in certain representative capacities) (collectively, the "Magness Group"). Under these call agreements, each of the Magness Group and the Malones granted to TCI the right to acquire all of the shares of TCI's common stock owned by them ("High Voting Shares") that entitle the holder to cast more than one vote per share (the "High-Voting Stock") upon Dr. Malone's death or upon a contemplated sale of the High-Voting Shares (other than a minimal amount) to third parties. In either such event, TCI had the right to acquire such shares at a price equal to the then market price of shares of TCI's common stock of the corresponding series that entitled the holder to cast no more than one vote per share (the "Low-Voting Stock"), plus a 10% premium, or in the case of a sale, the lesser of such price and the price offered by the third party. In addition, each call agreement provides that if TCI were ever to be sold to a third party, then the maximum premium that the Magness Group or the Malones would receive for their High-Voting Shares would be the price paid for shares of the relevant series of Low-Voting Stock by the third party, plus a 10% premium. Each call agreement also prohibits any member of the Magness Group or the Malones from disposing of their High-Voting Shares, except for certain exempt transfers (such as transfers to related parties or to the other group or public sales of up to an aggregate of 5% of their High-Voting Shares after conversion to the respective series of Low-Voting Stock) and except for a transfer made in compliance with TCI's purchase right described above. TCI paid $150 million to the Malones and $124 million to the Magness Group in consideration of their entering into the call agreements, of which an aggregate of $140 million was allocated to and paid by Liberty Media Group. Also in February 1998, TCI, the Magness Group and the Malones entered into a shareholders' agreement which provides for, among other things, certain participation rights by the Magness Group with respect to transactions by Dr. Malone, and certain "tag-along" rights in favor of the Magness Group and certain "drag-along" rights in favor of the Malones, with respect to transactions in the High-Voting Stock. Such agreement also provides that a representative of Dr. Malone and a representative of the Magness Group will consult with each other on all matters to be brought to a vote of TCI's shareholders, but if a mutual agreement on how to vote cannot be reached, Dr. Malone will vote the High-Voting Stock owned by the Magness Group pursuant to an irrevocable proxy granted by the Magness Group. In connection with the AT&T merger, Liberty Media Group became entitled to exercise TCI's rights and became subject to its obligations under the call agreement and the shareholders' agreement with respect to the Liberty Media Group Class B tracking stock acquired by the Malones and the Magness Group as a result of the AT&T merger. If Liberty Media Group were to exercise its call right under the call agreement with the Malones or the Magness Group, it may also be required to purchase High-Voting Shares of the other group if such group exercises its "tag-along" rights under the shareholders' agreement. (continued) Due to Related Parties The components of "Due to related parties" are as follows:
New Liberty Old Liberty September 30, December 31, 1999 1998 amounts in millions Note payable to TCI, including accrued interest $ -- 141 Intercompany account 86 556 ----- ----- $ 86 697 ===== =====
The non-interest bearing intercompany account includes certain stock compensation allocations (in Old Liberty) and income tax allocations that are to be settled at some future date. Stock compensation liabilities of New Liberty are classified as a separate component in current liabilities. All other amounts included in the intercompany account are to be settled within thirty days following notification. (11) Commitments and Contingencies Encore Media Group, a wholly owned subsidiary of Liberty Media Group, is obligated to pay fees for the rights to exhibit certain films that are released by various producers through 2017 (the "Film Licensing Obligations"). Based on customer levels at September 30, 1999, these agreements require minimum payments aggregating approximately $887 million. The aggregate amount of the Film Licensing Obligations under these license agreements is not currently estimable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. Nevertheless, required aggregate payments under the Film Licensing Obligations could prove to be significant. Flextech has undertaken to finance the working capital requirements of a joint venture, (the "Principal Joint Venture") formed with BBC Worldwide and is obligated to provide the Principal Joint Venture with a primary credit facility of (pound)88 million ($145 million) and subject to certain restrictions, a standby credit facility of (pound)30 million ($49 million). As of September 30, 1999, the Principal Joint Venture had borrowed (pound)45 million ($74 million) under the primary credit facility. If Flextech defaults on its funding obligation to the Principal Joint Venture and fails to cure within 42 days after receipt of notice from BBC Worldwide, BBC Worldwide is entitled, within the following 90 days, to require that Liberty Media Group assume all of Flextech's funding obligations to the Principal Joint Venture. Liberty Media Group has guaranteed various loans, notes payable, letters of credit and other obligations (the "Guaranteed Obligations") of certain affiliates. At September 30, 1999, the Guaranteed Obligations aggregated approximately $496 million. Currently, Liberty Media Group is not certain of the likelihood of being required to perform under such guarantees. (continued) Liberty Media Group leases business offices, has entered into pole rental and transponder lease agreements and uses certain equipment under lease arrangements. On September 21, 1998, Hurricane Georges struck Puerto Rico and caused considerable property damage to the area in general, including Liberty Media Group's Puerto Rico subsidiary's cable television systems (the "Puerto Rico Subsidiary"). The Puerto Rico Subsidiary's cable television systems represent $31 million of Liberty Media Group's revenue for the nine months ended September 30, 1999. As of September 30, 1999, approximately 99% of the Puerto Rico Subsidiary's pre-hurricane basic customers were receiving cable television services. The loss of revenue from September 21, 1998 through September 30, 1999 was $13 million. The Puerto Rico Subsidiary's business interruption insurance covered the first $3 million in lost revenue. The Puerto Rico Subsidiary has also claimed coverage for business interruption under a secondary insurance carrier. Such policy, which covers the Puerto Rico Subsidiary's parent company's subsidiaries, carries a deductible of $2.5 million. This insurance claim is subject to approval by such insurance carrier and accordingly, no assurance can be given that amounts claimed will be paid in their entirety. However, in the event such claims are collected the overall impact in lost revenues for the Puerto Rico Subsidiary as a result of Hurricane Georges will not exceed $2.5 million. Liberty Media Group has contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible Liberty Media Group may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying combined financial statements. During the nine months ended September 30, 1999, Liberty Media Group, in conjunction with AT&T, continued its enterprise-wide, comprehensive efforts to assess and remediate its computer systems and related software and equipment to ensure such systems, software and equipment recognize, process and store information in the year 2000 and thereafter. AT&T's year 2000 remediation efforts include an assessment of Liberty Media Group's most critical systems, equipment, and facilities. AT&T also continued its efforts to verify the year 2000 readiness of Liberty Media Group's significant suppliers and vendors and continued to communicate with significant business partners and affiliates to assess such partners and affiliates' year 2000 status. Failure to achieve year 2000 compliance by Liberty Media Group, its significant business partners and affiliates with which it has a relationship could negatively affect Liberty Media Group's ability to conduct business for an extended period. There can be no assurance that all of Liberty Media Group's computer systems and related software will be fully year 2000 compliant; in addition, other companies on which Liberty Media Group's computer systems and related software and operations rely may or may not be fully compliant on a timely basis, and any such failure could have a material adverse effect on Liberty Media Group's financial position, results of operation or liquidity. EX-99 5 EXHIBIT 99.2 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (see notes 1 and 2) Consolidated Balance Sheets (unaudited)
New TCI Old TCI ------------- ------------ September 30, December 31, 1999 1998 ------------- ------------ Assets amounts in millions - ------ Cash and cash equivalents $ -- 419 Restricted cash (note 4) 19 185 Trade and other receivables, net 478 653 Prepaid and committed program rights -- 263 Investment in Liberty Media Group and related receivables (note 5) 35,519 -- Investments in affiliates other than Liberty Media Group (the "Other Affiliates"), accounted for under the equity method (notes 6 and 12) 14,393 4,709 Investment in Time Warner, Inc. ("Time Warner") (note 2) 34 7,118 Investment in AT&T Corp. ("AT&T") (notes 2 and 11) -- 3,556 Investment in Sprint Corporation (note 2) -- 2,446 Property and equipment, at cost: Land 119 63 Distribution systems 6,243 10,107 Support equipment and buildings 999 1,769 ---------- ---------- 7,361 11,939 Less accumulated depreciation 492 4,786 ---------- ---------- 6,869 7,153 ---------- ---------- Franchise costs and other intangible assets 32,895 15,782 Less accumulated amortization 508 2,723 ---------- ---------- 32,387 13,059 ---------- ---------- Other assets, net of accumulated amortization 1,462 2,290 ---------- ---------- $ 91,161 41,851 ========== ==========
(continued) I-1 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (see notes 1 and 2) Consolidated Balance Sheets, continued (unaudited)
New TCI Old TCI ------------- ------------ September 30, December 31, 1999 1998 ------------- ------------ Liabilities and Stockholders' Equity amounts in millions Accounts payable $ 276 229 Accrued interest 136 253 Accrued programming expense 327 471 Other accrued expenses 743 1,128 Debt (notes 2 and 8): Due to unaffiliated parties 9,449 14,052 Notes payable to AT&T 8,559 -- Deferred income taxes 18,277 9,749 Other liabilities 1,032 1,819 ---------- ---------- Total liabilities 38,799 27,701 ---------- ---------- Minority interests in equity of consolidated subsidiaries 2,175 1,460 Redeemable securities (note 2) -- 322 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts ("Trust Preferred Securities") holding solely subordinated debt securities (note 9) 1,649 1,500 Stockholders' equity (notes 2 and 10): Class A Series Preferred Stock, $.01 par value. Authorized 700,000 shares -- -- Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock, $.01 par value. Authorized 1,675,096 shares; issued 1,552,490 shares -- -- Common stock, $.01 par value. Authorized 3,550,000,000 shares; issued 1,327,985,000 shares in 1999 13 -- Common stock, $1 par value: Series A TCI Group. Authorized 1,750,000,000 shares; issued 610,748,188 shares in 1998 -- 611 Series B TCI Group. Authorized 150,000,000 shares; issued 73,929,229 shares in 1998 -- 74 Series A Liberty Media Group. Authorized 750,000,000 shares; issued 367,890,546 shares in 1998 -- 368 Series B Liberty Media Group. Authorized 75,000,000 shares; issued 35,198,156 shares in 1998 -- 35 Series A TCI Ventures Group. Authorized 750,000,000 shares; issued 377,253,230 shares in 1998 -- 377 Series B TCI Ventures Group. Authorized 75,000,000 shares; issued 45,750,534 shares in 1998 -- 46 Additional paid-in capital 52,531 5,987 Accumulated other comprehensive earnings, net of taxes 2,445 3,749 Retained earnings (accumulated deficit) (2,406) 1,124 ---------- ---------- 52,583 12,371 Investment in AT&T (notes 2 and 11) (4,045) -- Treasury stock and common stock held by subsidiaries, at cost -- (1,503) ---------- ---------- Total stockholders' equity 48,538 10,868 ---------- ---------- Commitments and contingencies (notes 13 and 14) $ 91,161 41,851 ========== ==========
See accompanying notes to consolidated financial statements. I-2 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (see notes 1 and 2) Consolidated Statements of Operations (unaudited)
New TCI Old TCI ------------------ ------------------ Three months Three months ended ended September 30, 1999 September 30, 1998 ------------------ ------------------ amounts in millions, except per share amounts Revenue (note 11) $ 1,442 1,843 Operating costs and expenses: Operating (note 11) 599 754 Selling, general and administrative (note 11) 324 412 Year 2000 costs 16 5 AT&T merger and integration costs 4 1 Stock compensation (2) 11 Depreciation and amortization 461 421 ---------- ---------- 1,402 1,604 ---------- ---------- Operating income 40 239 Other income (expense): Interest expense: Unaffiliated parties (142) (272) AT&T (notes 2 and 8) (106) -- Interest and dividend income 1 33 Share of losses of Liberty Media Group (note 5) (217) -- Share of losses of the Other Affiliates, net (note 6) (412) (397) Minority interests in earnings of consolidated subsidiaries, net (note 9) (45) (30) Gain on issuance of stock by equity investee (note 7) -- 58 Gain on issuance of equity interests by subsidiary (note 6) -- 17 Gains on disposition of assets, net (notes 7 and 11) -- 2,605 Other, net 2 (7) ---------- ---------- (919) 2,007 ---------- ---------- Earnings (loss) before income taxes and extraordinary items (879) 2,246 Income tax benefit (expense) 239 (902) ---------- ---------- Earnings (loss) before extraordinary items (640) 1,344 Extraordinary gain (loss) (net of income taxes of $2 million and $9 million in 1999 and 1998, respectively) (note 8) 4 (4) ---------- ---------- Net earnings (loss) (636) 1,340 Dividend requirements on preferred stocks (2) (5) ---------- ---------- Net earnings (loss) attributable to common stockholders $ (638) 1,335 ========== ==========
(continued) I-3 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (see notes 1 and 2) Consolidated Statements of Operations, continued (unaudited)
New TCI Old TCI ------------------ ------------------ Three months Three months ended ended September 30, 1999 September 30, 1998 ------------------ ------------------ amounts in millions, except per share amounts Net earnings (loss) attributable to common stockholders: TCI Group Series A and Series B common stock $ -- 47 Liberty Media Group Series A and Series B common stock -- (11) TCI Ventures Group Series A and Series B common stock -- 1,299 ---------- ---------- $ -- 1,335 ========== ========== Basic earnings (loss) attributable to common stockholders per common share (note 3): TCI Group Series A and Series B common stock $ -- .09 ========== ========== Liberty Media Group Series A and Series B common stock $ -- (.03) ========== ========== TCI Ventures Group Series A and Series B common stock $ -- 3.07 ========== ========== Diluted earnings (loss) attributable to common stockholders per common and potential common share (note 3): TCI Group Series A and Series B common stock $ -- .08 ========== ========== Liberty Media Group Series A and Series B common stock $ -- (.03) ========== ========== TCI Ventures Group Series A and Series B common stock $ -- 2.88 ========== ========== Comprehensive earnings (loss) $ (202) 1,425 ========== ==========
See accompanying notes to consolidated financial statements. (continued) I-4 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (see notes 1 and 2) Consolidated Statements of Operations, continued (unaudited)
New TCI Old TCI ------------------ --------------------------------------- Seven months Two months Nine months ended ended ended September 30, 1999 February 28, 1999 September 30, 1998 ------------------ ----------------- ------------------ amounts in millions, except per share amounts Revenue (note 11) $ 3,344 1,145 5,563 Operating costs and expenses: Operating (note 11) 1,345 467 2,202 Selling, general and administrative (note 11) 807 322 1,316 Year 2000 costs 47 11 6 AT&T merger and integration costs 31 65 11 Stock compensation 72 366 423 Reserve for loss arising from contingent obligation (note 13) 50 -- -- Write-off of in-process research and development costs (note 2) 594 -- -- Depreciation and amortization 1,143 277 1,289 ---------- ---------- ---------- 4,089 1,508 5,247 ---------- ---------- ---------- Operating income (loss) (745) (363) 316 Other income (expense): Interest expense: Unaffiliated parties (346) (161) (807) AT&T (notes 2 and 8) (212) -- -- Interest and dividend income 7 13 72 Share of losses of Liberty Media Group (note 5) (818) -- -- Share of losses of the Other Affiliates, net (note 6) (789) (161) (986) Minority interests in earnings of consolidated subsidiaries, net (note 9) (103) (26) (95) Gain on issuance of stock by equity investee (note 7) -- -- 259 Gains on issuance of equity interests by subsidiaries (notes 6 and 7) -- 389 55 Gains on disposition of assets, net (notes 6, 7 and 11) -- 144 3,704 Other, net 7 8 (25) ---------- ---------- ---------- (2,254) 206 2,177 ---------- ---------- ---------- Earnings (loss) before income taxes and extraordinary items (2,999) (157) 2,493 Income tax benefit (expense) 589 (119) (1,079) ---------- ---------- ---------- Earnings (loss) before extraordinary items (2,410) (276) 1,414 Extraordinary gain (loss) (net of income taxes of $2 million and $3 million for the seven and two month periods in 1999, respectively, and $17 million in 1998) (note 8) 4 (5) (27) ---------- ---------- ---------- Net earnings (loss) (2,406) (281) 1,387 Dividend requirements on preferred stocks (5) (4) (18) ---------- ---------- ---------- Net earnings (loss) attributable to common stockholders $ (2,411) (285) 1,369 ========== ========== ==========
(continued) I-5 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (see notes 1 and 2) Consolidated Statements of Operations, continued (unaudited)
New TCI Old TCI ------------------ --------------------------------------- Seven months Two months Nine months ended ended ended September 30, 1999 February 28, 1999 September 30, 1998 ------------------ ----------------- ------------------ amounts in millions, except per share amounts Net earnings (loss) attributable to common stockholders: TCI Group Series A and Series B common stock $ -- (226) 130 Liberty Media Group Series A and Series B common stock -- (49) 227 TCI Ventures Group Series A and Series B common stock -- (10) 1,012 ---------- ---------- ---------- $ -- (285) 1,369 ========== ========== ========== Basic earnings (loss) attributable to common stockholders per common share (note 3): TCI Group Series A and Series B common stock $ -- (.42) .25 ========== ========== ========== Liberty Media Group Series A and Series B common stock $ -- (.13) .64 ========== ========== ========== TCI Ventures Group Series A and Series B common stock $ -- (.02) 2.40 ========== ========== ========== Diluted earnings (loss) attributable to common stockholders per common and potential common share (note 3): TCI Group Series A and Series B common stock $ -- (.43) .22 ========== ========== ========== Liberty Media Group Series A and Series B common stock $ -- (.13) .58 ========== ========== ========== TCI Ventures Group Series A and Series B common stock $ -- (.09) 2.24 ========== ========== ========== Comprehensive earnings $ 39 691 2,330 ========== ========== ==========
See accompanying notes to consolidated financial statements. I-6 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (see notes 1 and 2) Consolidated Statement of Stockholders' Equity (unaudited)
Common Stock ------------------------------------------------------------------ Class B TCI Group Liberty Media Group TCI Ventures Group Preferred -------------------- -------------------- -------------------- Stock Series A Series B Series A Series B Series A Series B --------- -------- -------- -------- -------- -------- -------- amounts in millions Old TCI - ------- Balance at January 1, 1999 $ -- 611 74 368 35 377 46 Net loss -- -- -- -- -- -- -- Reclassification of redeemable common stock to equity upon expiration of put obligations -- -- -- -- -- -- -- Proceeds received upon termination of equity swap facilities (note 10) -- -- -- -- -- -- -- Settlement of equity swap transaction in connection with preferred stock exchange (note 10) -- -- -- -- -- -- -- Gain from contribution of cable television systems to joint venture, net of taxes (note 7) -- -- -- -- -- -- -- Issuance of common stock upon exercise of stock options -- -- -- -- -- -- -- Recognition of stock compensation related to restricted stock awards -- -- -- -- -- -- -- Issuance of restricted stock granted pursuant to stock incentive plan -- 3 -- -- -- -- -- Conversion of Series B common stock to Series A common stock -- -- -- -- -- 1 (1) Accreted dividends on all classes of preferred stock -- -- -- -- -- -- -- Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements -- -- -- -- -- -- -- Foreign currency translation adjustment -- -- -- -- -- -- -- Change in unrealized holding gains for available-for-sale securities, net of taxes -- -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Balance at February 28, 1999 $ -- 614 74 368 35 378 45 ======== ======== ======== ======== ======== ======== ========
Treasury stock and Accumulated common other stock Additional comprehensive held by Total paid-in earnings, Retained subsidiaries, stockholders' capital net of taxes earnings at cost equity ---------- ------------- -------- ------------- ------------- amounts in millions Old TCI - ------- Balance at January 1, 1999 5,987 3,749 1,124 (1,503) 10,868 Net loss -- -- (281) -- (281) Reclassification of redeemable common stock to equity upon expiration of put obligations 10 -- -- -- 10 Proceeds received upon termination of equity swap facilities (note 10) 677 -- -- -- 677 Settlement of equity swap transaction in connection with preferred stock exchange (note 10) (29) -- -- -- (29) Gain from contribution of cable television systems to joint venture, net of taxes (note 7) 9 -- -- -- 9 Issuance of common stock upon exercise of stock options 3 -- -- -- 3 Recognition of stock compensation related to restricted stock awards 12 -- -- -- 12 Issuance of restricted stock granted pursuant to stock incentive plan (3) -- -- -- -- Conversion of Series B common stock to Series A common stock -- -- -- -- -- Accreted dividends on all classes of preferred stock -- -- (4) -- (4) Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements 2 -- -- -- 2 Foreign currency translation adjustment -- (15) -- -- (15) Change in unrealized holding gains for available-for-sale securities, net of taxes -- 987 -- -- 987 -------- -------- -------- -------- -------- Balance at February 28, 1999 6,668 4,721 839 (1,503) 12,239 ======== ======== ======== ======== ========
(continued) I-7 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (see notes 1 and 2) Consolidated Statement of Stockholders' Equity, continued (unaudited)
Accumulated other Class B Additional comprehensive Preferred Common paid-in earnings, Accumulated Stock Stock capital net of taxes deficit ---------- ---------- ---------- ------------- ----------- amounts in millions New TCI - ------- Balance at March 1, 1999 (note 2) $ -- 13 52,142 -- -- Net loss -- -- -- -- (2,406) Payment of preferred stock dividends -- -- (10) -- -- Issuance of AT&T Common Stock upon conversion of TCI notes payable (note 8) -- -- 40 -- -- Issuance of AT&T Liberty Tracking Stock upon conversion of Liberty Media Group debt (note 5) -- -- 354 -- -- Gain from issuance of common stock by subsidiary and affiliate, net of taxes (note 6) -- -- 484 -- -- Gain from issuance of common stock by attributed subsidiary of Liberty Media Group, net of taxes -- -- 50 -- -- Utilization of net operating loss carryforwards by AT&T (notes 5 and 11) -- -- (580) -- -- Reclassification of liability for stock options upon exercise and cancellation of such options -- -- 42 -- -- Reclassification by Liberty Media Group of redeemable common stock to equity upon expiration of put obligation -- -- 9 -- -- Change in non-interest bearing intercompany account with AT&T -- -- -- -- -- Change in unrealized holding gains for available-for-sale securities, net of taxes (note 5) -- -- -- 2,357 -- Foreign currency translation adjustments, net of taxes (note 5) -- -- -- 88 -- ---------- ---------- ---------- ---------- ---------- Balance at September 30, 1999 $ -- 13 52,531 2,445 (2,406) ========== ========== ========== ========== ==========
Total Investment stockholders' in AT&T equity ------------- ------------- amounts in millions New TCI - ------- Balance at March 1, 1999 (note 2) (4,018) 48,137 Net loss -- (2,406) Payment of preferred stock dividends -- (10) Issuance of AT&T Common Stock upon conversion of TCI notes payable (note 8) -- 40 Issuance of AT&T Liberty Tracking Stock upon conversion of Liberty Media Group debt (note 5) -- 354 Gain from issuance of common stock by subsidiary and affiliate, net of taxes (note 6) -- 484 Gain from issuance of common stock by attributed subsidiary of Liberty Media Group, net of taxes -- 50 Utilization of net operating loss carryforwards by AT&T (notes 5 and 11) -- (580) Reclassification of liability for stock options upon exercise and cancellation of such options -- 42 Reclassification by Liberty Media Group of redeemable common stock to equity upon expiration of put obligation -- 9 Change in non-interest bearing intercompany account with AT&T (27) (27) Change in unrealized holding gains for available-for-sale securities, net of taxes (note 5) -- 2,357 Foreign currency translation adjustments, net of taxes (note 5) -- 88 ---------- ---------- Balance at September 30, 1999 (4,045) 48,538 ========== ==========
See accompanying notes to consolidated financial statements. I-8 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (see notes 1 and 2) Consolidated Statements of Cash Flows (unaudited)
New TCI Old TCI ------------------- ------------------------------------- Seven months Two months Nine months ended ended ended September 30, 1999 February 28, 1999 September 30, 1998 ------------------- ----------------- ------------------ amounts in millions (see note 4) Cash flows from operating activities: Net earnings (loss) before extraordinary items $ (2,410) (276) 1,414 Adjustments to reconcile net earnings (loss) before extraordinary items to net cash provided by (used in) operating activities: Depreciation and amortization 1,143 277 1,289 Stock compensation 72 366 423 Payments of obligation relating to stock compensation (47) (294) (161) Reserve for loss arising from contingent obligation 50 -- -- Payment of amounts relating to contingent obligation (116) -- -- Share of losses of Liberty Media Group 818 -- -- Share of losses of the Other Affiliates, net 789 161 986 Minority interests in earnings of consolidated subsidiaries, net 103 26 95 Gains on issuance of equity interests by subsidiaries -- (389) (55) Gain on issuance of stock by equity investee -- -- (259) Gains on disposition of assets, net -- (144) (3,704) Deferred income tax expense (benefit) (377) 116 1,026 Write-off of in-process research and development costs 594 -- -- Other noncash charges (credits) (53) 1 (3) Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions: Change in receivables and prepaids 11 (84) (191) Change in non-interest bearing intercompany account with AT&T (27) -- -- Change in other accruals and payables (23) 44 (112) ---------- ---------- ---------- Net cash provided by (used in) operating activities 527 (196) 748 ---------- ---------- ---------- Cash flows from investing activities: Cash paid for acquisitions and exchanges, net (75) (353) (166) Capital expended for property and equipment (1,910) (297) (1,123) Effect on cash and cash equivalents of deconsolidation of subsidiaries (401) (53) -- Investments in and loans to affiliates (101) (52) (1,346) Collections of loans to affiliates, net 127 709 1,675 Proceeds from disposition of assets 38 344 712 Change in restricted cash 36 112 (335) Other investing activities (28) 65 (73) ---------- ---------- ---------- Net cash provided by (used in) investing activities (2,314) 475 (656) ---------- ---------- ---------- Cash flows from financing activities: Borrowings of debt 3,584 583 4,645 Repayments of debt (2,228) (1,468) (4,213) Payment of dividends on subsidiary preferred stock and Trust Preferred Securities (124) (12) (141) Payment of preferred stock dividends (10) (4) (27) Proceeds received upon termination of equity swap facilities -- 677 -- Prepayment penalties -- (4) (39) Repurchase of common stock -- -- (31) Repurchase of subsidiary common and preferred stock -- (45) (15) Payments for call agreements -- -- (274) Proceeds from issuance of subsidiary stock -- -- 91 Other financing activities (10) 8 (12) ---------- ---------- ---------- Net cash provided by (used in) financing activities 1,212 (265) (16) ---------- ---------- ---------- Net change in cash and cash equivalents (575) 14 76 Cash and cash equivalents at beginning of period 575 419 244 ---------- ---------- ---------- Cash and cash equivalents at end of period $ -- 433 320 ========== ========== ==========
See accompanying notes to consolidated financial statements. I-9 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1999 (unaudited) (1) Basis of Presentation The accompanying consolidated financial statements include the accounts of Tele-Communications, Inc. and those of all of its subsidiaries ("TCI" or the "Company"). On March 9, 1999, AT&T acquired TCI in a merger transaction (the "AT&T Merger"). For financial reporting purposes the AT&T Merger and related restructuring transactions described in note 2 are deemed to have occurred on March 1, 1999. The consolidated financial statements for periods prior to March 1, 1999 are referred to herein as "Old TCI", and the consolidated financial statements for periods subsequent to February 28, 1999 are referred to herein as "New TCI." Due to the March 1, 1999 application of purchase accounting in connection with the AT&T Merger, the predecessor consolidated financial statements of Old TCI are not comparable to the successor consolidated financial statements of New TCI. In the following text, "TCI" and "the Company" refer to both Old TCI and New TCI. See note 2. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying interim consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in TCI's Annual Report on Form 10-K for the year ended December 31, 1998. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Prior to the AT&T Merger, TCI generally recognized changes in its proportionate share of the underlying equity of a subsidiary or equity method investee, which resulted from the issuance of additional equity securities by such subsidiary or equity investee, in the consolidated statement of operations. Upon consummation of the AT&T Merger, TCI began to account for such changes in the underlying equity of its subsidiaries and affiliates as equity transactions in order to conform with AT&T's accounting policy. Certain prior period amounts have been reclassified for comparability with the current period presentation. (continued) I-10 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Targeted Stock Prior to the AT&T Merger, the Company's assets and operations were included in three separate groups, each of which was tracked separately by public equity securities. These groups were formerly known as the "Liberty Media Group" (referred to herein as the "Old Liberty Group"), the "TCI Ventures Group" and the "TCI Group." Old Liberty Group was intended to reflect the separate performance of TCI's assets which produce and distribute programming services. The TCI Ventures Group was intended to reflect the separate performance of TCI's principal international assets and businesses and substantially all of TCI's non-cable and non-programming assets. The TCI Group was intended to reflect the separate performance of TCI and its subsidiaries and assets not attributed to Old Liberty Group or TCI Ventures Group. Such subsidiaries and assets are comprised primarily of TCI's domestic cable and communications business. TCI Group, Old Liberty Group and TCI Ventures Group individually may be referred to herein as a "Group." The TCI Group was tracked separately through the Tele-Communications, Inc. Series A TCI Group Common Stock (the "TCI Group Series A Stock") and Series B TCI Group Common Stock (the "TCI Group Series B Stock," and together with the TCI Group Series A Stock, the "TCI Group Stock"). The Old Liberty Group was tracked through the Tele-Communications, Inc. Series A Liberty Media Group Common Stock ("Liberty Group Series A Stock") and Series B Liberty Media Group Common Stock ("Liberty Group Series B Stock" and together with the Liberty Group Series A Stock, the "Liberty Group Stock"). The TCI Ventures Group was tracked separately through the Tele-Communications, Inc. Series A TCI Ventures Group Common Stock ("TCI Ventures Group Series A Stock") and Series B TCI Ventures Group Common Stock ("TCI Ventures Group Series B Stock" and together with the TCI Ventures Group Series A Stock, the "TCI Ventures Group Stock"). Upon consummation of the AT&T Merger, each of the separate series of Tele-Communications, Inc. common stock was converted either into shares of AT&T common stock, par value $1.00 per share, ("AT&T Common Stock") or shares of one of two classes of a new AT&T tracking stock designated to track the combined Old Liberty Group and TCI Ventures Group after giving effect to certain asset transfers. See note 2. (continued) I-11 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (2) Merger with AT&T and Related Accounting On March 9, 1999, AT&T acquired TCI in the AT&T Merger, in which Italy Merger Corp., a wholly-owned subsidiary of AT&T, merged with and into TCI, and TCI thereby became a subsidiary of AT&T. As a result of the AT&T Merger, (i) each share of TCI Group Series A Stock was converted into 1.16355 shares of AT&T Common Stock, (ii) each share of TCI Group Series B Stock was converted into 1.27995 shares of AT&T Common Stock, (iii) each share of Liberty Group Series A Stock was converted into 2 shares of a newly created class of AT&T common stock designated as the Class A Liberty Media Group Common Stock, par value $1.00 per share (the "AT&T Liberty Class A Tracking Stock"), (iv) each share of Liberty Group Series B Stock was converted into 2 shares of a newly created class of AT&T common stock designated as the Class B Liberty Media Group Common Stock, par value $1.00 per share (the "AT&T Liberty Class B Tracking Stock" and together with the AT&T Liberty Class A Tracking Stock, the "AT&T Liberty Tracking Stock"), (v) each share of TCI Ventures Group Series A Stock was converted into 1.04 shares of AT&T Liberty Class A Tracking Stock, (vi) each share of TCI Ventures Group Series B Stock was converted into 1.04 shares of AT&T Liberty Class B Tracking Stock, (vii) each share of TCI's Convertible Preferred Stock, Series C-TCI Group (the "Series C-TCI Group Preferred Stock") was converted into 154.589253 shares of AT&T Common Stock, (viii) each share of TCI's Convertible Preferred Stock Series C-Liberty Media Group (the "Series C-Liberty Media Group Preferred Stock") was converted into 112.50 shares of AT&T Liberty Class A Tracking Stock, (ix) each share of TCI's Redeemable Convertible TCI Group Preferred Stock, Series G ("Series G Preferred Stock") was converted into 1.3846245 shares of AT&T Common Stock and (x) each share of TCI's Redeemable Convertible Liberty Media Group Preferred Stock, Series H ("Series H Preferred Stock") was converted into 1.18125 shares of AT&T Liberty Class A Tracking Stock. Following the AT&T Merger, each share of Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock ("Class B Preferred Stock") continues to be outstanding as the Class B Preferred Stock of TCI with the same rights and preferences such stock had prior to the AT&T Merger. In general, the holders of shares of AT&T Liberty Class A Tracking Stock and the holders of shares of AT&T Liberty Class B Tracking Stock will vote together as a single class with the holders of shares of AT&T Common Stock on all matters presented to such stockholders, with the holders being entitled to 3/40th of a vote for each share of AT&T Liberty Class A Tracking Stock held, 3/4ths of a vote per share of AT&T Liberty Class B Tracking Stock held and 1 vote per share of AT&T Common Stock held. (continued) I-12 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The shares of AT&T Liberty Tracking Stock issued in the AT&T Merger are intended to reflect the separate performance of the businesses and assets attributed to Old Liberty Group and TCI Ventures Group at the time of the AT&T Merger. References herein to "Liberty/Ventures Group" refer to the combined assets and businesses of Old Liberty Group and TCI Ventures Group for periods prior to the AT&T Merger, and subsequent to the AT&T Merger such combined assets and business are referred to as "Liberty Media Group." Pursuant to, and subject to the terms and conditions set forth in the Agreement and Plan of Restructuring and Merger, dated as of June 23, 1998 (the "Merger Agreement"), immediately prior to the AT&T Merger, certain assets previously attributed to TCI Ventures Group (including, among others, the shares of AT&T Common Stock received in the merger of AT&T and Teleport Communications Group, Inc. ("TCG"), the stock of At Home Corporation ("@Home") attributed to TCI Ventures Group, the assets and business of the National Digital Television Center, Inc. ("NDTC") and TCI Ventures Group's equity interest in Western Tele-Communications, Inc. ("WTCI")) were transferred to TCI Group in exchange for approximately $5.5 billion in cash. Also, upon consummation of the AT&T Merger, through a new tax sharing agreement between Liberty Media Group and AT&T, Liberty Media Group became entitled to the benefit of approximately $2 billion of net operating loss carryforwards attributable to all entities included in TCI's consolidated federal income tax return as of the date of the AT&T Merger. Such net operating loss carryforwards are subject to adjustment by the Internal Revenue Service and are subject to limitations on usage which may affect the ultimate amount utilized. Additionally, certain warrants to purchase shares of General Instruments Corporation ("GI") previously attributed to TCI Group were transferred to Liberty/Ventures Group in exchange for approximately $176 million in cash. The transfer of certain immaterial assets was also effected. Immediately prior to the AT&T Merger, AT&T and Liberty Media Corporation entered into an agreement relating to the carriage of programming of Liberty Media Group to be distributed over the AT&T cable systems. Pursuant to this agreement, Liberty Media Group will be granted, among other rights, "preferred vendor status" with respect to certain types of new programming services. Liberty Media Group will also be entitled to the use of channel capacity equal to one six megahertz channel to be used for category specific interactive video channels. In addition, such agreement also provided for the extension of existing affiliation agreements between TCI and programming affiliates of Liberty Media Group to a date not less than 10 years from the closing of the AT&T Merger, upon the terms and conditions set forth in such agreement. (continued) I-13 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Pursuant to amended corporate governance documents for the entities included in Liberty Media Group and certain agreements among AT&T and TCI, the business of Liberty Media Group will continue to be managed by certain persons who were members of TCI's management prior to the AT&T Merger. AT&T will initially designate one third of the directors of such entities and its rights as the sole shareholder of the common stock of such entities following the AT&T Merger will, in accordance with Delaware law, be limited to actions which will require shareholder approval. Therefore, management has concluded that TCI does not have a controlling financial interest (as that term is used in Statement of Financial Accounting Standards No. 94) in the entities comprising the Liberty Media Group following the AT&T Merger, and will account for its ownership interests in such entities under the equity method. Immediately prior to the AT&T Merger, TCI restructured its ownership of certain of its subsidiaries (the "Restructuring"). The Restructuring included merging TCI's cable subsidiary, TCI Communications, Inc. ("TCIC"), into TCI. As a result of TCIC's merger with TCI, all assets and liabilities of TCIC have been assumed by TCI, including TCIC's public debt. In connection with TCIC's merger with TCI, each share of TCIC's Cumulative Exchangeable Preferred Stock, Series A was converted into 2.119 shares of TCI Group Series A Stock, and such shares of TCI Group Series A Stock were subsequently converted into AT&T Common Stock in connection with the AT&T Merger. All other public securities issued by subsidiaries of TCIC (other than TCI Pacific Communications, Inc. ("Pacific")) otherwise remained unaffected. Furthermore, as part of the Restructuring, (i) AT&T loaned TCI $5.5 billion pursuant to a promissory note, (ii) certain asset transfers were made between TCI and its subsidiaries, (iii) 123,896 shares of the Company's Convertible Redeemable Participating Preferred Stock, Series F ("Series F Preferred Stock") which were held by subsidiaries of TCI, were converted into 185,428,946 shares of TCI Group Series A Stock (which in turn were converted into 215,755,850 shares of AT&T Common Stock in the AT&T Merger and continue to be held by subsidiaries of TCI), (iv) the remaining 154,411 shares of Series F Preferred Stock which were formerly held by subsidiaries of TCI were distributed to TCI through a series of liquidations and canceled, and (v) 125,728,816 shares of TCI Group Series A Stock, 9,154,134 shares of TCI Group Series B Stock, 6,654,367 shares of Liberty Group Series A Stock, 3,417,187 shares of Liberty Group Series B Stock, and 67,536 shares of Class B Preferred Stock, each formerly held by subsidiaries of TCI, were distributed to TCI through a series of liquidations and canceled. Under the terms of the 5% Class A Senior Cumulative Exchangeable Preferred Stock of Pacific (the "Exchangeable Preferred Stock"), each share of that preferred stock is exchangeable, from and after August 1, 2001, for approximately 6.3375 shares of AT&T Common Stock, subject to certain anti-dilution adjustments. Additionally, Pacific may elect to make any dividend, redemption or liquidation payment on the Exchangeable Preferred Stock in cash, by delivery of shares of AT&T Common Stock or by a combination of the foregoing forms of consideration. (continued) I-14 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The AT&T Merger has been accounted for using the purchase method of accounting and has been deemed to be effective as of March 1, 1999 for financial reporting purposes. Accordingly, the preliminary allocation of AT&T's purchase price to acquire Old TCI has been reflected in TCI's consolidated financial statements as of March 1, 1999. A final allocation of such purchase price will be made upon resolution of pre-acquisition contingencies and receipt of final third party appraisals. Certain transactions occurring between March 1, 1999 and March 9, 1999 that affected Old TCI's equity and stock compensation have been reflected in the two-month period ended February 28, 1999. The $52.2 billion aggregate value assigned to TCI's net assets as a result of the application of purchase accounting was comprised of the following:
amounts in millions Issuance of AT&T Common Stock $ 26,798 Issuance of AT&T Liberty Tracking Stock 23,360 Assumption of convertible notes 1,593 Assumption of Class B Preferred Stock 154 Estimated merger costs 250 ---------------- $ 52,155 ================
The value assigned to the AT&T Common Stock was based on the average closing price of AT&T Common Stock a few days before and after the AT&T Merger was agreed to and announced. The value assigned to the AT&T Liberty Tracking Stock was based on the average closing price of Liberty Group Stock a few days before and after the AT&T Merger was agreed to and announced. The Liberty Group Stock was used to value the AT&T Liberty Tracking Stock issued in the AT&T Merger because the fair value of Liberty Group Stock was more readily determinable than the fair value of the AT&T Liberty Tracking Stock. (continued) I-15 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The following table reflects the opening summarized balance sheet of New TCI as adjusted to give effect to the Restructuring, the preliminary allocation of AT&T's purchase price to acquire TCI (as adjusted through September 30, 1999), and the deconsolidation of the entities comprising Liberty Media Group following the AT&T Merger:
amounts in millions Assets Cash and cash equivalents $ 575 Restricted cash 55 Receivables and prepaid assets 518 Investment in Liberty Media Group 33,728 Investment in the Other Affiliates 11,919 Property and equipment 5,455 Intangible assets 35,274 Other assets 2,437 -------- $ 89,961 ======== Liabilities and Stockholders' Equity Accounts payable and accrued expenses $ 1,742 Debt 16,844 Deferred income taxes 17,959 Other liabilities 1,053 -------- Total liabilities 37,598 -------- Minority interests in equity of consolidated subsidiaries 2,566 Trust Preferred Securities 1,660 Stockholders' equity 52,155 Investment in AT&T (4,018) -------- Total stockholders' equity 48,137 -------- $ 89,961 ========
The following table reflects the change in cash and cash equivalents as a result of the Restructuring and the deconsolidation of Liberty Media Group:
amounts in millions Cash and cash equivalents of Old TCI at February 28, 1999 $ 433 Cash received from AT&T in Restructuring 5,461 Decrease in cash due to deconsolidation of Liberty Media Group (5,319) -------- Cash and cash equivalents of New TCI at March 1, 1999 $ 575 ========
(continued) I-16 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As a result of the application of purchase accounting, New TCI has recorded its assets and liabilities at their preliminary fair values on March 9, 1999. During the third quarter of 1999, $19 billion of goodwill recorded in connection with the preliminary allocation of AT&T's purchase price to acquire Old TCI was reclassified to franchise costs. Franchise costs represent the value attributable to the agreements with local franchise authorities that allow access to homes in TCI's service areas. As with goodwill, franchise costs are amortized over 40 years. Generally accepted accounting principles require deferred income taxes to be recorded on the difference between the financial reporting basis and income tax basis of franchise costs, whereas no such requirement exists for goodwill. Accordingly, during the third quarter of 1999, New TCI recorded an increase to its deferred income tax liability of approximately $12 billion, and recorded an equal and offsetting increase to franchise costs. This reclassification and its related deferred income tax effects were given retroactive effect to the March 9, 1999 acquisition date in order to provide for meaningful comparisons. Such retroactive treatment had no impact on New TCI's net loss since the increased amortization of franchise costs was fully offset by the deferred income tax benefit of such amortization. During the second and third quarters of 1999, further refinements were also made to the preliminary allocation of AT&T's purchase price to acquire Old TCI as a result of the appraisal process. Refinements of the allocation of AT&T's purchase price to acquire Old TCI are treated as changes in estimates and accounted for prospectively. As of September 30, 1999, the allocation of AT&T's purchase price to acquire Old TCI had not been finalized. Accordingly, the Company may make additional refinements to the preliminary allocation of AT&T's purchase price to acquire Old TCI in future periods. In addition to the above, certain of the more significant effects of purchase accounting are described below. New TCI's intangible assets in the March 1, 1999 opening consolidated balance sheet also include $594 million of in-process research and development costs. Such amount reflects the value, as of the acquisition date, of the Company's research and development projects which had not yet reached technological feasibility and which had no alternative future use. Such in-process research and development costs were written-off during March 1999. As a result of the application of purchase accounting, the amount assigned to New TCI's other liabilities includes $237 million which represents New TCI's estimated liability for unvested stock appreciation rights as of March 9, 1999. Such unvested stock appreciation rights will vest over remaining periods ranging from 1 to 5 years. The amount assigned to New TCI's minority interests in equity of consolidated subsidiaries includes $2.1 billion which represents the fair value of the redeemable preferred stock of a subsidiary. For additional information regarding the effects of purchase accounting on New TCI's assets and liabilities, see notes 6, 8, 9 and 13. (continued) I-17 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The following unaudited condensed results of operations for the nine months ended September 30, 1999 and 1998 were prepared assuming the AT&T Merger, the Restructuring and the deconsolidation of Liberty Media Group occurred on January 1, 1998. These pro forma amounts are not necessarily indicative of operating results which would have occurred if the AT&T Merger, the Restructuring and the deconsolidation of Liberty Media Group had occurred on January 1, 1998.
Nine months ended September 30, ------------------------------- 1999 1998 ----------- ----------- amounts in millions Revenue $ 4,285 4,735 Net earnings (loss) before extraordinary items $ (2,958) 885 Net earnings (loss) $ (2,959) 858
(3) Earnings (Loss) Per Common and Potential Common Share Basic earnings per share ("EPS") is measured as the income or loss attributable to common stockholders divided by the weighted average outstanding common shares for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares as if they had been converted at the beginning of the periods presented. Potential common shares that have an anti-dilutive effect are excluded from diluted EPS. Basic and diluted EPS are presented only for periods prior to the AT&T Merger. Subsequent to the AT&T Merger, all shares of common stock of TCI are held by AT&T. See notes 1 and 2. (a) TCI Group Stock The basic earnings (loss) attributable to TCI Group common stockholders per common share for the two months ended February 28, 1999 and the three and nine month periods ended September 30, 1998 was computed by dividing net earnings (loss) attributable to TCI Group common stockholders by the weighted average number of common shares outstanding of TCI Group Stock during the period. The diluted loss attributable to TCI Group common stockholders per common share for the two months ended February 28, 1999 was computed by dividing net loss attributable to TCI Group common stockholders, which is increased by aggregate fees paid on equity swap facilities of $4 million during 1999, by the weighted average number of common shares outstanding of TCI Group Stock during the period. Potential common shares were not included in the computation of weighted average shares outstanding because their inclusion would be anti-dilutive. (continued) I-18 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The diluted earnings attributable to TCI Group common stockholders per common share for the three and nine months ended September 30, 1998 was computed by dividing net earnings attributable to TCI Group common stockholders, which is adjusted by the addition of preferred stock dividends and interest accrued during the three and nine months ended September 30, 1998 to net earnings, assuming conversion of TCI Group convertible securities as of the beginning of the period to the extent that the assumed conversion of such securities would have been dilutive, by the weighted average number of common shares and dilutive potential common shares outstanding of TCI Group Stock during the period. Shares issuable upon conversion of the Series C-TCI Group Preferred Stock, the Convertible Preferred Stock, Series D ("Series D Preferred Stock"), the Series G Preferred Stock, certain stock rights, preferred stock of subsidiaries, convertible notes payable, stock options and other performance awards have been included in the diluted calculation of weighted average shares to the extent that the assumed issuance of such shares would have been dilutive, as illustrated below. All of the outstanding shares of Series D Preferred Stock were redeemed effective April 1, 1998. In connection with the March 9, 1999 AT&T Merger, TCI Group Stock was converted into AT&T Common Stock. See note 2. (continued) I-19 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Information concerning the reconciliation of basic EPS to diluted EPS with respect to TCI Group Stock is presented below:
Old TCI --------------------------------------------------------- Two months Three months Nine months ended ended ended February 28, 1999 September 30, 1998 September 30, 1998 ----------------- ------------------ ------------------ amounts in millions, except per share amounts Basic EPS: Earnings (loss) attributable to common stockholders $ (226) 47 130 ========== ========== ========== Weighted average common shares 539 523 521 ========== ========== ========== Basic earnings (loss) per share attributable to common stockholders $ (.42) .09 .25 ========== ========== ========== Diluted EPS: Earnings (loss) attributable to common stockholders $ (226) 47 130 Add preferred dividend requirements -- -- -- Add interest expense -- -- -- Less fees paid on equity swap facilities (4) 1 2 ---------- ---------- ---------- Adjusted earnings (loss) attributable to common stockholders assuming conversion of preferred shares $ (230) 48 132 ========== ========== ========== Weighted average common shares 539 523 521 ---------- ---------- ---------- Add dilutive potential common shares: Employee and director options and other performance awards -- 12 10 Stock right -- 1 -- Convertible notes payable -- 24 24 Series C-TCI Group Preferred Stock -- -- -- Series D Preferred Stock -- -- -- Series G Preferred Stock -- -- -- Preferred stock of subsidiaries -- 45 45 ---------- ---------- ---------- Dilutive potential common shares -- 82 79 ---------- ---------- ---------- Diluted weighted average common shares 539 605 600 ========== ========== ========== Diluted earnings (loss) per share attributable to common stockholders $ (.43) .08 .22 ========== ========== ==========
I-20 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (b) Liberty Group Stock The basic earnings (loss) attributable to Old Liberty Group common stockholders per common share for the two months ended February 28, 1999 and the three and nine month periods ended September 30, 1998 was computed by dividing net earnings (loss) attributable to Old Liberty Group common stockholders by the weighted average number of common shares outstanding of Liberty Group Stock during the period. The diluted loss attributable to Old Liberty Group common stockholders per common share for the two months ended February 28, 1999 and the three months ended September 30, 1998 was computed by dividing the net loss attributable to Old Liberty Group stockholders by the weighted average number of common shares outstanding of Liberty Group Stock during the period. Potential common shares were not included in the computation of weighted average shares outstanding because their inclusion would be anti-dilutive. The diluted earnings attributable to Old Liberty Group common stockholders per common and potential common share for the nine months ended September 30, 1998 was computed by dividing earnings attributable to Old Liberty Group common stockholders by the weighted average number of common and dilutive potential common shares outstanding of Liberty Group Stock during the period. Shares issuable upon conversion of the Series C-Liberty Media Group Preferred Stock, the Series D Preferred Stock, the Series H Preferred Stock, convertible notes payable, stock options and other performance awards have been included in the diluted calculation of weighted average shares to the extent that the assumed issuance of such shares would have been dilutive, as illustrated below. All of the outstanding shares of Series D Preferred Stock were redeemed effective April 1, 1998. Numerator adjustments for dividends and interest associated with the convertible preferred shares and convertible notes payable, respectively, were not made to the computation of diluted earnings per share as such dividends and interest were paid by TCI Group. In connection with the AT&T Merger, Liberty Group Stock was converted into AT&T Liberty Tracking Stock. See note 2. (continued) I-21 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Information concerning the reconciliation of basic EPS to diluted EPS with respect to Liberty Group Stock is presented below:
Old TCI ------------------------------------------------------------ Two months Three months Nine months ended ended ended February 28, 1999 September 30, 1998 September 30, 1998 ----------------- ------------------ ------------------ amounts in millions, except per share amounts Basic EPS: Earnings (loss) attributable to common stockholders $ (49) (11) 227 ============ ============ ============ Weighted average common shares 367 357 357 ============ ============ ============ Basic earnings (loss) per share attributable to common stockholders $ (.13) (.03) .64 ============ ============ ============ Diluted EPS: Earnings (loss) attributable to common stockholders $ (49) (11) 227 ============ ============ ============ Weighted average common shares 367 357 357 ------------ ------------ ------------ Add dilutive potential common shares: Employee and director options and other performance awards -- -- 8 Convertible notes payable -- -- 19 Series C-Liberty Media Group Preferred Stock -- -- 4 Series D Preferred Stock -- -- -- Series H Preferred Stock -- -- 4 ------------ ------------ ------------ Dilutive potential common shares -- -- 35 ------------ ------------ ------------ Diluted weighted average common shares 367 357 392 ============ ============ ============ Diluted earnings (loss) per share attributable to common stockholders $ (.13) (.03) .58 ============ ============ ============
(c) TCI Ventures Group Stock The basic earnings (loss) attributable to TCI Ventures Group common stockholders per common share for the two months ended February 28, 1999 and the three and nine month periods ended September 30, 1998 was computed by dividing net earnings (loss) attributable to TCI Ventures Group common stockholders by the weighted average number of common shares outstanding of TCI Ventures Group Stock during the period. The diluted loss attributable to TCI Ventures Group common stockholders per common share for the two months ended February 28, 1999 was computed by dividing the net loss attributable to TCI Ventures Group stockholders by the weighted average number of common shares outstanding of TCI Ventures Group during the period. In 1999, the net loss attributable to TCI Ventures Group common stockholders is increased by $29 million for charges recorded directly to equity upon settlement of an equity swap transaction. See note 10. For purposes of computing diluted EPS such amount is assumed to be charged to earnings. Potential common shares were not included in the computation of weighted average shares outstanding because their inclusion would be anti-dilutive. (continued) I-22 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The diluted earnings attributable to TCI Ventures Group common stockholders per common share for the three and nine month periods ended September 30, 1998 was computed by dividing net earnings attributable to TCI Ventures Group common stockholders by the weighted average number of common shares outstanding of TCI Ventures Group Stock during the period. Shares issuable upon conversion of convertible notes payable, stock options and other performance awards have been included in the diluted calculation of weighted average shares to the extent that the assumed issuance of such shares would have been dilutive, as illustrated below. Numerator adjustments for interest associated with convertible notes payable were not made to the computation of diluted earnings per share as such interest was paid by TCI Group. In connection with the March 9, 1999 AT&T Merger, TCI Ventures Group Stock was converted into AT&T Liberty Tracking Stock. See note 2. Information concerning the reconciliation of basic EPS to diluted EPS with respect to TCI Ventures Group is presented below:
Old TCI ----------------------------------------------------------- Two months Three months Nine months ended ended ended February 28, 1999 September 30, 1998 September 30, 1998 ----------------- ------------------ ------------------ amounts in millions, except per share amounts Basic EPS: Earnings (loss) attributable to common stockholders $ (10) 1,299 1,012 ============ ============ ============ Weighted average common shares 423 423 422 ============ ============ ============ Basic earnings (loss) per share attributable to common stockholders $ (.02) 3.07 2.40 ============ ============ ============ Diluted EPS: Earnings (loss) attributable to common stockholders $ (10) 1,299 1,012 ============ ============ ============ Weighted average common shares 423 423 422 ------------ ------------ ------------ Add dilutive potential common shares: Employee and director options and other performance awards -- 7 9 Convertible notes payable -- 21 21 ------------ ------------ ------------ Dilutive potential common shares -- 28 30 ------------ ------------ ------------ Diluted weighted average common shares 423 451 452 ============ ============ ============ Diluted earnings (loss) per share attributable to common stockholders $ (.09) 2.88 2.24 ============ ============ ============
(4) Supplemental Disclosures to Consolidated Statements of Cash Flows Cash paid for interest was $395 million, $287 million and $905 million for the seven months ended September 30, 1999, the two months ended February 28, 1999 and the nine months ended September, 1998, respectively. Cash paid for income taxes was not material during such periods. (continued) I-23 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Significant non-cash investing and financing activities and certain supplemental disclosures with respect to the statement of cash flows are reflected below:
New TCI Old TCI ------------------ -------------------------------------- Seven months Two months Nine months ended ended ended September 30, 1999 February 28, 1999 September 30, 1998 ------------------ ----------------- ------------------ amounts in millions Cash paid for acquisitions: Recorded value of assets acquired $ (34) (353) (906) Net liabilities assumed -- -- 79 Deferred tax liability recorded in acquisitions -- -- 105 Change in minority interests in equity of consolidated subsidiaries -- -- (215) Elimination of notes receivable from affiliates -- -- 350 Common stock issued in acquisitions -- -- 376 ------------ ------------ ------------ Cash paid for acquisitions $ (34) (353) (211) ============ ============ ============ Cash received (paid) in exchanges: Recorded value of assets acquired $ (2,243) -- (72) Historical cost of assets exchanged 2,202 -- 87 Gain recorded on exchange of assets -- -- 30 ------------ ------------ ------------ Cash received (paid) in exchanges $ (41) -- 45 ============ ============ ============ Capitalized costs of distribution agreements for @Home $ 79 -- 83 ============ ============ ============
(continued) I-24 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company ceased to include TV Guide, Inc. ("TV Guide") in its consolidated financial results and began to account for TV Guide using the equity method of accounting effective February 28, 1999 (see note 7). In addition, during the second quarter of 1999, the Company ceased to include @Home in its consolidated financial results and began to account for @Home using the equity method of accounting (see note 6). The effects of changing the method of accounting for the Company's ownership interests in TV Guide and @Home from the consolidation method to the equity method are summarized below:
Seven months Two months ended ended September 30, 1999 February 28, 1999 ------------------ ----------------- amounts in millions Assets (other than cash and cash equivalents) reclassified to investments in affiliates $ (918) (572) Liabilities reclassified to investments in affiliates 357 190 Minority interests in equity of subsidiaries reclassified to investments in affiliates 474 63 Gain on issuance of equity by subsidiary, net of taxes 488 372 ------------ ------------ Decrease in cash and cash equivalents $ 401 53 ============ ============
For a description of certain additional non-cash transactions, see notes 2, 6 and 7. The Company's restricted cash of $19 million at September 30, 1999, includes amounts held in escrow of $10 million and proceeds received in connection with certain asset dispositions. Such proceeds, which aggregated $9 million, are designated to be reinvested in certain identified assets for income tax purposes. (continued) I-25 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (5) Investment in Liberty Media Group As described in note 2, immediately following the AT&T Merger, the entities comprising the Liberty Media Group were deconsolidated. The Company's investment in Liberty Media Group includes non-interest bearing receivables from Liberty Media Group. Summarized unaudited results of operations for Liberty Media Group for the period in which the Company used the equity method to account for Liberty Media Group are as follows:
Seven months ended September 30, 1999 ------------------ amounts in millions Revenue $ 506 Operating costs and expenses (408) Stock compensation (432) Depreciation and amortization (394) ------------ Operating loss (728) Interest expense (87) Share of losses of affiliates, net (597) Other, net 189 ------------ Loss before income taxes (1,223) Income tax benefit 405 ------------ Net loss $ (818) ============
During March and April 1999, certain convertible debentures of a subsidiary attributed to the Liberty Media Group were converted into shares of AT&T Liberty Tracking Stock. The $354 million principal amount of such converted debentures has been reflected as an increase to New TCI's "Additional paid-in capital." The accompanying consolidated statement of stockholders' equity for the seven months ended September 30, 1999 includes changes in Liberty Media Group's unrealized holding gains for available-for-sale securities totaling $2,320 million, net of taxes, and Liberty Media Group's foreign currency translation adjustments totaling $88 million, net of taxes. During the third quarter of 1999, AT&T utilized $85 million of Liberty Media Group's net operating loss carryforwards to offset AT&T's current federal income tax liability. Liberty Media Group did not receive any consideration for the utilization of such net operating loss carryforwards. Accordingly, AT&T's utilization of Liberty Media Group's net operating loss carryforwards has been reflected as a decrease to New TCI's "Additional paid-in capital." (continued) I-26 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (6) Investments in the Other Affiliates The Company has various investments in the Other Affiliates accounted for under the equity method. The following table includes the Company's carrying value of its more significant investments in the Other Affiliates as of the indicated dates:
New TCI Old TCI ------------- ------------ September 30, December 31, 1999 1998 ------------- ------------ amounts in millions Cablevision Systems Corporation ("CSC")(a) $ 3,130 945 @Home(b) 2,866 -- Lenfest Communications, Inc. 2,196 (138) Texas Cable Partners, L.P. 1,570 111 Bresnan Communications Group LLC ("Bresnan") 873 -- Falcon Communications, L.P. ("Falcon") 660 189 InterMedia Capital Partners IV, L.P. ("InterMedia IV") and InterMedia Capital Management IV, L.P. ("ICM IV") 641 201 USA Networks, Inc. and related investments(c) -- 1,042 Various foreign equity investments(c) -- 1,492 Other 2,457 867 ------------ ------------ $ 14,393 4,709 ============ ============
----------------- (a) CSC On March 4, 1998, the Company contributed to 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"). CSC also assumed and repaid approximately $574 million of debt owed by the Company to external parties and $95 million of debt owed to the Company. As a result of the CSC Transaction, the Company recognized a $506 million gain in the accompanying consolidated statement of operations for the nine months ended September 30, 1998. Such gain represents the excess of the $1,161 million fair value of the CSC Class A common shares received over the historical cost of the net assets transferred by the Company to CSC. (continued) I-27 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements At September 30, 1999, the Company owned 48,942,172 shares of CSC Class A common stock, which had a closing market price of $72.75 per share on such date. Such shares represented an approximate 32% equity interest in CSC's total outstanding shares and an approximate 9% voting interest in CSC in all matters except for (i) the election of directors, in which case the Company effectively has the right to designate two of CSC's directors, and (ii) any increase in authorized shares, in which case the Company has agreed to vote its interest in proportion with the public holders of CSC Class A common shares. 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. As a result of the deconsolidation of Liberty Media Group, 1,040,400 shares of CSC Class A common stock held by Liberty Media Group are no longer included in the Company's investment in CSC. See note 2. (b) @Home During the second quarter of 1999, the stockholders of @Home approved certain changes in the corporate governance of @Home. As a result of these changes, management concluded that TCI no longer held a controlling financial interest (as that term is used in Statement of Financial Accounting Standards No. 94) in @Home and, accordingly, during the second quarter of 1999, TCI ceased to consolidate @Home and began to account for @Home using the equity method of accounting. On May 28, 1999, @Home consummated a merger agreement with Excite, Inc. ("Excite"), a global Internet media company that offers consumers and advertisers comprehensive Internet navigation services with extensive personalization capabilities. Under the terms of the merger agreement, @Home issued approximately 116 million shares of its common stock for all of the outstanding common stock of Excite based on an exchange ratio of 2.083804 shares of @Home's common stock for each share of Excite's common stock. @Home may issue up to approximately 46 million additional shares of common stock in connection with the assumption of obligations under Excite's stock option and employer stock purchase plans and outstanding warrants. As a result of the merger, TCI's economic interest in @Home decreased from 38% to 26%. Due to the resulting increase in @Home's equity, net of the dilution of TCI's ownership interest in @Home, TCI recorded a $488 million increase to "Additional paid-in capital" and a $312 million increase to "Deferred income tax liability." At September 30, 1999, the Company owned 63,720,000 shares of @Home Class A common stock, which had a closing market price of $41.44 per share on such date. (continued) I-28 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements During the two months ended February 28, 1999, @Home issued 2.2 million common shares. Due to the resulting increase in @Home's equity, net of the dilution of TCI's ownership interest in @Home, TCI recognized a gain of $17 million. (c) Liberty Media Group Investments As a result of the deconsolidation of Liberty Media Group, the indicated investments are no longer included in the Company's consolidated investments. See note 2. At September 30, 1999, the aggregate carrying value of the Company's investments in the Other Affiliates exceeded the Company's aggregate proportionate share of the Other Affiliates' underlying equity by $14.0 billion, of which $8.4 billion, $4.2 billion and $1.4 billion is being amortized over 40 years, 25 years and 7 years, respectively. TCI has entered into various agreements, which, among other matters, contemplate the disposition of certain of its investments in the Other Affiliates. See note 7. Summarized unaudited combined results of operations for the Other Affiliates for the periods in which the Company used the equity method to account for the Other Affiliates are as follows:
Nine months ended September 30, --------------------------------- Combined Operations 1999 1998 ------------------- ------------ ------------ amounts in millions Revenue $ 7,282 11,198 Operating expenses (5,661) (10,179) Depreciation and amortization (2,110) (2,177) ------------ ------------ Operating loss (489) (1,158) Interest expense (1,052) (1,458) Other, net (149) (33) ------------ ------------ Net loss $ (1,690) (2,649) ============ ============
(7) Acquisitions and Dispositions On May 4, 1999, AT&T and Comcast Corporation ("Comcast") announced that they had signed a letter of intent to exchange various cable systems, including certain cable systems of TCI. In addition, Comcast will receive an option from AT&T to purchase, over the next three years, additional cable systems with a total of approximately 1.25 million subscribers, which may include cable subscribers of TCI. The foregoing letter of intent is subject to completion of definitive agreements, consummation of certain other transactions, and regulatory and legal approvals. (continued) I-29 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On July 6, 1999, AT&T and Cox Communications, Inc. ("Cox") signed an agreement whereby AT&T would redeem approximately 50.3 million shares of AT&T Common Stock held by Cox in exchange for cable television systems of TCI serving approximately 316,000 customers and TCI's interest in certain equity method investments. The transaction is subject to receipt of necessary government and regulatory approvals. No assurance can be given that such transaction will be consummated. See note 6. TCI has entered into agreements with Century Communications Corp. ("Century") whereby TCI will contribute cable television systems serving approximately 249,000 customers located in Southern California to a newly formed limited partnership in which TCI will have an approximate 25% partnership interest. TCI will also exchange with the new partnership a cable television system serving approximately 100,000 customers in Southern California for cable television systems in Northern California serving approximately 100,000 customers. The transactions are subject to various closing conditions. No assurance can be given that such transactions will be consummated. On October 1, 1999, a merger was consummated in which Century merged with and into Adelphia Communications Corporation ("Adelphia"). As a result of such merger, Adelphia assumed all of Century's rights and obligations relating to the above described transaction. On October 1, 1999, TCI, InterMedia IV, and InterMedia Partners, a California Limited Partnership and a consolidated subsidiary of the Company ("InterMedia Partners"), entered into a series of transactions with unaffiliated third parties that resulted in the disposition of certain cable television systems, the acquisition by InterMedia IV of all of its partnership interests that were not owned by TCI and the exchange of certain of InterMedia IV's and InterMedia Partners' cable television systems. As a result of such transactions, InterMedia IV became a consolidated subsidiary of TCI. See notes 6 and 12. During the second quarter of 1999, TCI entered into separate agreements to sell the majority of its 50% interest in Bresnan (the "Bresnan Transaction") and its 46% interest in Falcon (the "Falcon Transaction") to Charter. In accordance with the terms of the Bresnan Transaction, TCI would receive consideration of approximately $900 million in the form of cash, and an approximate 4.5% interest in a new entity to be formed by Charter. In accordance with the terms of the Falcon Transaction, TCI would receive cash proceeds of approximately $725 million for its interest in Falcon Communications, L.P. The transactions are subject to various closing conditions. No assurance can be given that such transactions will be consummated. See note 6. (continued) I-30 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements During the second quarter of 1999, the Company paid $41 million in cash and traded cable television systems serving approximately 618,000 customers located in Florida, Hawaii, Maine, New York, Ohio, Texas and Wisconsin in exchange for cable television systems serving approximately 565,000 customers located in Illinois, New Jersey, Oregon and Pennsylvania (the "1999 Exchange"). The 1999 Exchange was consummated pursuant to an agreement that was executed in November 1998. No gain was recognized on the 1999 Exchange due to the Company's application of purchase accounting in connection with the AT&T Merger. During the two months ended February 28, 1999, the Company completed a transaction whereby the Company contributed cable television systems to Bresnan, an entity in which the Company had an approximate 80% ownership interest. Through a series of transactions, including the contribution of cash by a third party in exchange for an ownership interest in Bresnan, the Company's ownership interest in Bresnan was reduced to a non-controlling 50% ownership interest (the "1999 Contribution Transaction"). In connection with the associated dilution of the Company's ownership interest, the Company deconsolidated assets and liabilities related to cable television systems serving approximately 614,000 customers. The deconsolidated liabilities included $210 million of debt owed to external parties and $709 million of intercompany debt owed to the Company. In connection with the 1999 Contribution Transaction, the Company has agreed to take certain steps to support compliance by Bresnan with its payment obligations under certain debt instruments. See note 13. As a result of the dilution of the Company's ownership interest from 80% to 50%, the Company recorded a $9 million increase (net of deferred income taxes of $5 million) to additional paid-in capital in connection with the 1999 Contribution Transaction. No gain was recognized due to the Company's aforementioned commitment to support the entity's payment obligations under certain debt instruments. During February 1999, the Company sold cable television assets serving approximately 145,000 customers to an unaffiliated third party for approximately $300 million. The Company recorded a $123 million gain on such disposition. During the year ended 1998, the Company completed various transactions in addition to the CSC Transaction described in note 6, wherein the Company contributed cable television systems serving in the aggregate approximately 1.9 million customers to several 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 debt owed by the Company to external parties aggregating $323 million and intercompany debt owed to the Company aggregating $2,374 million. In connection with such transactions, the Company has agreed to take certain steps to support compliance by the 1998 Joint Ventures with their payment obligations under certain debt instruments. See notes 6 and 13. (continued) I-31 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Effective February 28, 1999, TV Guide (formerly United Video Satellite Group, Inc. ("UVSG")) and The News Corporation Limited ("News Corp.") completed a transaction whereby News Corp.'s TV Guide properties were combined with UVSG to create a platform for offering television guide services to consumers and advertising and the resulting company was named TV Guide. As part of this combination, a unit of News Corp. received consideration consisting of $800 million in cash and 60 million shares of UVSG's stock, including 22.5 million shares of its Class A common stock and 37.5 million shares of its Class B common stock. In addition, News Corp. elected to purchase approximately 6.5 million additional shares of UVSG Class A common stock for $129 million in order to equalize its ownership with that of Liberty/Ventures Group. Prior to such transactions, UVSG was a subsidiary of TCI. Immediately following these transactions, and another transaction completed on the same date, News Corp., Liberty/Ventures Group and TV Guide's public stockholders owned on an economic basis approximately 44%, 44% and 12%, respectively, of TV Guide and News Corp. and Liberty/Ventures Group each had approximately 49% of the voting power of TV Guide's outstanding stock. Due to the resulting increase in TV Guide's equity, net of the dilution of TCI's ownership interest in TV Guide, TCI recognized a $372 million gain (before deducting deferred income tax expense of $147 million). Effective September 1, 1998, Telewest Communications plc ("Telewest") and General Cable PLC ("General Cable") consummated a merger in which General Cable merged with and into Telewest. As a result of such merger, TCI's ownership interest in Telewest decreased to 22%. In connection with such dilution, TCI recognized a gain of $58 million (before deducting deferred income tax expense of $20 million). On July 23, 1998, a merger in which TCG agreed to be acquired by AT&T was consummated. See note 11. On April 22, 1998, TCG completed a merger transaction with ACC Corp. ("ACC") in which ACC shares were exchanged for shares of TCG. As a result of ACC's merger with TCG, Old TCI's interest in TCG was reduced to approximately 26%. In connection with the dilution of Old TCI's interest in TCG, Old TCI recorded a gain of $201 million (before deducting deferred income tax expense of $71 million). Effective February 1, 1998, Turner-Vision, Inc. ("Turner Vision") contributed the assets, obligations and operations of its retail C-band satellite business to Superstar/Netlink Group LLC ("Superstar/Netlink") in exchange for an approximate 20% interest in Superstar/Netlink. As a result of this transaction, the Company's ownership interest in Superstar/Netlink decreased from 100% to approximately 80% and the Company recognized a gain of $38 million (before deducting deferred income tax expense of $15 million). Turner Vision's contribution to Superstar/Netlink was accounted for as a purchase, and the $61 million excess of the purchase price over the fair value of the assets acquired was recorded as goodwill. (continued) I-32 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (8) Debt Debt is summarized as follows:
New TCI Old TCI ------------- ------------ September 30, December 31, 1999 1998 ------------- ------------ amounts in millions AT&T Notes (a) $ 8,559 -- Other notes payable (b) 9,154 9,412 Bank credit facilities (c) -- 3,773 Commercial paper -- 109 Convertible notes (d) -- 40 Capital lease obligations and other debt 295 718 ------------ ------------ $ 18,008 14,052 ============ ============
(a) Amounts outstanding under the notes payable to AT&T ("AT&T Notes") bear interest at the London Interbank Offered Rate ("LIBOR") plus 15 basis points (6.23% at September 30, 1999) and are due and payable on or before March 9, 2004. Interest on the AT&T Notes is compounded quarterly. (b) During the seven months ended September 30, 1999, the Company redeemed certain notes payable which had an aggregate principal balance of $64.6 million and fixed interest rates ranging from 7.875% to 8.75%. In connection with such redemptions, the Company recognized a pre-tax gain on early extinguishment of debt of $6 million. Such gain related to the excess of the fair value assigned to the debt in purchase accounting over the amount paid to redeem the debt. During the two months ended February 28, 1999, the Company redeemed certain notes payable which had an aggregate principal balance of $21 million and fixed interest rates ranging from 8.75% to 9.25%. In connection with such redemptions, the Company recognized a pre-tax loss on early extinguishment of debt of $4 million. Such loss related to prepayment penalties and the retirement of deferred loan costs. During the nine months ended September 30, 1998, the Company redeemed certain notes payable which had an aggregate principal balance of $352 million and fixed interest rates ranging from 8.67% to 10.25%. In connection with such redemptions, the Company recognized a pre-tax loss on early extinguishment of debt of $44 million in 1998. Such loss related to prepayment penalties amounting to $39 million and the retirement of deferred loan costs. (c) During the two months ended February 28, 1999, the Company repaid a bank credit facility. In connection with such repayment, the Company recognized a pre-tax loss on early extinguishment of debt of $4 million. Such loss related to the retirement of deferred loan costs. (continued) I-33 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As security for borrowings under one of Old TCI's credit facilities, Old TCI had pledged a portion of its Time Warner common stock. As a result of the deconsolidation of Liberty/Ventures Group, such borrowings and the associated Time Warner common stock are no longer reflected in the Company's consolidated debt and asset balances. (d) The convertible notes, which were stated net of unamortized discount of $166 million at December 31, 1998, were scheduled to mature on December 12, 2021. The notes required an annual interest payment equal to 1.85% of the face amount of the notes. On March 26, 1999, all of the notes were converted into shares of AT&T Common Stock, AT&T Liberty Class A Tracking Stock and TCI Satellite Entertainment, Inc. Series A common stock, $1.00 par value per share ("Satellite Series A Common Stock") in accordance with the terms of the notes. Following such conversion, none of such notes remain outstanding. Such notes were held by a then director of the Company, as well as several members of his family. In connection with the AT&T Merger, such director resigned. Immediately prior to the AT&T Merger, the notes were convertible, at the option of the holders, into an aggregate of 24,163,259 shares of TCI Group Series A Stock, 19,416,889 shares of Liberty Group Series A Stock, 20,711,364 shares of TCI Ventures Group Series A Stock and 3,451,897 shares of Satellite Series A Common Stock. Pursuant to the terms of the Merger Agreement and a certain stock purchase agreement, dated as of July 9, 1986, among the Company and the holders of such convertible notes, the conversion feature of the convertible notes was adjusted such that as of the March 9, 1999 consummation date of the AT&T Merger, such notes were convertible into an aggregate of 28,632,122 shares of AT&T Common Stock, 60,373,632 shares of AT&T Liberty Class A Tracking Stock and 3,451,897 shares of Satellite Series A Common Stock. Certain debt instruments of a subsidiary of the Company contain restrictive covenants which require, among other things, the maintenance of certain earnings, specified cash flow and financial ratios (primarily the ratios of cash flow to total debt and cash flow to debt service, as defined), and include certain limitations on indebtedness, investments, guarantees, dispositions, stock repurchases and/or dividend payments. The aggregate fair value assigned in purchase accounting to New TCI's debt and related variable and fixed interest rate exchange agreements ("Interest Rate Swaps") exceeded the aggregate recorded value at the date of the AT&T Merger by $938 million. Such excess is being amortized over the respective remaining 1 to 30 year lives of the underlying debt obligations and Interest Rate Swaps. See note 2. The fair value of the Company's debt, exclusive of the AT&T Notes, is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. At September 30, 1999, the fair value of the Company's debt, exclusive of the AT&T Notes, was $9,007 million, as compared to a carrying value of $9,449 million on such date. Due to its related party nature, it is not practical to obtain a reasonable estimate of the fair value of the AT&T Notes. (continued) I-34 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements In order to achieve the desired balance between variable and fixed rate indebtedness, the Company may enter into Interest Rate Swaps pursuant to which it (i) pays fixed interest rates (the "Fixed Rate Agreements") and receives variable interest rates and (ii) pays variable interest rates (the "Variable Rate Agreements") and receives fixed interest rates. At December 31, 1998, all of the Company's Fixed Rate Agreements had expired. During the nine months ended September 30, 1998, the Company's payments pursuant to the Fixed Rate Agreements were less than $1 million. During the seven months ended September 30, 1999, the two months ended February 28, 1999 and the nine months ended September 30, 1998, the Company's net receipts pursuant to the Variable Rate Agreements were $16 million, $1 million and $8 million, respectively. Information concerning the Company's Variable Rate Agreements at September 30, 1999 is as follows:
Amount to be Expiration Interest rate Notional received (paid) upon date to be received amount termination (a) ---------- -------------- -------- -------------------- dollar amounts in millions February 2000 5.8%-6.6% $ 300 $ 1 March 2000 5.8%-6.0% 675 -- September 2000 5.1% 75 (1) March 2027 9.7% 300 2 December 2036 9.7% 200 (3) ---------- ---------- $ 1,550 $ (1) ========== ==========
-------------------- (a) The estimated amount that the Company would receive (pay) to terminate the agreements at September 30, 1999, taking into consideration current interest rates and the current creditworthiness of the counterparties, represents the fair value of the Interest Rate Swaps. In addition to the Variable Rate Agreements, the Company has entered into Interest Rate Swaps pursuant to which it pays a variable rate based on LIBOR (6.4% at September 30, 1999) and receives a variable rate based on the Constant Maturity Treasury Index ("CMT") (6.1% at September 30, 1999) on a notional amount of $400 million through September 2000; and pays a variable rate based on LIBOR (6.3% at September 30, 1999) and receives a variable rate based on CMT (6.2% at September 30, 1999) on notional amounts of $95 million through February 2000. During each of the seven months ended September 30, 1999, the two months ended February 28, 1999 and the nine months ended September 30, 1998, the Company's net payments pursuant to such agreements were $1 million. At September 30, 1999, the Company would be required to pay less than $1 million to terminate such Interest Rate Swaps. (continued) I-35 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company is exposed to credit losses for the periodic settlements of amounts due under the Interest Rate Swaps in the event of nonperformance by the other parties to the agreements. However, the Company does not anticipate that it will incur any material credit losses because it does not anticipate nonperformance by the counterparties. Further, the Company does not anticipate material near-term losses in future earnings, fair values or cash flows resulting from derivative financial instruments as of September 30, 1999. (9) Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Subordinated Debt Securities The Trust Preferred Securities are presented together in a separate line item in the accompanying consolidated balance sheets captioned "Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debt securities." Dividends accrued on the Trust Preferred Securities aggregated $83 million, $23 million and $106 million during the seven months ended September 30, 1999, the two months ended February 28, 1999 and the nine months ended September 30, 1998, respectively, and are included in minority interests in earnings of consolidated subsidiaries in the accompanying consolidated financial statements. The aggregate fair value assigned to the Trust Preferred Securities in purchase accounting exceeded the aggregate recorded value at the date of the AT&T Merger by $160 million. Such excess is being amortized over the remaining 28 to 46 year terms of such securities. (10) Stockholders' Equity Treasury Stock and Common Stock Held by Subsidiaries, at Cost In conjunction with the AT&T Merger, Old TCI shares held in treasury and Old TCI shares held by subsidiaries were canceled. See note 2. General During 1997, Old TCI entered into certain equity swap facilities. Due to Old TCI's ability to issue shares to settle periodic price fluctuations and fees under the equity swap facilities, Old TCI recorded all amounts received or paid under these arrangements as increases or decreases, respectively, to equity. From February 1, 1999 to March 5, 1999, Old TCI terminated all transactions under the equity swap facilities and the related swap agreements. In connection with the termination of such transactions, the Company received aggregate cash payments of $677 million. Such cash payments are reflected in Old TCI's consolidated financial statements for the two months ended February 28, 1999. (continued) I-36 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements In July 1998, the Company entered into an equity swap transaction with a commercial bank, which provided the Company with the right but not the obligation to acquire 1,084,056 shares of TCI Group Series A Stock for approximately $45 million on or before April 19, 1999. During the two months ended February 28, 1999, the Company acquired the 1,084,056 shares of TCI Group Series A Stock under the agreement. Such shares were used to satisfy the exchange requirements of a subsidiary's preferred stock. The $29 million excess of the amount paid for the TCI Group Series A Stock over the Company's minority interest in such subsidiary has been reflected as a decrease to stockholders' equity in the accompanying consolidated financial statements for the two months ended February 28, 1999. (11) Transactions with Related Parties On July 23, 1998, a merger in which TCG agreed to be acquired by AT&T, was consummated. As a result of such merger, TCI received in exchange for all of its interest in TCG, 70,429,248 shares of AT&T Common Stock. TCI recognized a $2.3 billion gain on such transaction during the third quarter of 1998 based on the difference between the carrying amount of TCI's interest in TCG and the fair value of the AT&T Common Stock received. Prior to the AT&T Merger, TCI had accounted for its ownership interest in AT&T Common Stock as an available-for-sale security. Such AT&T Common Stock was transferred from Liberty/Ventures Group to TCI Group in connection with the AT&T Merger. See note 2. In addition, immediately prior to the AT&T Merger, certain shares of Series F Preferred Stock were converted into shares of TCI Group Stock which, in turn, were converted into 215,755,850 shares of AT&T Common Stock. Such converted shares are recorded at Old TCI's historical cost basis. New TCI treats its investment in AT&T Common Stock as an investment in its parent. Accordingly, New TCI's investment in AT&T Common Stock is reflected as a reduction of TCI's equity. Old TCI recognized dividend income of $15.5 million on its AT&T Common Stock during the third quarter of 1998. The Company has not received any dividends on its investment in AT&T Common Stock subsequent to the AT&T Merger. The Company's non-interest bearing intercompany account with AT&T ($27 million at September 30, 1999) is included in TCI's "Investment in AT&T" in the accompanying consolidated balance sheet. Certain entities attributed to Liberty Media Group produce and/or distribute programming to the Company. Charges to the Company aggregated $121 million for the seven months ended September 30, 1999. Such amount is included in operating costs and expenses in the accompanying consolidated statements of operations. AT&T provides long distance service and allocates certain other administrative costs to the Company. During the seven months ended September 30, 1999, such amounts aggregated $29 million and are included in selling, general and administrative expenses in the accompanying consolidated statements of operations. (continued) I-37 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NDTC leases transponder facilities to entities attributed to Liberty Media Group. Charges by NDTC for such arrangements were $14 million for the seven months ended September 30, 1999 and are included in revenue in the accompanying consolidated statements of operations. During the third quarter of 1999, AT&T utilized $495 million of TCI's net operating loss carryforwards to offset AT&T's current federal income tax liability. TCI did not receive any consideration for the utilization of such net operating loss carryforwards. Accordingly, TCI has reflected AT&T's utilization of the net operating loss carryforwards as a decrease to "Additional paid-in capital" in the accompanying consolidated financial statements. (12) Transactions with Officers and Directors After the Company's stockholders voted to approve the terms of the AT&T Merger, on February 17, 1999, TCI's Board of Directors approved the payment by Liberty/Ventures Group of $1 million to each of two directors of the Company for their services on the Special Committee of TCI's Board of Directors in evaluating the AT&T Merger and the consideration to be received by the stockholders of the Company. In addition, Liberty/Ventures Group paid $10 million to a director and executive officer of TCI, immediately prior to the AT&T Merger, for his services in negotiating the merger agreement and completing the AT&T Merger. Prior to the AT&T Merger, a limited liability company owned by Dr. Malone, a director of the Company and TCI's former Chairman and Chief Executive Officer, acquired, from certain subsidiaries of Old TCI, working cattle ranches located in Wyoming in exchange for $17 million. The purchase price paid by such limited liability company was in the form of a 12-month note in the amount of $17 million having an interest rate of 7%. Such note is payable to an entity attributed to Liberty Media Group at any time without penalty and is personally guaranteed by Dr. Malone. No gain or loss was recognized by TCI on this transaction. As described more fully in note 7, the Company, on October 1, 1999, became the owner of all of the partnership interests in InterMedia IV. An individual who was a director and executive officer of TCI had a .001% special limited partnership interest in ICM IV, which in turn has a 1.19% limited partnership interest in InterMedia IV. Such individual's special limited partnership interest in ICM IV was created in August 1997 in connection with TCI's acquisition of all of the partnership interests (other than a .002% general partnership interest and a .001% special limited partnership interest) in ICM IV. In connection with the transaction described in note 7, such individual, by virtue of his .001% special limited partnership interest in ICM IV, participated in a profit sharing mechanism of InterMedia IV and received cash consideration of approximately $11 million based on the valuation of InterMedia IV. For additional transactions involving the Company's officers and directors, see notes 8 and 13. (continued) I-38 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (13) Commitments and Contingencies The Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") imposed certain rate regulations on the cable television industry. Under the 1992 Cable Act, all cable systems are subject to rate regulation, unless they face "effective competition," as defined by the 1992 Cable Act and expanded in the Telecommunications act of 1996 (the "1996 Act"), in their local franchise area. Although the Federal Communications Commission (the "FCC") has established regulations required by the 1992 Cable Act, local government units (commonly referred to as local franchising authorities) are primarily responsible for administering the regulation of a cable system's basic service tier ("BST"). The FCC itself directly administered rate regulation of any cable programming service tier ("CPST"). The FCC's authority to regulate CPST rates expired on March 31, 1999. The FCC has taken the position that it will still adjudicate CPST complaints filed after this sunset date (but no later than 180 days after the last CPST rate increase imposed prior to March 31, 1999), and will strictly limit its review (and possible refund orders) to the time period predating the sunset date. Under the FCC's rate regulations, most cable systems were required to reduce their BST and CPST rates in 1993 and 1994, and have since had their 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. Operators also have the opportunity to bypass this "benchmark" regulatory structure in favor of the traditional "cost-of-service" regulation in cases where the latter methodology appears favorable. 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 Company believes that it has complied in all material respects with the provisions of the 1992 Cable Act and the 1996 Act, including its rate setting provisions. If, as a result of the review process, a system cannot substantiate its rates, it could be required to retroactively reduce its rates to the appropriate benchmark and refund the excess portion of rates received. Any refunds of the excess portion of CPST rates would be retroactive to the date of complaint. Any refunds of the excess portion of BST or equipment rates would be retroactive to one year prior to the implementation of the rate reductions. (continued) I-39 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company is obligated and/or has guaranteed Liberty Media Group's obligation to pay fees for the rights to exhibit certain films that are released by various producers through 2017 (the "Film Licensing Obligations"). Based on customer levels at September 30, 1999, these agreements require minimum payments aggregating approximately $440 million. The aggregate amount of the Film Licensing Obligations under these license agreements is not currently estimable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. Nevertheless, required aggregate payments under the Film Licensing Obligations could prove to be significant. The Company is a party to affiliation agreements with programming suppliers. Pursuant to certain of such agreements, the Company is committed to carry such suppliers' programming on its cable systems. Additionally, certain of such agreements provide for penalties and charges in the event the programming is not carried or not delivered to a contractually specified number of customers. The Company is committed to purchase billing services from a third party pursuant to three successive five-year agreements. Pursuant to such arrangement, the Company is obligated at September 30, 1999 to make minimum payments aggregating approximately $1.5 billion through 2012. Such minimum payments are subject to inflation and other adjustments pursuant to the terms of the underlying agreements. The Company has guaranteed notes payable and other obligations of affiliated and other companies with outstanding balances of approximately $47 million at September 30, 1999. The Company also has agreed to take certain steps to support debt compliance with respect to obligations aggregating $1,720 million of certain cable television partnerships in which the Company has non-controlling ownership interests. See note 7. The Company also has guaranteed the performance of certain affiliates and other parties with respect to such parties' contractual and other obligations. Although there can be no assurance, management of the Company believes that it will not be required to meet its obligations under such guarantees, or if it is required to meet any of such obligations, that they will not be material to the Company. During 1999, a subsidiary of the Company entered into a contribution agreement ("Contribution Agreement") with certain shareholders of Phoenixstar, Inc. (formerly Primestar, Inc.) ("Phoenixstar") pursuant to which the Company would, to the extent it is relieved of $166 million of contingent liabilities then owed to certain creditors of Phoenixstar and its subsidiaries, contribute up to $166 million to Phoenixstar to the extent necessary to satisfy liabilities of Phoenixstar. During the second quarter of 1999 and the fourth quarter of 1998, the Company recorded charges of $50 million and $90 million, respectively, to provide for the estimated losses that were expected to result from the Contribution Agreement. During 1999, the Company contributed approximately $116 million to Phoenixstar in partial satisfaction of its obligation. The Company's remaining obligation under the Contribution Agreement will expire in 2001. An individual who is a director of TCI is also the Chairman of the Board of TCI Satellite Entertainment, Inc. ("TSAT"). TSAT has an approximate 37% ownership interest in Phoenixstar. (continued) I-40 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements TCI has agreed to make fixed monthly payments to an entity attributed to Liberty Media Group pursuant to an affiliation agreement. The fixed annual commitments increase annually from $190 million in 1999 to $267 million in 2003, and will increase with inflation through 2022. In addition, TCI is obligated to make minimum revenue payments through 2017 and minimum license fee payments through 2007 aggregating $385 million to an entity attributed to Liberty Media Group. Such minimum payments are subject to inflation and other adjustments pursuant to the terms of the underlying agreements. Effective as of December 16, 1997, NDTC on behalf of the Company and other cable operators that may be designated from time to time by NDTC ("Approved Purchasers"), entered into an agreement with GI to purchase a minimum of 6.5 million set-top devices during calendar years 1998, 1999 and 2000 at an average price of $318 per set-top device. The 1998 purchase commitment of 1.5 million set-top devices was met. The agreement with GI was amended in the third quarter of 1999 to change the remaining minimum purchase commitment for set-top devices to 1,880,000 devices in 1999 and 2,500,000 devices in 2000. During the nine months ended September 30, 1999, approximately 1.4 million set-top devices had been purchased under the 1999 commitment. In connection with NDTC's purchase commitment, GI agreed to grant warrants to purchase its common stock proportional to the number of devices ordered by each organization. In connection with the AT&T Merger, such warrants were transferred to Liberty/Ventures Group in exchange for approximately $176 million in cash. To the extent such warrants do not vest because TCI fails to meet its purchase commitments, as amended, TCI is required to repay a proportional amount of such cash to Liberty Media Group. NDTC has the right to terminate the agreement if, among other reasons, GI fails to meet a material milestone designated in the agreement with respect to the development, testing and delivery of advanced digital set-top devices. (continued) I-41 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On July 17, 1998, the Company acquired 21.4 million shares of common stock of GI in exchange for (i) certain of the assets of NDTC's set-top authorization business, (ii) the license of certain related software to GI, (iii) a $50 million promissory note from the Company to GI, and (iv) a nine-year revenue guarantee from the Company in favor of GI. In connection therewith, NDTC also entered into a services agreement pursuant to which it will provide certain postcontract services to GI's set-top authorization business. As a result of the deconsolidation of Liberty Media Group, the 21.4 million shares of GI common stock are no longer included in the Company's consolidated assets. The excess of the fair value of GI common stock received in 1998 over (i) the book value of certain assets transferred from NDTC to GI, and (ii) the present value of the promissory note due from the Company to GI, was deferred by the Company. As a result of the application of purchase accounting in connection with the AT&T Merger, the deferred amount related to the revenue guarantee was reduced to $61 million and the remaining deferred amount was reduced to $48 million. The Company has contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible the Company may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying consolidated financial statements. (14) Year 2000 During the nine months ended September 30, 1999, the Company continued its enterprise-wide, comprehensive efforts to assess and remediate its computer systems and related software and equipment to verify that such systems, software and equipment recognize, process and store information in the year 2000 and thereafter. The Company's year 2000 remediation efforts include an assessment of its most critical systems, such as customer service and billing systems, headends and other cable plant systems that support the Company's programming services, business support operations, and other equipment and facilities. The Company also continued its efforts to verify the year 2000 readiness of its significant suppliers and vendors and continued to communicate with significant business partners and affiliates to assess such partners' and affiliates' year 2000 status. (continued) I-42 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company has a year 2000 Program Management Office (the "PMO") to organize and manage its year 2000 efforts. The PMO is responsible for overseeing the process and standards of the Company's year 2000 efforts, controlling data, and reporting on the Company's year 2000 efforts. At September 30, 1999, the PMO was comprised of a 133-member, full-time staff, accountable to executive management of the Company. During the nine months ended September 30, 1999, the Company continued its survey of third-party vendors and suppliers whose systems, services or products are important to the Company's operations, and whose year 2000 readiness is critical to continued provision of the Company's cable service. The Company has examined the public disclosures regarding the year 2000 readiness status made by vendors of critical systems products utilized by the Company (such as addressable controllers, accounting systems and other critical hardware and software), and the public disclosures regarding the year 2000 readiness status made by critical suppliers (such as utilities, banking, and similar critical operational services). Verification of the survey results may include, as deemed necessary, conducting functionality tests, reviewing vendors' and suppliers' test data, scripts and certifications, engaging in regular conferences with vendors' and suppliers' year 2000 teams, or re-examining public disclosures for changes in status. The Company generally has required any new vendors to provide assurances that their products and services are year 2000 ready. For those critical vendors that may not be year 2000 ready by year end, contingency plans will be implemented. Significant market value is associated with the Company's investments in certain public and private corporations, partnerships and other businesses. Accordingly, the Company is monitoring the public disclosure of such publicly-held business entities, including CSC and @Home, to determine their year 2000 readiness. In addition, the Company has surveyed and monitored the year 2000 status of certain privately-held business entities in which the Company has significant investments. Year 2000 expenses and capital expenditures incurred during the seven months ended September 30, 1999 were $47 million and $18 million, respectively. Year 2000 expenses and capital expenditures incurred during the two months ended February 28, 1999 were $11 million and $2 million, respectively. Year 2000 expenses and capital expenditures for the seven months ended September 30, 1999 are exclusive of costs attributable to Liberty Media Group, which was deconsolidated as of March 1, 1999. See note 2. Management of the Company currently estimates the remaining costs, exclusive of future costs attributable to the assessment and remediation of year 2000 issues associated with Liberty Media Group, to be not less than $25 million, bringing the total estimated cost associated with the Company's year 2000 remediation efforts to be not less than $117 million (including $36 million for replacement of noncompliant information technology systems). Also included in this estimate is $7 million in future payments to be made pursuant to unfulfilled executory contracts or commitments with vendors for year 2000 remediation services. (continued) I-43 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The failure to correct a material year 2000 problem could result in an interruption or failure of certain important business operations. There can be no assurance that the Company's systems or the systems of other companies on which the Company relies will be converted in time or that any such failure to convert by the Company or other companies will not have a material adverse effect on its financial position, results of operations or cash flows. (15) Information about the Company's Operating Segments Prior to the AT&T Merger, Old TCI had two reportable segments: domestic cable and communications services and domestic programming services. Domestic cable and communications services receive video, audio and data signals from various sources, and amplify and distribute the signals by coaxial cable and optical fiber to the premises of customers who pay a fee for the service. Domestic programming services are produced, acquired, and distributed, through all available formats and media, branded entertainment and informational programming and software, including multimedia products, delivered in both analog and digital form. Old TCI's domestic cable and communications services business and assets were included in TCI Group, and Old TCI's domestic programming business and assets were included in Old Liberty Group. Old TCI's principal international businesses and assets and Old TCI's remaining non-cable and non-programming domestic businesses and assets were included in TCI Ventures Group. As described in note 2, immediately prior to the AT&T Merger, Old TCI purchased certain assets from Liberty/Ventures Group and the net assets attributed to Liberty Media Group were deconsolidated. As a result of these transactions, domestic cable and communications services is the only reportable segment of New TCI. Accordingly, segment information is not provided for New TCI. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Old TCI evaluated performance based on a measure of "Operating Cash Flow" (defined by the Company as operating income before depreciation, amortization, other non-cash items, year 2000 costs, AT&T merger and integration costs and stock compensation). Operating Cash Flow is a measure of value and borrowing capacity within the cable television industry and is not intended to be a substitute for cash flow provided by operating activities, or a measure of performance prepared in accordance with generally accepted accounting principles, and should not be relied upon as such. Old TCI generally accounted for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. Old TCI's reportable segments were strategic business units that offered different products and services. They were managed separately because each segment required different technology and marketing strategies. (continued) I-44 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Old TCI utilized the following interim financial information for purposes of making decisions about allocating resources to a segment and assessing a segment's performance:
Domestic cable Domestic & communications programming All services services other Total ---------------- ------------ ------------ ------------ amounts in millions Two months ended February 28, 1999: External and intersegment revenue $ 902 128 165 1,195 Intersegment revenue $ -- 39 11 50 Segment Operating Cash Flow $ 301 30 25 356 Three months ended September 30, 1998: External and intersegment revenue $ 1,497 176 249 1,922 Intersegment revenue $ (4) 69 14 79 Segment Operating Cash Flow $ 603 31 43 677 Nine months ended September 30, 1998: External and intersegment revenue $ 4,613 498 685 5,796 Intersegment revenue $ (13) 210 36 233 Segment Operating Cash Flow $ 1,882 75 88 2,045
(continued) I-45 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements A reconciliation of reportable segment Operating Cash Flow to Old TCI's consolidated earnings (loss) before income taxes and extraordinary items is as follows:
Old TCI ------------------------------------------ Two months Nine months ended ended February 28, 1999 September 30, 1998 ------------------ ------------------ amounts in millions Total Operating Cash Flow for reportable segments 331 1,957 Other Operating Cash Flow 25 88 Other items excluded from Operating Cash Flow: Year 2000 costs (11) (6) AT&T merger and integration costs (65) (11) Stock compensation (366) (423) Reserve for loss arising from contingent obligation -- -- Write-off of in-process research and development costs -- -- Depreciation and amortization (277) (1,289) Interest expense (161) (807) Interest and dividend income 13 72 Share of losses of Liberty Media Group -- -- Share of losses of the Other Affiliates, net (161) (986) Minority interest in earnings of consolidated subsidiaries, net (26) (95) Gains on issuance of equity interests by subsidiaries 389 55 Gain on issuance of stock by equity investee -- 259 Gains on disposition of assets, net 144 3,704 Other, net 8 (25) ------------------ ------------------ Earnings (loss) before income taxes and extraordinary items (157) 2,493 ================== ==================
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