AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 2002
REGISTRATION NO. 333-82460
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
AT&T COMCAST CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 4841 27-0000798
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
1500 MARKET STREET
PHILADELPHIA, PENNSYLVANIA 19102
TEL: (215) 665-1700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
ARTHUR R. BLOCK, ESQ.
SENIOR VICE PRESIDENT,
ASSISTANT SECRETARY AND ASSISTANT TREASURER
AT&T COMCAST CORPORATION
1500 MARKET STREET
PHILADELPHIA, PENNSYLVANIA 19102
TEL: (215) 665-1700
FAX: (215) 981-7790
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
DENNIS S. HERSCH, ESQ. MARILYN J. WASSER, ESQ. RICHARD D. KATCHER, ESQ.
WILLIAM L. TAYLOR, ESQ. VICE PRESIDENT -- LAW AND STEVEN A. ROSENBLUM, ESQ.
DAVIS POLK & WARDWELL SECRETARY STEPHANIE J. SELIGMAN, ESQ.
450 LEXINGTON AVENUE AT&T CORP. WACHTELL, LIPTON, ROSEN & KATZ
NEW YORK, NEW YORK 10017 295 NORTH MAPLE AVENUE 51 WEST 52ND STREET
TEL: (212) 450-4000 BASKING RIDGE, NEW JERSEY 07920 NEW YORK, NEW YORK 10019
FAX: (212) 450-3800 TEL: (908) 221-2000 TEL: (212) 403-1000
FAX: (212) 403-2000
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: as soon as
practicable after this registration statement is declared effective and all
conditions to the proposed transaction have been satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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[COMCAST LOGO] [AT&T LOGO]
A MERGER PROPOSAL -- YOUR VOTE IS VERY IMPORTANT
Comcast and AT&T have agreed to combine Comcast and AT&T's broadband
business. As a result, AT&T shareholders will have shares of both AT&T and the
new corporation -- AT&T Comcast. We are proposing the transaction because we
believe the combination of Comcast and AT&T Broadband will create the world's
premier broadband communications company. The new corporation will be named AT&T
Comcast Corporation and will be headquartered in Philadelphia.
When the transaction is completed,
- Comcast shareholders will receive one share of a corresponding class of
AT&T Comcast common stock in exchange for each Comcast share they own;
and
- AT&T shareholders will receive a number of shares of AT&T Comcast common
stock determined pursuant to a formula described in this joint proxy
statement/prospectus for each AT&T share they own. If the AT&T exchange
ratio were determined as of the date of this joint proxy
statement/prospectus, each AT&T shareholder would receive approximately
0.35 of a share of AT&T Comcast common stock for each of their AT&T
shares, although the actual exchange ratio may differ. AT&T shareholders
will also continue to hold their shares of AT&T common stock.
THE BOARDS OF DIRECTORS OF BOTH COMCAST AND AT&T HAVE UNANIMOUSLY APPROVED
THE TRANSACTION AND RECOMMEND THAT THEIR RESPECTIVE SHAREHOLDERS VOTE FOR THE
PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED BY THE MERGER AGREEMENT. THE BOARDS OF DIRECTORS OF BOTH COMCAST
AND AT&T ALSO RECOMMEND THAT THEIR RESPECTIVE SHAREHOLDERS APPROVE THE AT&T
COMCAST CHARTER PROPOSAL, INCLUDING THE CORPORATE GOVERNANCE PROVISIONS OF THE
AT&T COMCAST CHARTER DESCRIBED IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
APPROVAL OF THE AT&T COMCAST CHARTER PROPOSAL IS A CONDITION TO COMPLETION OF
THE AT&T COMCAST TRANSACTION. SURAL LLC HAS AGREED TO VOTE IN FAVOR OF THE
TRANSACTION AND AT&T COMCAST CHARTER PROPOSALS, THEREBY ASSURING APPROVAL OF THE
TRANSACTION AND AT&T COMCAST CHARTER PROPOSALS BY THE COMCAST SHAREHOLDERS.
In addition to the transaction and AT&T Comcast charter proposals, holders
of Comcast common stock are also being asked to consider a proposal that is
referred to in this joint proxy statement/prospectus as the preferred structure
proposal. The outcome of the vote on this proposal will determine which of the
two alternative capital structures described in this joint proxy
statement/prospectus is implemented upon completion of the transaction.
THE COMCAST BOARD OF DIRECTORS RECOMMENDS THAT THE COMCAST SHAREHOLDERS
VOTE FOR THE PREFERRED STRUCTURE PROPOSAL.
In addition to the transaction and AT&T Comcast charter proposals, the
election of directors and other matters to be considered at the AT&T annual
meeting, AT&T shareholders are also being asked to consider a proposal to create
a tracking stock that is intended to reflect the financial performance and
economic value of the AT&T Consumer Services business and related benefit plan
proposals and to consider a reverse stock split of AT&T common stock.
THE AT&T BOARD OF DIRECTORS RECOMMENDS THAT THE AT&T SHAREHOLDERS VOTE FOR
THE PROPOSAL TO CREATE AN AT&T CONSUMER SERVICES GROUP TRACKING STOCK.
Information about all the proposals is contained in this joint proxy
statement/prospectus. We urge you to read this joint proxy statement/prospectus,
including the section describing risk factors that begins on page I-30.
/s/ BRIAN L. ROBERTS /s/ MICHAEL ARMSTRONG
Brian L. Roberts C. Michael Armstrong
President Chairman and Chief Executive Officer
Comcast Corporation AT&T Corp.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED IN
CONNECTION WITH THE TRANSACTION OR DETERMINED IF THIS JOINT PROXY
STATEMENT/PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
This joint proxy statement/prospectus is dated May 14, 2002, and is first
being mailed to shareholders of Comcast and AT&T on or about May 14, 2002.
COMCAST CORPORATION
1500 MARKET STREET
PHILADELPHIA, PENNSYLVANIA 19102-2148
---------------------
NOTICE OF SPECIAL MEETING OF COMCAST SHAREHOLDERS
TO BE HELD ON JULY 10, 2002
---------------------
A special meeting of shareholders of Comcast Corporation will be held on
Wednesday, July 10, 2002 at 10:00 a.m. local time at The Doubletree Hotel
Philadelphia, Broad and Locust Streets, Philadelphia, Pennsylvania, for the
following purposes:
- to approve and adopt the merger agreement among Comcast Corporation, AT&T
Corp. and the other parties thereto, whereby our company and a newly
formed corporation containing AT&T's broadband business will each merge
with separate wholly owned subsidiaries of a newly formed corporation
called AT&T Comcast Corporation, and the transactions contemplated by the
merger agreement,
- to approve the AT&T Comcast charter, including the corporate governance
provisions of the AT&T Comcast charter described in this joint proxy
statement/prospectus,
- to approve and adopt an amendment to our articles of incorporation to
permit the above-described transaction to be completed on the terms and
conditions described as the "preferred structure" in the accompanying
joint proxy statement/prospectus, and
- to transact such other business as may properly come before the special
meeting or any adjournment or postponement thereof.
We describe these items of business more fully in the accompanying joint
proxy statement/prospectus. We will also be holding our annual meeting of
shareholders of Comcast Corporation at 9:00 a.m. local time on the same day at
the same location as the special meeting. A separate proxy statement for the
annual meeting describing the matters to be acted upon at that meeting will be
forwarded to our shareholders.
The close of business on Thursday, April 25, 2002 has been fixed as the
record date for the special meeting. All shareholders of record at that time are
entitled to notice of, and all holders of our Class A common stock and Class B
common stock are entitled to vote at, the special meeting and any adjournment or
postponement thereof.
Because holders of our Class A Special common stock are not generally
entitled to vote and no resolution is proposed for the special meeting for which
a vote of the Class A Special common stock is required by law, holders of Class
A Special common stock are not entitled to vote at the special meeting. The
enclosed joint proxy statement/prospectus is being sent to holders of Class A
Special common stock for informational purposes and as required by law.
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. OUR
BOARD OF DIRECTORS URGES YOU TO VOTE BY TELEPHONE OR VIA THE INTERNET, OR TO
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY WITH RESPECT TO YOUR SHARES OF CLASS
A COMMON STOCK AND MAIL IT PROMPTLY IN THE POSTAGE-PAID ENVELOPE PROVIDED,
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON. YOU CAN
WITHDRAW YOUR PROXY, OR CHANGE YOUR VOTE AT ANY TIME BEFORE IT IS VOTED. YOU CAN
DO THIS BY EXECUTING A LATER-DATED PROXY, BY VOTING BY BALLOT AT THE SPECIAL
MEETING, BY TELEPHONE OR VIA THE INTERNET, OR BY FILING AN INSTRUMENT OF
REVOCATION WITH THE INSPECTORS OF ELECTION IN CARE OF OUR SECRETARY AT THE ABOVE
ADDRESS.
IMPORTANT NOTICE: ALL SPECIAL MEETING ATTENDEES MAY BE ASKED TO PRESENT A
VALID GOVERNMENT-ISSUED PHOTO IDENTIFICATION (FEDERAL, STATE OR LOCAL), SUCH AS
A DRIVER'S LICENSE OR PASSPORT, BEFORE ENTERING THE SPECIAL MEETING. IN
ADDITION, VIDEO AND AUDIO RECORDING DEVICES AND OTHER ELECTRONIC DEVICES WILL
NOT BE PERMITTED AT THE SPECIAL MEETING, AND ATTENDEES WILL BE SUBJECT TO
SECURITY INSPECTIONS.
STANLEY WANG
Secretary
May 14, 2002
AT&T CORP.
295 NORTH MAPLE AVENUE
BASKING RIDGE, NJ 07920-1002
---------------------
NOTICE OF ANNUAL MEETING OF AT&T SHAREHOLDERS
TO BE HELD ON JULY 10, 2002
---------------------
The 117th annual meeting of shareholders of AT&T Corp. will be held at 9:30
a.m., local time, on Wednesday, July 10, 2002, at the Charleston Area Convention
Center Complex, 5001 Coliseum Drive, N. Charleston, South Carolina 29418, for
the following purposes:
- to elect directors for the ensuing year;
- to ratify the appointment of auditors to examine AT&T's accounts for the
year 2002;
- to approve and adopt the merger agreement by and among AT&T Corp., AT&T
Broadband Corp., Comcast Corporation, and the other parties thereto,
whereby AT&T Broadband, a newly formed company that will contain our
broadband businesses, will be spun off and combined with Comcast in a new
Pennsylvania corporation called "AT&T Comcast Corporation," and the
transactions contemplated by the merger agreement, including the AT&T
Broadband spin-off;
- to approve the AT&T Comcast charter, including the corporate governance
provisions of the AT&T Comcast charter described in the joint proxy
statement/prospectus;
- to approve and adopt an amendment to AT&T's charter to authorize the
creation of AT&T Consumer Services Group tracking stock;
- to approve a new incentive plan to enable AT&T to grant incentive awards
based on shares of AT&T Consumer Services Group tracking stock to
officers and employees of AT&T and its subsidiaries;
- to approve an amendment to AT&T's employee stock purchase plan to permit
the issuance of AT&T Consumer Services Group tracking stock under the
plan;
- to approve an amendment to AT&T's charter to effect a one-for-five
reverse stock split of AT&T common stock at the discretion of our board
of directors; and
- to act upon such other matters, including the shareholder proposals set
forth in Chapter XIV of the joint proxy statement/prospectus, as may
properly come before the AT&T annual meeting or any adjournment or
postponement thereof.
We describe these items of business more fully in the joint proxy
statement/prospectus.
Only holders of record of AT&T common stock at the close of business on May
14, 2002 are entitled to notice of, and to vote at, the annual meeting or any
adjournment or postponement thereof.
BY ORDER OF THE BOARD OF DIRECTORS
MARILYN J. WASSER
Vice President -- Law and Secretary
Basking Ridge, NJ
May 14, 2002
If you attend the meeting you may be asked to present valid
government-issued identification, such as a driver's license or passport, before
being admitted. Cameras, recording devices, and other electronic devices will
not be permitted, and attendees will be subject to security inspections.
WE URGE YOU TO VOTE BY TELEPHONE OR VIA THE INTERNET, OR TO COMPLETE, DATE
AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE POSTAGE-PAID ENVELOPE
PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON. YOU
CAN WITHDRAW YOUR PROXY, OR CHANGE YOUR VOTE AT ANY TIME BEFORE IT IS VOTED. YOU
CAN DO THIS BY EXECUTING A LATER-DATED PROXY, BY VOTING BY BALLOT AT THE ANNUAL
MEETING, BY TELEPHONE OR VIA THE INTERNET, OR BY FILING AN INSTRUMENT OF
REVOCATION WITH THE INSPECTORS OF ELECTION IN CARE OF OUR VICE PRESIDENT -- LAW
AND SECRETARY AT THE ABOVE ADDRESS.
TABLE OF CONTENTS
CHAPTER ONE -- SUMMARY AND OVERVIEW
OF THE TRANSACTIONS............... I-1
QUESTIONS AND ANSWERS ABOUT THE
TRANSACTIONS................... I-1
QUESTIONS AND ANSWERS ABOUT AT&T
CONSUMER SERVICES GROUP
TRACKING STOCK................. I-6
SUMMARY........................... I-8
THE AT&T COMCAST TRANSACTION...... I-9
AT&T CONSUMER SERVICES GROUP
TRACKING STOCK................. I-19
RECENT FINANCIAL RESULTS.......... I-21
RISK FACTORS...................... I-30
CHAPTER TWO -- THE AT&T COMCAST
TRANSACTION....................... II-1
General........................ II-1
Background of the AT&T Comcast
Transaction.................. II-2
Comcast's Reasons for the AT&T
Comcast Transaction.......... II-8
Comcast's Preferred Structure
Proposal..................... II-11
AT&T's Reasons for the AT&T
Comcast Transaction.......... II-12
AT&T Comcast Charter
Proposal..................... II-16
Material Federal Income Tax
Consequences................. II-16
Regulatory Matters............. II-20
Description of New Credit
Facilities................... II-21
Appraisal Rights............... II-23
Federal Securities Laws
Consequences; Stock Transfer
Restriction Agreements....... II-23
Accounting Treatment........... II-23
Litigation..................... II-27
CHAPTER THREE -- FINANCIAL
INFORMATION RELATING TO THE AT&T
COMCAST TRANSACTION............... III-1
CHAPTER FOUR -- OPINIONS OF
FINANCIAL ADVISORS................ IV-1
OPINIONS OF COMCAST'S FINANCIAL
ADVISORS....................... IV-1
OPINIONS OF AT&T'S FINANCIAL
ADVISORS....................... IV-12
CHAPTER FIVE -- DESCRIPTION OF THE
AT&T COMCAST TRANSACTION
AGREEMENTS........................ V-1
THE MERGER AGREEMENT.............. V-1
THE SEPARATION AND DISTRIBUTION
AGREEMENT...................... V-16
THE SUPPORT AGREEMENT............. V-21
THE EXCHANGE AGREEMENT AND
INSTRUMENT OF ADMISSION........ V-24
THE TAX SHARING AGREEMENT......... V-27
THE ANCILLARY AGREEMENTS.......... V-28
CHAPTER SIX -- AT&T CORP.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......... VI-1
CHAPTER SEVEN -- AT&T BROADBAND
GROUP............................. VII-1
DESCRIPTION OF AT&T BROADBAND
GROUP.......................... VII-1
AT&T BROADBAND GROUP MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.................. VII-23
CHAPTER EIGHT -- DESCRIPTION OF
GOVERNANCE ARRANGEMENTS FOLLOWING
THE AT&T COMCAST TRANSACTION...... VIII-1
CHAPTER NINE -- EMPLOYEE BENEFITS
MATTERS........................... IX-1
INTERESTS OF DIRECTORS AND
OFFICERS IN THE AT&T COMCAST
TRANSACTION.................... IX-1
OTHER BENEFITS MATTERS............ IX-6
CHAPTER TEN -- AT&T CONSUMER
SERVICES GROUP TRACKING STOCK..... X-1
THE CONSUMER SERVICES CHARTER
AMENDMENT PROPOSAL............. X-1
REASONS FOR AT&T CONSUMER SERVICES
GROUP TRACKING STOCK........... X-11
DESCRIPTION OF AT&T CONSUMER
SERVICES GROUP................. X-14
AT&T CONSUMER SERVICES GROUP
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...... X-27
i
RELATIONSHIP BETWEEN THE AT&T
GROUPS......................... X-37
THE INCENTIVE PLAN PROPOSAL....... X-45
THE EMPLOYEE STOCK PURCHASE PLAN
PROPOSAL....................... X-50
CHAPTER ELEVEN -- DESCRIPTION OF
AT&T BUSINESS SERVICES GROUP...... XI-1
CHAPTER TWELVE -- FINANCIAL
STATEMENTS........................ XII-1
CHAPTER THIRTEEN -- INFORMATION
ABOUT THE COMCAST SPECIAL MEETING
AND VOTING........................ XIII-1
CHAPTER FOURTEEN -- INFORMATION
ABOUT THE AT&T ANNUAL MEETING AND
VOTING............................ XIV-1
CHAPTER FIFTEEN -- CERTAIN LEGAL
INFORMATION....................... XV-1
COMPARISON OF AT&T, COMCAST AND
AT&T COMCAST SHAREHOLDER
RIGHTS......................... XV-1
Summary of Material Differences
Between the Current Rights of
AT&T Shareholders and the
Rights Those Shareholders
Will Have as AT&T Comcast
Shareholders Following the
Completion of the AT&T
Comcast Transaction.......... XV-1
Summary of Material Differences
Between the Current Rights of
Comcast Shareholders and the
Rights Those Shareholders
Will Have as AT&T Comcast
Shareholders Following the
Completion of the AT&T
Comcast Transaction.......... XV-6
DESCRIPTION OF AT&T COMCAST
CAPITAL STOCK.................. XV-10
Authorized Capital Stock....... XV-10
AT&T Comcast Class A Common
Stock........................ XV-10
AT&T Comcast Class B Common
Stock........................ XV-12
AT&T Comcast Class A Special
Common Stock................. XV-13
AT&T Comcast Class C Common
Stock........................ XV-13
AT&T Comcast Preferred Stock... XV-14
Dividend Rights................ XV-14
Rights Upon Liquidation........ XV-15
Mergers, Consolidations,
Etc. ........................ XV-15
Transfer Agent and Registrar... XV-15
Stock Exchange Listings........ XV-15
DESCRIPTION OF AT&T COMCAST
SHAREHOLDER RIGHTS PLAN........ XV-16
INFORMATION REGARDING
FORWARD-LOOKING STATEMENTS..... XV-18
LEGAL MATTERS..................... XV-18
EXPERTS........................... XV-18
CHAPTER SIXTEEN -- ADDITIONAL
INFORMATION FOR SHAREHOLDERS...... XVI-1
FUTURE SHAREHOLDER PROPOSALS...... XVI-1
WHERE YOU CAN FIND MORE
INFORMATION.................... XVI-1
ANNEXES
Annex A Agreement and Plan of Merger
Annex B Separation and Distribution
Agreement
Annex C Form of Amended and Restated
Articles of Incorporation of AT&T
Comcast Corporation
Annex D Term Sheet for Amended and
Restated Articles of
Incorporation of AT&T Comcast
Corporation (Alternative
Structure)
Annex E Articles of Amendment--Domestic
Business Corporation
Annex F Form of By-Laws of AT&T Comcast
Corporation
Annex G Opinion of Morgan Stanley & Co.
Incorporated
Annex H Opinion of J.P. Morgan Securities
Inc.
Annex I Opinion of Merrill Lynch, Pierce,
Fenner & Smith, Incorporated
Annex J Opinion of Credit Suisse First
Boston Corporation
Annex K Opinion of Goldman, Sachs & Co.
Annex L Form of Certificate of Amendment
of the Certificate of
Incorporation of AT&T Corp.
Annex M Form of AT&T Amendment to the
By-Laws of AT&T Corp.
Annex N AT&T Corp. Board of Directors
Policy Statement Regarding AT&T
Groups Tracking Stock Matters
ii
CHAPTER ONE
SUMMARY AND OVERVIEW OF THE TRANSACTIONS
QUESTIONS AND ANSWERS ABOUT THE TRANSACTIONS
Q: When and where will the meetings of shareholders take place?
A: The Comcast special meeting will take place on Wednesday, July 10, 2002 in
Philadelphia, Pennsylvania. The AT&T annual meeting will take place on July
10, 2002 in Charleston, South Carolina. The address of your meeting is
specified in the notice for your meeting.
Q: What proposals am I being asked to vote upon and what vote is required to
approve each proposal?
A: If you are a Comcast shareholder, you are being asked to vote upon the
following proposals:
- Approval and adoption of the merger agreement and the transactions
contemplated by the merger agreement. The Comcast transaction proposal
requires the affirmative vote of a majority of the votes cast by holders
of shares of Comcast Class A common stock and Comcast Class B common
stock, voting together as a single class. Approval of this proposal is
assured because Sural LLC, which holds approximately 86.7% of the combined
voting power of the Comcast stock, has agreed to vote its shares in favor
of the Comcast transaction proposal. Any shares of Comcast Class A common
stock not voted, whether by abstention, broker non-vote or otherwise, have
no impact on the vote.
- Approval of the AT&T Comcast charter. The AT&T Comcast charter proposal
requires the affirmative vote of a majority of the votes cast by holders
of shares of Comcast Class A common stock and Comcast Class B common
stock, voting together as a single class. Approval of this proposal is
assured because Sural LLC has agreed to vote its shares in favor of it.
Any shares of Comcast Class A common stock not voted, whether by
abstention, broker non-vote or otherwise, have no impact on the vote.
- Approval and adoption of an amendment to the Comcast charter to allow the
implementation of the Preferred Structure. The preferred structure
proposal requires the affirmative vote of a majority of the votes cast by
(1) holders of shares of Comcast Class A common stock, voting as a single
class, and (2) holders of shares of Comcast Class A common stock and
Comcast Class B common stock, voting together as a single class. Sural LLC
has agreed to vote its shares in favor of the preferred structure
proposal, thereby assuring approval by holders of Comcast Class A common
stock and Comcast Class B common stock, voting together as a single class.
Any shares of Comcast Class A common stock not voted, whether by
abstention, broker non-vote or otherwise, have no impact on the vote.
APPROVAL OF THE AT&T COMCAST CHARTER PROPOSAL, INCLUDING THE CORPORATE
GOVERNANCE PROVISIONS CONTAINED IN THE AT&T COMCAST CHARTER, IS A CONDITION
TO COMPLETION OF THE AT&T COMCAST TRANSACTION. THEREFORE, IF COMCAST
SHAREHOLDERS WISH TO APPROVE THE AT&T COMCAST TRANSACTION, THEY MUST ALSO
APPROVE THE AT&T COMCAST CHARTER PROPOSAL.
APPROVAL OF THE COMCAST TRANSACTION PROPOSAL AND THE AT&T COMCAST CHARTER
PROPOSAL IS NOT CONDITIONED ON APPROVAL OF THE PREFERRED STRUCTURE PROPOSAL.
If you are an AT&T shareholder, you are being asked to vote upon the
following proposals:
- Approval and adoption of the merger agreement and the transactions
contemplated by the merger agreement, including the AT&T Broadband
spin-off. The AT&T transaction proposal requires the affirmative vote of a
majority of outstanding shares of AT&T common stock. Any shares of AT&T
common stock not voted, whether by abstention, broker non-vote or
otherwise, have the effect of a vote against the AT&T transaction
proposal.
I-1
- Approval of the AT&T Comcast charter. The AT&T Comcast charter proposal
requires the affirmative vote of a majority of the votes cast by holders of
shares of AT&T common stock. Any shares of AT&T common stock not voted,
whether by abstention, broker non-vote or otherwise, have no impact on the
vote. Approval of the AT&T Comcast charter proposal, including the
corporate governance provisions contained in the AT&T Comcast charter, is a
condition to completion of the AT&T Comcast transaction. THEREFORE, IF AT&T
SHAREHOLDERS WISH TO APPROVE THE AT&T COMCAST TRANSACTION, THEY MUST ALSO
APPROVE THE AT&T COMCAST CHARTER PROPOSAL.
- Approval and adoption of an amendment to AT&T's charter to authorize the
creation of AT&T Consumer Services Group tracking stock. The Consumer
Services charter amendment proposal requires the affirmative vote of a
majority of outstanding shares of AT&T common stock. Any shares of AT&T
common stock not voted, whether by abstention, broker non-vote or
otherwise, have the effect of a vote against the Consumer Services charter
amendment proposal.
- Approval and adoption of an amendment to AT&T's charter to authorize a
reverse stock split on AT&T common stock. The reverse stock split
proposal requires the affirmative vote of a majority of outstanding shares
of AT&T common stock. Any shares of AT&T common stock not voted, whether
by abstention or otherwise, have the effect of a vote against the reverse
stock split proposal.
- Approval of other matters related to the creation of AT&T Consumer
Services Group tracking stock and various annual meeting matters, in each
case as described more fully in this document.
APPROVAL OF THE AT&T COMCAST CHARTER PROPOSAL, INCLUDING THE CORPORATE
GOVERNANCE PROVISIONS CONTAINED IN THE AT&T COMCAST CHARTER, IS A CONDITION
TO COMPLETION OF THE AT&T COMCAST TRANSACTION. THEREFORE, IF AT&T
SHAREHOLDERS WISH TO APPROVE THE AT&T COMCAST TRANSACTION, THEY MUST ALSO
APPROVE THE AT&T COMCAST CHARTER PROPOSAL.
APPROVAL OF THE AT&T TRANSACTION PROPOSAL AND THE AT&T COMCAST CHARTER
PROPOSAL IS NOT CONDITIONED ON APPROVAL OF ANY OF THE OTHER AT&T PROPOSALS.
APPROVAL OF THE OTHER AT&T PROPOSALS IS NOT CONDITIONED ON APPROVAL OF THE
AT&T TRANSACTION PROPOSAL OR THE AT&T COMCAST CHARTER PROPOSAL.
Q: What if I return my proxy but do not mark it to show how I am voting?
A: If you sign and return your proxy card without marking a box with respect to
one or more of your proposals, the shares will be voted with respect to such
proposal or proposals as recommended by your board of directors.
Q: What do I need to do now?
A: After carefully reading and considering the information contained in this
document, please respond by completing, signing and dating your proxy card
or voting instructions and returning it in the enclosed postage-paid
envelope or, if available, by submitting your proxy or voting instructions
by telephone or through the Internet as soon as possible so that your shares
may be represented at your meeting.
Registered shareholders and most beneficial holders that hold shares through
a bank or broker may vote by telephone or via the Internet. If one of these
options is available to you, we strongly encourage you to use it because it
is faster and less costly.
Registered shareholders of Comcast can vote by telephone by calling
1-877-779-8683 or via the Internet at http://www.eproxyvote.com/cmcsa1.
Registered shareholders of AT&T can vote by telephone by calling
1-800-273-1174 or via the Internet at http://att.proxyvoting.com.
If you are a beneficial holder of Comcast common stock or AT&T common stock
and you hold shares through a bank or broker, you will receive separate
voting instructions on the form you receive from the bank or broker.
I-2
Q: What percentage of AT&T Comcast's economic interest and voting power will
AT&T shareholders hold upon completion of the AT&T Comcast transaction?
A: AT&T shareholders will own approximately 54.8% of AT&T Comcast's economic
interest upon completion of the AT&T Comcast transaction. If the preferred
capital structure is implemented, AT&T shareholders will own approximately
60.6% of AT&T Comcast's voting power upon completion of the AT&T Comcast
transaction. If the alternative capital structure is implemented, AT&T
shareholders will own approximately 56.6% of AT&T Comcast's voting power
upon completion of the AT&T Comcast transaction.
Q: What percentage of AT&T Comcast's economic interest and voting power will
Comcast shareholders hold upon completion of the AT&T Comcast transaction?
A: Comcast Class A shareholders, Comcast Class B shareholders and Comcast Class
A Special shareholders, who presently own approximately 2.3%, 1.0% and
96.7%, respectively, of Comcast's economic interest, will own approximately
1.0%, 0.4% and 38.6%, respectively, of AT&T Comcast's economic interest upon
completion of the AT&T Comcast transaction.
If the preferred capital structure is implemented, Comcast Class A
shareholders, who presently own approximately 13.4% of Comcast's voting
power, will own approximately 1.1% of AT&T Comcast's voting power upon
completion of the AT&T Comcast transaction. If the alternative capital
structure is implemented, Comcast Class A shareholders will own
approximately 5.14% of AT&T Comcast's voting power upon completion of the
AT&T Comcast transaction.
Under either of these capital structures, Comcast Class B shareholders, who
presently own approximately 86.6% of Comcast's voting power, will own
33 1/3% of AT&T Comcast's voting power upon completion of the AT&T Comcast
transaction.
Under either of the capital structures, Comcast Class A Special
shareholders, who presently have no voting rights, will own AT&T Comcast
Class A Special stock, which also will have no voting rights.
The percentages described in this answer and the preceding answer assume
that the transaction with Microsoft Corporation described in this document
is completed and that AT&T Comcast is not required to make any of the
potential additional payments of AT&T Comcast common stock described in this
document. If the Microsoft transaction is not completed, Comcast Class A
shareholders, Comcast Class B shareholders, Comcast Class A Special
shareholders and AT&T shareholders will own approximately 1%, 0.4%, 40.6%
and 57.7%, respectively, of AT&T Comcast's economic interest upon completion
of the AT&T Comcast transaction. In addition, if the Microsoft transaction
is not completed, AT&T Comcast Class A shareholders, under the preferred
capital structure, or AT&T Comcast Class C shareholders, under the
alternative capital structure, will own an additional 4.95% of AT&T
Comcast's voting power upon completion of the AT&T Comcast transaction.
Q: Who will hold the remaining percentage of AT&T Comcast's economic interest
and voting power upon completion of the AT&T Comcast transaction?
A: If the transaction with Microsoft Corporation described in this document is
completed, Microsoft will hold AT&T Comcast's remaining approximately 5.3%
economic interest and 4.95% voting power upon completion of the AT&T Comcast
transaction.
Q: If I am a holder of Comcast Class A Special common stock, do I have the
right to vote on the AT&T Comcast transaction?
A: No. Except as required by applicable law, holders of Comcast Class A Special
common stock do not have any voting rights. As required by applicable law,
Comcast has forwarded this document to you to notify you of the AT&T Comcast
transaction.
Q: Can I change my vote after I have delivered my proxy?
A: Yes. You can change your vote at any time before your proxy is voted at your
meeting. You can do this in one of three ways.
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- First, you can revoke your proxy.
- Second, you can submit a new proxy with a later date.
- Third, you can attend your meeting and vote in person.
If you choose either of the methods set forth in the first two bullet points
above, you must submit your notice of revocation or your new proxy to the
secretary of Comcast or AT&T, as appropriate, before your meeting. If your
shares are held in an account at a brokerage firm or bank, you should
contact your brokerage firm or bank to change your vote.
You may change your vote by submitting a new vote by telephone or via the
Internet regardless of whether you submitted your earlier proxy by mail,
telephone or via the Internet.
Q: If my shares are held in an account in a brokerage firm or bank, will my
broker vote my shares for me?
A: If you are a Comcast shareholder and you do not provide your broker with
instructions on how to vote your shares, your broker will not be permitted
to vote them with respect to any of the Comcast proposals. You should
therefore be sure to provide your broker with instructions on how to vote
your shares.
If you are an AT&T shareholder and you do not provide your broker with
instructions on how to vote your shares, your broker will not be permitted
to vote them with respect to the AT&T transaction proposal, the AT&T Comcast
charter proposal, the Consumer Services charter amendment proposal, the
incentive plan proposal or the employee stock purchase plan proposal but
will be permitted to vote them with respect to the reverse stock split
proposal, the election of directors, the ratification of auditors and each
of the shareholder proposals.
If you are an AT&T shareholder and you do not give voting instructions to
your broker, you will, in effect, be voting against the AT&T transaction
proposal and the Consumer Services charter amendment proposal.
PLEASE CHECK THE VOTING FORM USED BY YOUR BROKER TO SEE IF IT OFFERS
TELEPHONE OR INTERNET VOTING.
Q: Will I receive dividends on my AT&T Comcast shares?
A: AT&T Comcast does not currently intend to pay dividends on its common stock.
Q: Should I send in my stock certificates now?
A: No. If you are a Comcast shareholder and you currently hold your Comcast
shares in certificated form, after the AT&T Comcast transaction is completed
you will receive written instructions from the exchange agent on how to
exchange your Comcast stock certificates for your AT&T Comcast shares.
If you are a Comcast shareholder and you currently hold your shares in
uncertificated form, after the AT&T Comcast transaction is completed your
AT&T Comcast shares will be delivered to you without your having to take any
action.
If you are an AT&T shareholder, after the AT&T Comcast transaction is
completed you will not need to exchange any stock certificates in order to
receive your AT&T Comcast shares.
PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES WITH YOUR PROXY.
Q: When do you expect to complete the AT&T Comcast transaction?
A: We expect to complete the AT&T Comcast transaction by the end of 2002.
Q: Who can help answer my questions?
A: If you have any questions about the AT&T Comcast transaction or how to
submit your proxy, or if you need additional copies of this
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document, the enclosed proxy card or voting instructions, you should contact:
- if you are a Comcast shareholder:
D.F. King & Co., Inc.
77 Water Street
New York, NY 10005
Shareholders: 1-866-880-6503
Innisfree M&A Incorporated
501 Madison Avenue
20th Floor
New York, NY 10022
Shareholders: 1-877-750-9499
Banks and Brokers: 1-212-750-5833
For additional copies of this document, you should contact D.F. King & Co., Inc.
or Innisfree M&A Incorporated as described above or send email to
comcastinfo@dfking.com or info@innisfreema.com.
- if you are an AT&T shareholder:
Georgeson Shareholder Communications
Attn: AT&T Inquiries
17 State Street, 10th Floor
New York, NY 10004
Telephone:1-866-777-9124 (shareholders)
1-212-440-9800 (bank and broker inquiries)
e-mail: attinfo@georgesonshareholder.com
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QUESTIONS AND ANSWERS ABOUT
AT&T CONSUMER SERVICES GROUP TRACKING STOCK
Q: What is the purpose of AT&T Consumer Services Group tracking stock?
A: Approval and issuance of AT&T Consumer Services Group tracking stock will
allow AT&T to offer two separate classes of stock of AT&T -- existing AT&T
common stock plus a new tracking stock intended to track the performance of
AT&T's Consumer Services business. Following the issuance of AT&T Consumer
Services Group tracking stock, if the AT&T Comcast transaction is completed,
AT&T common stock will effectively act as tracking stock for AT&T Business
Services Group plus any retained portion of AT&T Consumer Services Group.
Q: What is a tracking stock and how does it work?
A: A tracking stock is a separate class or series of a company's common stock
that is intended to reflect the financial performance and economic value of
a group of assets or a specific business unit, division, subsidiary or
equity investment of the company. You should note that:
- Holders of a tracking stock of AT&T are shareholders of AT&T and not of
the underlying business or subsidiary. Thus, holders of AT&T Consumer
Services Group tracking stock will have no direct interest in the assets,
subsidiaries or businesses whose performance AT&T Consumer Services Group
tracking stock is intended to reflect.
- AT&T intends the terms of its tracking stock to link the economic value
of the tracking stock to the performance of the tracked business rather
than to the performance of AT&T as a whole. However, there may not always
be a linkage between the market value of the tracking stock and the
financial performance and economic value of the tracked business.
- The market value of the tracking stock may be adversely affected not only
by factors that adversely affect the tracked business, but also by
factors that adversely affect AT&T generally.
Q: Will AT&T Consumer Services Group tracking stock be intended to reflect 100%
of the value and performance of AT&T's Consumer Services business?
A: AT&T expects that, when it distributes AT&T Consumer Services Group tracking
stock, it will distribute shares intended to reflect all of the financial
performance and economic value of AT&T Consumer Services Group. However, if
AT&T determines to distribute less than all these shares, AT&T would retain
the remaining portion of the value and performance of AT&T Consumer Services
Group. While AT&T intends that this retained portion would be reflected in
AT&T common stock, there is no assurance that it will be. We refer to any
portion that AT&T does not distribute as AT&T's "retained portion" of the
value of AT&T Consumer Services Group.
Q: If I continue to hold all my shares of AT&T common stock, what will I
receive as a result of all the transactions?
A: If you continue to hold your shares of AT&T common stock and shares of AT&T
securities that you receive as dividends on your AT&T common stock, and if
AT&T completes the AT&T Comcast transaction and the distribution of AT&T
Consumer Services Group tracking stock, you will end up with shares of:
- Common stock of AT&T Corp. These will be your existing shares of AT&T
common stock, which will primarily be intended to track the financial
performance and economic value of AT&T Business Services Group plus any
retained portion of the value of AT&T Consumer Services Group.
- AT&T Consumer Services Group tracking stock of AT&T Corp. You would
receive shares of AT&T Consumer Services Group tracking stock as a
dividend on your existing shares of AT&T common stock.
- Common stock of AT&T Comcast Corporation. In the AT&T Comcast
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transaction, you will receive a number of shares of AT&T Comcast common
stock based on the number of shares of AT&T common stock, NYSE symbol
"T," that you own.
Q: Why is AT&T proposing a tracking stock rather than splitting off AT&T's
Consumer Services business into a separate company?
A: AT&T is proposing a tracking stock to allow AT&T to offer a more specific,
targeted class of stock for investors while at the same time maintaining the
benefits of keeping both AT&T Business Services Group and AT&T Consumer
Services Group together in a larger, integrated company.
Q: Will AT&T issue fractional shares of AT&T Consumer Services Group tracking
stock?
A: No. AT&T expects that it will issue cash in lieu of any fractional shares of
AT&T Consumer Services Group tracking stock, including with respect to
shares held in AT&T's Dividend Reinvestment Plan.
Q: Is approval or completion of any AT&T proposal a condition to the Consumer
Services charter amendment proposal?
A: No. However, AT&T will not implement the Incentive Plan proposal or the
Employee Stock Purchase Plan proposal if AT&T Consumer Services Group
tracking stock is not issued.
Q: When does AT&T expect to distribute the AT&T Consumer Services Group
tracking stock?
A: If the AT&T Consumer Services Group tracking stock proposal is approved,
AT&T plans to distribute these shares as a dividend to holders of AT&T
common stock at such time as AT&T determines that there is sufficient market
receptivity and support for such a distribution. AT&T has not yet determined
the timing of the distribution, which may be made within a year of
shareholder approval or may be made thereafter, depending on market
conditions.
Q: If AT&T shareholders approve all the AT&T proposals, will AT&T definitely
implement them all?
A: No. There are a number of conditions to the AT&T Comcast transaction other
than AT&T shareholder approvals, including regulatory approvals. Similarly,
there are a number of factors that could cause the AT&T Board to decide not
to proceed with the distribution of AT&T Consumer Services Group tracking
stock as well, such as future market conditions and receptivity, financial
performance or superior alternatives that may arise. Other events or
circumstances, including litigation, could occur that affect the timing or
terms of the proposed transactions or AT&T's ability to complete the
proposed transactions.
The Consumer Services charter amendment proposal gives the AT&T Board the
authority to amend AT&T's charter to create AT&T Consumer Services Group
tracking stock. The proposed Consumer Services charter amendment, however,
does not mandate that the AT&T Board use this power or specify the manner in
which AT&T may issue AT&T Consumer Services Group tracking stock. Rather,
AT&T Consumer Services Group tracking stock will be a new class of AT&T
common stock that the AT&T Board may issue from time to time as it
determines appropriate, up to the total number of authorized shares and
subject to stock exchange rules with respect to shareholder approval of
share issuances.
AT&T does not plan to seek new shareholder approval for any change that the
AT&T Board may approve in the timing or manner of issuing AT&T Consumer
Services Group tracking stock.
I-7
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To better understand
the AT&T Comcast transaction, you should read this entire document carefully, as
well as those additional documents to which we refer you. See "Additional
Information for Shareholders -- Where You Can Find More Information."
THE COMPANIES
COMCAST CORPORATION
1500 Market Street
Philadelphia, Pennsylvania 19102-2148
(215) 665-1700
http://www.comcast.com
Comcast is a Pennsylvania corporation incorporated in 1969. Comcast is
involved in three principal lines of business:
- Cable -- through the development, management and operation of broadband
communications networks;
- Commerce -- through QVC, its electronic retailing subsidiary; and
- Content -- through its consolidated subsidiaries Comcast Spectacor,
Comcast SportsNet, Comcast SportsNet Mid-Atlantic, Comcast Sports
Southeast, E! Entertainment Television, The Golf Channel and Outdoor Life
Network, and through its other programming investments.
AT&T CORP.
295 North Maple Avenue
Basking Ridge, NJ 07920-1002
(908) 221-2000
http://www.att.com
AT&T is a New York corporation incorporated in 1885. AT&T currently
consists primarily of AT&T Broadband Group, AT&T Consumer Services Group and
AT&T Business Services Group. These AT&T groups are not separate companies, but,
rather, are parts of AT&T. The transactions proposed in this document would:
- separate and spin off AT&T Broadband into a separate company that
immediately would be combined with and become a part of AT&T Comcast, and
- establish a tracking stock for AT&T Consumer Services Group.
AT&T BROADBAND GROUP
AT&T Broadband Group is one of the nation's largest broadband communications
businesses, providing cable television, high-speed cable Internet services and
communications services over one of the most extensive broadband networks in the
country. At or for the year ended December 31, 2001, AT&T Broadband Group:
- owned and operated cable systems aggregating approximately 13.56 million
analog video subscribers;
- had approximately $10.1 billion in combined revenue;
- had approximately $3.9 billion in net loss;
- had debt of approximately $23.3 billion; and
- had investments in companies, joint ventures and partnerships, including
Time Warner Entertainment Company, L.P., Insight Midwest, L.P. and Texas
Cable Partners, L.P.
AT&T CONSUMER SERVICES GROUP
AT&T Consumer Services Group is the leading provider of domestic and
international long distance service to residential consumers in the United
States. AT&T Consumer Services Group provides a broad range of communications
services to consumers, including:
- inbound and outbound domestic and international long distance;
- transaction-based long distance services, such as operator-assisted
calling services and prepaid phone cards;
- local calling offers; and
- dial-up Internet service through AT&T WorldNet Service.
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AT&T BUSINESS SERVICES GROUP
AT&T Business Services Group is one of the nation's largest business
services communications providers, providing a variety of global communications
services to over 4 million customers, including large domestic and multinational
businesses, small- and medium-sized businesses, and government agencies. AT&T
Business Services Group operates one of the largest telecommunications networks
in the United States.
AT&T Business Services Group provides a broad range of communications
services and customized solutions, including:
- long distance, international and toll-free voice services;
- local services, including private line, local data and special access
services;
- data and internet protocol, or IP, services, including frame relay and
asynchronous transfer mode, or ATM;
- managed networking services and outsourcing solutions; and
- wholesale transport services.
The table below sets forth the approximate percentage of consolidated revenue,
operating income, net loss, assets and indebtedness of AT&T, giving prior effect
to the split-off of the AT&T Wireless Services Group, that were attributable to
each of AT&T Broadband Group, AT&T Consumer Services Group and AT&T excluding
AT&T Broadband Group at or for the year ended December 31, 2001. In the future,
these percentages will vary with the relative performance of the different AT&T
groups. In addition, the actual debt levels of each of the AT&T groups in the
future will depend on a variety of other factors, including the progress AT&T
makes on its various debt reduction activities. The table also should be read in
the context of the financial and other information set forth in this document.
AT OR FOR YEAR ENDED DECEMBER 31, 2001
-------------------------------------------------
% OF % OF AT&T % OF % OF % OF
AT&T OPERATING AT&T AT&T AT&T
REVENUE INCOME NET LOSS* ASSETS DEBT
------- --------- --------- -------- ----
AT&T Broadband Group................................ 19.3% (111.4)% 61.0% 62.4% 43.5%
AT&T Consumer Services Group........................ 28.7% 123.1% (42.0)% 1.4% 1.8%
AT&T Corp. (excluding AT&T Broadband Group)**....... 81.2% 211.4% (1.9)% 37.7% 56.5%
- ---------------
* Based on net loss from continuing operations before cumulative effect of
accounting change.
** Includes AT&T Business Services Group and AT&T Consumer Services Group and
excludes Liberty Media Group and AT&T Wireless Services Group.
AT&T COMCAST CORPORATION
1500 Market Street
Philadelphia, Pennsylvania 19102-2148
(215) 665-1700
AT&T Comcast is a newly formed Pennsylvania corporation that has not, to
date, conducted any activities other than those incident to its formation, the
financing and other matters contemplated by the merger agreement and the
preparation of this document. Upon completion of the AT&T Comcast transaction,
Comcast and AT&T Broadband will each become a wholly owned subsidiary of AT&T
Comcast. The business of AT&T Comcast will be the combined businesses currently
conducted by Comcast and AT&T Broadband Group.
THE AT&T COMCAST TRANSACTION
REASONS FOR THE AT&T COMCAST TRANSACTION (SEE PAGE II-8)
Comcast and AT&T believe that the combined strengths of Comcast and AT&T's
broadband business will enable them to create the world's premier broadband
communications company. The AT&T Comcast transaction will combine the companies'
extensive broadband communications networks, technologically
I-9
advanced broadband delivery systems and managerial expertise to build a business
that Comcast and AT&T expect will create substantial long-term value for
shareholders of both companies. Comcast and AT&T believe that AT&T Comcast will
grow the broadband business with more efficiency to create stronger operating
and financial results than either company could achieve on its own.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS (SEE PAGE II-8)
To Comcast Shareholders: The Comcast Board believes that the AT&T Comcast
transaction, including the Comcast merger and the AT&T Comcast charter, is fair
to you and in your best interest, and unanimously voted to approve the merger
agreement and the transactions contemplated by the merger agreement. The Comcast
Board unanimously recommends that you vote FOR the approval and adoption of the
merger agreement and the transactions contemplated by the merger agreement and
recommends that you vote FOR the AT&T Comcast charter proposal.
The Comcast Board believes that the preferred structure proposal is in your
best interest and unanimously recommends that you vote FOR the preferred
structure proposal.
To AT&T Shareholders: The AT&T Board believes that the AT&T Comcast
transaction, including the separation, the AT&T Broadband spin-off, the AT&T
Broadband merger and the AT&T Comcast charter, is fair to you and in your best
interest and unanimously voted to approve the merger agreement and the
transactions contemplated by the merger agreement. The AT&T Board unanimously
recommends that you vote FOR the approval and adoption of the merger agreement
and the transactions contemplated by the merger agreement and FOR the AT&T
Comcast charter proposal.
OPINIONS OF FINANCIAL ADVISORS (SEE PAGE IV-1)
Opinions of Comcast's Financial Advisors. In deciding to approve the AT&T
Comcast transaction, the Comcast Board considered opinions of three of its
financial advisors, Morgan Stanley & Co. Incorporated, J.P. Morgan Securities
Inc. and Merrill Lynch, Pierce, Fenner & Smith, Incorporated, each dated
December 19, 2001, to the Comcast Board to the effect that as of that date, the
conversion ratios in the Comcast merger applicable to holders of Comcast common
stock, in the aggregate, were fair, from a financial point of view, to Comcast
shareholders, taken together. The full text of these opinions are attached as
Annexes G, H and I to this document. Comcast urges its shareholders to read each
of these opinions in its entirety for a description of the procedures followed,
assumptions made, matters considered and limitations on the review undertaken.
THESE OPINIONS DO NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO ANY
MATTER RELATING TO THE MERGERS OR ANY RELATED TRANSACTIONS.
Opinions of AT&T's Financial Advisors. In connection with the proposed
mergers, AT&T's financial advisors, Credit Suisse First Boston Corporation and
Goldman, Sachs & Co., each has delivered a written opinion to the AT&T Board as
to the fairness as of the date of the opinion, from a financial point of view,
of the AT&T Broadband exchange ratio provided for in the AT&T Broadband merger
to holders of AT&T Broadband common stock immediately prior to the mergers,
other than Comcast and its affiliates. The full text of the separate written
opinions of Credit Suisse First Boston Corporation and Goldman, Sachs & Co.,
each dated December 19, 2001, to the AT&T Board are attached to this document as
Annexes J and K, respectively. AT&T urges its shareholders to read each opinion
carefully in its entirety for a description of the procedures followed,
assumptions made, matters considered and limitations on the review undertaken.
THESE OPINIONS DO NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO ANY
MATTER RELATING TO THE MERGERS OR ANY RELATED TRANSACTIONS.
THE STRUCTURE OF THE AT&T COMCAST TRANSACTION
The AT&T Comcast transaction will occur in several steps. First, AT&T will
transfer the assets and liabilities of AT&T's broadband business to AT&T
Broadband, a holding company formed for the purpose of effectuating the AT&T
Comcast transaction. Second, AT&T will spin off AT&T Broadband to its
shareholders. Third, Comcast and AT&T Broadband will each merge with a
different, wholly owned subsidiary of AT&T Comcast. In the AT&T Comcast
transaction, Comcast and AT&T shareholders will receive the consideration
described below.
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The merger agreement provides for all of the steps described above to occur
on the closing date for the mergers.
CAPITAL STRUCTURE (SEE PAGE V-1)
AT&T Comcast will have one of two capital structures upon completion of the
AT&T Comcast transaction, the Preferred Structure or the Alternative Structure.
These capital structures are described in the following paragraphs.
PREFERRED STRUCTURE
If holders of Comcast Class A common stock, voting as a single class,
approve the preferred structure proposal, AT&T Comcast's capital structure upon
completion of the AT&T Comcast transaction will be as follows:
- Class B common stock -- each share will have 15 votes and all shares in
the aggregate will have 33 1/3% of the voting power of AT&T Comcast
stock,
- Class A common stock -- each share will have a number of votes determined
pursuant to a formula and all shares in the aggregate will initially have
66 2/3% of the voting power of AT&T Comcast stock, and
- Class A Special common stock -- will be non-voting.
The 33 1/3% aggregate voting power of AT&T Comcast Class B common stock
will not be diluted by additional issuances of any other class of AT&T Comcast
stock and will be reduced only in limited circumstances. For a more complete
description of the voting rights of the various classes of AT&T Comcast stock
that will be outstanding upon completion of the AT&T Comcast transaction if the
Preferred Structure is implemented, see "Certain Legal Information --
Description of AT&T Comcast Capital Stock."
ALTERNATIVE STRUCTURE
If holders of Comcast Class A common stock, voting as a single class, do
not approve the preferred structure proposal, AT&T Comcast's capital structure
upon completion of the AT&T Comcast transaction will be as follows:
- Class B common stock -- each share will have 15 votes and all shares in
the aggregate will have 33 1/3% of the voting power of AT&T Comcast
stock,
- Class A common stock -- each share will have 1 vote and all shares in the
aggregate will have approximately 5.14% of the voting power of AT&T
Comcast stock,
- Class A Special common stock -- will be non-voting, and
- Class C common stock -- each share will have a number of votes determined
pursuant to a formula and all shares in the aggregate will initially have
approximately 61 53/100% of the voting power of AT&T Comcast stock.
The 33 1/3% aggregate voting power of AT&T Comcast Class B common stock and
approximately 5.14% aggregate voting power of AT&T Comcast Class A common stock
will not be diluted by additional issuances of any other class of AT&T Comcast
stock and will be reduced only in limited circumstances. For a more complete
description of the voting rights of the various classes of AT&T Comcast stock
that will be outstanding upon completion of the AT&T Comcast transaction if the
Alternative Structure is implemented, see "Certain Legal Information --
Description of AT&T Comcast Capital Stock."
WHY THE COMCAST BOARD RECOMMENDS THE PREFERRED STRUCTURE OVER THE ALTERNATIVE
STRUCTURE
The Comcast Board has recommended that holders of Comcast Class A common
stock approve the preferred structure proposal because the Comcast Board
believes that the Preferred Structure is in the best interests of the holders of
Comcast Class A common stock.
Under the Preferred Structure:
- holders of Comcast Class A common stock will receive shares of AT&T
Comcast Class A common stock (approximately 22 million shares in the
aggregate) and
- holders of AT&T common stock will also receive shares of AT&T Comcast
Class A common stock (up to 1.235 billion shares in the aggregate).
Upon completion of the AT&T Comcast transaction under the Preferred Structure,
there will be outstanding approximately 1.37 billion shares of AT&T Comcast
Class A common stock, assuming that the transaction with Microsoft described
below is completed and that AT&T Comcast is not required to make any of the
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additional payments of AT&T Comcast common stock described below.
By contrast, under the Alternative Structure:
- holders of Comcast Class A common stock will receive shares of AT&T
Comcast Class A common stock (approximately 22 million shares in the
aggregate) and
- holders of AT&T common stock will receive shares of a different class of
AT&T Comcast common stock, AT&T Comcast Class C common stock.
Upon completion of the AT&T Comcast transaction under the Alternative Structure,
there will be outstanding only approximately 22 million shares of AT&T Comcast
Class A common stock.
The Comcast Board believes that holders of Comcast Class A common stock
would benefit from the increased liquidity of the AT&T Comcast shares they
receive under the Preferred Structure and that this benefit outweighs the
potential benefits of the greater per share voting rights of the AT&T Comcast
Class A common stock under the Alternative Structure.
WHAT COMCAST SHAREHOLDERS WILL RECEIVE IN THE COMCAST MERGER (SEE PAGE V-1)
Comcast shareholders will receive one share of the corresponding class of
AT&T Comcast common stock in exchange for each of their shares of Comcast common
stock.
Upon completion of the AT&T Comcast transaction, assuming that the
Microsoft transaction described below is completed and AT&T Comcast is not
required to make any of the additional payments of AT&T Comcast common stock
described below, Comcast shareholders will own approximately
- 40.0% of AT&T Comcast's economic interest and
- if the Preferred Structure is implemented, 34.4% of AT&T Comcast's voting
power or, if the Alternative Structure is implemented, 38.5% of AT&T
Comcast's voting power.
Upon completion of the AT&T Comcast transaction, regardless of which
capital structure is implemented and whether or not the Microsoft transaction
described below is completed or AT&T Comcast is required to make any of the
potential additional payments of AT&T Comcast common stock described below,
Sural LLC, which is controlled by Brian L. Roberts, President of Comcast, and
currently holds approximately 86.7% of Comcast's voting power, will hold
approximately 33 1/3% of AT&T Comcast's voting power, including all of the
outstanding AT&T Comcast Class B common stock.
WHAT AT&T SHAREHOLDERS WILL RECEIVE IN THE AT&T COMCAST TRANSACTION (SEE PAGE
V-1)
The precise number of shares of AT&T Comcast common stock that each holder
of AT&T common stock will receive in the AT&T Comcast transaction will depend
upon the number of shares of AT&T common stock outstanding and the value of the
employee stock options and stock appreciation rights held by current AT&T
Broadband employees and former AT&T and AT&T Broadband employees, in each case
at the time the AT&T Comcast transaction is completed, and the number of shares,
if any, of AT&T common stock held by Comcast immediately prior to the record
date for the AT&T Broadband spin-off.
If the exchange ratio were determined as of the date of this document,
assuming AT&T Comcast is not required to make any of the additional payments of
AT&T Comcast common stock described below, AT&T shareholders will receive with
respect to each of their shares of AT&T common stock:
- if the Preferred Structure is implemented, approximately 0.35 of a share
of AT&T Comcast Class A common stock or
- if the Alternative Structure is implemented, approximately 0.35 of a
share of AT&T Comcast Class C common stock.
Upon completion of the AT&T Comcast transaction, assuming the Microsoft
transaction described below is completed and AT&T Comcast is not required to
make any of the additional payments of AT&T Comcast common stock described
below, AT&T shareholders will own approximately
- 54.8% of AT&T Comcast's economic interest and
- if the Preferred Structure is implemented, 60.6% of AT&T Comcast's voting
power or, if the Alternative Structure is
I-12
implemented, 56.6% of AT&T Comcast's voting power.
The actual exchange ratio may vary from the 0.35 estimate calculated as of
the date of this document. For example, if Comcast were to sell all of its
shares of AT&T common stock prior to the record date for the AT&T Broadband
spin-off and if AT&T were to issue the maximum number of shares it is permitted
to issue under the merger agreement, the exchange ratio, determined as of the
date of this document and otherwise using then current information but giving
effect to such sales and issuances, would be approximately 0.32 shares of AT&T
Comcast common stock for each share of AT&T common stock.
AT&T Comcast will not issue any fractional shares in the AT&T Comcast
transaction. AT&T shareholders will receive a check in the amount of the net
proceeds from the sale of their fractional shares in the market.
AT&T Consumer Services Group tracking stock will not entitle holders
thereof to receive any shares of AT&T Comcast common stock.
POTENTIAL ADDITIONAL PAYMENTS (SEE PAGE V-2)
Subject to the limitations described in the next paragraph, AT&T Comcast
may be required to issue additional shares of AT&T Comcast common stock to AT&T
securityholders who receive shares in connection with the AT&T Comcast
transaction
- if prior to the completion of the AT&T Comcast transaction Standard &
Poor's does not commit to include the class of AT&T Comcast common stock
that the AT&T shareholders receive in the AT&T Comcast transaction in the
Standard & Poor's 500 Index and
- the average trading price for that class of AT&T Comcast common stock
during 10 trading days randomly selected from a specified post-closing
pricing period is less than the average trading price for the AT&T
Comcast Class A Special common stock on the same trading days.
The post-closing pricing period from which the 10 days will be selected will be
a 20-trading day period that commences no later than 45 days after the closing
date of the AT&T Comcast transaction.
However, the obligation of AT&T Comcast to issue additional shares of AT&T
Comcast common stock as described in the preceding paragraph will be subject to
the following limitations:
- AT&T Comcast will not be obligated to compensate AT&T securityholders who
receive shares in connection with the AT&T Comcast transaction to the
extent the price differential exceeds 3%,
- the number of shares that would otherwise be issued will be reduced by
the number of shares, if any, issued as described in the next paragraph
and
- if the class of AT&T Comcast common stock to be issued to AT&T
shareholders in connection with the AT&T Comcast transaction is included
in the Standard & Poor's 500 Index prior to the close of the pricing
period referred to in the preceding paragraph, no additional shares will
be issued.
AT&T Comcast may also be required to issue additional shares of AT&T
Comcast common stock to AT&T securityholders who receive shares in connection
with the AT&T Comcast transaction to ensure that they receive shares of AT&T
Comcast common stock with a value in excess of 50% of the value of all shares of
AT&T Comcast common stock issued in connection with the AT&T Comcast
transaction. Unless AT&T receives a ruling from the Internal Revenue Service
that permits AT&T and Comcast to use the valuation methodology described in the
second preceding paragraph, the value of the shares of AT&T Comcast common stock
will be determined as of the closing date of the AT&T Comcast transaction. It is
not expected that any additional shares will be issued as a result of the
requirement described in this paragraph.
Any additional payments of AT&T Comcast common stock that are owed will be
made promptly after the amount of such payment can be determined.
The potential additional payments described in this subsection are
sometimes referred to in this document as "additional payments."
I-13
SUPPORT AGREEMENT (SEE PAGE V-21)
Sural LLC, which is controlled by Brian L. Roberts, President of Comcast,
has entered into a support agreement with, among others, AT&T pursuant to which
it has agreed to vote its shares of Comcast common stock in favor of the Comcast
transaction proposal, the AT&T Comcast charter proposal and the preferred
structure proposal. Because Sural held approximately 86.7% of the aggregate
voting power of Comcast stock as of the record date for the Comcast special
meeting, Sural's vote in favor of the Comcast transaction proposal and the AT&T
Comcast charter proposal will be sufficient to approve the Comcast transaction
proposal and the AT&T Comcast charter proposal without the vote of any other
Comcast shareholder. Approval of the preferred structure proposal will still
require the affirmative vote of a majority of the votes cast by holders of
shares of Comcast Class A common stock, voting as a single class.
Sural has also agreed in the support agreement to vote its shares of AT&T
Comcast Class B common stock in favor of the nominees selected by AT&T Comcast's
directors nominating committee or otherwise nominated by AT&T Comcast for
election as directors at the 2004 annual meeting of AT&T Comcast shareholders,
subject to certain exceptions. Sural has further agreed in the support agreement
to restrictions on its ability to transfer its shares of AT&T Comcast Class B
common stock. Those restrictions survive until the tenth anniversary of the
completion of the AT&T Comcast transaction.
AT&T COMCAST BOARD AND MANAGEMENT FOLLOWING THE AT&T COMCAST TRANSACTION (SEE
PAGE VIII-1)
Upon completion of the AT&T Comcast transaction, the AT&T Comcast Board
will consist of 12 members, at least seven of whom will be independent
directors. Comcast and AT&T will each designate five of the initial members of
the AT&T Comcast Board from among its then-existing Board members and will
jointly designate the two remaining initial members of the AT&T Comcast Board,
each of whom will be an independent director. Except for certain pre-approved
designees, the individuals designated by Comcast and AT&T will be mutually
agreed by Comcast and AT&T. If the AT&T Comcast Board decides to establish an
executive committee, Ralph J. Roberts, Chairman of the Board of Comcast, will be
its chairman.
Upon completion of the AT&T Comcast transaction, C. Michael Armstrong,
Chairman of the Board and Chief Executive Officer of AT&T, will become Chairman
of the Board of AT&T Comcast and Brian L. Roberts, President of Comcast, will
become Chief Executive Officer and President of AT&T Comcast. The other members
of senior management of AT&T Comcast upon completion of the AT&T Comcast
transaction will be selected by Brian L. Roberts in consultation with C. Michael
Armstrong.
INTERESTS OF DIRECTORS AND OFFICERS IN THE AT&T COMCAST TRANSACTION (SEE PAGE
IX-1)
When considering our Board's recommendations that you vote in favor of the
AT&T Comcast transaction, you should be aware that a number of our directors and
officers have interests in the AT&T Comcast transaction that are different from,
or in addition to, yours. These interests include the following:
- C. Michael Armstrong, Chairman of the Board and Chief Executive Officer
of AT&T, will become Chairman of the Board of AT&T Comcast upon
completion of the AT&T Comcast transaction and will be able to be removed
from his position only with the approval of at least 75% of the entire
AT&T Comcast Board;
- Brian L. Roberts, President of Comcast, will become Chief Executive
Officer and President of AT&T Comcast upon completion of the AT&T Comcast
transaction and will be able to be removed from his position only with
the approval of at least 75% of the entire AT&T Comcast Board; and
- five of the then-existing members of each of the Comcast Board and the
AT&T Board will become members of the AT&T Comcast Board upon completion
of the AT&T Comcast transaction for a term that does not expire until the
2004 annual meeting of AT&T Comcast shareholders.
I-14
Furthermore, a number of our directors and officers will receive:
-- funding of benefits in trust;
-- employment agreements with AT&T Comcast;
-- accelerated vesting of stock options and other equity-based awards;
and
-- the right to continued indemnification and insurance coverage by
AT&T Comcast for acts or omissions occurring prior to the AT&T
Comcast transaction.
CONDITIONS TO THE COMPLETION OF THE AT&T COMCAST TRANSACTION (SEE PAGE V-12 AND
PAGE V-18)
The completion of the AT&T Comcast transaction is subject to the
satisfaction or waiver of several conditions, including:
- approval by AT&T shareholders of the AT&T transaction proposal and the
AT&T Comcast charter proposal;
- approval by Comcast shareholders of the Comcast transaction proposal and
the AT&T Comcast charter proposal;
- expiration or termination of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended;
- the absence of any law, regulation or order prohibiting the completion of
the AT&T Comcast transaction;
- receipt of all required regulatory approvals other than those the failure
of which to be obtained would not reasonably be expected to have a
material adverse effect on either Comcast or AT&T Broadband Group;
- accuracy of the representations and warranties of the other party,
including with respect to the absence of a material adverse effect;
- receipt and continuing effectiveness of an Internal Revenue Service
ruling or rulings, or an opinion from tax counsel acceptable to Comcast
and AT&T, to the effect that, for U.S. federal income tax purposes, the
AT&T Broadband spin-off will be tax-free to AT&T and its shareholders,
the mergers will not cause the AT&T Broadband spin-off to fail to be
qualified as a tax-free transaction, and the AT&T Broadband spin-off will
not cause the distributions by AT&T of the common stock of AT&T Wireless
Services, Inc. or of Liberty Media Corporation to fail to qualify as
tax-free transactions;
- receipt by each party of an opinion of its counsel to the effect that the
combination of AT&T Broadband and Comcast will qualify as a tax-free
transaction for U.S. federal income tax purposes;
- performance by Sural LLC in all material respects of its obligations
under the support agreement; and
- receipt of appropriate note consents, or the defeasance, purchase or
acquisition of indebtedness, in respect of at least 90% in aggregate
principal amount of the securities issued under the AT&T indenture, dated
as of September 7, 1990, and outstanding as of December 19, 2001.
TERMINATION RIGHTS (SEE PAGE V-13)
The merger agreement may be terminated by mutual agreement of Comcast and
AT&T.
The merger agreement may be terminated by Comcast or AT&T if:
- the AT&T shareholders fail to approve either the AT&T transaction
proposal or the AT&T Comcast charter proposal;
- the Comcast shareholders fail to approve either the Comcast transaction
proposal or the AT&T Comcast charter proposal;
- the AT&T Comcast transaction is not completed by March 1, 2003;
- the other party breaches the merger agreement such that the related
closing conditions cannot be satisfied by March 1, 2003; or
- any material law or regulation makes completion of the AT&T Comcast
transaction illegal or a permanent injunction prohibiting completion of
the AT&T Comcast transaction is entered.
I-15
In addition, AT&T may terminate the merger agreement if, as permitted by
the merger agreement, the closing date for the AT&T Comcast transaction is
delayed because the Microsoft transaction described below does not occur;
provided that AT&T may terminate the merger agreement pursuant to this provision
only (1) on two business days' notice delivered to Comcast between 30 and 45
days after the commencement of the delay; and (2) if prior to the effectiveness
of the termination Comcast does not agree to close the AT&T Comcast transaction
within 60 days of the commencement of the delay.
In addition, Comcast may terminate the merger agreement if:
- the AT&T Board withdraws or modifies, in a manner adverse to Comcast, its
recommendation of either the AT&T transaction proposal or the AT&T
Comcast charter proposal; or
- AT&T willfully and materially breaches its obligations described below in
this summary under "Duty to Recommend the AT&T Comcast Transaction" or
"No Solicitation of Competing Transactions."
TERMINATION FEES (SEE PAGE V-14)
AT&T will pay a wholly owned subsidiary of Comcast a termination fee in the
amount of $1.5 billion in cash if the merger agreement is terminated because:
- the AT&T Board withdraws or modifies, in a manner adverse to Comcast, its
recommendation of either the AT&T transaction proposal or the AT&T
Comcast charter proposal; or
- AT&T willfully and materially breaches its obligations described below
under "Duty to Recommend the AT&T Comcast Transaction" or "No
Solicitation of Competing Transactions."
In addition, if (1) a competing acquisition proposal made by a third party
is pending at the time of the AT&T meeting, (2) the merger agreement is
terminated because the AT&T shareholders fail to approve the AT&T transaction
proposal or the AT&T Comcast charter proposal at the AT&T meeting, and (3)
within one year of the AT&T meeting, AT&T enters into an agreement relating to
an alternative material transaction, AT&T will pay a wholly owned subsidiary of
Comcast a $1.5 billion termination fee in cash.
Comcast will pay AT&T a $1.5 billion termination fee in cash if the merger
agreement is terminated because the Comcast Board withdraws or modifies, in a
manner adverse to AT&T, its recommendation of either the Comcast transaction
proposal or the AT&T Comcast charter proposal or if Comcast shareholders fail to
approve either the Comcast transaction proposal or the AT&T Comcast charter
proposal. See "Support Agreement" above.
DUTY TO RECOMMEND THE AT&T COMCAST TRANSACTION (SEE PAGE V-8)
The AT&T Board has recommended that the AT&T shareholders approve the AT&T
transaction proposal and the AT&T Comcast charter proposal. The AT&T Board is
permitted to withdraw or modify, in a manner adverse to Comcast, its
recommendation of the AT&T transaction proposal or the AT&T Comcast charter
proposal if the AT&T Board determines in good faith that it must take such
action to comply with its fiduciary duties under applicable law and provides
Comcast with two business days' prior written notice. AT&T does not have the
right to terminate the merger agreement to accept a superior acquisition
proposal for its broadband business and subject to applicable law must submit
the AT&T Comcast transaction to AT&T shareholders at the AT&T annual meeting.
NO SOLICITATION OF COMPETING TRANSACTIONS (SEE PAGE V-9)
AT&T is generally prohibited from soliciting or encouraging, among other
specific acquisition proposals, acquisition proposals from third parties that
would reasonably be expected to be inconsistent in any material respect with the
AT&T Comcast transaction or materially delay, impede or adversely affect the
AT&T Comcast transaction. AT&T is also prohibited from providing nonpublic
information to or engaging in negotiations with any third party that has made or
is known by AT&T to be considering making an acquisition proposal of the type
described in the previous sentence.
I-16
However, AT&T may furnish nonpublic information and engage in negotiations
with a third party that has made an unsolicited acquisition proposal if the AT&T
Board determines in good faith that such acquisition proposal would reasonably
be expected to lead to a proposal that would be more favorable to AT&T
shareholders than the AT&T Comcast transaction and that it must take such action
to comply with its fiduciary duties under applicable law.
MICROSOFT ARRANGEMENT (SEE PAGE V-24)
Comcast, AT&T and AT&T Comcast have entered into an exchange agreement with
Microsoft Corporation pursuant to which at the time of the AT&T Broadband
spin-off Microsoft will exchange $5 billion of quarterly income preferred
securities, or QUIPS, issued by AT&T Finance Trust I, an AT&T subsidiary, for a
number of shares of AT&T Broadband common stock that, subject to the limitation
described in the next sentence, will be converted in the AT&T Broadband merger
into 115 million shares of AT&T Comcast Class A common stock under the Preferred
Structure or AT&T Comcast Class C common stock under the Alternative Structure.
To the extent necessary so that Microsoft will not hold more than 4.95% of AT&T
Comcast's voting power as a result of the AT&T Comcast transaction, Microsoft
has agreed to accept shares of the non-voting AT&T Comcast Class A Special
common stock in the AT&T Broadband merger, on a one-for-one basis, instead of
shares of voting AT&T Comcast common stock.
If the Microsoft transaction is completed, AT&T Comcast has agreed in the
exchange agreement that it will not discriminate against Microsoft with respect
to the provision of high-speed Internet services over AT&T Comcast cable
systems.
REGULATORY MATTERS (SEE PAGE II-20)
Under U.S. antitrust laws, Comcast and AT&T may not complete the AT&T
Comcast transaction until Comcast and AT&T have notified the Antitrust Division
of the United States Department of Justice and the Federal Trade Commission of
the AT&T Comcast transaction by filing the necessary report forms and until a
required waiting period has ended. Comcast and AT&T have filed the required
information and materials to notify the U.S. Department of Justice and the
Federal Trade Commission of the AT&T Comcast transaction. On February 21, 2002,
Comcast and AT&T received a request from the United States Department of
Justice, the reviewing agency, for additional information regarding the AT&T
Comcast transaction. Comcast and AT&T are in the process of responding to this
request.
Under federal communications law and local franchise requirements, Comcast
and AT&T must also obtain the approval of the Federal Communications Commission,
or FCC, and a number of state and local authorities in connection with the AT&T
Comcast transaction. Comcast and AT&T have filed the required applications with
the FCC and these state and local authorities. The FCC and most of these state
and local authorities have not completed their reviews of the AT&T Comcast
transaction.
Comcast and AT&T have agreed to use their best efforts to obtain all
regulatory approvals that are necessary or advisable in connection with the AT&T
Comcast transaction. In addition, Comcast and AT&T have also agreed to take all
actions necessary to obtain termination of the applicable waiting periods under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 relating to the AT&T
Comcast transaction and to obtain all consents of the FCC required to complete
the AT&T Comcast transaction.
There can be no assurances that Comcast and AT&T will obtain all regulatory
approvals necessary to complete the AT&T Comcast transaction or that the
granting of these approvals will not involve the imposition of conditions on the
completion of the AT&T Comcast transaction or require changes to the terms of
the AT&T Comcast transaction.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE II-16)
It is a condition to the AT&T Broadband spin-off and to the mergers that
AT&T receive a private letter ruling from the Internal Revenue Service, or an
opinion of counsel, to the effect that AT&T, AT&T Broadband and holders of AT&T
common stock who receive shares of AT&T Broadband common stock in the AT&T
Broadband spin-off will not recognize gain or loss for U.S. federal income tax
purposes in connection
I-17
with the AT&T Broadband spin-off. AT&T has filed a private letter ruling request
in respect of this matter with the IRS. It is a condition to the mergers that
AT&T and Comcast each receive an opinion of counsel to the effect that AT&T
Broadband, Comcast and their respective shareholders who exchange their shares
for shares of AT&T Comcast common stock in the mergers will not recognize gain
or loss for U.S. federal income tax purposes in connection with the mergers,
except for gain or loss with respect to cash received instead of fractional
shares. The receipt of this opinion by AT&T is also a condition to the AT&T
Broadband spin-off.
Subject to the limitations and qualifications described in "The AT&T
Comcast Transaction -- Material Federal Income Tax Consequences," it is the
opinion of Wachtell, Lipton, Rosen & Katz, counsel to AT&T, that the AT&T
Broadband spin-off will qualify as a tax-free reorganization. As a result, (1)
no gain or loss will be recognized by AT&T or AT&T Broadband upon the separation
and the AT&T Broadband spin-off (other than gains related to certain
intercompany transactions that will be triggered by the AT&T Broadband spin-off)
and (2) no gain or loss will be recognized by U.S. holders of AT&T common stock
upon their receipt of shares of AT&T Broadband common stock in the AT&T
Broadband spin-off.
Subject to the limitations and qualifications described in "The AT&T
Comcast Transaction -- Material Federal Income Tax Consequences," it is the
opinion of Wachtell, Lipton, Rosen & Katz, counsel to AT&T, and Davis Polk &
Wardwell, counsel to Comcast, that the mergers will constitute an exchange to
which Section 351 of the Internal Revenue Code applies. As a result, (1) no gain
or loss will be recognized by Comcast, AT&T Broadband, the AT&T Broadband merger
subsidiary, or the Comcast merger subsidiary upon the mergers and (2) except for
gain or loss with respect to cash received instead of fractional shares, no gain
or loss will be recognized by U.S. holders of AT&T Broadband common stock or
Comcast common stock on the exchange of such stock for AT&T Comcast common
stock.
MARKET PRICE INFORMATION (SEE PAGE I-29)
Comcast Class A common stock and Comcast Class A Special common stock are
listed on The Nasdaq Stock Market under the symbols "CMCSA" and "CMCSK,"
respectively. AT&T common stock is primarily listed on the New York Stock
Exchange under the symbol "T."
On July 6, 2001, the last full trading day before Comcast publicly
announced its proposal to AT&T to acquire AT&T's broadband business, Comcast
Class A common stock and Comcast Class A Special common stock closed at $41.85
and $42.08, respectively, and AT&T common stock closed at $16.65, as adjusted to
reflect the AT&T Wireless Services split-off. On December 19, 2001, the last
full trading day before the public announcement of the AT&T Comcast transaction,
Comcast Class A common stock and Comcast Class A Special common stock closed at
$38.09 and $38.07, respectively, and AT&T common stock closed at $16.80. On May
13, 2002, the last full trading day before the date of this document, Comcast
Class A common stock and Comcast Class A Special common stock closed at $31.03
and $29.09, respectively, and AT&T common stock closed at $13.70.
STOCK EXCHANGE LISTINGS (SEE PAGE XV-15)
The shares of AT&T Comcast Class A common stock, AT&T Comcast Class A
Special common stock and, if the Alternative Structure is implemented, AT&T
Comcast Class C common stock issued in connection with the AT&T Comcast
transaction will be quoted on The Nasdaq Stock Market under the ticker symbols
"CMCSA," "CMCSK" and, if applicable, "CMCSJ," respectively.
APPRAISAL RIGHTS (SEE PAGE II-23)
Holders of Comcast Class A common stock, Comcast Class A Special common
stock and AT&T common stock are not entitled to appraisal rights in connection
with the AT&T Comcast transaction.
I-18
AT&T CONSUMER SERVICES GROUP TRACKING STOCK
THE CONSUMER SERVICES CHARTER AMENDMENT PROPOSAL
AT&T shareholders are being asked to approve an amendment to the AT&T
charter to authorize AT&T to create a new class of AT&T common stock -- AT&T
Consumer Services Group tracking stock -- and certain related benefit plan
proposals. The Consumer Services charter amendment proposal requires the
affirmative vote of holders of a majority of the outstanding shares of AT&T
common stock.
AT&T Consumer Services Group tracking stock is intended to reflect the
separate performance of AT&T Consumer Services Group, which includes the assets
and liabilities shown in the combined balance sheets of AT&T Consumer Services
Group. AT&T will include within AT&T Consumer Services Group all net income or
net losses generated by the assets that comprise AT&T Consumer Services Group
and all net proceeds from any disposition of these assets.
If AT&T Consumer Services Group tracking stock is issued and if the AT&T
Comcast transaction is completed, AT&T common stock will effectively act as
tracking stock for AT&T Business Services Group plus any retained portion of
AT&T Consumer Services Group.
TERMS OF AT&T CONSUMER SERVICES GROUP TRACKING STOCK
The proposed Consumer Services charter amendment would authorize AT&T to
issue up to 500 million shares of AT&T Consumer Services Group tracking stock.
We describe some of the most significant terms of AT&T Consumer Services Group
tracking stock below, but we include a more detailed description of AT&T
Consumer Services Group tracking stock later in this document.
Voting Rights. Each share of AT&T Consumer Services Group tracking stock
will initially have one vote per share. If AT&T completes the AT&T Broadband
spin-off or otherwise distributes one or more entities holding all or
substantially all of the assets of its broadband business to its
securityholders, each share of AT&T Consumer Services Group tracking stock will
initially have 2.5 votes per share. If the reverse stock split proposal is
approved and implemented, AT&T Consumer Services Group tracking stock would have
...2 of a vote per share if the AT&T Broadband separation is not completed or .5
of a vote per share if the AT&T Broadband separation is completed. Except as
required by law or by any special voting rights of any other class or series of
AT&T stock, holders of shares of AT&T Consumer Services Group tracking stock
will vote together with all other AT&T shareholders on matters presented to AT&T
shareholders.
Dividends. Holders of AT&T Consumer Services Group tracking stock will be
entitled to dividends only to the extent declared by the AT&T Board. AT&T's
charter will define an available dividend amount with respect to AT&T Consumer
Services Group tracking stock. The available dividend amount is designed to be
equivalent to an allocable portion of the amount that would legally be available
for the payment of dividends by AT&T Consumer Services Group plus an amount
equal to its net income available to common shareowners for the year in which
the dividend is declared and/or the prior year, determined in each case as if it
were a separate legal entity.
Dividends on AT&T Consumer Services Group tracking stock may only be paid
up to the applicable amounts described above and also will be subject to the
legal capacity of AT&T as a whole to pay dividends. Subject to these limitations
and to the discretion of the AT&T Board, AT&T currently expects to pay dividends
on AT&T Consumer Services Group tracking stock equal in the aggregate to
two-thirds of the aggregate annual dividend AT&T currently pays on AT&T common
stock, and to pay dividends on AT&T common stock equal to one-third of the
aggregate annual current dividend. The aggregate annual current dividend paid on
AT&T common stock is $0.15 per share.
Redemption. AT&T may, or, in some cases, is required to, redeem shares of
AT&T Consumer Services Group tracking stock under a number of circumstances, in
each case without the approval of holders of AT&T Consumer Services Group
tracking stock:
- At any time, AT&T may redeem shares of AT&T Consumer Services Group
tracking
I-19
stock for a comparable tracking stock of any company that owns
substantially all the assets and liabilities allocated to AT&T Consumer
Services Group at that time without the payment of any premium.
- At any time, AT&T may redeem the shares of AT&T Consumer Services Group
tracking stock for shares of AT&T common stock having a market value
equal to 110% of the market value of AT&T Consumer Services Group
tracking stock.
- At any time, AT&T may redeem shares of AT&T Consumer Services Group
tracking stock for shares of one or more subsidiaries that hold all
material assets and liabilities allocated to AT&T Consumer Services
Group, as long as the redemption is tax free to shareholders. This would
result in a split-off of AT&T Consumer Services Group.
- With some exceptions, in the event of certain dispositions of all or
substantially all the assets of AT&T Consumer Services Group, AT&T is
generally required to redeem shares of AT&T Consumer Services Group
tracking stock for (1) shares of AT&T common stock or (2) cash and/or
property in an amount equal to the net proceeds of the disposition that
are allocable to AT&T Consumer Services Group tracking stock.
Liquidation. In the event of a liquidation of AT&T, holders of AT&T
Consumer Services Group tracking stock and AT&T common stock will be entitled to
share in the funds available for distribution to AT&T common shareholders in
proportion to the relative market capitalization of the outstanding shares of
each class of AT&T stock.
ISSUANCE OF AT&T CONSUMER SERVICES GROUP TRACKING STOCK
If the AT&T Consumer Services Group tracking stock proposal is approved,
AT&T plans to distribute these shares as a dividend to holders of AT&T common
stock at such time as AT&T determines that there is sufficient market
receptivity and support for such a distribution. AT&T has not yet determined the
timing of the distribution, which may be made within a year of shareholder
approval or may be made thereafter, depending on market conditions. AT&T expects
that, when it distributes AT&T Consumer Services Group tracking stock, it will
distribute shares intended to reflect all of the financial performance and
economic value of AT&T Consumer Services Group.
NOTWITHSTANDING AT&T'S CURRENT PLANS, THE AT&T BOARD COULD DECIDE NOT TO
PROCEED WITH THE PROPOSAL, COULD ISSUE SHARES REPRESENTING LESS THAN ALL OF THE
FINANCIAL PERFORMANCE AND ECONOMIC VALUE OF AT&T CONSUMER SERVICES GROUP, OR
COULD PROCEED AT A TIME OR IN A MANNER DIFFERENT FROM ITS CURRENT INTENTIONS.
AT&T's plans may change, for example, if the AT&T Board decides that market
conditions and receptivity warrant such a change or do not support a
distribution of shares of AT&T Consumer Services Group tracking stock. If the
AT&T Consumer Services Group tracking stock proposal is approved, the AT&T Board
will have the ability to issue shares of AT&T Consumer Services Group tracking
stock at such time, in such amount and in such manner as it determines
appropriate.
Approval of the Consumer Services charter amendment proposal will give the
AT&T Board wide discretion on how to implement the Consumer Services charter
amendment proposal. If you do not want to give the AT&T Board this authority
with respect to implementing the Consumer Services charter amendment proposal,
you should not vote for the proposal.
If AT&T Consumer Services Group tracking stock is issued and if the AT&T
Comcast transaction is completed, AT&T intends the AT&T common stock to reflect
only the financial performance and economic value of AT&T Business Services
Group, together with AT&T's retained portion, if any, of the value of AT&T
Consumer Services Group, although there is no assurance that it will.
AT&T expects to list AT&T Consumer Services Group tracking stock on a
national securities exchange or quotation system.
REASONS FOR AT&T CONSUMER SERVICES GROUP TRACKING STOCK
AT&T believes that issuance of AT&T Consumer Services Group tracking stock
will improve shareholder value by creating separate
I-20
classes of stock, AT&T believes that AT&T Consumer Services Group tracking stock
will:
- allow AT&T shareholders to view more clearly the performance of each of
AT&T Consumer Services Group and AT&T Business Services Group, and to
evaluate each of AT&T Consumer Services Group's and AT&T Business
Services Group's results against those of its competitors; and
- enable AT&T shareholders and other investors to invest in the securities
that fit their needs and investment profiles without the requirement of
simultaneously investing in other businesses, and permit the creation of
more effective management incentive and retention programs.
For additional reasons for, and more detail on the reasons for, AT&T
Consumer Services Group tracking stock, see "AT&T Consumer Services Group
Tracking Stock -- Reasons for AT&T Consumer Services Group Tracking Stock."
U.S. FEDERAL INCOME TAX CONSIDERATIONS
AT&T expects the distribution of AT&T Consumer Services Group tracking
stock to holders of AT&T common stock to be tax free to AT&T and to holders of
AT&T common stock.
RECENT FINANCIAL RESULTS
For information on Comcast's earnings for the quarter ended March 31, 2002,
please see the Current Report on Form 8-K filed by Comcast with the SEC on May
3, 2002, which is incorporated by reference into this document.
For information on AT&T's earnings for the quarter ended March 31, 2002,
please see the Current Report on Form 8-K filed by AT&T with the SEC on April
25, 2002, which is incorporated by reference into this document.
I-21
SELECTED FINANCIAL DATA OF COMCAST CORPORATION
The following summary consolidated financial data is derived from Comcast's
audited consolidated financial statements. You should read the financial data
presented below in conjunction with the consolidated financial statements,
accompanying notes and management's discussion and analysis of results of
operations and financial condition of Comcast, which are incorporated by
reference into this document.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues........................................ $ 9,674.2 $ 8,218.6 $ 6,529.2 $ 5,419.0 $ 4,700.4
Operating income (loss)......................... (746.2) (161.0) 664.0 557.1 466.6
Income (loss) from continuing operations before
extraordinary items and cumulative effect of
accounting change............................. 225.6 2,045.1 780.9 1,007.7 (182.9)
Gain (loss) from discontinued operations(1)..... 335.8 (31.4) (25.6)
Cumulative effect of accounting change.......... 384.5
Extraordinary items............................. (1.5) (23.6) (51.0) (4.2) (30.2)
Net income (loss)............................... 608.6 2,021.5 1,065.7 972.1 (238.7)
BASIC EARNINGS (LOSS) FOR COMMON STOCKHOLDERS
PER COMMON SHARE(2):
Income (loss) from continuing operations before
extraordinary items and cumulative effect of
accounting change............................. $ .24 $ 2.27 $ 1.00 $ 1.34 $ (.29)
Gain (loss) from discontinued operations(1)..... .45 (.04) (.04)
Cumulative effect of accounting change.......... .40
Extraordinary items............................. (.03) (.07) (.01) (.04)
--------- --------- --------- --------- ---------
Net income (loss)............................... $ .64 $ 2.24 $ 1.38 $ 1.29 $ (.37)
========= ========= ========= ========= =========
DILUTED EARNINGS (LOSS) FOR COMMON STOCKHOLDERS
PER COMMON SHARE(2):
Income (loss) from continuing operations before
extraordinary items and cumulative effect of
accounting change............................. $ .23 $ 2.16 $ .95 $ 1.25 $ (.29)
Gain (loss) from discontinued operations(1)..... .41 (.03) (.04)
Cumulative effect of accounting change.......... .40
Extraordinary items............................. (.03) (.06) (.01) (.04)
--------- --------- --------- --------- ---------
Net income (loss)............................... $ .63 $ 2.13 $ 1.30 $ 1.21 $ (.37)
========= ========= ========= ========= =========
Cash dividends declared per common share(2)..... $ .0467 $ .0467
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets.................................... $38,131.8 $35,744.5 $28,685.6 $14,710.5 $11,234.3
Working capital................................. 1,419.5 1,670.9 4,771.6 2,497.0 13.6
Long-term debt(3)............................... 11,741.6 10,517.4 8,707.2 5,464.2 5,334.1
Total debt(3)................................... 12,201.8 10,811.3 9,224.7 5,577.7 5,466.4
Stockholders' equity............................ 14,473.0 14,086.4 10,341.3 3,815.3 1,646.5
I-22
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Debt ratio(4)................................... 45.7% 43.4% 47.1% 59.4% 76.9%
SUPPLEMENTARY FINANCIAL DATA:
Operating income before depreciation and
amortization(5)............................... 2,701.8 $ 2,470.3 $ 1,880.0 $ 1,496.7 $ 1,293.1
Net cash provided by (used in)(6)
Operating activities.......................... 1,229.5 1,219.3 1,249.4 1,067.7 844.6
Financing activities.......................... 1,476.3 (271.4) 1,341.4 809.2 283.9
Investing activities.......................... (3,007.3) (1,218.6) (2,539.3) (1,415.3) (1,045.8)
Capital expenditures............................ 2,181.7 1,636.8 893.8 898.9 795.5
- ---------------
(1) In July 1999, Comcast sold Comcast Cellular Corporation to SBC
Communications, Inc. Comcast Cellular is presented as a discontinued
operation for all periods presented.
(2) Adjusted for Comcast's two-for-one stock split in the form of a 100%
stock dividend in May 1999.
(3) Includes a $666.0 million adjustment to carrying value at December 31,
1999.
(4) Debt ratio reflects debt from continuing operations as a percent of
capital (debt plus stockholders' equity).
(5) Operating income before depreciation and amortization is commonly
referred to in Comcast's businesses as "operating cash flow." Operating
cash flow is a measure of a company's ability to generate cash to
service its obligations, including debt service obligations, and to
finance capital and other expenditures. In part due to the capital
intensive nature of Comcast's businesses and the resulting significant
level of non-cash depreciation and amortization expense, operating cash
flow is frequently used as one of the bases for comparing businesses in
Comcast's industries, although Comcast's measure of operating cash flow
may not be comparable to similarly titled measures of other companies.
Operating cash flow is the primary basis used by Comcast's management
to measure the operating performance of its businesses. Operating cash
flow does not purport to represent net income or net cash provided by
operating activities, as those terms are defined under generally
accepted accounting principles, and should not be considered as an
alternative to those measurements as an indicator of Comcast's
performance.
(6) This represents net cash provided by (used in) operating activities,
financing activities and investing activities as presented in Comcast's
consolidated statement of cash flows.
I-23
SELECTED FINANCIAL DATA OF AT&T CORP. AND SUBSIDIARIES
The consolidated income statement data below for the three years ended
December 31, 2001, and the consolidated balance sheet data at December 31, 2001
and 2000, were derived from audited consolidated financial statements. The
remaining data was derived from AT&T's unaudited consolidated financial
statements.
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
2001 2000(1) 1999(2) 1998 1997
-------- -------- -------- -------- --------
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
RESULTS OF OPERATIONS AND EARNINGS PER SHARE:
Revenue............................................... $ 52,550 $ 55,533 $ 54,973 $ 47,817 $ 46,910
Operating income...................................... 3,754 4,228 11,458 7,632 6,835
(Loss) income from continuing operations before
cumulative effect of accounting change.............. (6,842) 4,133 3,861 5,052 4,088
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF ACCOUNTING CHANGE:
AT&T Common Stock Group:
(Loss) income....................................... (4,131) 2,645 5,883 5,052 4,088
(Loss) earnings per basic share..................... (1.33) 0.76 1.91 1.89 1.53
(Loss) earnings per diluted share................... (1.33) 0.75 1.87 1.87 1.53
Dividends declared per share........................ 0.15 0.6975 0.88 0.88 0.88
Liberty Media Group(3):
(Loss) income....................................... (2,711) 1,488 (2,022) -- --
(Loss) earnings per basic and diluted share......... (1.05) 0.58 (0.80) -- --
ASSETS AND CAPITAL:
Property, plant and equipment, net.................... $ 41,322 $ 41,269 $ 33,366 $ 21,780 $ 19,177
Total assets -- continuing operations................. 165,282 207,136 146,094 40,134 41,029
Total assets.......................................... 165,282 234,360 163,457 54,185 55,797
Long-term debt........................................ 40,527 33,089 23,214 5,555 7,840
Total debt............................................ 53,485 64,927 35,694 6,638 11,895
Mandatorily redeemable preferred securities........... 2,400 2,380 1,626 -- --
Shareowners' equity................................... 51,680 103,198 78,927 25,522 23,678
Debt ratio(4)......................................... 47.7% 57.2% 54.3% 36.7% 57.2%
Gross capital expenditures............................ 8,388 10,462 11,194 6,871 6,065
- ---------------
(1) AT&T Common Stock Group continuing operations results exclude Liberty Media
Group (LMG). In addition, on June 15, 2000, AT&T completed the acquisition
of MediaOne Group, Inc.
(2) In connection with the March 9, 1999 merger with Tele-Communications, Inc.,
AT&T issued separate tracking stock for LMG. LMG was accounted for as an
equity investment prior to its split-off from AT&T on August 10, 2001.
(3) No dividends have been declared for LMG tracking stocks.
(4) Debt ratio reflects debt from continuing operations as a percent of total
capital (debt plus equity, excluding LMG and AT&T Wireless Group). For
purposes of this calculation, equity includes convertible quarterly trust
preferred securities as well as redeemable preferred stock of subsidiary.
I-24
SELECTED FINANCIAL DATA OF AT&T BROADBAND GROUP
Presented in the table below is selected historical financial data of AT&T
Broadband Group. AT&T Broadband Group is an integrated business of AT&T and not
a stand-alone entity. AT&T Broadband Group represents the assets, liabilities
and businesses that AT&T will assign and transfer to AT&T Broadband Corp., a
newly formed holding company for AT&T's broadband business, in connection with
the AT&T Comcast transaction. AT&T Broadband Group consists primarily of the
assets, liabilities and business of AT&T Broadband, LLC (formerly TCI), acquired
by AT&T on March 9, 1999, and MediaOne Group, Inc., acquired by AT&T on June 15,
2000.
The combined income statement data for the years ended December 31, 2001
and 2000 and the ten months ended December 31, 1999 and the combined balance
sheet data at December 31, 2001 and 2000 were derived from the audited combined
financial statements of AT&T Broadband Group. The remaining data was derived
from unaudited combined financial statements.
The financial data presented below is not necessarily comparable from
period to period as a result of several transactions, including the acquisition
and dispositions of cable systems, primarily the TCI and MediaOne acquisitions.
For this and other reasons, you should read the selected historical financial
data provided below in conjunction with the combined financial statements and
accompanying notes beginning on page XII-78 and the discussion under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page VI-1.
TEN MONTHS
ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
------------------------ ------------
2001 2000(1) 1999(2)
---------- ---------- ------------
(UNAUDITED)
(DOLLARS IN MILLIONS)
INCOME STATEMENT DATA:
Revenue..................................................... $ 10,132 $ 8,445 $ 5,080
Operating loss.............................................. (4,183) (8,656) (1,177)
Loss before cumulative effect of accounting change.......... (4,171) (5,370) (2,200)
BALANCE SHEET DATA:
Total assets................................................ $103,187 $117,534 $58,228
Total debt.................................................. $ 23,285 $ 28,420 $14,900
Minority interest........................................... $ 3,302 $ 4,421 $ 2,327
Company-Obligated Convertible Quarterly Income Preferred
Securities................................................ $ 4,720 $ 4,710 $ 4,700
- ---------------
(1) Effective June 15, 2000, AT&T acquired MediaOne Group, Inc. which is
attributed to AT&T Broadband Group. The acquisition was accounted for under
the purchase method of accounting.
(2) Effective March 1, 1999, AT&T acquired TCI which is attributed to AT&T
Broadband Group. The acquisition was accounted for under the purchase method
of accounting.
I-25
SELECTED PRO FORMA FINANCIAL DATA
This information is only a summary and you should read it together with the
financial information we included elsewhere in this document.
AT&T COMCAST
The following unaudited pro forma combined condensed financial data set
forth below for AT&T Comcast gives effect to the AT&T Comcast transaction, as if
such transaction had been completed on January 1, 2001 for income statement
purposes and at December 31, 2001 for balance sheet purposes. The unaudited
selected pro forma financial data does not necessarily represent what AT&T
Comcast's financial position or results of operations would have been had the
AT&T Comcast transaction occurred on such dates.
We have included detailed unaudited pro forma combined condensed financial
statements in Chapter 3 of this document.
SUMMARY PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(Unaudited)
(Dollars in Millions, Except Per Share Amounts)
AT OR FOR THE
YEAR ENDED
DECEMBER 31,
-----------------
2001
-----------------
INCOME STATEMENT DATA:
Revenues.................................................... $ 19,697.3
Operating loss.............................................. $ (3,069.8)
Loss before extraordinary items and cumulative effect of
accounting change......................................... $ (3,026.4)
Weighted average AT&T Comcast common shares
outstanding-basic......................................... 2,248.4
Loss per AT&T Comcast common share.......................... $ (1.35)
BALANCE SHEET DATA:
Total assets................................................ $140,774.9
Long-term debt, less current portion........................ $ 31,528.6
Total stockholders' equity.................................. $ 61,741.8
I-26
SELECTED PRO FORMA FINANCIAL DATA
AT&T
The unaudited pro forma combined condensed financial data set forth below
for AT&T give effect to:
- the Liberty Media Group distribution
- the AT&T Broadband Group distribution
as if such events had been completed on January 1, 1999 for income statement
purposes, and at December 31, 2001 for balance sheet purposes. Since Liberty
Media Group was split-off from AT&T on August 10, 2001, no balance sheet pro
forma adjustments were made for Liberty Media Group. The unaudited selected pro
forma financial information does not necessarily represent what AT&T's financial
position or results of operations would have been had the AT&T Broadband
distribution or the Liberty Media Group distribution occurred on such dates.
We have included detailed unaudited pro forma financial statements in
Chapter 12 of this document.
SUMMARY PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(Unaudited)
(Dollars in Millions, Except Per Share Amounts)
AT AND FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2001 2000 1999
------- ------- -------
INCOME STATEMENT DATA:
Revenue..................................................... $42,665 $47,204 $49,925
Operating income............................................ 7,937 12,884 12,635
(Loss) income from continuing operations -- attributable to
AT&T common stock group................................... (3,475) 3,903 3,450
Weighted average AT&T common shares -- basic................ 3,695 3,526 3,115
(Loss) earnings per AT&T common share -- basic(1)........... (0.94) 1.11 1.11
Weighted average AT&T common shares -- diluted.............. 3,695 3,545 3,152
(Loss) earnings per AT&T common share -- diluted(1)......... (0.94) 1.10 1.09
Cash dividends declared per AT&T common share............... $ 0.15 $0.6975 $ 0.88
BALANCE SHEET DATA:
Total assets................................................ $62,257
Long-term debt.............................................. 24,025
Total shareowners' equity................................... 9,242
- ---------------
(1) Adjusted for the proposed one-for-five reverse stock split of AT&T common
stock, (loss) earnings per basic share would have been $(4.70), $5.53 and
$5.54 for the years ended December 31, 2001, 2000 and 1999, respectively.
(Loss) earnings per diluted share on the same basis would have been $(4.70),
$5.50 and $5.47 for the years ended December 31, 2001, 2000 and 1999,
respectively.
I-27
UNAUDITED COMPARATIVE PER SHARE DATA
In the table below, we provide you with historical per share information
for Comcast, pro forma per share information for AT&T Comcast and historical and
pro forma equivalent per share information for AT&T Broadband Group as of and
for the year ended December 31, 2001. We have assumed, for purposes of the AT&T
Comcast pro forma financial information, that the AT&T Comcast transaction had
been completed on January 1, 2001 for income statement purposes, and that the
AT&T Comcast transaction had been completed on December 31, 2001 for balance
sheet purposes. Comcast did not pay dividends during the year ended December 31,
2001; therefore no historical or pro forma equivalent per share information is
presented.
At December 31, 2001, AT&T Broadband Group did not have any shares
outstanding as it represents an integrated business of AT&T. As a step in the
AT&T Comcast transaction, AT&T will spin off AT&T Broadband to its shareholders
by distributing one share of AT&T Broadband common stock for each share of AT&T
common stock, NYSE symbol "T," outstanding. The following comparative per share
information assumes that 3,542 million shares of AT&T Broadband common stock
were outstanding in 2001, which represents the number of shares of AT&T common
stock, NYSE symbol "T," outstanding on December 31, 2001.
Assuming Comcast retains its AT&T shares and converts them into
exchangeable preferred stock of AT&T as contemplated by the merger agreement,
the exchange ratio would be approximately 0.35 as of the date of this document.
The AT&T Broadband Group pro forma equivalent per share data presents AT&T
Comcast pro forma per share data multiplied by an exchange ratio of 0.35.
It is important that when you read this information, you read it along with
the financial statements and accompanying notes of Comcast, AT&T and AT&T
Broadband Group incorporated by reference into this document or included
elsewhere in this document. You should not rely on the unaudited pro forma
financial information as an indication of the results of operations or financial
position that would have been achieved if the AT&T Comcast transaction had taken
place on the dates indicated or of the results of operations or financial
position of AT&T Comcast after the completion of the AT&T Comcast transaction.
AT&T BROADBAND
COMCAST AT&T COMCAST AT&T BROADBAND GROUP PRO FORMA
HISTORICAL PRO FORMA GROUP HISTORICAL EQUIVALENT
---------- ------------ ---------------- ---------------
Book Value per common share:
December 31, 2001................... $ 15.31 $ 27.52 $11.90 $ 9.63
Income (loss) before extraordinary
items and cumulative effect of
accounting change per share -- basic
for the year ended December 31,
2001............................. $ 0.24 $ (1.35) $(1.18) $(0.47)
Income (loss) before extraordinary
items and cumulative effect of
accounting change per
share -- diluted
for the year ended December 31,
2001............................. $ 0.23 $ (1.35) $(1.18) $(0.47)
I-28
COMPARATIVE MARKET PRICE INFORMATION
Shares of Comcast Class A Special common stock are listed on The Nasdaq
Stock Market under the symbol "CMCSK" and shares of Comcast Class A common stock
are listed on The Nasdaq Stock Market under the symbol "CMCSA." The Comcast
Class B common stock is not publicly traded. AT&T Broadband Group has been an
integrated business of AT&T and its common stock is not publicly traded. The
following table sets forth, for the periods indicated, the high and low sales
prices paid per share of Comcast Class A Special common stock and Comcast Class
A common stock, as furnished by The Nasdaq Stock Market, and dividends paid on
such classes of common stock, as adjusted for Comcast's two-for-one stock split
in the form of a 100% stock dividend in May 1999. For current price information,
you should consult publicly available sources.
COMCAST CLASS A SPECIAL COMCAST CLASS A
COMMON STOCK COMMON STOCK
--------------------------- ---------------------------
DIVIDENDS DIVIDENDS
CALENDAR PERIOD HIGH LOW PAID HIGH LOW PAID
- --------------- ------ ------ --------- ------ ------ ---------
1999
First Quarter........................ $38.56 $29.63 $.0117 $37.34 $28.94 $.0117
Second Quarter....................... 42.00 29.44 39.69 28.38
Third Quarter........................ 41.56 32.63 38.56 29.44
Fourth Quarter....................... 56.50 35.69 53.13 32.06
2000
First Quarter........................ $54.56 $38.31 $51.44 $36.25
Second Quarter....................... 44.19 29.75 41.75 29.75
Third Quarter........................ 41.06 31.06 40.69 30.75
Fourth Quarter....................... 43.94 34.00 43.94 33.88
2001
First Quarter........................ $45.88 $38.69 $45.25 $38.06
Second Quarter....................... 45.50 39.50 44.75 38.88
Third Quarter........................ 43.30 32.51 42.70 32.79
Fourth Quarter....................... 40.18 35.19 40.06 34.95
2002
First Quarter........................ $37.33 $29.65 $37.13 $30.10
Second Quarter (Through May 13)...... 32.36 25.65 33.75 27.14
The following table sets forth the high and low sales prices per share of
Comcast Class A Special common stock and Comcast Class A common stock, as
furnished by The Nasdaq Stock Market, on July 6, 2001, the last full trading day
before Comcast publicly announced its proposal to AT&T to acquire AT&T's
broadband business, on December 19, 2001, the last full trading day prior to the
public announcement of the AT&T Comcast transaction, and on May 13, 2002, the
last full trading day for which this information could be calculated prior to
the date of this document:
COMCAST CLASS A
SPECIAL COMMON COMCAST CLASS A
STOCK COMMON STOCK
--------------- ---------------
HIGH LOW HIGH LOW
------ ------ ------ ------
July 6, 2000............................................... $42.79 $42.08 $42.09 $41.46
December 19, 2001.......................................... 39.15 37.75 39.13 37.80
May 13, 2002............................................... 29.29 28.49 31.06 30.30
I-29
RISK FACTORS
RISK FACTORS RELATING TO THE AT&T COMCAST TRANSACTION
In addition to the other information contained in or incorporated by
reference in this document, you should carefully consider the following risk
factors in deciding whether to vote for your transaction proposal and the AT&T
Comcast charter proposal.
Merger Consideration Subject to Adjustment Only in Limited
Circumstances. Upon completion of the mergers, all shares of Comcast common
stock and AT&T Broadband common stock will be converted into shares of AT&T
Comcast common stock. Except as described in the next paragraph, the exchange
ratios applicable to the mergers are fixed, and the per share number of shares
of AT&T Comcast common stock to be issued to Comcast shareholders in the Comcast
merger and to AT&T Broadband shareholders in the AT&T Broadband merger will not
be adjusted to reflect the economic performance of either Comcast or AT&T
Broadband between the date of the execution of the merger agreement and the
completion of the mergers. Accordingly, a Comcast shareholder or AT&T Broadband
shareholder will not receive any additional shares of AT&T Comcast common stock
in the mergers if the economic performance of its company improves relative to
the economic performance of the other company between the date of the execution
of the merger agreement and the completion of the mergers.
AT&T Comcast will issue up to 1.235 billion shares of AT&T Comcast common
stock to holders of AT&T Broadband common stock in the AT&T Broadband merger,
excluding 115 million shares to be issued to an affiliate of Microsoft in the
Microsoft transaction described in this document and assuming that AT&T Comcast
is not required to make any additional payments of AT&T Comcast common stock in
connection with the AT&T Comcast transaction. The number of shares of AT&T
Comcast common stock that AT&T Comcast will issue in the AT&T Broadband merger
to each holder of AT&T Broadband common stock in exchange for each of such
holder's shares of AT&T Broadband common stock (the "AT&T Broadband exchange
ratio") will be calculated pursuant to the formula included in "Description of
the AT&T Comcast Transaction Agreements -- The Merger Agreement -- Calculation
of the AT&T Broadband Exchange Ratio." Assuming that AT&T Comcast is not
required to make any of the additional payments of AT&T Comcast common stock
described herein, if the AT&T Broadband exchange ratio were determined as of the
date of this document, the AT&T Broadband exchange ratio would be approximately
0.35. However, since the AT&T Broadband exchange ratio is calculated by
reference to the number of shares of AT&T Broadband common stock outstanding at
the completion of the AT&T Comcast transaction, the value of the employee stock
options and stock appreciation rights held by current employees of AT&T
Broadband and former employees of AT&T and AT&T Broadband at the completion of
the AT&T Comcast transaction and the number of shares of AT&T common stock held
by Comcast immediately prior to the record date for the AT&T Broadband spin-off,
the exchange ratio will change if any of these variables change after the date
of this document. Accordingly, holders of AT&T Broadband common stock may
receive less than approximately 0.35 of a share of AT&T Comcast common stock in
exchange for each of their shares of AT&T Broadband common stock in the AT&T
Broadband merger. The actual exchange ratio may vary from the 0.35 estimate
calculated as of the date of this document. For example, if Comcast were to sell
all of its shares of AT&T common stock prior to the record date for the AT&T
Broadband spin-off and if AT&T were to issue the maximum number of shares it is
permitted to issue under the merger agreement, the exchange ratio, determined as
of the date of this document and otherwise using then current information but
giving effect to such sales and issuances, would be approximately 0.32 shares of
AT&T Comcast common stock for each share of AT&T Broadband common stock.
AT&T Comcast May Fail to Realize the Anticipated Benefits of the AT&T
Comcast Transaction. The AT&T Comcast transaction will combine two companies
that have previously operated separately. Comcast and AT&T Broadband expect to
realize cost savings and other financial and operating benefits as a result of
the AT&T Comcast transaction. However, Comcast and AT&T Broadband cannot predict
with certainty when these cost savings and benefits will occur, or the extent to
which they actually will be achieved. There are a large number of systems that
must be integrated, including management
I-30
information, purchasing, accounting and finance, sales, billing, payroll and
benefits and regulatory compliance. The integration of Comcast and AT&T
Broadband will also require substantial attention from management. The diversion
of management attention and any difficulties associated with integrating Comcast
and AT&T Broadband could have a material adverse effect on AT&T Comcast's
operating results and on the value of AT&T Comcast common stock.
Regulatory Agencies May Impose Conditions on Approvals Relating to the
Mergers. Before the AT&T Comcast transaction may be completed, various
approvals must be obtained from, or notifications submitted to, among others,
the Antitrust Division of the U.S. Department of Justice, the Federal Trade
Commission, the FCC, the Internal Revenue Service and numerous state and local
authorities. These governmental entities may attempt to condition their approval
of the AT&T Comcast transaction, or of the transfer to AT&T Comcast of licenses
and other entitlements, on the imposition of certain conditions that could have
a material adverse effect on AT&T Comcast's operating results and on the value
of AT&T Comcast common stock.
Comcast and AT&T have agreed to use their best efforts to obtain all
regulatory approvals that are necessary or advisable in connection with the AT&T
Comcast transaction. In addition, Comcast and AT&T have also agreed to take all
actions necessary to obtain termination of the applicable waiting periods under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 relating to the AT&T
Comcast transaction and to obtain all consents of the FCC required to complete
the AT&T Comcast transaction.
AT&T Comcast Will Have to Abide by Restrictions to Preserve the Tax
Treatment of the AT&T Comcast Transaction. Because of the limitations imposed
by Section 355(e) of the Internal Revenue Code of 1986, as amended, or the
"Code," and by the separation and distribution agreement, the ability of AT&T
Comcast and AT&T Broadband to engage in certain acquisitions, redeem stock or
issue equity securities will be limited for a period of 25 months following the
AT&T Broadband spin-off. See "Description of the AT&T Comcast Transaction
Agreements -- The Separation and Distribution Agreement -- Post-Spin-off
Transactions." These restrictions may prevent AT&T Comcast from entering into
transactions which might be advantageous to its shareholders, such as issuing
equity securities to satisfy its financing needs or acquiring businesses or
assets by issuing equity securities.
AT&T Comcast and its Subsidiaries May Not Be Able to Obtain the Necessary
Financing At All or on Terms Acceptable to it. To complete the AT&T Comcast
transaction, Comcast estimates it will require financing of $11 billion to $14
billion, assuming that the Microsoft transaction is completed. This financing is
expected to include (1) approximately $9 billion to $10 billion to retire the
intercompany debt balance which AT&T Broadband is expected to owe AT&T upon
completion of the AT&T Comcast transaction, (2) approximately $1 billion to $2
billion to refinance certain AT&T Broadband debt that may be put for redemption
by investors or that will mature on or soon after the completion of the AT&T
Comcast transaction and (3) approximately $1 billion to $2 billion to provide
appropriate cash reserves to fund the operations and capital expenditures of
AT&T Broadband after completion of the AT&T Comcast transaction.
On May 3, 2002, AT&T Broadband and AT&T Comcast entered into definitive
credit agreements with a syndicate of lenders, including JPMorgan Chase Bank,
Citibank, N.A., Bank of America, N.A., Merrill Lynch Capital Corporation and
Morgan Stanley Senior Funding, Inc. for an aggregate of approximately $12.8
billion in new indebtedness in order to satisfy these financing requirements.
See "-- Description of New Credit Facilities." Comcast may also use other
available sources of financing to fund its requirements, including existing
cash, cash equivalents and short term investments, amounts available under
Comcast subsidiaries' lines of credit, and the proceeds of sales of Comcast's
and AT&T Broadband's investments.
Under the terms of the new credit agreements referred to above, the
obligations of the lenders to provide the financing upon completion of the AT&T
Comcast transaction are subject to a number of conditions, including the
condition that AT&T Comcast obtain an investment-grade credit rating. It is
possible that AT&T Comcast will not obtain an investment-grade credit rating or
that other of the conditions to borrowing may not be satisfied. If the
conditions to borrowing are not satisfied, and if other
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sources of financing are not sufficient or available, Comcast may not be able to
obtain the necessary financing. If Comcast fails to obtain the necessary
financing or fails to obtain it on acceptable terms, such failure could have a
material adverse effect on the business and financial condition of AT&T Comcast
and its subsidiaries. If Comcast is unable to obtain the necessary financing, it
may be forced to consider other alternatives to raise the necessary funds,
including sales of assets. There can be no assurance that Comcast will be able
to obtain the necessary financing at all or on terms acceptable to it.
AT&T Comcast and its Subsidiaries Will Have Significant Debt and Debt-like
Obligations and May Not Obtain Investment-Grade Credit Ratings. After
completion of the AT&T Comcast transaction, AT&T Comcast and its subsidiaries
will have a significant amount of debt and debt-like obligations. Although this
amount will be reduced by $5 billion if the Microsoft transaction described in
this document is completed, the credit ratings of AT&T Comcast and its
subsidiaries after completion of the AT&T Comcast transaction may be lower than
the existing credit ratings of Comcast, AT&T's principal broadband subsidiaries
and their respective subsidiaries. In addition, it is possible that neither AT&T
Comcast nor any of its subsidiaries that issue debt may obtain an
investment-grade credit rating. The likelihood of lower or non-investment-grade
credit ratings for AT&T Comcast and its subsidiaries after completion of the
AT&T Comcast transaction will be increased if the Microsoft transaction
described in this document, which is not a condition to the completion of the
AT&T Comcast transaction, is not completed. Differences in credit ratings would
affect the interest rates charged on financings, as well as the amounts of
indebtedness, types of financing structures and debt markets that may be
available to AT&T Comcast and its subsidiaries. In addition, the failure of
certain subsidiaries of AT&T Comcast to maintain certain credit ratings during
the period that is 90 days before and after the completion of the AT&T Comcast
transaction could trigger put rights on the part of holders of up to
approximately $4.8 billion of debt as of the date of this document, which would
require AT&T Comcast to obtain additional financing. Accordingly, a downgrade in
the existing credit ratings of Comcast, AT&T's principal broadband subsidiaries
and their respective subsidiaries or the failure of AT&T Comcast and its
subsidiaries to obtain investment-grade credit ratings, in each case upon
completion of the AT&T Comcast transaction, could have a material adverse effect
on AT&T Comcast's operating results and on the value of AT&T Comcast common
stock.
The Voting Power of AT&T Comcast's Principal Shareholder May Discourage
Third Party Acquisitions of AT&T Comcast at a Premium. After completion of the
AT&T Comcast transaction, Brian L. Roberts will have significant control over
the operations of AT&T Comcast through his control of Sural LLC, which as a
result of its ownership of all outstanding shares of AT&T Comcast Class B common
stock will hold a nondilutable 33 1/3% of the combined voting power of AT&T
Comcast stock and will also have separate approval rights over certain material
transactions involving AT&T Comcast. See "Certain Legal Information --
Description of AT&T Comcast Capital Stock -- AT&T Comcast Class B Common Stock."
In addition, upon completion of the AT&T Comcast transaction, Brian L. Roberts
will be the CEO and President of AT&T Comcast and will, together with the
Chairman of the Board of AT&T Comcast, comprise the Office of the Chairman, AT&T
Comcast's principal executive deliberative body. The extent of Brian L.
Roberts's control over AT&T Comcast may have the effect of discouraging offers
to acquire control of AT&T Comcast and may preclude holders of AT&T Comcast
common stock from receiving any premium above market price for their shares that
may be offered in connection with any attempt to acquire control of AT&T
Comcast.
The Historical Financial Information of AT&T Broadband Group After the AT&T
Broadband Spin-off May Not Be Representative of its Results Without the Other
AT&T Businesses and Therefore Is Not a Reliable Indicator of Its Historical or
Future Results. AT&T Broadband Group is currently a fully integrated business
unit of AT&T; consequently, the financial information of AT&T Broadband Group
included in this document has been derived from the consolidated financial
statements and accounting records of AT&T and reflects certain assumptions and
allocations. The financial position, results of operations and cash flows of
AT&T Broadband Group without the other AT&T businesses could differ from those
that would have resulted had AT&T Broadband Group operated with the other AT&T
businesses.
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Shares of AT&T Comcast Issued in the AT&T Broadband Merger May Not Be
Included in the Standard & Poor's 500 Index. In the merger agreement, each of
AT&T, Comcast and AT&T Comcast agreed to use its reasonable best efforts to have
the shares issued to holders of AT&T Broadband common stock in the AT&T
Broadband merger included in the Standard & Poor's 500 Index. However, the
decision as to whether or not these securities are included in the index will be
made by Standard & Poor's, Inc. and they may decide not to include them. If
these securities are not included in that index, there could be downward
pressure on the trading prices of those securities. Although in some cases AT&T
Comcast will issue additional shares to former shareholders of AT&T Broadband if
there is a trading disparity between the shares of AT&T Comcast Class A Special
common stock issued in the Comcast merger and the shares of AT&T Comcast common
stock issued in the AT&T Broadband merger, the number of shares AT&T Comcast is
required to issue is limited and is calculated as of a set time and as a result
may not adequately compensate shareholders for any downward price pressure
resulting from the failure of these securities to be included in that index. For
more information, see "Description of the AT&T Comcast Transaction
Agreements -- The Merger Agreement -- Merger Consideration -- Potential
Additional Payments."
If The Transaction With Microsoft Corporation Is Not Completed, AT&T
Comcast May Have Significant Additional Debt and More Stringent Limitations On
Its Ability To Issue Equity. The AT&T Comcast transaction is not conditioned on
completion of the transaction with Microsoft Corporation described in this
document. If the Microsoft transaction is not completed, as described under
"Description of the AT&T Comcast Transaction Agreements -- The Merger
Agreement -- Covenants -- QUIPS Failure," AT&T Broadband will either assume
AT&T's obligations to Microsoft under the trust preferred securities, or QUIPS,
issued by AT&T Finance Trust I or pay AT&T an amount in cash equal to the fair
market value of the QUIPS and indemnify AT&T for certain possible related
liabilities. Absent selling assets or stock to pay down debt and depending on
which outcome occurs, AT&T Comcast and its subsidiaries would have up to an
additional $5 billion of debt upon completion of the AT&T Comcast transaction
and the risks detailed in two of the preceding risk factors -- that AT&T Comcast
and its subsidiaries may not be able to obtain the necessary financing at all or
on terms acceptable to it and that AT&T Comcast and its subsidiaries will have
significant debt and debt-like obligations and may not obtain investment-grade
credit ratings -- would be significantly heightened. In addition, if the
Microsoft transaction is not completed, the limitations imposed by Section
355(e) of the Code on AT&T Comcast's and AT&T Broadband's ability to issue
equity that are described above would be expected to be more stringent.
Atypical Governance Arrangements May Make It More Difficult for
Shareholders to Act. In connection with the AT&T Comcast transaction, AT&T
Comcast will implement a number of governance arrangements that are atypical for
a large, publicly held corporation. A number of these arrangements relate to the
election of the AT&T Comcast Board. The term of the AT&T Comcast Board upon
completion of the AT&T Comcast transaction will not expire until the 2004 annual
meeting of AT&T Comcast shareholders. Since AT&T Comcast shareholders will not
have the right to call special meetings of shareholders or act by written
consent and AT&T Comcast directors will be able to be removed only for cause,
AT&T Comcast shareholders will not be able to replace the initial AT&T Comcast
Board members prior to that meeting. After the 2004 annual meeting of AT&T
Comcast shareholders, AT&T Comcast directors will be elected annually. Even
then, however, it will be difficult for an AT&T Comcast shareholder, other than
Sural LLC or a successor entity controlled by Brian L. Roberts, to elect a slate
of directors of its own choosing to the AT&T Comcast Board. Brian L. Roberts,
through his control of Sural LLC or a successor entity, will hold a 33 1/3%
nondilutable voting interest in AT&T Comcast stock. In addition, AT&T Comcast
will adopt a shareholder rights plan upon completion of the AT&T Comcast
transaction that will prevent any holder of AT&T Comcast stock, other than any
holder of AT&T Comcast Class B common stock or any of such holder's affiliates,
from acquiring AT&T Comcast stock representing more than 10% of AT&T Comcast's
voting power without the approval of the AT&T Comcast Board.
I-33
In addition to the governance arrangements relating to the AT&T Comcast
Board, Comcast and AT&T have agreed to a number of governance arrangements which
will make it difficult to replace the senior management of AT&T Comcast. Upon
completion of the AT&T Comcast transaction, C. Michael Armstrong, Chairman of
the Board and CEO of AT&T, will be the Chairman of the Board of AT&T Comcast and
Brian L. Roberts, President of Comcast, will be the CEO and President of AT&T
Comcast. After the 2005 annual meeting of AT&T Comcast shareholders, Brian L.
Roberts will also be the Chairman of the Board of AT&T Comcast. Prior to the
sixth anniversary of the 2004 annual meeting of AT&T Comcast shareholders,
unless Brian L. Roberts ceases to be Chairman of the Board or CEO of AT&T
Comcast prior to such time, the Chairman of the Board and CEO of AT&T Comcast
will be able to be removed only with the approval of at least 75% of the entire
AT&T Comcast Board. This supermajority removal requirement will make it unlikely
that C. Michael Armstrong or Brian L. Roberts will be removed from their
management positions.
For a more detailed description of these and other AT&T Comcast governance
arrangements that will be in effect upon completion of the AT&T Comcast
transaction, see "Description of Governance Arrangements Following the AT&T
Comcast Transaction."
If AT&T Shareholders and Comcast Shareholders Do Not Approve the AT&T
Comcast Charter Proposal, the AT&T Comcast Transaction Will Not Be
Completed. AT&T and Comcast are asking their respective shareholders to approve
separately the AT&T Comcast charter proposal, including the corporate governance
arrangements contained in the AT&T Comcast charter. Approval of the AT&T Comcast
charter proposal is a condition to completion of the AT&T Comcast transaction.
Therefore, if AT&T shareholders or Comcast shareholders do not approve the AT&T
Comcast charter proposal, the AT&T Comcast transaction will not be completed. If
AT&T shareholders and Comcast shareholders wish to approve the AT&T Comcast
transaction, they must also approve the AT&T Comcast charter proposal.
Directors of Comcast and AT&T Have Potential Conflicts of Interest that May
Have Influenced Their Recommendations. A number of directors of Comcast and
AT&T who recommend that you vote in favor of the AT&T Comcast transaction have
interests in the AT&T Comcast transaction that are different from, or in
addition to, yours. Upon completion of the AT&T Comcast transaction, C. Michael
Armstrong, Chairman of the Board and Chief Executive Officer of AT&T, will
become Chairman of the Board of AT&T Comcast and Brian L. Roberts, President of
Comcast, will become Chief Executive Officer and President of AT&T Comcast. As
noted above, removal of these officers from their positions will require the
approval of at least 75% of the entire AT&T Comcast Board. Also upon completion
of the AT&T Comcast transaction, five of the existing members of each of the
Comcast Board and AT&T Board will become members of the AT&T Comcast Board.
Their term as directors will not expire until the 2004 annual meeting of AT&T
Comcast shareholders. Furthermore, in connection with the AT&T Comcast
transaction, a number of Comcast and AT&T directors will receive funding of
benefits in trust, employment agreements with AT&T Comcast, acceleration of
vesting of AT&T Broadband stock options and other equity-based awards and the
right to continued indemnification and insurance coverage by AT&T Comcast for
acts or omissions occurring prior to the AT&T Comcast transaction. These
interests may have influenced these directors in making their recommendation
that you vote in favor of the AT&T Comcast transaction. For a description of
these interests, see "Employee Benefits Matters -- Interests of Directors and
Officers in the AT&T Comcast Transaction."
AT&T Comcast Does Not Currently Intend to Pay Dividends. AT&T shareholders
have historically received quarterly dividends from AT&T. AT&T Comcast does not
currently intend to pay dividends after completion of the AT&T Comcast
transaction.
The Absence of an Historical Trading Market Creates Uncertainty about
Future Trading Prices. As AT&T and Comcast complete the AT&T Comcast
transaction, shares of AT&T Comcast common stock will begin trading publicly for
the first time. Until an orderly trading market for AT&T Comcast common stock
develops, and after that time as well, there may be significant fluctuations in
price.
Future Sales of Shares of AT&T Common Stock and AT&T Comcast Common Stock
May Materially Adversely Affect Trading Prices. There are a variety of
potential future transactions that could result in
I-34
sales of shares of AT&T common stock before or after the completion of the AT&T
Comcast transaction or of shares of AT&T Comcast common stock after the
completion of the AT&T Comcast transaction. Depending on the timing and size of
these sales, the trading prices of these securities could be materially
adversely affected. The trading prices could also be affected by the perception
that those sales might occur. Potential transactions include the following:
- Shares of substantially all the AT&T Comcast common stock issued in the
AT&T Comcast transaction (including shares issued upon the exercise of
any options or other equity based awards) will be freely tradeable after
the completion of the AT&T Comcast transaction. See also "-- Shares of
AT&T Comcast Issued in the AT&T Broadband Merger May Not Be Included in
the Standard & Poor's 500 Index."
- As described under "Description of AT&T Business Services
Group -- International -- AT&T Canada," AT&T currently intends to raise
cash to settle a substantial portion of its AT&T Canada back end purchase
requirement through the issuance of equity or equity-like securities. It
is likely that AT&T will take steps to raise such funds through the
issuance of these equity or equity-like securities and AT&T currently is
evaluating commencing such issuance in the near future. Subject to the
limitations on the number of shares that can be issued that are set forth
in the merger agreement, AT&T could issue these securities at any time by
use of a currently effective shelf registration statement. The maximum
aggregate number of shares of AT&T common stock AT&T is permitted to
issue under the merger agreement prior to the completion of the AT&T
Comcast transaction pursuant to the transactions described in this bullet
point and in the last bullet point is 275 million.
- Comcast currently has approximately 83.5 million shares of AT&T common
stock. The merger agreement provides that these shares will not
participate in the AT&T Broadband spin-off but will instead be
effectively concentrated into shares of AT&T common stock after the
completion of the AT&T Comcast transaction. However, as permitted by the
merger agreement, Comcast may dispose of some or all of its shares of
AT&T common stock before or after the shareholder meetings or before or
after completion of the AT&T Comcast transaction. In addition, as
described under "Description of the AT&T Comcast Transaction
Agreements -- The Merger Agreement -- Covenants -- Covenant Regarding
Comcast's AT&T Stock," AT&T Comcast will be required to dispose of shares
of AT&T common stock within one year of the completion of the AT&T
Comcast transaction to the extent necessary so that its ownership of AT&T
common stock will not exceed 5% of the outstanding shares of AT&T common
stock.
- AT&T made an offer to certain active and former employees, as well as
active and former non-employee directors, to relinquish certain deferred
compensation benefits in exchange for a single payment to be made in
shares of AT&T common stock with a value equal to 90% of the present
value of such individual's future benefits. The election period has
expired. As a result of this offer, AT&T is required to issue AT&T common
stock with a value of approximately $220 million, subject to certain
contingencies. The actual number of shares of AT&T common stock, if any,
to be issued would depend on the trading prices of AT&T common stock over
a specified trading period. Virtually all shares issued in connection
with this offer will be freely tradeable.
Additional Risk Factors. For a description of additional risk factors, see
"The AT&T Comcast Transaction -- Comcast's Reasons for the AT&T Comcast
Transaction" and "The AT&T Comcast Transaction -- AT&T's Reasons for the AT&T
Comcast Transaction."
RISK FACTORS FOR AT&T RELATING TO THE AT&T COMCAST TRANSACTION, INCLUDING THE
PROPOSED AT&T BROADBAND SPIN-OFF
Holders of shares of AT&T common stock should also consider the following
risk factors in deciding whether to vote for approval and adoption of the merger
agreement and the transactions contemplated by the merger agreement, including
the AT&T Broadband spin-off.
I-35
The AT&T Broadband Spin-off May Materially Adversely Impact AT&T's
Competitive Position. If the AT&T Comcast transaction is completed, AT&T and
AT&T Comcast will compete in some markets. Competition between AT&T's and AT&T
Comcast's business units in overlapping markets, including consumer markets
where cable, telephone and digital subscriber lines, or DSL, solutions may be
available at the same time, could result in material downward price pressure on
product or service offerings which could materially adversely impact the
companies. In addition, any incremental costs associated with operating as
separate entities may materially adversely affect the different businesses and
companies and their competitive positions. Synergies resulting from cooperation
and joint ownership among AT&T's businesses may be lost due to the proposed
transactions.
AT&T Will Have to Abide By Potentially Significant Restrictions to Preserve
the Tax Treatment of the AT&T Comcast Transaction. Because of the restrictions
imposed by Section 355(e) of the Code and by the separation and distribution
agreement, the ability of AT&T to engage in certain acquisitions, redeem stock
or issue equity securities will be limited for a period of 25 months following
the AT&T Broadband spin-off. These restrictions may prevent AT&T from entering
into transactions which might be advantageous to its shareholders, such as
issuing equity securities to satisfy its financing needs or acquiring businesses
or assets by issuing equity securities.
The AT&T Comcast Transaction is Conditioned on AT&T Obtaining Consents
Under a Substantial Amount of Indebtedness, Which May Involve Material Costs and
May Be Difficult to Complete. The AT&T Comcast transaction is conditioned on
AT&T's obtaining Note Consents, as described below, or having defeased,
purchased, retired or acquired debt, in respect of series representing at least
90% in aggregate principal amount of the securities issued under the AT&T
indenture, dated September 7, 1990, and outstanding as of December 19, 2001. At
December 19, 2001, there was approximately $12.7 billion in aggregate principal
amount of debt issued under that indenture. "Note Consent" means, with respect
to any series of securities issued under the indenture, the consent to the
transactions contemplated by the separation and distribution agreement of
holders of at least a majority in aggregate principal amount of such series to
the AT&T Broadband spin-off. AT&T may seek to obtain these consents through a
variety of measures. Although AT&T Comcast has agreed to bear a portion of the
related costs, the consent process and any related transaction may result in
increased costs for, and additional covenants imposed upon, AT&T. In addition,
the consent process itself involves a number of uncertainties and AT&T may not
be able to complete it on a timely basis on commercially reasonable terms. AT&T
and Comcast are exploring a variety of alternatives to satisfy this condition,
including the possibility of offering to exchange new bonds of AT&T Broadband
for one or more series of AT&T's existing long-term debt. To the extent any
bonds were so exchanged, there would be an appropriate reduction in the amount
of intercompany indebtedness AT&T Broadband would be required to repay to AT&T
at the closing.
AT&T and Comcast could mutually agree to waive this condition with respect
to all or any portion of any indebtedness for which consents are not obtained.
In the event that AT&T and Comcast elect to waive the condition with respect to
any portion of this indebtedness, if bondholders were to assert successfully
that completing the AT&T Broadband spin-off requires their consent, AT&T would
be required to refinance the indebtedness. Depending on the amount of such
indebtedness, market conditions and other factors, this could have a material
adverse effect on AT&T and its financial condition.
If the AT&T Comcast Transaction is Completed, AT&T Will Need to Obtain
Financing on a Stand-Alone Basis Which May Involve Costs. Following the AT&T
Comcast transaction, AT&T will have to raise financing with the support of a
reduced pool of less diversified assets, and AT&T may not be able to secure
adequate debt or equity financing on desirable terms. The cost to AT&T of
financing without AT&T Broadband Group may be materially higher than the cost of
financing with AT&T Broadband Group as part of AT&T.
AT&T's current long-term/short-term debt ratings are A-3/P-2 by Moody's,
BBB+/A-2 by Standard & Poor's, and A-/F-2 by Fitch. All long-term ratings are
under further review for further downgrade. The short-term ratings are not under
review. The credit rating of AT&T following the AT&T Comcast transaction may be
different than the historical ratings of AT&T and different from what it
I-36
would be without the AT&T Comcast transaction. Differences in credit ratings
affect the interest rate charged on financings, as well as the amounts of
indebtedness, types of financing structures and debt markets that may be
available to AT&T following the AT&T Comcast transaction. AT&T may not be able
to raise the capital it requires on favorable terms following the AT&T Comcast
transaction.
The Historical Financial Information of AT&T Excluding AT&T Broadband Group
May Not Be Representative of its Results Without AT&T Broadband Group and
therefore is Not a Reliable Indicator of its Historical or Future Results. AT&T
currently includes AT&T Broadband Group as a fully integrated business unit of
AT&T; consequently the financial information of AT&T without AT&T Broadband
Group included in this document has been derived from the consolidated financial
statements and accounting records of AT&T and reflects certain assumptions and
allocations. The financial position, results of operations and cash flows of
AT&T without AT&T Broadband Group could differ from those that would have
resulted had AT&T operated without AT&T Broadband Group or as an entity
independent of AT&T Broadband Group.
AT&T Could Incur Material U.S. Federal Income Tax Liabilities in Connection
with the AT&T Comcast Transaction. AT&T may incur material U.S. federal income
tax liabilities as a result of certain issuances of shares or change of control
transactions with respect to AT&T Comcast, Liberty Media Corporation or AT&T
Wireless Services, Inc. Under Section 355(e) of the Code, a split-off/spin-off
that is otherwise tax free may be taxable to the distributing company (i.e.,
AT&T) if, as a result of certain transactions occurring generally within a
two-year period after the split-off/spin-off, non-historic shareholders acquire
50% or more of the distributing company or the spun-off company. It is possible
that transactions with respect to AT&T could cause all three split-offs or
spin-offs to be taxable to AT&T.
Under separate intercompany agreements between AT&T and each of Liberty
Media Corporation, AT&T Wireless and AT&T Broadband Corp., AT&T generally will
be entitled to indemnification from the spun-off company for any tax liability
that results from the split-off or spin-off failing to qualify as a tax-free
transaction, unless, in the case of AT&T Wireless and AT&T Comcast, the tax
liability was caused by post split-off or spin-off transactions with respect to
the stock or assets of AT&T. AT&T Comcast's indemnification obligation is
generally limited to 50% of any tax liability that results from the split-off or
spin-off failing to qualify as tax free, unless such liability was caused by a
post split-off or spin-off transaction with respect to the stock or assets of
AT&T Comcast.
If one or more of the split-offs or spin-offs were taxable to AT&T and AT&T
were not indemnified for this tax liability, the liability could have a material
adverse effect on AT&T. To the extent AT&T is entitled to an indemnity with
respect to the tax liability, AT&T would be required to collect the claim on an
unsecured basis. In addition, there may be other tax costs incurred as a result
of the AT&T Broadband spin-off. If incurred, these costs could be significant to
AT&T and AT&T Broadband.
The Total Value of the Securities Following the AT&T Comcast Transaction
Might be Less Than the Value of AT&T Common Stock Without the AT&T Comcast
Transaction. If AT&T completes the AT&T Comcast transaction, holders of AT&T
common stock that do not dispose of those shares of AT&T common stock eventually
will own a new security -- shares of AT&T Comcast -- in addition to their shares
of AT&T common stock. The aggregate value of the shares of AT&T Comcast and of
the shares of AT&T common stock securities could be less than what the value of
AT&T common stock would have been if the AT&T Comcast transaction were not
completed. The trading price of AT&T common stock may decline as a result of the
AT&T Comcast transaction or as a result of other factors.
As AT&T completes the AT&T Comcast transaction, shares of AT&T Comcast will
begin trading publicly for the first time. Until orderly trading markets develop
for each of these new securities, and after that time as well, there may be
significant fluctuations in price.
RISK FACTORS RELATING TO THE BUSINESS OF AT&T COMCAST
Actual Financial Position and Results of Operations of AT&T Comcast May
Differ Significantly and Adversely From the Pro Forma Amounts Reflected in this
Document. Assuming completion of the AT&T
I-37
Comcast transaction, the actual financial position and results of operations of
AT&T Comcast may differ, perhaps significantly and adversely, from the pro forma
amounts reflected in the AT&T Comcast Corporation Unaudited Pro Forma Combined
Condensed Financial Statements included in this document due to a variety of
factors, including access to additional information, changes in value not
currently identified and changes in operating results between the date of the
pro forma financial data and the date on which the AT&T Comcast transaction is
completed.
In addition, in many cases each of Comcast and AT&T Broadband Group has
long-term agreements, in some cases with the same counterparties, for the same
services and products, such as programming, billing services and interactive
programming guides. Comcast and AT&T Broadband Group cannot disclose the terms
of many of these contracts to each other because of confidentiality provisions
included in these contracts or other legal restrictions. For this and other
reasons, it is not clear, in the case of certain services and products, whether
after completion of the AT&T Comcast transaction each of the existing agreements
will continue to apply only to the operations to which they have historically
applied or whether instead one of the two contracts will apply to the operations
of both companies and the other contract will be terminated. Since these
contracts often differ significantly in their terms, resolution of these
contractual issues could cause the actual financial position and results of
operations of AT&T Comcast to differ significantly and adversely from the pro
forma amounts reflected in the AT&T Comcast Corporation Unaudited Pro Forma
Combined Condensed Financial Statements included in this document.
Programming Costs Are Increasing and AT&T Comcast May Not Have the Ability
to Pass These Increases on to Its Customers, Which Would Materially Adversely
Affect Its Cash Flow and Operating Margins. Programming costs are expected to
be AT&T Comcast's largest single expense item. In recent years, the cable and
satellite video industries have experienced a rapid increase in the cost of
programming, particularly sports programming. This increase is expected to
continue, and AT&T Comcast may not be able to pass programming cost increases on
to its customers. The inability to pass these programming cost increases on to
its customers would have a material adverse impact on its cash flow and
operating margins. In addition, as AT&T Comcast upgrades the channel capacity of
its systems and adds programming to its basic, expanded basic and digital
programming tiers, AT&T Comcast may face increased programming costs, which, in
conjunction with the additional market constraints on its ability to pass
programming costs on to its customers, may reduce operating margins.
AT&T Comcast also will be subject to increasing financial and other demands
by broadcasters to obtain the required consent for the transmission of broadcast
programming to its subscribers. Comcast and AT&T cannot predict the financial
impact of these negotiations or the effect on AT&T Comcast's subscribers should
AT&T Comcast be required to stop offering this programming.
AT&T Comcast Will Face a Wide Range of Competition in Areas Served by its
Cable Systems, Which Could Adversely Affect its Future Results of
Operations. AT&T Comcast's cable communications systems will compete with a
number of different sources which provide news, information and entertainment
programming to consumers. AT&T Comcast will compete directly with program
distributors and other companies that use satellites, build competing cable
systems in the same communities AT&T Comcast will serve or otherwise provide
programming and other communications services to AT&T Comcast's subscribers and
potential subscribers. In addition, federal law now allows local telephone
companies to provide directly to subscribers a wide variety of services that are
competitive with cable communications services. Some local telephone companies
provide, or have announced plans to provide, video services within and outside
their telephone service areas through a variety of methods, including broadband
cable networks.
Additionally, AT&T Comcast will be subject to competition from
telecommunications providers and ISPs in connection with offerings of new and
advanced services, including telecommunications and Internet services. This
competition may materially adversely affect AT&T Comcast's business and
operations in the future.
AT&T Comcast Will Have Substantial Capital Requirements Which May Require
it to Obtain Additional Financing that May Be Difficult to Obtain. AT&T Comcast
Expects that its Capital
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Expenditures Will Exceed, Perhaps Significantly, its Net Cash Provided by
Operations, Which May Require it to Obtain Additional Financing. Failure to
Obtain Necessary Financing Could Have a Material Adverse Effect on AT&T
Comcast. Comcast and AT&T anticipate that AT&T Comcast will upgrade a
significant portion of its broadband systems over the coming years and make
other capital investments, including with respect to its advanced services. In
2002, Comcast and AT&T anticipate that AT&T Broadband and Comcast's cable
division will incur capital expenditures of approximately $4.3 billion and $1.3
billion, respectively. AT&T Comcast is expected to incur substantial capital
expenditures in the years following completion of the AT&T Comcast transaction.
However, the actual amount of the funds required for capital expenditures cannot
be determined with precision at this time. Capital expenditures are expected to
be used to acquire equipment, such as set-top boxes, cable modems and telephone
equipment, and to pay for installation costs for additional video and advanced
services customers. In addition, capital is expected to be used to upgrade and
rebuild network systems to expand bandwidth capacity and add two-way capability
so that it may offer advanced services. There can be no assurance that these
amounts will be sufficient to accomplish the planned system upgrades, equipment
acquisitions and expansion.
Comcast and AT&T Broadband Group also have commitments under certain of
their franchise agreements with local franchising authorities to upgrade and
rebuild certain network systems. These commitments may require capital
expenditures in order to avoid default and/or penalties.
Historically, AT&T Broadband Group's capital expenditures have
significantly exceeded its net cash provided by operations. For the year ended
December 31, 2001, AT&T Broadband Group's capital expenditures exceeded its net
cash provided by operations by $3.5 billion. In addition, for the year ended
December 31, 2001, Comcast's capital expenditures exceeded its net cash provided
by operating activities by $952 million.
After completion of the AT&T Comcast transaction, AT&T and Comcast expect
that for some period of time AT&T Comcast's capital expenditures will exceed,
perhaps significantly, its net cash provided by operating activities. This may
require AT&T Comcast to obtain additional financing. AT&T Comcast may not be
able to obtain or to obtain on favorable terms the capital necessary to fund the
substantial capital expenditures described above that are required by its
strategy and business plan. A failure to obtain necessary capital or to obtain
necessary capital on favorable terms could have a material adverse effect on
AT&T Comcast and result in the delay, change or abandonment of AT&T Comcast's
development or expansion plans.
Entities that Will Be Included in AT&T Comcast Are Subject to Long-Term
Exclusive Agreements that May Limit Their Future Operating Flexibility and
Materially Adversely Affect AT&T Comcast's Financial Results. Entities
currently attributed to AT&T Broadband Group, and which will be subsidiaries of
AT&T Comcast, may be subject to long-term agreements relating to significant
aspects of AT&T Broadband Group's operations, including long-term agreements for
video programming, audio programming, electronic program guides, billing and
other services. For example, AT&T Broadband Group's predecessor, TCI, and AT&T
Broadband Group's subsidiary, Satellite Services, Inc., are parties to an
affiliation term sheet with Starz Encore Group, an affiliate of Liberty Media,
which extends to 2022 and provides for a fixed price payment, subject to
adjustment for various factors including inflation, and may require AT&T
Broadband to pay two-thirds of Starz Encore Group's programming costs above
levels designated in the term sheet. Satellite Services, Inc. also entered into
a ten-year agreement with TV Guide in January 1999 for interactive program guide
services, which designates TV Guide Interactive as the interactive programming
guide for AT&T Broadband systems. Furthermore, a subsidiary of AT&T Broadband is
party to an agreement that does not expire until December 31, 2012 under which
it purchases certain billing services from an unaffiliated third party. The
price, terms and conditions of the Starz Encore term sheet, the TV Guide
agreement and the billing agreement may not reflect the current market and if
one or more of these arrangements continue to apply to AT&T Broadband after
completion of the AT&T Comcast transaction, they may materially adversely impact
the financial performance of AT&T Comcast.
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By letter dated May 29, 2001, AT&T Broadband Group disputed the
enforceability of the excess programming pass through provisions of the Starz
Encore term sheet and questioned the validity of the term sheet as a whole. AT&T
Broadband Group also has raised certain issues concerning the uncertainty of the
provisions of the term sheet and the contractual interpretation and application
of certain of its provisions to, among other things, the acquisition and
disposition of cable systems. In July 2001, Starz Encore Group filed suit
seeking payment of the 2001 excess programming costs and a declaration that the
term sheet is a binding and enforceable contract. In October 2001, AT&T
Broadband Group and Starz Encore Group agreed to stay the litigation until
August 31, 2002 to allow the parties time to continue negotiations toward a
potential business resolution of this dispute. The Court granted the stay on
October 30, 2001. The terms of the stay order allow either party to petition the
Court to lift the stay after April 30, 2002 and to proceed with the litigation.
On March 13, 2002, AT&T Broadband Group informed CSG Systems, Inc. that
AT&T Broadband Group was considering the initiation of an arbitration against
CSG relating to a Master Subscriber Management System Agreement that the two
companies entered into in 1997. Pursuant to the Master Agreement, CSG provides
billing support to AT&T Broadband Group. On May 10, 2002, AT&T Broadband Group
filed a demand for arbitration against CSG before the American Arbitration
Association. In the event that this process results in the termination of the
Master Agreement, AT&T Broadband Group may incur significant costs in connection
with its replacement of these billing services and may experience temporary
disruptions to its operations.
AT&T Comcast Will Be Subject to Regulation by Federal, State and Local
Governments Which May Impose Costs and Restrictions. The federal, state and
local governments extensively regulate the cable communications industry.
Comcast and AT&T expect that court actions and regulatory proceedings will
refine the rights and obligations of various parties, including the government,
under the Communications Act of 1934, as amended. The results of these judicial
and administrative proceedings may materially affect AT&T Comcast's business
operations. Local authorities grant Comcast and AT&T Broadband franchises that
permit them to operate their cable systems. AT&T Comcast will have to renew or
renegotiate these franchises from time to time. Local franchising authorities
often demand concessions or other commitments as a condition to renewal or
transfer, which concessions or other commitments could be costly to obtain.
AT&T Comcast Will Be Subject to Additional Regulatory Burdens in Connection
With the Provision of Telecommunications Services, Which Could Cause It to Incur
Additional Costs. AT&T Comcast will be subject to risks associated with the
regulation of its telecommunications services by the FCC and state public
utilities commissions, or PUCs. Telecommunications companies, including
companies that have the ability to offer telephone services over the Internet,
generally are subject to significant regulation. This regulation could
materially adversely affect AT&T Comcast's business operations.
AT&T Comcast's Competition May Increase Because of Technological Advances
and New Regulatory Requirements, Which Could Adversely Affect its Future Results
of Operations. Numerous companies, including telephone companies, have
introduced Digital Subscriber Line technology, known as DSL, which provides
Internet access to subscribers at data transmission speeds equal to or greater
than that of modems over conventional telephone lines. Comcast and AT&T expect
other advances in communications technology, as well as changes in the
marketplace, to occur in the future. Other new technologies and services may
develop and may compete with services that cable communications systems offer.
The success of these ongoing and future developments could have a negative
impact on AT&T Comcast's business operations.
In addition, over the past several years, a number of companies, including
telephone companies and Internet Service Providers, known as ISPs, have asked
local, state, and federal governmental authorities to mandate that cable
communications operators provide capacity on their broadband infrastructure so
that these and others may deliver Internet and other interactive television
services directly to customers over these cable facilities. Some cable operators
have initiated litigation challenging municipal efforts to unilaterally impose
so-called "open access" requirements. The few court decisions dealing with this
issue
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have been inconsistent. Moreover, in connection with their review of the
AOL-Time Warner merger, the FCC and the Federal Trade Commission imposed "open
access", technical performance and other requirements related to the merged
company's Internet and Instant Messaging platforms. The FCC recently concluded
in a regulatory proceeding initiated by it to consider "open access" and related
regulatory issues that cable modem service, as it is currently offered, is
properly classified as an interstate information service that is not subject to
common carrier regulation but remains subject to the FCC's jurisdiction. The FCC
is seeking public comment regarding the regulatory implications of this
conclusion, including, among other things, whether it is appropriate to impose
"open access" requirements on these services or whether consumers will be able
to obtain a choice of ISPs without government intervention. A number of cable
operators have reached agreements to provide unaffiliated ISPs access to their
cable systems in the absence of regulatory requirements. Recently, Comcast
reached an "access" agreement with United Online and AT&T Broadband reached an
"access" agreement with each of EarthLink, Internet Central and Connected Data
Systems. In addition, under the terms of the exchange agreement that Comcast and
AT&T have executed with Microsoft, upon completion of the Microsoft transaction
described in this document and the AT&T Comcast transaction, AT&T Comcast will
be required, with respect to each such agreement with another ISP, to offer
Microsoft an "access" agreement on terms no less favorable than those provided
to the other ISP with respect to the specific cable systems covered under the
agreement with the other ISP. Notwithstanding the foregoing, there can be no
assurance that regulatory authorities will not impose "open access" or similar
requirements on AT&T Comcast as part of the regulatory review of the AT&T
Comcast transaction or as part of an industry-wide requirement. Such
requirements could have a negative impact on AT&T Comcast's business operations.
AT&T Comcast, Through AT&T Broadband, Will Have Substantial Economic
Interests in Joint Ventures in Which It Will Have Limited Management
Rights. AT&T Broadband Group is a partner in several large joint ventures, such
as Time Warner Entertainment, Texas Cable Partners and Kansas City Cable
Partners, in which it has a substantial economic interest but does not have
substantial control with regard to management policies or the selection of
management. These joint ventures may be managed in a manner contrary to the best
interests of AT&T Comcast, and the value of AT&T Comcast's investment, through
AT&T Broadband, in these joint ventures may be affected by management policies
that are determined without input from AT&T Comcast or over the objections of
AT&T Comcast. AT&T Broadband Group has cable partnerships with each of AOL Time
Warner, Insight Communications, Adelphia Communications, Midcontinent and US
Cable. Materially adverse financial or other developments with respect to a
partner could adversely impact the applicable partnership.
AT&T Broadband Faces Risks Arising from its and AT&T's Relationship with At
Home Corporation. Through a subsidiary, AT&T owns approximately 23% of the
outstanding common stock and 74% of the voting power of the outstanding common
stock of At Home Corporation, which filed for bankruptcy protection on September
28, 2001. Until October 1, 2001, AT&T appointed a majority of At Home's
directors and it now appoints none.
Since September 28, 2001, some creditors of At Home have threatened to
commence litigation against AT&T relating to the conduct of AT&T or its
designees on the At Home Board in connection with At Home's declaration of
bankruptcy and At Home's subsequent aborted efforts to dispose of some of its
businesses or assets in a bankruptcy court-supervised auction, as well as in
connection with other aspects of AT&T's relationship with At Home. The liability
for any such lawsuits would be shared equally between AT&T and AT&T Broadband.
No such lawsuits have been filed to date. However, on April 26, 2002, At Home
and its creditor committees filed a motion seeking to appoint At Home's
bondholders as representatives of At Home to pursue its claims against AT&T. On
May 1, 2002, At Home filed a draft proposed plan of liquidation pursuant to
Chapter 11 of the U.S. Bankruptcy Code, which, among other things, implements
the creditor's settlement and provides that all claims and causes of action of
the bankrupt estate of At Home against AT&T and other shareholders will be
transferred to a liquidating trust owned ratably by the bondholders of At Home
and funded with at least $12 million, and as much as $17 million, to finance the
litigation of those claims. The creditor settlement calls for confirmation of
the plan by July 31, 2002, and for the plan to be effective by August 30, 2002.
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In addition, purported class action lawsuits have been filed in California
state court on behalf of At Home shareholders against AT&T, At Home, Comcast and
former directors of At Home. The lawsuits claim that the defendants breached
fiduciary obligations of care, candor and loyalty in connection with a
transaction announced in March 2000 in which, among other things, AT&T, Cox and
Comcast agreed to extend existing distribution agreements, the At Home Board was
reorganized, and AT&T agreed to give Cox and Comcast rights to sell their At
Home shares to AT&T. These actions have been consolidated by the court and are
subject to a stay, which the plaintiffs are seeking to have lifted. The
liability for any such lawsuits would be shared equally between AT&T and AT&T
Broadband.
In March 2002 a purported class action was filed in the United States
District Court for the Southern District of New York against, among others, AT&T
and certain of its senior officers alleging violations of the federal securities
laws in connection with the disclosures made by At Home in the period from April
17, 2001 through August 28, 2001. Any liabilities resulting from this lawsuit
would be shared equally between AT&T and AT&T Broadband.
RISK FACTORS RELATING TO AT&T'S CREDIT RATING
The AT&T Comcast transaction, if implemented as proposed, would result in a
substantial reduction in AT&T's overall debt level. Nevertheless, the AT&T
Comcast transaction may not be completed and, even if it is completed, AT&T will
continue to have substantial indebtedness. As a result, AT&T shareholders should
consider the following additional risk.
The Financial Condition and Prospects of AT&T and the AT&T Groups May be
Materially Adversely Affected by Further Ratings Downgrades. In the fall of
2001, all of AT&T's long-term debt ratings were reduced and remain under review
for further downgrade. AT&T's current long-term ratings are A3 by Moody's, BBB+
by Standard & Poor's, and A- by Fitch. In addition, all three of AT&T's
short-term debt ratings were reduced in the fall of 2001, but are not under
further review. These ratings are currently P-2 by Moody's, A-2 by Standard and
Poor's, and F-2 by Fitch. Discussions with rating agencies are ongoing and
further ratings actions could occur at any time. As a result, the cost of any
new financings may be higher. Ratings downgrades by Moody's and Standard &
Poor's on the $10 billion AT&T global notes issued November 2001 would also
trigger an increase in the interest rate, by 25 basis points for each rating
notch downgraded, on these notes. Furthermore, with additional ratings
downgrades, AT&T may not have access to the commercial paper market sufficient
to satisfy its short-term borrowing needs. If necessary, AT&T could access its
short-term credit facilities which currently expire in December 2002 or increase
its borrowings under its securitization program.
In addition, AT&T's $10 billion global offering includes provisions that
would allow investors to require AT&T to repurchase the notes under certain
conditions as determined at the time of notification to bondholders. These
conditions include a maximum adjusted debt to EBITDA ratio (adjusted) for pro
forma AT&T excluding AT&T Broadband Group of no more than 2.75 times at
specified times and a minimum rating of these notes of no lower than Baa3 from
Moody's and BBB- from Standard and Poor's. If the ratings are Baa3 or BBB-, the
minimum rating requirement will be satisfied if the ratings are not under review
for downgrade or on CreditWatch with negative implications, respectively. If
AT&T is required to repurchase the notes, it may not be able to obtain
sufficient financing in the timeframe required. In addition, such replacement
financing may be more costly or have additional covenants than current debt.
To the extent that the combined outstanding short-term borrowings under the
bank credit facilities and AT&T's commercial paper program were to exceed the
market capacity for such borrowings at the expiration of the bank credit
facilities, AT&T's continued liquidity would depend upon its ability to reduce
such short-term debt through a combination of capital market borrowings, asset
sales, operational cash generation, capital expenditure reduction and other
means. AT&T's ability to achieve such objectives is subject to a risk of
execution and such execution could materially impact AT&T's operational results.
In addition, the cost of any capital market financing could be significantly in
excess of AT&T's historical financing costs. Also, AT&T could suffer negative
banking, investor, and public relations repercussions if
I-42
AT&T were to draw upon the bank facilities, which are intended to serve as a
back-up source of liquidity only. Such impacts could cause further deterioration
in AT&T's cost of and access to capital.
If AT&T's long term credit ratings were to be downgraded one notch by each
of Moody's and Standard and Poor's, AT&T's interest expense would increase by
$50 million annually on the $10 billion global offering. In addition, AT&T could
incur increased costs versus those expected at current rating levels in the
renewal of its credit facility and refinancings of approximately $5 billion of
debt over the next year. Assuming current market conditions and assumptions
regarding the type of financing available, the additional annualized cost
increases could approximate $100 million. Therefore, in total, a one notch
downgrade in AT&T's long term credit ratings could increase the annualized
interest expense by approximately $150 million. In addition, interest expense
could be higher in subsequent periods than it otherwise would have been as
additional maturing debt is replaced by debt with higher interest rate spreads
due to the lower credit ratings.
AT&T currently has an $8 billion 364-day term bank facility that expires
December 2002. This facility provides that AT&T will not spin off AT&T Broadband
unless after giving effect thereto AT&T's public debt rating for its long-term
senior debt is at least BBB+ by Standard & Poor's and Baa1 by Moody's and
certain other financial conditions are met. At this time, AT&T has not utilized
this facility. If AT&T does not satisfy these tests at the time, AT&T would be
required to replace or renegotiate the facility.
RISK FACTORS RELATING TO AT&T CONSUMER SERVICES GROUP TRACKING STOCK
Holders of shares of AT&T common stock should consider the following risk
factors in deciding whether to vote for approval of the AT&T Consumer Services
Group tracking stock proposal, which factors would arise if the AT&T Board
elected to issue AT&T Consumer Services Group tracking stock.
The Market Price of AT&T Consumer Services Group Tracking Stock May Not
Reflect the Financial Performance and Economic Value of AT&T Consumer Services
Group as Intended and May Not Effectively Track the Separate Performance of AT&T
Consumer Services Group. The market price of AT&T Consumer Services Group
tracking stock may not in fact reflect the financial performance and economic
value of AT&T Consumer Services Group as intended. Holders of AT&T Consumer
Services Group tracking stock will continue to be common shareholders of AT&T,
and, as such, will be subject to all risks associated with an investment in AT&T
and all of its businesses, assets and liabilities. The performance of AT&T as a
whole may affect the market price of AT&T Consumer Services Group tracking stock
or the market price could more independently reflect the performance of the
business of AT&T Consumer Services Group. Investors may discount the value of
AT&T Consumer Services Group tracking stock because it is part of a common
enterprise with the rest of the operations of AT&T rather than a stand-alone
entity.
The Combined Market Prices of AT&T Common Stock and AT&T Consumer Services
Group Tracking Stock May Not Equal or Exceed the Market Price of AT&T Common
Stock Before the Distribution of AT&T Consumer Services Group Tracking Stock; No
Market Currently Exists for AT&T Consumer Services Group Tracking Stock.
Investors may not assign values to AT&T common stock or AT&T Consumer Services
Group tracking stock based on the reported financial results and prospects of
the AT&T groups or the dividend policies established by the AT&T Board with
respect to that class of AT&T common stock.
Because there has been no prior market for AT&T Consumer Services Group
tracking stock, there can be no assurances as to how AT&T Consumer Services
Group tracking stock will trade or if an active market for AT&T Consumer
Services Group tracking stock will be maintained. In addition, AT&T does not
expect that shares of AT&T Consumer Services Group tracking stock will be
included in the Standard & Poor's 500 Index. The failure to be included in that
index could have an adverse effect on the market
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price of the shares. In addition, AT&T cannot predict the market impact of some
of the terms of AT&T Consumer Services Group tracking stock, such as:
- the relative voting rights of AT&T common stock and AT&T Consumer
Services Group tracking stock, and
- the discretion of the AT&T Board to make determinations affecting AT&T
Consumer Services Group tracking stock.
The AT&T Board Has the Flexibility to Treat AT&T Consumer Services Group
Tracking Stock a Number of Different Ways in the Event of a Future Merger or
Other Transaction Involving AT&T; the AT&T Board is Under No Obligation to
Select the Alternative that will Treat Holders Most Favorably.
The terms of AT&T Consumer Services Group tracking stock provide the AT&T
Board considerable flexibility in the event of a future merger or other
transaction involving AT&T. For example, depending on the circumstances, the
AT&T Board could, without the approval of holders of AT&T Consumer Services
Group tracking stock:
- exercise its right to redeem the shares of AT&T Consumer Services Group
tracking stock for shares of AT&T common stock at a 10% premium;
- roll over the shares of AT&T Consumer Services Group tracking stock into
a comparable tracking stock of a new entity;
- redeem the shares of AT&T Consumer Services Group tracking stock in
connection with a tax-free spin-off of AT&T Consumer Services Group; or
- redeem all or a portion of the shares of AT&T Consumer Services Group
tracking stock in exchange for the net after-tax proceeds of a
disposition of AT&T Consumer Services Group.
Holders of the shares of AT&T Consumer Services Group tracking stock could
receive consideration with very different values under each of the alternatives.
It is also possible that a particular alternative may not be available in
connection with a specific transaction. For example, AT&T may not be able to
structure a spin-off of AT&T Consumer Services Group on a tax-free basis at a
particular time.
In selecting an alternative, the AT&T Board will make its determination
based on what is in the best interests of all shareholders of AT&T as a whole.
The AT&T Board has no duty to select the alternative that will result in the
best economic treatment for holders of the shares of AT&T Consumer Services
Group tracking stock. For example, the selection of an alternative may depend on
whether it is advisable for AT&T to dispose of AT&T Consumer Services Group in
connection with a particular transaction. The terms of AT&T Consumer Services
Group tracking stock provide that to the extent permitted by law neither holders
of the shares of AT&T Consumer Services Group tracking stock nor holders of any
other class of common stock of AT&T will have any claim based on which
alternative the AT&T Board selects.
The Complex Nature of the Terms of AT&T Consumer Services Group Tracking
Stock, or Confusion in the Marketplace About What a Tracking Stock is, Could
Materially Adversely Affect the Market Prices of AT&T Consumer Services Group
Tracking Stock. Tracking stocks, like AT&T Consumer Services Group tracking
stock, are more complex than traditional common stock, and are not directly or
entirely comparable to common stock of companies that have been spun off by
their parent companies. The complex nature of the terms of AT&T Consumer
Services Group tracking stock, and the potential difficulties investors may have
in understanding these terms, may materially adversely affect the market price
of AT&T Consumer Services Group tracking stock. Examples of these terms include:
- the discretion of the AT&T Board to make determinations affecting AT&T
Consumer Services Group tracking stock,
- AT&T's rights in the event of a proposed spin-off or disposition of
substantially all the assets of AT&T Consumer Services Group,
I-44
- the ability of AT&T to roll AT&T Consumer Services Group tracking stock
over into a tracking stock of a new entity in the event of a merger or
other business combination, or
- the ability of AT&T to convert shares of AT&T Consumer Services Group
tracking stock into shares of AT&T common stock.
Confusion in the marketplace about what a tracking stock is and what it is
intended to represent, and/or investors' reluctance to invest in tracking
stocks, also could materially adversely affect the market price of AT&T Consumer
Services Group tracking stock.
Holders of AT&T Common Stock and AT&T Consumer Services Group Tracking
Stock Will Be Shareholders of One Company and, Therefore, Financial Impacts on
One AT&T Group Could Adversely Affect the Other AT&T Group. Holders of AT&T
common stock and AT&T Consumer Services Group tracking stock all will be common
shareholders of AT&T. As such, they will be subject to various risks associated
with an investment in a single company and all of AT&T's businesses, assets and
liabilities. Financial effects arising from one AT&T group that affect AT&T's
consolidated results of operations or financial condition could, if significant,
affect the combined results of operations or financial position of the other
AT&T group or the market price of the class of common shares relating to the
other AT&T group.
In addition, if AT&T or any of its subsidiaries were to incur significant
indebtedness on behalf of an AT&T group, including indebtedness incurred or
assumed in connection with an acquisition or investment, it could affect the
credit rating of AT&T and its subsidiaries. This, in turn, could increase the
borrowing costs of the other AT&T group and AT&T as a whole. Net losses of
either AT&T group and dividends or distributions on shares of any class of
common or preferred stock will reduce the funds of AT&T legally available for
payment of future dividends on each of AT&T common stock and AT&T Consumer
Services Group tracking stock. For these reasons, you should read AT&T's
consolidated financial information together with the financial information of
AT&T Consumer Services Group.
Holders of AT&T Consumer Services Group Tracking Stock will have Limited
Shareholder Rights, and Will Have No Additional Rights Specific to AT&T Consumer
Services Group, Including Direct Voting Rights. These Shareholders Will Have
Very Limited, if Any, Control Rights. Holders of AT&T Consumer Services Group
tracking stock will not have any direct voting rights in AT&T Consumer Services
Group, except to the extent required under AT&T's charter or by New York law.
AT&T will not hold separate meetings for holders of AT&T Consumer Services Group
tracking stock. When a vote is taken on any matter as to which all of AT&T's
common shares are voting together as one class, any class or series of AT&T's
common shares that is entitled to more than the number of votes required to
approve the matter being voted upon will be in a position to control the outcome
of the vote on that matter.
Each share of AT&T common stock has one vote per share. Each share of AT&T
Consumer Services Group tracking stock will initially have one vote per share.
If AT&T completes the AT&T Broadband spin-off or otherwise distributes one or
more entities holding all or substantially all of the assets of its Broadband
business to its securityholders, each share of AT&T Consumer Services Group
tracking stock will initially have 2.5 votes per share. If the reverse stock
split proposal is approved and implemented, the AT&T Consumer Services Group
tracking stock would have .2 of a vote per share if the Broadband separation is
not completed or .5 of a vote per share if the Broadband separation is
completed.
Holders of AT&T Consumer Services Group Tracking Stock May Have Potentially
Diverging Interests from Holders of Other Classes of AT&T Capital Stock, and
AT&T Board Decisions Could Affect These Holders Disparately and Adversely. The
existence of separate classes of AT&T common stock could give rise to occasions
when the interests of holders of AT&T common stock and holders of AT&T Consumer
Services Group tracking stock diverge, conflict or appear to diverge or
conflict. Examples include determinations by the AT&T Board to:
- set priorities for use of capital and debt capacity, including by loaning
the cash flow of AT&T Consumer Services Group to AT&T Business Services
Group, making it currently unavailable to support the growth and
operations of AT&T Consumer Services Group,
I-45
- pay or omit the payments of dividends on AT&T common stock or AT&T
Consumer Services Group tracking stock,
- approve dispositions of assets attributed to either AT&T group,
- formulate public policy positions for AT&T,
- establish material commercial relationships between the AT&T groups,
- make operational, financial and purchasing decisions with respect to one
AT&T group that could be considered to be detrimental to the other AT&T
group, and
- take positions on public policy or regulatory matters that benefit one
AT&T group more than the other AT&T group or that have disproportionate
impacts on the individual groups.
In addition, a percentage of AT&T's contingent liabilities that do not
primarily relate to the business, assets and liabilities of either AT&T Consumer
Services Group or AT&T's other businesses will be allocated to AT&T Consumer
Services Group. The AT&T Board will establish that percentage in its sole
discretion prior to the initial issuance of any shares of AT&T Consumer Services
Group tracking stock. This percentage may differ in the case of different
categories of contingent liabilities.
A Decision by the AT&T Board to Dispose of Assets Attributed to AT&T
Consumer Services Group Could have a Material Adverse Impact on the Trading
Price of AT&T Consumer Services Group Tracking Stock. Assuming AT&T Consumer
Services Group's assets at the applicable time continue to represent less than
substantially all of the assets of AT&T as a whole, the AT&T Board could, in its
sole discretion and without shareholder approval, approve sales and other
dispositions of all or any portion of the assets of AT&T Consumer Services
Group.
In the event of a disposition of all or substantially all of the properties
and assets attributed to AT&T Consumer Services Group, generally defined as 80%
or more of the fair value of AT&T Consumer Services Group, with several
exceptions, AT&T will be required under AT&T's charter to:
- convert each outstanding share of the affected tracking stock into shares
of AT&T common stock at a 10% premium, or
- distribute cash and/or securities, other than AT&T common stock, or other
property equal to the fair value of the net after-tax proceeds from that
disposition allocable to AT&T Consumer Services Group tracking stock, or
- take a combination of the actions described in the preceding bullet
points.
If a disposition of this type occurs, since holders may only receive an amount
determined by reference to net after-tax proceeds, the disposition could have a
material adverse impact on AT&T Consumer Services Group tracking stock.
The AT&T Board is not required to select the option that would result in
the distribution with the highest value to holders of AT&T Consumer Services
Group tracking stock.
In addition, under New York law, the AT&T Board could decline to dispose of
AT&T Consumer Services Group assets, even if a majority of holders of AT&T
Consumer Services Group tracking stock request this disposition.
AT&T May Make Operational and Financial Decisions that Benefit One AT&T
Group More than the Other AT&T Group. The AT&T Board could, in its sole
discretion, from time to time, make operational and financial decisions or
implement policies that affect disproportionately the businesses of either AT&T
group. These decisions could include:
- allocation of financing opportunities in the public markets or the
refinancing of existing indebtedness,
- allocation of business opportunities, resources and personnel,
I-46
- loans or other transfers of funds from one group to the other,
- transfers of services or assets between the AT&T groups and other
inter-group transactions, and
- purchasing decisions
that, in each case, may be suitable for one or both of the AT&T groups. Any of
these decisions may benefit one AT&T group more than the other AT&T group. For
example, the decision to obtain funds for one AT&T group may materially
adversely affect the ability of the other AT&T group to obtain funds sufficient
to implement its growth strategies or may increase the cost of those funds.
In addition, AT&T Consumer Services Group is subject to AT&T's existing
agreements or arrangements with third parties. These agreements or arrangements
currently may benefit both AT&T groups, as in the case of purchasing
arrangements, or may have the effect of limiting or impairing the AT&T groups'
respective business opportunities.
All of these decisions will be made by the AT&T Board in its good faith
business judgment, and in accordance with procedures and policies adopted by the
AT&T Board from time to time, including the AT&T Groups policy statement
described under "AT&T Consumer Services Group Tracking Stock -- Relationship
between the AT&T Groups -- The AT&T Groups Policy Statement."
The AT&T Board Will Have the Ability to Control Loans and Asset Transfers
between the AT&T Groups, and These Transactions May Have an Adverse Impact on
the Holders of AT&T Consumer Services Group Tracking Stock. The AT&T Board may
decide to transfer funds or other assets between AT&T groups. Transfers of
assets among the AT&T groups that the AT&T Board designates as an equity
contribution or repayment will result in a change in AT&T's retained portion of
the value of AT&T Consumer Services Group. Any change in the retained portion of
the value of AT&T Consumer Services Group would be determined by reference to
the then-current market value of AT&T Consumer Services Group tracking stock as
determined by the AT&T Board. This increase or decrease, however, could occur at
a time when AT&T Consumer Services Group tracking stock is considered
undervalued or overvalued.
Under the AT&T Groups policy statement, the AT&T groups may make loans to
each other at interest rates and on terms and conditions substantially
equivalent to the interest rates and terms and conditions that the AT&T groups
would be able to obtain from third parties without the benefit of support or
guarantee by AT&T. The actual rates of interest charged or paid by either of the
AT&T groups in the future is uncertain and will depend on a variety of factors,
including the credit profile of the AT&T group and market conditions. As a
result, future interest rates charged or paid by either of the AT&T groups may
materially exceed those reflected in the financial statements included elsewhere
in this document.
The AT&T Board May Change the AT&T Groups Policy Statement or Bylaw
Amendment Related to the AT&T Groups without Shareholder Approval. The AT&T
Board intends to adopt the AT&T Groups policy statement described in this
document to govern the relationship between AT&T groups and to amend AT&T's
bylaws to create the AT&T Groups capital stock committee that will oversee the
interaction between the AT&T groups. The AT&T Board may supplement, modify,
suspend or rescind the policies set forth in the AT&T Groups policy statement or
related bylaw amendment, or make additions or exceptions to them, in the sole
discretion of the AT&T Board, without approval of AT&T shareholders, although
there is no present intention to do so. The AT&T Board would make any of these
determinations, including any decision that would have disparate impacts upon
holders of AT&T common stock and AT&T Consumer Services Group tracking stock, in
a manner consistent with its fiduciary duties to AT&T and all of its common
shareholders as a whole. See "-- The fiduciary duties of the AT&T Board to more
than one class of common stock are not clear under New York law" for more
information regarding the AT&T Board's fiduciary duties to AT&T shareholders.
See "AT&T Consumer Services Group Tracking Stock -- Relationship between the
AT&T Groups" for a description of the AT&T Groups policy statement and bylaw
amendment.
It Will Likely Not Be Possible for a Third Party to Acquire AT&T Consumer
Services Group without AT&T's Consent Even if the Holders of the AT&T Consumer
Services Group Tracking Stock Desired to
I-47
Sell. If AT&T Consumer Services Group were an independent entity, any person
interested in acquiring that entity without negotiation with AT&T Consumer
Services Group's management could seek control of the outstanding stock of that
entity by means of a tender offer or proxy contest. Although the Consumer
Services charter amendment will create a new class of AT&T common stock that is
intended to reflect the separate financial performance and economic value of
AT&T Consumer Services Group, a person interested in acquiring only AT&T
Consumer Services Group without negotiation with AT&T's management still would
be required to seek control of the voting power represented by all of the
outstanding capital stock of AT&T entitled to vote on that acquisition,
including shares of AT&T common stock. As a result, this may discourage
potential interested bidders from seeking to acquire AT&T Consumer Services
Group. See "-- Holders of AT&T Consumer Services Group Tracking Stock Will Have
Limited Shareholder Rights, and Will Have No Additional Rights Specific to AT&T
Consumer Services Group, including Direct Voting Rights. These Shareholders Will
Have Very Limited, if Any, Control Rights" for more information on the rights of
holders of AT&T Consumer Services tracking stock. This inability of third
parties directly to acquire control of AT&T Consumer Services Group may
materially adversely affect the market price of AT&T Consumer Services Group
tracking stock.
There Will Be No Board of Directors or Committee that Owes any Separate
Fiduciary Duties to Holders of AT&T Consumer Services Group Tracking Stock,
Apart from Those Owed to AT&T Shareholders Generally, and Actions of the AT&T
Board May Be More Adverse to Holders of the AT&T Consumer Services Group Trading
Stock than Would Be the Case if AT&T Consumer Services Group Were a Standalone
Entity. Each of the AT&T Board and the AT&T Groups capital stock committee owes
fiduciary duties to AT&T and AT&T shareholders as a whole. AT&T Consumer
Services Group will not have a separate board of directors to represent solely
the interests of holders of AT&T Consumer Services Group tracking stock.
Consequently, there is no separate board of directors or committee that owes any
separate duties to holders of AT&T Consumer Services Group tracking stock.
The Fiduciary Duties of the AT&T Board to More Than One Class of Common
Stock Are Not Clear Under New York Law. Although AT&T is not aware of any legal
precedent under New York law involving the fiduciary duties of directors of
corporations having two or more classes of common stock, or separate classes or
series of capital stock, principles of Delaware law established in cases
involving differing treatment of two classes of capital stock or two groups of
holders of the same class of capital stock provide that a board of directors
owes its duty to all shareholders, regardless of class or series, and does not
have separate or additional duties to either group of shareholders. Under these
principles of Delaware law and the related principle known as the "business
judgment rule," absent abuse of discretion, a good faith business decision made
by a disinterested and adequately informed board of directors, or a committee of
the board of directors, with respect to any matter having disparate impacts upon
holders of AT&T common stock or AT&T Consumer Services Group tracking stock
would be a defense to any challenge to a determination made by or on behalf of
holders of any class of AT&T common shares. Nevertheless, a New York court
hearing a case involving this type of a challenge may decide to apply principles
of New York law different from the principles of Delaware law discussed above,
or may develop new principles of law, in order to decide that case. Any future
shareholder litigation over the meaning or application of the terms of AT&T
Consumer Services Group tracking stock or the AT&T Board's policies may be
costly and time consuming to AT&T and AT&T Consumer Services Group.
Changes in the Tax Law or in the Interpretation of Current Tax Law May
Result in Redemption of AT&T Consumer Services Group Tracking Stock or May
Prevent AT&T From Issuing Further Shares of AT&T Consumer Services Group
Tracking Stock. From time to time, there have been legislative and
administrative proposals that, if effective, would have resulted in the
imposition of corporate level or shareholder level tax upon the issuance of
tracking stock. As of the date of this document, no proposals of this type are
outstanding.
If there are adverse tax consequences associated with the issuance of AT&T
Consumer Services Group tracking stock, it is possible that AT&T would cease
issuing additional shares of AT&T Consumer Services Group tracking stock. This
could affect the value of shares of AT&T Consumer Services Group tracking stock
then outstanding.
I-48
AT&T May Optionally Redeem AT&T Consumer Services Group Tracking Stock even
if Holders Desire to Continue to Hold These Shares. The AT&T Board may, at any
time, redeem all outstanding shares of AT&T Consumer Services Group tracking
stock for shares of AT&T common stock at a 10% premium. AT&T could decide to
redeem AT&T Consumer Services Group tracking stock at a time when any or all
AT&T common stock and AT&T Consumer Services Group tracking stock may be
considered to be overvalued or undervalued. In addition, a redemption at any
premium would preclude holders of both AT&T common stock and the redeemed AT&T
Consumer Services Group tracking stock from retaining their investment in a
security intended to reflect separately the financial performance and economic
value of the relevant AT&T group. It also would give holders of the redeemed
AT&T Consumer Services Group tracking stock an amount of consideration that may
differ from the amount of consideration a third-party buyer pays or would pay
for all or substantially all of the assets of the respective AT&T group. For
further details, see "AT&T Consumer Services Group Tracking Stock -- The
Consumer Services Charter Amendment Proposal -- Consumer Services Group Tracking
Stock Amendment."
AT&T Has the Right to Require the Exchange of AT&T Consumer Services Group
Tracking Stock for Tracking Stock of Another Entity, which Could Materially
Change the Nature of Their Investment. In the event of a disposition or other
transfer by AT&T of all of the properties and assets of AT&T Consumer Services
Group, whether or not involving a merger or other business combination involving
AT&T as a whole, the Consumer Services charter amendment generally allows AT&T
to redeem all outstanding shares of AT&T Consumer Services Group tracking stock,
without paying a premium, in exchange for a new tracking stock of the entity
that owns substantially all of the assets and liabilities of AT&T Consumer
Services Group.
If the AT&T Board elected to roll the tracking stock over in connection
with a merger or other business combination, holders of AT&T Consumer Services
Group tracking stock would not share in any premium received by holders of AT&T
common stock and holders of AT&T common stock would not share in any premium
received by holders of AT&T Consumer Services Group tracking stock.
In the event of this redemption, the voting rights of the new tracking
stock will be set based on the ratio, over a fixed measurement period, of the
initial trading prices of the new tracking stock to the trading prices of the
common stock of the entity of which the new tracking stock is a part.
This new entity may have different businesses and a different capital
structure and be subject to different risks than AT&T generally. Holders of the
new tracking stock will become equity holders of this new entity and become
subject to risks affecting this new entity generally. Additionally, adverse
fluctuations in market valuations at and after the time of issuance of the new
tracking stock could materially adversely affect the relative voting power of
the new tracking stock with respect to the voting power of this new entity as a
whole.
The AT&T Board May Redeem AT&T Consumer Services Group Tracking Stock in
Exchange for Stock of One or More Qualifying Subsidiaries of AT&T. AT&T's
charter amendment proposal provides that AT&T may, at any time, redeem all
outstanding shares of AT&T Consumer Services Group tracking stock in exchange
for shares of common stock of a subsidiary of AT&T that holds all of the assets
and liabilities of AT&T Consumer Services Group. This type of redemption must be
tax free to holders of AT&T Consumer Services Group tracking stock, except with
respect to any cash in lieu of fractional shares. This redemption feature
differs from a traditional spin-off, in which a shareholder retains its interest
in the parent corporation and receives shares of the spun-off subsidiary via a
pro rata distribution of the subsidiary's shares to the parent shareholders. By
comparison, if the AT&T Consumer Services Group tracking stock is redeemed in
exchange for stock in a qualifying subsidiary, the holder of AT&T Consumer
Services Group tracking stock will no longer have an interest in AT&T. For more
information, see "AT&T Consumer Services Group Tracking Stock -- The Consumer
Services Charter Amendment Proposal -- Terms of the Consumer Services Group
Tracking Stock Amendment -- Redemption."
Future Sales of AT&T Consumer Services Group Tracking Stock and AT&T Common
Stock Could Materially Adversely Affect Their Respective Market Prices and the
Ability to Raise Capital in the Future. Sales of substantial amounts of AT&T
Consumer Services Group tracking stock and AT&T common stock
I-49
in the public market could hurt the market price of each of those securities.
These sales also could hurt AT&T's ability to raise capital in the future. Any
shares of AT&T Consumer Services tracking stock that AT&T distributes to holders
of AT&T common stock will be freely tradable without restriction under the
Securities Act of 1933, as amended, by persons other than "affiliates" of AT&T,
as defined under the Securities Act. Any sales of substantial amounts of AT&T
Consumer Services Group tracking stock or AT&T common stock in the public
market, or the perception that those sales might occur, could materially
adversely affect the respective market prices of AT&T Consumer Services tracking
stock or AT&T common stock, as applicable.
Shareholder approval will not be solicited by AT&T for the issuance of
authorized but unissued shares of AT&T Consumer Services Group tracking stock or
AT&T common stock, unless these approvals are deemed advisable by the AT&T Board
or are required by applicable law, regulation or stock exchange listing
requirements. The issuance of those shares could dilute the value of shares of
AT&T Consumer Services Group tracking stock or AT&T common stock, as the case
may be.
AT&T Expects to Split Its Current Dividend among AT&T Common Stock and AT&T
Consumer Services Group Tracking Stock, although There Is No Assurance as to
Future Dividend Levels. Following any issuance of AT&T Consumer Services Group
tracking stock, AT&T currently expects that one-third of the current dividend
payable on AT&T common stock will be allocated to AT&T common stock and that
two-thirds will be allocated to AT&T Consumer Services Group tracking stock. The
declaration of dividends by AT&T and the amount of those dividends will,
however, be in the discretion of the AT&T Board, and will depend upon each of
the AT&T group's financial performance, the dividend policies and capital
structures of comparable companies, each of the AT&T group's ongoing capital
needs, and AT&T's results of operations, financial condition, cash requirements
and future prospects, and other factors deemed relevant by the AT&T Board.
Payment of dividends also may be restricted by loan agreements, indentures and
other transactions that AT&T enters into from time to time.
In addition, the dividend amount that AT&T Consumer Services Group tracking
stock may pay to shareowners depends on, among other factors, the cash
generation ability and earnings power of AT&T Consumer Services Group. Based on
the risks of a decline in the long distance industry and successful entry into
growth opportunities such as local services and high speed data, there is a
possibility that AT&T Consumer Services Group would not generate sufficient cash
flow or earnings in the future to pay the expected dividend. This could have an
adverse affect on the AT&T Consumer Services Group tracking stock market price
and debt levels.
If AT&T Is Liquidated, Amounts Distributed to Holders of Each Class of AT&T
Common Stock May Not Reflect the Value of the Assets Attributed to the AT&T
Groups. Under AT&T's charter, AT&T would determine the liquidation rights of
holders of the respective classes of AT&T common stock in accordance with each
AT&T group's respective market capitalization at the time of liquidation.
However, the relative market capitalization of each AT&T group may not correctly
reflect the value of the net assets remaining and attributed to the AT&T groups
after satisfaction of outstanding liabilities.
AT&T Consumer Services Group Tracking Stock May Not Be Issued as Planned or
at All. The Consumer Services charter amendment proposal gives AT&T the
authority to create AT&T Consumer Services Group tracking stock. The proposed
Consumer Services Charter amendment, however, does not mandate the manner in
which AT&T may issue AT&T Consumer Services Group tracking stock or require that
AT&T issue any of these shares at all. Rather, AT&T Consumer Services Group
tracking stock will be a new class of AT&T common stock that the AT&T Board may
issue from time to time as it determines appropriate, up to the total number of
authorized shares and subject to stock exchange rules with respect to
shareholder approval of share issuances. AT&T does not plan to seek new
shareholder approval for any change that the AT&T Board may approve in the
timing or manner of issuing shares of AT&T Consumer Services Group tracking
stock. If you do not want to give the AT&T Board this broad authority with
respect to the Consumer Services charter amendment proposal, you should not vote
for the Consumer Services charter amendment proposal.
I-50
If the Consumer Services charter amendment proposal is approved the AT&T
Board may issue shares of AT&T Consumer Services Group tracking stock regardless
of whether the AT&T Comcast transaction is approved or completed.
RISK FACTORS RELATING TO AT&T CONSUMER SERVICES GROUP AND AT&T BUSINESS SERVICES
GROUP
AT&T Consumer Services Group and AT&T Business Services Group Expect There
to Be a Continued Decline in the Long Distance Industry. Historically, prices
for voice communications have fallen because of competition, the introduction of
more efficient networks and advanced technology, product substitution, excess
capacity and deregulation. AT&T Consumer Services Group and AT&T Business
Services Group expect these trends to continue, and each of AT&T Consumer
Services Group and AT&T Business Services Group may need to reduce its prices in
the future to remain competitive. In addition, AT&T Consumer Services Group and
AT&T Business Services Group do not expect that they will be able to achieve
increased traffic volumes in the near future to sustain their current revenue
levels. The extent to which each of AT&T Consumer Services Group's and AT&T
Business Services Group's business, financial condition, results of operations
and cash flow could be materially adversely affected will depend on the pace at
which these industry-wide changes continue and its ability to create new and
innovative services to differentiate its offerings, enhance customer retention,
and retain or grow market share.
AT&T Consumer Services Group and AT&T Business Services Group Face
Substantial Competition that May Materially Adversely Impact Both Market Share
and Margins. Each of AT&T Consumer Services Group and AT&T Business Services
Group currently faces significant competition, and AT&T expects the level of
competition to continue to increase. Some of the potential materially adverse
consequences of this competition include the following:
- market share loss and loss of key customers;
- possibility that customers shift to less profitable, lower margin
services;
- need to initiate or respond to price cuts in order to retain market
share;
- difficulties in AT&T Consumer Services Group's and AT&T Business Services
Group's ability to grow new businesses, introduce new services
successfully or execute on their business plan; and
- inability to purchase fairly priced access services or fairly priced
elements of local carriers' networks.
As a result of competitive factors, AT&T Consumer Services Group and AT&T
Business Services Group believe it is unlikely that they will sustain existing
price or margin levels.
AT&T Consumer Services Group and AT&T Business Services Group Face
Competition from a Variety of Sources.
- Competition from new entrants into long distance, including regional
phone companies. AT&T Consumer Services Group and AT&T Business Services
Group traditionally have competed with other long distance carriers. In
recent years, AT&T Consumer Services Group and AT&T Business Services
Group have begun to compete with incumbent local exchange carriers, which
historically have dominated local telecommunications, and with other
competitive local exchange carriers for the provision of long distance
services. In addition, other long distance companies are beginning to
offer local residential services bundled with long distance in portions
of over 30 states.
Some regional phone companies, such as Verizon Communications Inc. and
SBC Communications Inc., already have been permitted to offer long
distance services in some states within their regions. AT&T expects that
the regional phone companies will seek to enter all states in their
regions and eventually will be given permission to offer long distance
services within their regions.
The incumbent local exchange carriers presently have numerous advantages as
a result of their historic monopoly control over local exchanges.
I-51
- Competition from facilities-based companies, including regional phone
companies. AT&T Consumer Services Group and AT&T Business Services Group
also face the risk of increasing competition from entities that own their
own access facilities, particularly the regional phone companies, which
have access facilities across vast regions of the United States with the
ability to control cost, cycle time and functionality for most end-to-end
services in their regions. These entities can preserve large market share
and high margins on access services as they enter new markets, including
long distance and end-to-end services. This places them in superior
position vis-a-vis AT&T Consumer Services Group and AT&T Business
Services Group and other competitors that must purchase such high-margin
access services.
- Competition from lower-cost or less-leveraged providers. The cost
structure of AT&T Consumer Services Group and AT&T Business Services
Group also affects their competitiveness. Each faces the risk that it
will not be able to maintain a competitive cost structure if newer
technologies favor newer competitors that do not have legacy
infrastructure and as technology substitution continues. The ability of
each of AT&T Consumer Services Group and AT&T Business Services Group to
make critical investments to improve cost structure also may be impaired
by its current debt obligations.
- Competition as a result of technological change. AT&T Consumer Services
Group and AT&T Business Services Group also may be subject to additional
competitive pressures from the development of new technologies and the
increased availability of domestic and international transmission
capacity. The telecommunications industry is in a period of rapid
technological evolution, marked by the introduction of new product and
service offerings and increasing satellite, wireless, fiber optic and
coaxial cable transmission capacity for services similar to those
provided by AT&T Consumer Services Group and AT&T Business Services
Group. AT&T cannot predict which of many possible future product and
service offerings will be important to maintain its competitive position,
or what expenditures will be required to develop and provide these
products and services. Many of these new products and services are
substitutes for traditional telephone service. In particular, the rapid
expansion of usage of wireless and email services has led and is expected
to lead to an overall decline in telephone voice traffic volume on
traditional wireline networks.
- Competition as a result of excess capacity. Each of AT&T Consumer
Services Group and AT&T Business Services Group faces competition as a
result of excess capacity resulting from substantial network build out by
competitors that had access to inexpensive capital.
- Strength of competitors. Some of AT&T Consumer Services Group's and AT&T
Business Services Group's existing and potential competitors have
financial, personnel and other resources significantly greater than those
of AT&T Consumer Services Group and AT&T Business Services Group.
The Prices Charged to AT&T Consumer Services Group for Network Utilization
May Increase Over Time and May Be Adversely Impacted by the Volume of the
Business of AT&T Business Services Group. During the next few years, AT&T's
voice traffic volumes may decline at a rate faster than the rate at which AT&T
is able to reduce the cost of operating its circuit switched network, resulting
in higher unit costs for both AT&T Consumer Services Group and AT&T Business
Services Group. As described under "AT&T Consumer Services Group Tracking
Stock -- Relationship Between the AT&T Groups," under the terms of the proposed
Master Carrier Agreement, AT&T Consumer Services Group will be required to
procure all of its telecommunications needs from Network Services within the
AT&T Business Group. The pricing of these services will be based on the costs to
Network Services of providing those services, unless otherwise agreed. Also, the
agreement will contain provisions intended to assure that the AT&T Consumer
Services Group is treated no less favorably than the AT&T Business Services
Group with respect to the allocation of costs between the units, including a
fair allocation of any low cost capacity Network Services provides or obtains.
I-52
The overall level of network utilization by AT&T Consumer Services Group
and AT&T Business Services Group together will impact the per minute cost of
providing telecommunications services. There are substantial fixed costs
associated with providing telecommunications services and it is possible that
overall levels of usage (including usage by AT&T Business Services Group) may
decrease faster than the related decrease in variable costs. As a result,
although it will depend upon a variety of factors that are difficult to predict,
it is possible that costs per minute may increase over time. Since the terms of
this arrangement by which AT&T Consumer Services Group purchases
telecommunications services are essentially cost based, any such cost increase
would increase the charges to the AT&T Consumer Services Group and could
materially adversely impact the results of operations and financial condition of
the Group.
Since per minute costs are affected by both the level of usage of the AT&T
Consumer Services Group and AT&T Business Services Group, adverse business
conditions of either Group could increase per minute costs. As a result, the
costs charged to AT&T Consumer Services Group may increase as a result of a
decrease in the volume of usage by AT&T Business Services, and vice versa.
AT&T Consumer Services Group, however, may be more adversely affected by a
downturn in telecommunications traffic than its competitors since it is required
to obtain all of its telecommunications services from AT&T, even if more
favorable pricing is available elsewhere.
AT&T Consumer Services Will Not Be Able to Utilize the AT&T Brand if the
AT&T Consumer Services Group Tracking Stock Is No Longer Outstanding; AT&T
Consumer Services Group Is Allowed to Use the AT&T Brand only for Specified
Products and Services. As long as the AT&T Consumer Services Group tracking
stock is outstanding, AT&T Consumer Services Group will be entitled to use the
AT&T brand and related marks and logos on the terms described under "AT&T
Consumer Services Group Tracking Stock -- Relationship Between the AT&T Groups."
However, if AT&T Consumer Services Group tracking stock is no longer
outstanding, whether as a result of the split-off of that Group, a disposition
of that Group or otherwise, it will not be able to utilize the AT&T brand and
related marks and logos unless the parties agree on a mutually acceptable
arrangement at the time. The failure to be able to use this brand and related
marks and logos could have a material adverse affect on AT&T Consumer Services
Group.
In addition, under the terms of the brand license, AT&T Consumer Services
Group is only permitted to use the AT&T brand and related marks in connection
with the provision of specified products and services as set forth in this
section described under "AT&T Consumer Services Group Tracking Stock --
Relationship Between the AT&T Groups." If AT&T Consumer Services Group desires
to use the brand to provide additional products or services it must first obtain
AT&T's approval, which approval will not unreasonably be withheld.
AT&T Faces Risks in Connection with AT&T Canada. AT&T has an approximately
31% equity ownership in AT&T Canada. In the event foreign ownership restrictions
in Canada are lifted, in whole or in part, prior to June 30, 2003, AT&T is
required to purchase the outstanding shares, to the extent permitted by any
remaining foreign ownership restrictions, at the greater of the floor price (Cdn
$47.45 as of December 31, 2001) and the fair market value (we refer to the
greater price as the Back-end Price). The floor price accretes at 4% each
quarter, commencing on June 30, 2000. AT&T has the right to trigger the purchase
of the remaining equity of AT&T Canada for the Back-end Price at any time prior
to the earlier of a change in foreign ownership rules in Canada or June 30,
2003. If foreign ownership restrictions in Canada are not lifted and AT&T does
not exercise the call right by June 30, 2003, the shares may be put up for
auction, and AT&T would have to make shareholders whole for the amount, if any,
by which the Back-end Price exceeds the proceeds received in auction.
In 2001, AT&T recorded $1.8 billion of after tax charges ($3.0 billion of
pretax charges) reflecting the estimated loss on AT&T's commitment to purchase
the publicly owned shares of AT&T Canada. Included in these charges was
approximately $0.6 billion related to the assumption of British
Telecommunications plc's obligation to purchase the publicly owned shares of
AT&T Canada. These charges reflect the difference between the underlying value
of AT&T Canada shares and the price AT&T has committed to pay for them, and are
included in "Net losses related to other equity investments" in the
I-53
Consolidated Statement of Income and "Other long-term liabilities and deferred
credits" in the Consolidated Balance Sheet.
AT&T no longer records equity earnings or losses related to AT&T Canada
since AT&T's investment balance was written down to zero, largely through losses
generated by AT&T Canada. In the event AT&T acquires more than 50% of the voting
equity of AT&T Canada, AT&T Canada's results will be consolidated into AT&T's
results. At April 26, 2002, AT&T Canada had outstanding debt of approximately
$2.9 billion.
On March 14, 2002, AT&T Canada announced that it has formed a board
committee to help management address what AT&T Canada described as "complex
issues" facing the company. It also said one of the committee's first steps had
been to hire Greenhill & Co. LLC as its financial adviser to work with the
committee and management to evaluate various scenarios regarding what it
described as "the issues, opportunities and alternatives for the company."
On March 15, 2002, a group of more than 20 investors holding almost $1
billion of AT&T Canada public notes announced that they have organized as an ad
hoc committee to express their concerns about the company's business operations
and financial prospects. They stated that the group was formed in response to
several recent "troubling financial releases" from AT&T Canada and the rating
agency downgrades of AT&T Canada's public notes, including the notes issued by
MetroNet Communications.
On April 18, 2002, the counsel to the ad hoc group of bondholders issued a
press release stating that this group was concerned about AT&T's and AT&T
Canada's failure to engage in a dialogue concerning the commitment to
bondholders. The committee said it was troubled that AT&T would not commit to
stand behind the AT&T Canada bonds, alleging that senior executives of AT&T
participated in the road shows for placement of the AT&T Canada notes and made
certain statements to rating agencies. Further, the release stated that, in the
absence of AT&T committing to support AT&T Canada, the committee will have no
choice but to explore any and all available remedies. As stated above,
approximately Canadian $4.5 billion (approximately U.S. $2.9 billion) in
aggregate amount of indebtedness of AT&T Canada was outstanding as of April 26,
2002. AT&T expressly disclaims any obligation with respect to the bonds.
On May 9, 2002, a group of institutional investors holding approximately
$458 million of AT&T Canada's public notes announced that it had filed an
oppression application with the Ontario Superior Court of Justice asserting that
the conduct of AT&T Canada and its directors has been oppressive and unfairly
prejudicial to, and has unfairly disregarded, the interests of AT&T Canada's
noteholders. The investors also stated that the Application is supported by
other AT&T Canada noteholders holding an additional $250 million of AT&T
Canada's notes. Among other things, the Application seeks the following relief:
replacement of all current directors of AT&T Canada or orders regulating the
conduct of current directors; an order restraining AT&T Canada from collapsing
any "in the money" foreign currency swaps; and an order requiring AT&T Canada
and its directors to preserve assets and liquidity pending a restructuring.
As of December 31, 2001, the aggregate amount that AT&T would need to pay
to complete its obligation related to AT&T Canada was approximately $3.2 billion
(accreting at 4% per quarter). AT&T has the right to fund this acquisition
through cash or, subject to the limitations set forth in the merger agreement,
through the issuance of shares of AT&T common stock, or any combination thereof.
AT&T is currently exploring a variety of structures to satisfy its obligation
related to AT&T Canada.
AT&T currently intends to raise cash to settle a substantial portion of the
back end purchase requirement through the issuance of equity or equity-like
securities. It is likely that AT&T will take steps to raise such funds through
the issuance of these equity or equity-like securities and AT&T currently is
evaluating commencing such issuance in the near future. Subject to the
limitations on the number of shares that can be issued set forth in the merger
agreement, AT&T could issue these securities at any time by use of a currently
effective shelf registration statement. The issuance of equity or equity-like
securities to settle the back end purchase requirement may have a material
adverse impact on the market
I-54
price of AT&T common stock. AT&T's ability to settle its back end purchase
requirement in this manner will depend on market conditions and other factors
and there is no assurance that it will be able to do so.
If AT&T does not raise funds to complete this acquisition prior to the
completion of the AT&T Comcast transaction, to the extent AT&T directly or
indirectly uses equity to do so, the percentage of shares of AT&T that would be
required to be issued would be substantially increased.
In addition, adverse business developments involving AT&T Canada could
affect AT&T in a variety of ways. For example, in the event AT&T no longer
obtains telecommunications services from AT&T Canada, there are a variety of
other carriers that could provide AT&T with the telecommunications services
necessary to service its customers. However, there may be some difficulty in
obtaining services with comparable features and functions and prices from these
carriers which could adversely impact AT&T's ability to provide products and
services to its customers. In addition, AT&T may incur significant costs as a
result.
The Regulatory and Legislative Environment Creates Challenges for AT&T
Consumer Services Group and AT&T Business Services Group. Each of AT&T Consumer
Services Group and AT&T Business Services Group faces risks relating to
regulations and legislation. These risks include:
- difficulty of effective entry into local markets due to noncompetitive
pricing and to regional phone company operational issues that do not
permit rapid large-scale customer changes from regional phone companies
to new service providers,
- new head-on competition as regional phone companies begin to enter the
long distance business, and
- emergence of few facilities-based competitors to regional phone
companies, and the absence of any significant alternate source of supply
for most access and local services.
This dependency on supply materially adversely impacts each of AT&T
Consumer Services Group's and AT&T Business Services Group's cost structure, and
ability to create and market desirable and competitive end-to-end products for
customers.
In addition, regional phone companies will be entering the long distance
business while they still control substantially all the access facilities in
their regions. This will likely result in an increased level of competition for
long distance or end-to-end services as the services offered by regional phone
companies expand.
Each of AT&T Consumer Services Group and AT&T Business Services Group May
Substantially Increase its Debt Level in the Future, Which Could Subject it to
Various Restrictions and Higher Interest Costs and Decrease its Cash Flow and
Earnings. Each of AT&T Consumer Services Group and AT&T Business Services Group
may substantially increase its debt level in the future, which could subject it
to various restrictions and higher interest costs and decrease its cash flow and
earnings. It also may be difficult for AT&T Consumer Services Group and AT&T
Business Services Group to obtain all the financing they need to fund their
businesses and growth strategies on desirable terms. The amount of debt required
in the future will depend upon the performance revenue and margin of each of
AT&T Consumer Services Group and AT&T Business Services Group, which, in turn,
may be materially adversely affected by competitive and other pressures. Any
agreements governing indebtedness obtained by AT&T Consumer Services Group or
AT&T Business Services Group may contain financial and other covenants that
could impair AT&T Consumer Services Group's or AT&T Business Services Group's
flexibility and restrict its ability to pursue growth opportunities.
AT&T expects to explore and evaluate the relative advantages and
disadvantages of various funding mechanisms for AT&T. These alternatives may
include a bank credit line, commercial paper and other forms of public and
private debt financing. The decision on debt composition is dependent on, among
other things, the business and financial plans of AT&T and the market conditions
at the time of financing.
I-55
The Actual Amount of Funds Necessary to Implement Each of AT&T Consumer
Services Group's and AT&T Business Services Group's Strategy and Business Plan
May Materially Exceed Current Estimates, which Could have a Material Adverse
Effect on its Financial Condition and Results of Operations. The actual amount
of funds necessary to implement each of AT&T Consumer Services Group's and AT&T
Business Services Group's strategy and business plan may materially exceed AT&T
Consumer Services Group's and AT&T Business Services Group's current estimates
in the event of various factors, including:
- competitive downward pressures on revenues and margins,
- departures from AT&T Consumer Services Group's and AT&T Business Services
Group's respective current business plans,
- regulatory developments,
- unforeseen competitive developments,
- technological and other risks,
- unanticipated expenses,
- unforeseen delays and cost overruns, and
- engineering design changes.
If actual costs do materially exceed AT&T Consumer Services Group's and/or
AT&T Business Services Group's current estimates for these or other reasons,
this would have a material adverse effect on AT&T Consumer Services Group's
and/or AT&T Business Services Group's financial condition and results of
operations.
AT&T Consumer Services Group's Potential Growth in its AT&T DSL Service
Combining Voice and Data Services Utilizing DSL Technology, Involves
Technological, Marketing and Regulatory Hurdles and Requires Substantial Capital
Expenditures. AT&T Consumer Services Group's business plan will require
substantial capital expenditures in connection with its expansion into providing
voice and data services through DSL technology. The development of voice and
data services through DSL technology involves uncertainty relating to potential
technological hurdles, marketing success, regulatory and legislative
requirements and unforeseen costs. AT&T Consumer Services Group historically has
not had to incur these capital expenditures, and it may not be able to obtain
sufficient capital on favorable terms or at all. A failure to obtain capital
could have a material adverse effect on AT&T Consumer Services Group, and result
in the delay, change or abandonment of its development or expansion plans.
Substantially All of the Telephone Calls Made by Each of AT&T Consumer
Services Group's and AT&T Business Services Group's Customers are Connected
Using Other Companies' Networks, Including Those of Competitors, which Makes
Competition More Difficult for AT&T. AT&T Consumer Services Group principally
is a long distance voice telecommunications company. AT&T Consumer Services
Group does not own or operate any primary transmission facilities. Accordingly,
it must route domestic and international calls made by its customers over
transmission facilities that it obtains from network services within AT&T
Business Services Group under a Master Carrier Agreement described under "AT&T
Consumer Services Group Tracking Stock -- Relationship Between the AT&T Groups."
AT&T Business Services Group provides long distance and, to a limited extent,
local telecommunications over its own transmission facilities. Because AT&T
Business Services Group's network does not extend to homes, both AT&T Consumer
Services Group and AT&T Business Services Group must route calls through a local
telephone company to reach AT&T Business Services Group's transmission
facilities and, ultimately, to reach their final destinations.
In the United States, the providers of local telephone service generally
are the incumbent local exchange carriers, including the regional phone
companies. The permitted pricing of local transmission facilities that AT&T
Consumer Services Group and AT&T Business Services Group lease in the United
States is subject to legal uncertainties. In view of the proceedings pending
before the courts and regulatory authorities, there can be no assurance that the
prices and other conditions established in each state will
I-56
provide for effective local service entry and competition or provide AT&T
Consumer Services Group with new market opportunities. The effect of the most
recent court decisions is to increase the risks, costs, difficulties and
uncertainty of entering local markets through using the incumbent local exchange
carriers' facilities and services.
AT&T Consumer Services Group Must Rely on AT&T Business Services Group's
Ability to Maintain, Upgrade and Reduce Costs Associated with the Core Network,
Which May Lead to Additional Costs. AT&T Consumer Services Group currently is
dependent upon AT&T Business Services Group for leased line capacity, data
communications facilities, traffic termination services and physical space for
offices and equipment. Although AT&T Consumer Services Group expects to enter
into a service agreement with AT&T Business Services Group for it to provide
these services, if AT&T Business Services Group becomes unable to provide its
current level of services to AT&T Consumer Services Group during the term of the
service agreement or thereafter, AT&T Consumer Services Group may not be able to
find replacement service providers on a timely basis.
Failure to Develop Future Business Opportunities May have a Material
Adverse Effect on AT&T Consumer Services Group's Growth Potential. AT&T
Consumer Services Group intends to actively evaluate pursuing growth
opportunities in providing services through DSL technology, which involve new
services for which there are only limited proven markets. In addition, the
ability to deploy and deliver these services relies, in many instances, on new
and unproven technology. AT&T Consumer Services Group's DSL technology may not
perform as expected and AT&T Consumer Services Group may not be able to
successfully develop new enabling systems to effectively and economically
deliver these services. In addition, these opportunities require substantial
capital outlays to be incurred by AT&T Business Services and charged to AT&T
Consumer Services Group as part of its network usage under the transport
agreement. These outlays are currently estimated to be approximately $1 billion
over a three-year planning period, to deploy on the planned scale, but are
subject to adjustment for change in competitive conditions and market
uncertainties. This capital may not be available to support these services.
Furthermore, each of these opportunities entails additional operational risks.
For example, the delivery of these services requires AT&T Consumer Services
Group to provide installation and maintenance services, which services AT&T
Consumer Services Group has never provided previously. This will require AT&T
Consumer Services Group to hire, employ, train and equip technicians to provide
installation and repair in each market served, or rely on subcontractors to
perform these services. AT&T Consumer Services Group may not be able to hire and
train sufficient numbers of qualified employees or subcontract these services,
or do so on economically attractive terms. These services may not be successful
when they are in place and customers may not purchase the services offered. AT&T
Consumer Services Group's existing marketing channels may not be an effective
way to market these services. If these services are not successful or costs
associated with implementation and completion of the rollout of these services
materially exceed those currently estimated by AT&T Consumer Services Group,
AT&T Consumer Services Group's financial condition and prospects could be
materially adversely affected.
I-57
CHAPTER TWO
THE AT&T COMCAST TRANSACTION
GENERAL
The Comcast Board is using this document to solicit proxies from holders of
Comcast common stock for use at the Comcast special meeting. The AT&T Board is
also using this document to solicit proxies from holders of AT&T common stock
for use at the AT&T annual meeting.
COMCAST PROPOSALS
At the Comcast special meeting, holders of Comcast Class A common stock and
Comcast Class B common stock will be asked to vote upon a proposal to approve
and adopt the merger agreement and the transactions contemplated by the merger
agreement. This proposal is referred to in this document as the "Comcast
transaction proposal." In addition, holders of Comcast Class A common stock and
Comcast Class B common stock will be asked to vote upon a separate proposal to
approve the AT&T Comcast charter, including the corporate governance provisions
of the AT&T Comcast charter described in this document. This proposal is
referred to in this document as the "AT&T Comcast charter proposal."
At the Comcast special meeting, holders of Comcast Class A common stock,
voting as a single class, and holders of Comcast Class A common stock and
Comcast Class B common stock, voting together as a single class, will also be
asked to vote upon a proposal to adopt an amendment to the Comcast charter that
will allow implementation of the Preferred Structure. See "Description of the
AT&T Comcast Transaction Agreements -- The Merger Agreement -- Merger
Consideration -- The Preferred Structure." This proposal is referred to in this
document as the "preferred structure proposal."
APPROVAL OF THE AT&T COMCAST CHARTER PROPOSAL, INCLUDING THE CORPORATE
GOVERNANCE PROVISIONS CONTAINED IN THE AT&T COMCAST CHARTER, IS A CONDITION TO
COMPLETION OF THE AT&T COMCAST TRANSACTION. THEREFORE, IF COMCAST SHAREHOLDERS
WISH TO APPROVE THE AT&T COMCAST TRANSACTION, THEY MUST ALSO APPROVE THE AT&T
COMCAST CHARTER PROPOSAL. APPROVAL OF THE COMCAST TRANSACTION PROPOSAL AND THE
AT&T COMCAST CHARTER PROPOSAL IS NOT CONDITIONED ON APPROVAL OF THE PREFERRED
STRUCTURE PROPOSAL.
AT&T PROPOSALS
At the AT&T annual meeting, holders of AT&T common stock will be asked to
vote upon a proposal to approve and adopt the merger agreement and the
transactions contemplated by the merger agreement. This proposal is referred to
in this document as the "AT&T transaction proposal." In addition, holders of
AT&T common stock will be asked to vote upon a separate proposal to approve the
AT&T Comcast charter, including the corporate governance provisions of the AT&T
Comcast charter described in this document. This proposal is referred to in this
document as the "AT&T Comcast charter proposal." References in this document to
the AT&T Comcast charter proposal mean either the proposal to AT&T shareholders
to approve the AT&T Comcast charter or the proposal to Comcast shareholders to
approve the AT&T Comcast charter, or both of those proposals, as the context may
require.
At the AT&T annual meeting, holders of AT&T common stock will also be asked
to vote separately on a proposal to approve and adopt an amendment to the AT&T
charter creating a tracking stock that is intended to reflect the financial
performance and economic value of the AT&T Consumer Services business. See "AT&T
Consumer Services Group Tracking Stock -- The Consumer Services Charter
Amendment Proposal." This proposal is referred to in this document as the
"Consumer Services charter amendment proposal." AT&T shareholders will also be
asked to vote on benefit proposals related to the Consumer Services charter
amendment proposal. These proposals are referred to in this document as the
"incentive plan proposal" and the "employee stock purchase plan proposal." AT&T
shareholders will also be asked to vote separately on a proposal to approve and
adopt an amendment to the AT&T charter authorizing a reverse stock split. This
proposal is referred to in this document as the "reverse stock split proposal."
Finally, AT&T shareholders will be asked to vote upon the election of directors
and other
II-1
matters that properly come before the AT&T annual meeting. See "Information
about the AT&T Annual Meeting and Voting."
APPROVAL OF THE AT&T COMCAST CHARTER PROPOSAL, INCLUDING THE CORPORATE
GOVERNANCE PROVISIONS CONTAINED IN THE AT&T COMCAST CHARTER, IS A CONDITION TO
COMPLETION OF THE AT&T COMCAST TRANSACTION. THEREFORE, IF AT&T SHAREHOLDERS WISH
TO APPROVE THE AT&T COMCAST TRANSACTION, THEY MUST ALSO APPROVE THE AT&T COMCAST
CHARTER PROPOSAL.
APPROVAL OF THE AT&T TRANSACTION PROPOSAL AND THE AT&T COMCAST CHARTER
PROPOSAL IS NOT CONDITIONED ON APPROVAL OF ANY OF THE OTHER AT&T PROPOSALS.
APPROVAL OF THE OTHER AT&T PROPOSALS IS NOT CONDITIONED ON APPROVAL OF THE AT&T
TRANSACTION PROPOSAL OR THE AT&T COMCAST CHARTER PROPOSAL.
BACKGROUND OF THE AT&T COMCAST TRANSACTION
On October 25, 2000, AT&T announced, among other things, that it intended
to create and issue a tracking stock intended to reflect the financial
performance and economic value of AT&T Broadband and, thereafter, to separate
AT&T Broadband from AT&T so that, ultimately, AT&T Broadband would be a
standalone, publicly traded company. AT&T also announced that it intended to
create and issue a tracking stock intended to reflect the financial performance
and economic value of AT&T Consumer Services Group. In addition, AT&T announced
that it intended to separate AT&T's wireless services business from AT&T.
In December 2000 and in early 2001, C. Michael Armstrong, Chairman and
Chief Executive Officer of AT&T, and Charles H. Noski, Chief Financial Officer
of AT&T, received telephone calls from Ralph J. Roberts, Chairman of the Board
of Comcast, and from Brian L. Roberts, President of Comcast, in which the
Roberts expressed interest in initiating discussions with respect to the
possible combination of Comcast and AT&T Broadband. In January 2001, Messrs.
Armstrong and Noski met with the Roberts at the Roberts' request. At this
meeting, Mr. Armstrong told the Roberts that AT&T was concentrating on key
restructuring and operating matters at that time and was not interested in
engaging in discussions with respect to a combination.
On May 11, 2001, AT&T publicly filed preliminary proxy materials with
respect to a proposed special shareholders meeting at which AT&T planned to ask
shareholders to vote on (1) the creation of tracking stocks intended to reflect
the financial performance and economic value of AT&T Broadband and AT&T Consumer
Services Group, respectively, and (2) the separation of AT&T Broadband from the
rest of AT&T. In late May 2001, Brian L. Roberts again made inquiries regarding
AT&T's willingness to explore the possibility of a combination of Comcast and
AT&T Broadband. At Mr. Roberts' request, on June 6, 2001, Mr. Noski had dinner
with Mr. Roberts to discuss the potential for such a transaction. Mr. Roberts
and Mr. Noski discussed, among other things, how such a combination might be
structured, governed and valued. On June 17, 2001, Mr. Roberts and Mr. Noski had
another dinner meeting at which they had further discussions regarding the
possibility of a combination.
At a meeting on June 20, 2001, Mr. Noski reported to the AT&T Board on
these discussions with Mr. Roberts. At that meeting, the AT&T Board decided that
the discussions should not continue unless Comcast signed a confidentiality
letter containing customary standstill provisions. The AT&T Board also believed
that, if discussions were to continue, they should be with the understanding
that voting power in the combined company should follow economic interest more
closely than in the case of Comcast. Following the meeting, Charles Noski
conveyed the AT&T Board's views to Brian L. Roberts in a telephone call.
At a special meeting of the Comcast Board held on June 25, 2001, Comcast
management updated the directors on the status of the discussions with AT&T
concerning a potential AT&T Broadband transaction. The Comcast Board and
management discussed at length possible strategies to effect an AT&T Broadband
transaction, including the possibility of making an unsolicited offer for AT&T
Broadband. At the conclusion of this discussion, the Comcast Board determined
that it was not prepared to proceed with discussions on the terms outlined by
AT&T.
II-2
On July 3, 2001, AT&T filed revised preliminary proxy material indicating
that it intended to hold its special meeting of shareholders in September 2001
to vote on the creation of the AT&T Broadband tracking stock and the subsequent
separation of AT&T and AT&T Broadband.
On July 6, 2001, at a special meeting of the Comcast Board, Comcast
management informed the Comcast directors of AT&T's timetable for the creation
of the AT&T Broadband tracking stock and the separation of AT&T Broadband from
AT&T. Comcast management noted that mailing of the proxy materials to AT&T
shareholders for the September meeting could commence as early as late July.
Comcast management also reviewed with the Comcast Board the terms of an offer it
proposed to make to AT&T. After a lengthy discussion of the terms of the offer
and related matters, including the timeframe in which an outcome would be
determined and possible responses from AT&T, the Comcast Board unanimously
authorized Comcast management to proceed with the offer.
On July 8, 2001, Ralph J. Roberts and Brian L. Roberts sent the following
letter to Mr. Armstrong:
July 8, 2001
Mr. C. Michael Armstrong
Chairman and CEO
AT&T Corp.
32 Avenue of the Americas
New York, NY 10013
Dear Mike:
Over many months of discussions we have shared a vision that AT&T Broadband
and Comcast should be combined to create the world's leader in broadband
communications. We believed those discussions were progressing towards a
tax-free transaction that would dramatically accelerate your own plan to
separate the broadband company. It is unfortunate that we were not able to
agree on a basis for continuing our dialogue. Accordingly, we submit this
offer to you for consideration by your Board before a proxy statement
relating to your broadband tracking stock proposal is sent to your
shareholders later this month.
Under our proposal Comcast would issue 1.0525 billion shares with a value
of $44.5 billion based on Friday's closing price and assume $13.5 billion
in debt for your core broadband business, which is composed of your 13.5
million cable subscribers as well as your joint venture interests. In
addition, we are prepared to acquire your interests in TWE, Cablevision and
Rainbow by assuming more debt and issuing more equity to reflect their
values. Under our proposal your shareholders would own a majority of the
economic and voting interests of the combined company in a transaction that
would be tax-free to AT&T and all shareholders.
Our proposal values your core broadband business at $58 billion, which
represents 30x both 2000 EBITDA and annualized first quarter 2001 EBITDA.
AT&T shareholders would receive Comcast shares valued at $12.60 per AT&T
share based on Friday's closing price, while retaining complete ownership
of AT&T's historical communications business that according to published
reports has a value approaching $70 billion on a standalone basis. This
combined value is dramatically higher than your current market value per
share of $16.80 after giving effect to the spin-off of AT&T Wireless.
Your shareholders would receive significantly more value through a
combination with Comcast than through your planned restructuring. Not only
does our proposal avoid the market risks, costs and uncertainties inherent
in the planned broadband IPO, it values your business at a significant
premium to your potential public market valuation. At 30x AT&T Broadband's
annualized first quarter 2001 EBITDA, our offer far exceeds the trading
multiple of any publicly traded broadband company. Put another way, our
proposal delivers a very substantial premium over published reports of the
estimated value of your broadband business.
II-3
After combining our broadband businesses, your shareholders will retain a
majority of the future appreciation resulting from substantial combination
benefits. Upon full integration of our broadband businesses, we expect the
combination benefits will amount to at least $1.25 billion annually. This
benefit could eventually increase to between $2.6 and $2.8 billion annually
as we work together to raise the level of your margins. None of these
figures take account of any new content, internet or other value creating
opportunities. As a result of these combination benefits, merging our
broadband companies will clearly be value accretive to both groups of
shareholders.
Given the strength of Comcast's balance sheet we are confident that the new
company would have an investment grade debt rating, a view which is shared
by our financial advisors, Morgan Stanley, JP Morgan and Merrill Lynch.
We understand that there were concerns within AT&T about Comcast's voting
structure. As you know, multi-class structures are common in our industry
and have not affected stock trading values. Our Class A Special shares have
outperformed the cable composite index, the S&P 500 and The Nasdaq Stock
Market in each of the last one, three, five, seven and ten year periods. We
are confident that your shareholders would welcome our currency. In fact,
38 of your 50 largest institutional shareholders also have significant
investments in Comcast.
Our proposal is subject to the negotiation of a definitive merger
agreement. We are prepared to deliver a draft merger agreement as soon as
you wish. We are confident that the combination does not present any
significant regulatory issues.
In light of the significance of this proposal to both your shareholders and
ours, we are publicly releasing the text of this letter.
We hope that you will work with us to make this vision a reality.
Respectfully submitted,
Ralph J. Roberts Brian L. Roberts
Chairman of the Board President
On July 10, 2001, the AT&T Board met by telephone and was briefed by AT&T's
management and advisors with respect to the letter from Comcast and reviewed
with AT&T's legal advisors the AT&T Board's legal duties. On July 18, 2001, the
AT&T Board voted unanimously to reject Comcast's proposal to acquire AT&T
Broadband. After careful review, and based in part on the advice of its
financial advisors, Credit Suisse First Boston Corporation and Goldman, Sachs &
Co., the AT&T Board determined that Comcast's proposal did not reflect the full
value of AT&T Broadband. The AT&T Board also continued to be concerned by the
corporate governance issues arising from Comcast's multi-tier voting structure.
The AT&T Board directed AT&T management to explore financial and strategic
alternatives relating to AT&T Broadband, including the previously announced
restructuring plans, with the goal of providing the greatest long-term value to
shareholders. In addition, the AT&T Board decided to delay finalizing and
mailing to shareholders the proxy materials that AT&T had previously filed.
Thereafter, representatives of AT&T had preliminary discussions with
representatives of a number of third parties who had expressed interest in a
transaction with or an investment in AT&T or AT&T Broadband. AT&T informed each
of the parties that it would not be willing to discuss valuation or commence due
diligence activities until the other party entered into a customary
confidentiality agreement. AT&T's proposed confidentiality agreement included
provisions prohibiting interested parties from holding discussions with each
other with respect to a combination with AT&T Broadband without AT&T's consent.
II-4
AT&T's discussions with third parties included discussions with
representatives of Comcast. Because Comcast objected to signing AT&T's proposed
confidentiality agreement, however, these discussions initially did not include
any valuation discussions nor did the parties commence due diligence.
On September 17, 2001, Charles Noski and Brian L. Roberts and certain
representatives of their respective financial and legal advisors met in
Philadelphia. At this meeting, Mr. Roberts indicated that Comcast would be
willing to negotiate certain aspects of its proposed governance structure for a
combined Comcast-AT&T Broadband. He also indicated that Comcast would be willing
to enter into a confidentiality agreement containing restrictions on Comcast's
ability to talk to other parties regarding a potential combination with AT&T
Broadband, so long as AT&T was willing to indicate that Comcast's governance
position would not preclude a transaction with Comcast.
At meetings held on September 20 and 22, 2001, AT&T's management and
financial and legal advisors reviewed with the AT&T Board the status of
discussions with various parties and the strategic alternatives available to
AT&T with respect to AT&T Broadband. Following this review, the AT&T Board
instructed AT&T's management and advisors to continue to explore and develop
financial and strategic alternatives relating to AT&T Broadband. The AT&T Board
authorized management to indicate to Comcast that governance would not preclude
a transaction with Comcast if the terms of the transaction as a whole were
sufficiently attractive. The AT&T Board also authorized AT&T's management and
advisors to seek formal proposals from interested parties.
From August through October 2001, the Comcast Board met several times to
receive reports from its management on the status of Comcast's proposal to
acquire AT&T Broadband. After one of these briefings at a special meeting of the
Comcast Board held on September 26, 2001, Comcast's legal advisors reviewed the
terms of the confidentiality agreement that Comcast and AT&T had negotiated and
explained the restrictions imposed by the agreement on Comcast's ability to talk
to third parties. After a lengthy discussion of the terms of the confidentiality
agreement and related matters, the Comcast Board unanimously authorized
management to enter into the confidentiality agreement, to commence due
diligence on AT&T Broadband and to continue negotiations with AT&T regarding an
AT&T Broadband transaction.
On September 28, 2001, AT&T and Comcast entered into a confidentiality
agreement with respect to a possible transaction involving AT&T Broadband.
Thereafter, AT&T and Comcast commenced the exchange of confidential information
and other due diligence activities. Representatives of AT&T also continued
discussions and due diligence activities with other interested parties,
including parties interested in making an investment in AT&T Broadband. In
addition, AT&T's legal advisors sent first drafts of a proposed merger agreement
and separation and distribution agreement to parties that had executed a
confidentiality agreement.
On October 23 and 24, 2001, letters seeking formal proposals were sent on
AT&T's behalf to three parties, one of which was Comcast, that had expressed
interest in a possible combination with AT&T Broadband and had executed
confidentiality agreements. Each letter stated that the party should submit its
proposal to the attention of AT&T's legal advisor no later than November 30,
2001 and set forth procedures for submitting the proposal and for conducting due
diligence. The letter also stated that the proposal should include a copy of the
merger agreement marked to show any proposed changes and that the proposal
should have full board approval. In addition, the letter encouraged parties to
discuss any financial or legal issues with AT&T's financial and legal advisors
prior to submitting a proposal. Also on October 23, 2001, AT&T appointed William
T. Schleyer president and chief executive officer of AT&T Broadband and
appointed two other new senior executives of AT&T Broadband. AT&T stated that
the appointments were part of an effort to strengthen and enhance AT&T
Broadband's senior management team as AT&T continued to evaluate strategic and
financial alternatives for AT&T Broadband.
During the ensuing period, AT&T and its advisors conducted further
discussions and due diligence activities with each of the parties. These
included discussions relating to potential synergies and strategies, including
telephony strategy, for a combined company, as well as discussions with respect
to the draft merger agreement and other draft transaction documents,
particularly the separation and distribution
II-5
agreement and the other intercompany agreements. AT&T and its advisors also
discussed with each of the parties the governance structure proposed for the
combined company. In addition, during this period, AT&T continued to have
discussions with other parties interested in making only an investment in AT&T
Broadband.
Over the course of the discussions between Comcast and AT&T Broadband,
Comcast agreed that the voting power of the Class B shares held by the Roberts
family would be limited to one-third of the voting power of the combined company
and that the initial board of the combined company would be comprised of five
members of the current Comcast board, five members of the current AT&T Board to
be mutually agreed, including Mr. Armstrong as Chairman, and two new independent
directors to be selected mutually. The Roberts family agreed that, for five
years, it would not sell its Class B shares except to certain permitted
transferees or in a transaction that offered the same per share consideration to
all shareholders and that was approved or accepted by holders of a majority of
the shares held by shareholders other than the Roberts family.
From September through November 2001, Comcast held talks from time to time
with Microsoft Corporation concerning an arrangement whereby Microsoft would
exchange AT&T preferred securities held by it that are referred to in this
document as "QUIPS" in an aggregate principal amount of $5 billion for equity in
AT&T Comcast. The purpose of these discussions was to negotiate what is referred
to in this document as the "Microsoft transaction," in order to reduce the
amount of fixed obligations AT&T Comcast would have upon completion of an AT&T
Broadband transaction. Also, during October and November 2001 Brian L. Roberts
and C. Michael Armstrong had a series of meetings to discuss matters relating to
the strategy and management of the combined company.
On November 26, 2001, at a special meeting of the Comcast Board, management
updated the Board on the status of negotiations concerning an AT&T Broadband
transaction and on the extensive due diligence that Comcast and its financial
and legal advisors had conducted. At that meeting, management also described its
efforts to prepare a revised offer for AT&T Broadband for submission to AT&T on
November 30, 2001. The Comcast Board heard a presentation from Comcast's legal
advisor concerning the auction process initiated by AT&T and the fiduciary
duties of the Comcast directors and a presentation from Comcast's financial
advisors concerning the terms of Comcast's revised proposal. Thereafter, the
Comcast Board unanimously authorized management to continue negotiations with
AT&T concerning an AT&T Broadband transaction.
On November 27, 2001, a letter was sent on AT&T's behalf to each of the
three parties informing them that the deadline for submission of proposals had
been extended to December 3, 2001.
On the morning of December 3, 2001, at a special meeting of the Comcast
Board, management reviewed with the directors the terms of its revised offer to
acquire AT&T Broadband, including the amount of equity to be issued to AT&T
shareholders, the amount of debt to be assumed by AT&T Broadband and the
governance arrangements to be implemented for the combined company upon
completion of an AT&T Broadband transaction. Management also reviewed with the
directors the final terms of the Microsoft transaction. After discussion, the
Comcast Board unanimously authorized management to submit the revised offer on
the terms and conditions described at that meeting and to enter into the
exchange agreement with Microsoft relating to the Microsoft transaction. Shortly
after that meeting, Comcast and Microsoft executed the exchange agreement.
Later on December 3, 2001, each of the three parties submitted a proposal,
including proposed agreements, with respect to a combination with AT&T
Broadband. Over the course of the next several days, AT&T's management and its
financial and legal advisors reviewed the proposals and had discussions with
representatives of each of the parties. At the AT&T Board's direction, AT&T's
management and its advisors sought to clarify aspects of the proposals, as well
as to negotiate various provisions of the proposed agreements.
At meetings held on December 7 and 8, 2001, AT&T's management and financial
and legal advisors reviewed and discussed with the AT&T Board each of the
proposals, as well as other alternatives available
II-6
to AT&T. These alternatives included proceeding with the separation of AT&T
Broadband without any combination with another party, or retaining AT&T
Broadband as part of AT&T, possibly in connection with an investment by a third
party. AT&T's legal advisors also reviewed again with the AT&T Board the legal
standards applicable to their consideration of the proposals. The AT&T Board
concluded that none of the proposals as presented was sufficiently attractive to
accept, nor were the proposed agreements with any of the parties at a stage to
be executed immediately. The AT&T Board also concluded, however, that each of
the three proposals and sets of agreements might be capable of being improved
sufficiently to be acceptable to the AT&T Board. In light of these conclusions,
the AT&T Board directed AT&T's management and advisors to seek to improve the
terms of the proposals, and reach agreements that were ready to be executed, in
advance of the AT&T Board's regularly scheduled meeting to be held on December
19, 2001.
On December 8 and 9, 2001, representatives of AT&T informed each of the
three parties of the AT&T Board's decisions. The AT&T representatives proposed
meetings and discussions with representatives of each of the parties over the
next week with the goal of reaching revised proposals and final agreements no
later than December 16, 2001. In these meetings and discussions, in accordance
with the AT&T Board's instructions, AT&T's representatives requested that each
of the parties increase the amount of equity in the combined company that AT&T
shareholders would receive and agree on an allocation of assets and liabilities
between AT&T and AT&T Broadband consistent with the allocations proposed by
AT&T.
On December 15, 2001, the Comcast Board met to consider a recommendation by
management that Comcast increase its offer for AT&T Broadband. At that meeting,
management updated the Comcast directors on the status of the negotiations with
AT&T concerning the AT&T Broadband transaction. Comcast's legal advisor then
reviewed with the Comcast Board in detail the terms of the merger agreement and
the other transaction agreements that had been negotiated with AT&T as well as
the fiduciary duties of the Comcast directors. Also at that meeting, Comcast's
financial advisors made a presentation concerning certain financial aspects of
Comcast's proposal for AT&T Broadband. Thereafter, the Comcast Board unanimously
authorized management to increase Comcast's bid for AT&T Broadband.
On December 16, 2001, each of the three parties submitted revised
proposals, in each case increasing the equity amount offered to AT&T
shareholders and the amount of liabilities that the combined company would
assume. Over the next three days, representatives of AT&T had further
discussions with representatives of each of the three parties in an effort to
finalize the proposed agreements and to encourage each of the parties to make
sure that it had presented its best and final proposal. In the course of these
discussions with representatives of AT&T, all three parties made final
improvements to their proposals.
On the morning of December 19, 2001, the Comcast Board met to consider a
recommendation by management that Comcast increase the equity component of its
offer for AT&T Broadband. At that meeting, Comcast's legal advisor provided the
Board with an update on the status of the negotiations with AT&T. Comcast's
financial advisors indicated that they would be in a position to provide the
Board with opinions to the effect that the price proposed to be paid in the AT&T
Broadband transaction would be fair to Comcast's shareholders. After discussion,
the Comcast Board unanimously authorized Comcast management to increase its bid
for AT&T Broadband and to enter into an AT&T Broadband transaction on the terms
previously described to the Comcast Board.
At the AT&T Board meeting on December 19, 2001, AT&T's management and
financial and legal advisors reviewed and discussed with the AT&T Board the
final proposals from each of the parties and again reviewed the other
alternatives available to AT&T, and AT&T's legal advisors again reviewed the
legal standards applicable to the AT&T Board's decisions. AT&T's management and
advisors also reviewed with the AT&T Board the risks, including regulatory
risks, execution risks and certainty of completion, of each of the proposals and
alternatives.
Based on this review, the AT&T Board concluded that the Comcast proposal
offered greater value and certainty than the other two proposals, as well as
greater value and certainty than the other available
II-7
alternatives. With respect to the three combination proposals, the aggregate
value of the equity and debt assumption offered by Comcast (in the case of the
equity portion, based on then current public trading prices and pro forma
trading prices based on comparable multiples) was greater than that offered by
the other two proposals. The AT&T Board also believed, based on the
presentations of its legal advisors, that the Comcast proposal presented the
least regulatory risk of the three proposals. With respect to the alternative of
not accepting any combination proposal, and either continuing with the
separation of AT&T Broadband or retaining AT&T Broadband as part of AT&T, the
AT&T Board believed that the value that could be derived from a combination of
the operations of Comcast and AT&T Broadband was greater than the value that
could be expected from the continued operation of AT&T Broadband on its own. In
addition, the AT&T Board believed that the risks arising from AT&T's debt levels
would be substantially reduced by the proposed assumption of debt by AT&T
Comcast.
The AT&T Board noted favorably that the Roberts family had agreed to limit
the voting power of the Class B shares to 33 1/3%. The AT&T Board recognized
that this voting power would still give the Roberts family the ability to
exercise significant influence over the combined company and that this level of
voting power would be disproportionate to the Roberts family's economic interest
of less than 1.5% of AT&T Comcast. However, in comparison to the Roberts
family's approximately 86.7% voting interest in Comcast, or Comcast's original
combination proposal that would have given the Roberts family a voting interest
of approximately 43% in AT&T Comcast, the AT&T Board believed that the agreement
by the Roberts family to limit its voting power to 33 1/3% would increase the
influence of the public shareholders of AT&T Comcast and eliminate the majority
control that the Roberts family now exercises over Comcast.
However, in reviewing the agreement of the Roberts family not to sell its
Class B shares except to certain permitted transferees or in a transaction that
offered the same per share consideration to all shareholders and that was
approved or accepted by holders of a majority of the shares held by shareholders
other than the Roberts family, the AT&T Board determined that this protection
should be extended from five years to ten years. The AT&T Board directed
management to request that the Roberts family agree to this extension. Messrs.
Armstrong and Noski telephoned Brian L. Roberts to ask that the Roberts family
agree to the extension. After considering the issue, Mr. Roberts called Mr.
Armstrong back to inform him that the family would agree. The AT&T Board voted
unanimously to approve the Comcast proposal and the agreements reflecting that
proposal. Following the meeting, AT&T and Comcast executed the merger agreement,
AT&T and AT&T Broadband executed the separation and distribution agreement, and
AT&T, Comcast and Mr. Roberts executed the support agreement.
In April 2002, the merger agreement was amended to modify certain
governance arrangements. On May 14, 2002, the merger agreement and the
separation and distribution agreement were amended.
COMCAST'S REASONS FOR THE AT&T COMCAST TRANSACTION
The Comcast Board unanimously determined that the AT&T Comcast transaction,
including the Comcast merger, is fair to and in the best interests of Comcast
shareholders. The Comcast Board recommends that holders of Comcast common stock
vote FOR approval and adoption of the merger agreement and the transactions
contemplated by the merger agreement. In the course of determining that the AT&T
Comcast transaction, including the Comcast merger, is fair to and in the best
interests of Comcast shareholders, the Comcast Board consulted with management,
as well as its legal and financial advisors, and considered the following
primary factors:
- Creating an Unrivaled Broadband Network. Comcast believes that the
combination of Comcast with AT&T Broadband will create a network of
unrivaled scale and scope, uniquely situated to realize the vision of
broadband. On a pro forma basis, the combined network will have
approximately 22 million subscribers and will pass approximately 38
million homes. A network is considered to pass a home if the home can be
connected to the network without a further extension of transmission
lines. In comparison, Comcast's and AT&T Broadband's major cable
competitors, AOL Time Warner Inc., Charter Communications and Cox
Communications, have networks with approximately 11.2 million, 7.0
million and 6.2 million subscribers, respectively, that pass
II-8
approximately 18.3 million, 11.5 million and 10.0 million homes,
respectively, and Comcast's and AT&T Broadband's satellite-based
competitors, DirecTV and Echostar, have networks with approximately 10.7
million and 6.8 million subscribers, respectively. The combined company
will have a physical plant that is 80% upgraded to 550 MHZ and 67%
upgraded to 750 MHZ. Comcast expects these strengths will permit the
combined company to lead the industry in the development of new broadband
services, such as video-on-demand, interactive television and telephony.
- Synergies. Comcast estimates that the combined company could achieve
synergies and efficiencies worth approximately $1.25 billion to $1.95
billion annually in increased earnings before interest, tax, depreciation
and amortization, or EBITDA, and approximately $200 million to $300
million a year in capital expenditure savings. A combined AT&T Comcast
believes it can achieve the EBITDA synergies and efficiencies in the
following areas:
- ability to utilize AT&T Broadband's experience to introduce cable
telephony in Comcast's service areas ($600 to $800 million annually);
- increased ability to develop new products and services ($100 to $200
million annually);
- programming cost savings ($250 to $400 million annually);
- increased operating efficiencies ($200 to $300 million annually); and
- ability to sell national advertising ($100 to $200 million annually).
Some of these synergies and efficiencies should be realized immediately or
soon after completion of the AT&T Comcast transaction and more than half
of them should be realized within 3 years after completion of the AT&T
Comcast transaction. These estimates are forward-looking statements
subject to the risks described under "Certain Legal
Information -- Information Regarding Forward-Looking Statements."
- Potential for Earnings Growth. Comcast believes the combined company
will offer an opportunity for earnings growth as the AT&T Broadband
systems are brought up to industry-standard margins. Comcast has a track
record of maintaining EBITDA margins even as lower margin systems are
integrated. By combining the best management of Comcast and AT&T
Broadband, Comcast expects to accelerate the growth in EBITDA margins
that AT&T Broadband has begun.
- Fairness Opinions. Morgan Stanley & Co. Incorporated, J.P. Morgan
Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated,
financial advisors to Comcast, each rendered an opinion dated December
19, 2001 to the effect that as of that date and based upon and subject to
the assumptions, qualifications and limitations set forth therein, the
conversion ratios in the Comcast merger applicable to holders of Comcast
common stock, in the aggregate, were fair, from a financial point of
view, to Comcast shareholders, taken together. Comcast did not ask for
and accordingly did not receive from its financial advisors an opinion as
to the fairness of the conversion ratio in the Comcast merger applicable
to holders of any particular class of Comcast stock to holders of such
class of Comcast stock. The fairness opinions of Morgan Stanley & Co.
Incorporated, J.P. Morgan Securities Inc. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated are included as Annexes G, H and I,
respectively, to this document and should be read in their entireties.
The Comcast Board believes that these opinions support the Comcast
Board's conclusion that the AT&T Comcast transaction, including the
Comcast merger, is fair to and in the best interests of Comcast
shareholders.
- Tax-Free Transaction. Comcast expects that the Comcast merger will be
tax-free for U.S. federal income tax purposes to Comcast shareholders.
- Terms of the AT&T Comcast Transaction Agreements. The Comcast Board
considered the terms and conditions of the merger agreement, including
the conditions to closing, the termination fees payable under certain
circumstances and the restrictions imposed on the conduct of business of
AT&T Broadband and Comcast in the period prior to closing. The Comcast
Board took particular
II-9
note of the provisions of the merger agreement which do not permit AT&T to
terminate the merger agreement to accept a superior acquisition proposal or if
the AT&T Board changes its recommendation of the AT&T transaction proposal or
the AT&T Comcast charter proposal in a manner adverse to Comcast, and
which, subject to applicable law, require AT&T to submit the AT&T
transaction proposal and the AT&T Comcast charter proposal for a vote of
the AT&T shareholders at the AT&T meeting. The Comcast Board also
considered the terms and conditions of the other transaction agreements
described or referred to in this document.
- Governance. The Comcast Board considered the fact that Brian L. Roberts
will initially be the Chief Executive Officer and President of AT&T
Comcast and will, along with C. Michael Armstrong, comprise the Office of
the Chairman, AT&T Comcast's principal executive deliberative body. The
Comcast Board also considered the fact that Brian L. Roberts will, in
consultation with C. Michael Armstrong, select the initial executive
officers of the combined company.
- Structure of the AT&T Comcast Transaction. The Comcast Board considered
that the AT&T Comcast transaction is structured as a spin-off and merger
of AT&T Broadband with a subsidiary of AT&T Comcast instead of a spin-off
of AT&T's communications business and merger of AT&T (which would under
such a structure consist primarily of AT&T's broadband business) with a
subsidiary of AT&T Comcast. Comcast believes that the structure of the
AT&T Comcast transaction reduces the potential exposure of the combined
company to historic AT&T liabilities that are not attributable to AT&T's
broadband business. In addition, Comcast believes that the structure of
the AT&T Comcast transaction reduces the potential exposure of the
combined company to contractual liabilities of AT&T's communications
business.
The Comcast Board also considered potential adverse consequences and
negative factors, primarily consisting of the following, but concluded that the
positive factors outweighed these negative factors:
- Risk Factors. The Comcast Board considered the risks described under
"Summary and Overview of the Transactions -- Risk Factors Relating to the
AT&T Comcast Transaction" and "Summary and Overview of the
Transactions -- Risk Factors Relating to the Business of AT&T Comcast."
- Increased Debt Level. AT&T has allocated a significant portion of AT&T's
consolidated debt to AT&T Broadband. As a result of this allocation, AT&T
Comcast will be more leveraged than Comcast has historically been. The
Comcast Board believes that the financial strength of the combined
company and the deleveraging opportunities that will be available
following completion of the AT&T Comcast transaction will enable AT&T
Comcast to support and reduce this debt level.
- AT&T Broadband Operating Losses. The AT&T Broadband financial statements
for the year ended December 31, 2001 reflect significant operating
losses. The Comcast Board believes that the magnitude of the operating
losses reflected in the pro forma financial statements included in this
document is largely the result of amortization and non-recurring charges
and will not affect the ability of AT&T Comcast to generate cash in an
amount sufficient to fund its operations.
- Potential Additional Payments. The Comcast Board considered provisions
of the merger agreement that may require Comcast to increase the amount
of AT&T Comcast common stock to be issued to AT&T Broadband shareholders
in the AT&T Broadband merger. In particular, the Comcast Board noted that
the aggregate number of shares of AT&T Comcast common stock to be issued
to holders of AT&T Broadband common stock may be increased by up to 3% if
the AT&T Comcast common stock issued to holders of AT&T Broadband common
stock is not included in the Standard & Poor's 500 Index and there is a
per share disparity between the average trading price of such class of
stock and AT&T Comcast Class A Special common stock, in each case shortly
after completion of the AT&T Comcast transaction.
In addition, the Comcast Board was aware of the interests of certain of its
directors and officers described under "Employee Benefits Matters -- Interests
of Directors and Officers in the AT&T Comcast Transaction."
II-10
Due to the variety of factors and the quality and amount of information
considered, the Comcast Board did not find it practicable to and did not make
specific assessments of, quantify or assign relative weights to the specific
factors considered in reaching its determination to approve the merger agreement
and the transactions contemplated by the merger agreement. Instead, the Comcast
Board made its determination after consideration of all factors taken together.
In addition, individual members of the Comcast Board may have given different
weight to different factors.
COMCAST'S PREFERRED STRUCTURE PROPOSAL
Background. The Comcast charter provides that if in a transaction like the
Comcast merger holders of the Comcast Class A common stock, the Comcast Class B
common stock and the Comcast Class A Special common stock do not receive the
same consideration for each of their shares of Comcast common stock (i.e., the
same amount of cash or the same number of shares of each class of stock issued
in the transaction in proportion to the number of shares of Comcast common stock
held by them, respectively, without regard to class), holders of each class of
Comcast common stock must receive "mirror" securities (i.e., shares of a class
of stock having substantially equivalent rights as the applicable class of
Comcast stock). It is unclear that the shares of AT&T Comcast Class A common
stock to be issued to holders of the Comcast Class A common stock in the Comcast
merger under the Preferred Structure qualify as "mirror" securities because the
per share voting rights of the Class B common stock relative to the per share
voting rights of the Class A common stock will increase from 15:1 to
approximately 15:0.2094 (based on the number of shares of AT&T Comcast Class A
common stock and AT&T Comcast Class B common stock anticipated to be outstanding
upon completion of the AT&T Comcast transaction if the Preferred Structure is
implemented and assuming that the Microsoft transaction is completed and that
AT&T Comcast is not required to make any additional payments of AT&T Comcast
common stock in connection with the AT&T Comcast transaction). Consequently,
Comcast has decided to seek approval for the adoption of an amendment to the
Comcast charter that expressly permits implementation of the Preferred
Structure. If approved, the Comcast charter amendment would be effected
immediately prior to the Comcast merger. A copy of the Comcast charter amendment
that would be filed is attached as Annex E to this document. If the AT&T Comcast
transaction does not occur, the Comcast charter amendment will not be effected,
even if the preferred structure proposal is approved.
Recommendation. The Comcast Board has unanimously determined that the
Preferred Structure is in the best interests of holders of the Comcast Class A
common stock. The Comcast Board recommends that holders of Comcast common stock
vote FOR the adoption of the Comcast charter amendment described above. If the
preferred structure proposal is approved, the Preferred Structure will be
implemented upon completion of the AT&T Comcast transaction. See "Description of
the AT&T Comcast Transaction Agreements -- The Merger Agreement -- Merger
Consideration -- The Preferred Structure." If the preferred structure proposal
is not approved, the Alternative Structure will be implemented upon completion
of the AT&T Comcast transaction. See "Description of the AT&T Comcast
Transaction Agreements -- The Merger Agreement -- Merger Consideration -- The
Alternative Structure."
Reason. In the course of determining that the Preferred Structure is in
the best interests of holders of Comcast Class A common stock, the Comcast Board
consulted with management, as well as its financial and legal advisors. After
taking into account their advice, the Comcast Board decided to recommend
approval of the preferred structure proposal based on its belief that holders of
Comcast Class A common stock will benefit from owning shares in an extremely
liquid class of stock. If the Preferred Structure is implemented, assuming the
Microsoft transaction is completed and AT&T Comcast is not required to make any
additional payments of AT&T Comcast common stock in connection with the AT&T
Comcast transaction, upon completion of the AT&T Comcast transaction, there will
be approximately 1.372 billion outstanding shares of AT&T Comcast Class A common
stock. By contrast, if the Alternative Structure is implemented and regardless
of whether or not the Microsoft transaction is completed or AT&T Comcast is
required to make any additional payments of AT&T Comcast common stock in
connection with the AT&T Comcast transaction, upon completion of the AT&T
Comcast transaction, there will only be approximately 22 million outstanding
shares of AT&T Comcast Class A
II-11
common stock. Although it is not possible to predict how the AT&T Comcast Class
A common stock would trade relative to the AT&T Comcast Class C common stock
under the Alternative Structure, the Comcast Board was aware that the Comcast
Class A common stock (with approximately 22 million shares presently
outstanding) has typically traded at prices below those of the much more liquid
Comcast Class A Special common stock (with approximately 915 million shares
presently outstanding) notwithstanding the voting rights of the Comcast Class A
common stock and believed that the even greater difference in liquidity between
the AT&T Comcast Class A common stock (with approximately 22 million shares
outstanding) and the AT&T Comcast Class C common stock (with approximately 1.35
billion shares outstanding assuming that the Microsoft transaction is completed
and that AT&T Comcast is not required to make any additional payments of AT&T
Comcast common stock in connection with the AT&T Comcast transaction) under the
Alternative Structure could lead to an even greater trading disparity. While
holders of AT&T Comcast Class A common stock, together with holders of AT&T
Comcast Class B common stock, will have specific approval rights over numerous
corporate actions under the Alternative Structure that they will not have under
the Preferred Structure, holders of AT&T Comcast Class B common stock will
control these approval rights because holders of AT&T Comcast Class B common
stock will hold approximately 86.7% of the votes entitled to be cast on such
matters. In addition, Comcast does not believe that either the increased per
share voting power of AT&T Comcast Class A common stock under the Alternative
Structure relative to the per share voting power of the AT&T Comcast Class A
common stock under the Preferred Structure or the greater aggregate voting power
of the former holders of Comcast Class A common stock under the Alternative
Structure (5.14% as compared to approximately 1.1% under the Preferred Structure
assuming that the Microsoft transaction is completed and that AT&T Comcast is
not required to make any additional payments of AT&T Comcast common stock in
connection with the AT&T Comcast transaction) outweighs the advantage of the
greater liquidity that the AT&T Comcast Class A common stock will have under the
Preferred Structure relative to the Alternative Structure.
Holders of AT&T Comcast Class B common stock will have the same rights
under the Preferred Structure and the Alternative Structure in all material
respects. Accordingly, the Comcast Board did not separately consider the
interests of holders of Comcast Class B common stock in its decision to
recommend that holders of Comcast Class A common stock vote in favor of the
preferred structure proposal.
AT&T'S REASONS FOR THE AT&T COMCAST TRANSACTION
At a meeting held on December 19, 2001, the AT&T Board unanimously
determined that the AT&T Comcast transaction, including the separation, the AT&T
Broadband spin-off and the AT&T Broadband merger, is fair to and in the best
interests of AT&T shareholders. The AT&T Board recommends that holders of AT&T
common stock vote FOR approval and adoption of the merger agreement and the
transactions contemplated by the merger agreement. In the course of determining
that the AT&T Comcast transaction, including the separation, the AT&T Broadband
spin-off and the AT&T Broadband merger, is fair to and in the best interests of
AT&T shareholders, the AT&T Board consulted with management, as well as its
legal and financial advisors, and considered the following primary factors:
- Valuation. The AT&T Board believes that the AT&T Broadband exchange
ratio provides AT&T shareholders with an attractive valuation for their
interest in AT&T Broadband and offers superior and more certain value
than the alternatives that were available to AT&T. These alternatives
included other combination proposals with respect to AT&T Broadband,
continuing with the separation of AT&T Broadband without any combination
and retaining AT&T Broadband as part of AT&T.
- Strength of Combined Company. AT&T believes that the combination of AT&T
Broadband with Comcast will create a leading entertainment,
communications and information company, passing more than 38 million
homes with more than 22 million subscribers. The combined company will
have a presence in 41 states and will be the leader in eight of the ten
largest U.S. cable marketing areas and a major presence in 17 of the 20
largest cable marketing areas. AT&T believes that the
II-12
combined company will be a leader in advanced services, well positioned
for developing and bringing to market new and innovative products and
services for consumers. The scale of the combined company is expected to
accelerate broadband deployment in areas such as telephony, video on
demand, home networking and interactive television. AT&T Comcast is also
expected to be able to take advantage of significant cost savings through
elimination of duplicative operations, reduced operating costs and
adoption of best practices from both AT&T Broadband and Comcast, as well
as the development of new revenue-producing products and services. By
virtue of their large economic interest in AT&T Comcast, approximately
54.8% in the aggregate, AT&T shareholders will have a significant
opportunity to participate in the future performance of the combined
company.
- Telephony Strategy. AT&T Comcast is expected to be able to take
advantage of AT&T Broadband's cable telephony expertise in order to
develop telephony opportunities and increase revenues from telephony
service offerings. The AT&T Board believes that the opportunity to
utilize AT&T Comcast's extensive facilities should enhance the growth
opportunities of the combined company.
- Benefits of Separating AT&T Broadband. The AT&T Board continues to
believe that the separation of AT&T Broadband from the communications
services businesses of AT&T provides benefits to both businesses. The
separation is expected to give the broadband and communications services
businesses greater financial and operating strength to help realize
growth opportunities, reduce the complexity inherent in managing an
integrated enterprise of broadband and communications businesses, allow
the businesses to create more effective management incentive and
retention programs and allow for more focused investment opportunities
than those presented by a diversified AT&T. The AT&T Board believes that
the AT&T Comcast transaction will only enhance these benefits by creating
a better and stronger broadband business.
- Improvement of Financial Position of AT&T. AT&T has been pursuing a
course of activities designed to reduce its debt levels. The AT&T Board
believes that the allocation of a significant portion of AT&T's
consolidated debt to AT&T Broadband, followed by the combination of AT&T
Broadband with Comcast, will improve AT&T's financial position. AT&T
believes that the combined AT&T Comcast, with $19.7 billion in combined
pro forma revenue for the year ended December 31, 2001, will have greater
financial strength and ability to support the debt allocated to AT&T
Broadband and to engage in further debt reduction activities than an
independent AT&T Broadband, with $10.1 billion in revenue for the year
ended December 31, 2001, and that the communications services business
will have a strong capital position following the separation of AT&T
Broadband, putting it in a better position to take advantage of
opportunities in the future.
- Opinions of Financial Advisors. Credit Suisse First Boston and Goldman
Sachs, financial advisors to AT&T, rendered to the AT&T Board separate
written opinions, each dated December 19, 2001, to the effect that, as of
that date and based on and subject to the matters described in its
opinion, the AT&T Broadband exchange ratio was fair, from a financial
point of view, to holders of AT&T Broadband common stock immediately
prior to the mergers, other than Comcast and its affiliates. The opinions
of Credit Suisse First Boston and Goldman Sachs are attached as Annexes J
and K, respectively, to this document and should be carefully read in
their entireties.
- Tax-Free Transaction. AT&T expects the AT&T Comcast transaction,
including the separation, the AT&T Broadband spin-off and the AT&T
Broadband merger, to be tax-free for U.S. federal income tax purposes to
AT&T's shareholders.
- Other Agreement Terms. The AT&T Board considered the other terms and
conditions of the merger agreement, the separation and distribution
agreement and the related agreements, which are summarized in this
document. The AT&T Board took particular note of the provision that AT&T
and Comcast will seek to have the class of AT&T Comcast common stock
which the shareholders of AT&T will receive in the AT&T Broadband merger
included in the Standard & Poor's 500 Index. If the class is not
included, the shareholders of AT&T will receive in the AT&T Broadband
II-13
merger additional shares of the same class of AT&T Comcast common stock,
up to an additional 3%, if the shares they receive in the AT&T Broadband
merger trade below the AT&T Comcast Class A Special shares during 10
randomly selected trading days during a measurement period consisting of
20 consecutive trading days commencing no later than 45 days after the
closing date of the AT&T Comcast transaction.
The AT&T Board also considered potential adverse consequences and negative
factors, primarily consisting of the following, but concluded that the positive
factors outweighed these negative factors:
- Risk Factors. The AT&T Board considered the risks described under
"Summary and Overview of the Transactions -- Risk Factors."
- Governance of AT&T Comcast. The AT&T Board considered many elements of
the proposed governance arrangements as negative factors in evaluating
the proposed transaction, including those described below. See "Summary
and Overview of the Transactions -- Risk Factors -- Risk Factors Relating
to the AT&T Comcast Transaction -- Atypical Governance Arrangements May
Make It More Difficult for Shareholders to Act" and "Description of
Governance Arrangements Following the AT&T Comcast Transaction." In
determining that the benefits of the AT&T Comcast transaction offset
these negative factors, the AT&T Board considered the substantial and
extensive record of negotiations with Comcast on these governance
provisions, the fact that these negotiations had materially improved the
rights of the public shareholders over the rights available in the
transaction originally presented, the favorable economic terms of the
proposed transaction, the likelihood of completion of the proposed
transaction and the overall advantages of the transaction as compared
with the other strategic alternatives available to AT&T after an
extensive exploration process.
- Roberts Family Voting Power. The AT&T Board considered that the
Roberts family and its transferees will hold approximately 33.3% of
the voting power of AT&T Comcast through their ownership of shares of
AT&T Comcast Class B common stock representing approximately 1.0% of
the economic interest in the combined company and that this voting
interest will generally not be diluted by future issuances of shares
of any other class of AT&T Comcast stock.
However, the AT&T Board compared these elements of the governance
structure to the existing governance structure of Comcast whereby the
Roberts family has approximately 86.7% of the voting power and
approximately 3% of the economic interest. The AT&T Board also
considered as an offsetting factor that the charter of AT&T Comcast
provided that a majority of the AT&T Comcast Board would consist of
independent directors at all times. The AT&T Board considered as a
further offsetting factor that the Roberts family agreed that for a
period of 10 years after completion of the AT&T Comcast transaction
they would not receive a premium for their high-vote stock without
making the same premium available for the shares held by the public.
- Term of the AT&T Comcast Directors. As originally negotiated, the
term of the AT&T Comcast Board upon completion of the AT&T Comcast
transaction would not expire until the 2005 annual meeting of AT&T
Comcast shareholders. AT&T and Comcast have now agreed that AT&T
Comcast will hold an annual meeting at which directors will be elected
in April 2004.
- Composition of Directors Nominating Committee. The AT&T Board
considered the structure of the Directors Nominating Committee of the
AT&T Comcast Board, including that Brian L. Roberts would be Chairman
of the Directors Nominating Committee, would have a vote in the
selection of additional members to the Directors Nominating Committee
and would thereby have influence over the selection of nominees for
election to the AT&T Comcast Board. The AT&T Board did not believe
this factor materially increases Mr. Roberts' influence over that
available by virtue of his voting power.
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- Supermajority Removal Provisions. The AT&T Board considered the 75%
removal provisions that are applicable to Brian L. Roberts and C.
Michael Armstrong, which make it unlikely that they will be removed
from their management positions.
- Shareholder Rights Plan. The AT&T Board considered that AT&T Comcast
would adopt a shareholder rights plan after completion of the AT&T
Comcast transaction that will prevent any holder of AT&T Comcast
stock, other than any holder of AT&T Comcast Class B common stock or
any of such holder's affiliates, from acquiring AT&T Comcast stock
representing more than 10% of AT&T Comcast's voting power without the
approval of the AT&T Comcast Board. The AT&T Board considered that in
making future decisions as to whether or not to redeem the shareholder
rights plan the AT&T Comcast Board would be bound by its fiduciary
duties to all shareholders.
- Difficulty in Execution. A significant degree of difficulty and
management distraction is inherent in the process of separating AT&T
Broadband from AT&T and integrating AT&T Broadband and Comcast. In
addition, there is a risk that cost efficiencies and benefits sought in
the AT&T Comcast transaction might not be fully achieved or that
achieving these benefits may take longer than expected.
- Share Trading Prices. There is no assurance as to the trading prices of
the shares of AT&T Comcast or AT&T following completion of the AT&T
Comcast transaction. In addition, while AT&T and Comcast will seek to
have the class of AT&T Comcast common stock which shareholders of AT&T
will receive in the AT&T Broadband merger included in the Standard &
Poor's 500 Index, there is no assurance that the companies will be
successful in achieving this inclusion. If the class of AT&T Comcast
common stock issuable in the AT&T Broadband merger is not included in the
index, this may adversely affect its trading price. In this event, while
AT&T shareholders will receive additional shares of the same class of
AT&T Comcast common stock to the extent the shares they receive in the
AT&T Broadband merger trade below the AT&T Comcast Class A Special shares
during a specified measurement period following the completion of the
AT&T Comcast transaction, this protection is limited to 3%.
- Alternative Transactions Not Permitted. The provisions of the merger
agreement do not permit AT&T to terminate the merger agreement for an
alternative transaction involving AT&T Broadband, although AT&T is
permitted to conduct negotiations with third parties under limited
circumstances, and the merger agreement requires AT&T to pay a $1.5
billion fee to a wholly owned subsidiary of Comcast in the event the
merger agreement is terminated under specified circumstances.
- AT&T's Lack of Diversification and Reduced Size. The lack of
diversification and reduced size of AT&T following the separation of AT&T
Broadband could affect its ability to achieve economies of scale, could
create capital and size constraints that did not previously exist, could
create increased costs due to decreasing purchasing power and could limit
its ability to obtain financing.
- Potential Volatility of Earnings and Stock Prices. As more focused
companies, the earnings of each of AT&T and AT&T Comcast will be more
closely tied to its particular performance and as a result their
securities could be subject to greater volatility.
In addition, the AT&T Board was aware of the interests of certain of its
directors and officers described under "Employee Benefits Matters -- Interests
of Directors and Officers in the AT&T Comcast Transaction."
Due to the variety of factors and the quality and amount of information
considered, the AT&T Board did not find it practicable to and did not make
specific assessments of, quantify or assign relative weights to the specific
factors considered in reaching its determination to approve the merger agreement
and the transactions contemplated by the merger agreement. Instead, the AT&T
Board made its determination after consideration of all factors taken together.
In addition, individual members of the AT&T Board may have given different
weight to different factors.
II-15
AT&T COMCAST CHARTER PROPOSAL
AT&T and Comcast are asking their respective shareholders to approve
separately the AT&T Comcast charter proposal, including the corporate governance
arrangements contained in the AT&T Comcast charter. These corporate governance
arrangements are described under "Description of Governance Arrangements
Following the AT&T Comcast Transaction." Approval of the AT&T Comcast charter
proposal is a condition to completion of the AT&T Comcast transaction.
Therefore, if AT&T shareholders and Comcast shareholders wish to approve the
AT&T Comcast transaction, they must also approve the AT&T Comcast charter
proposal.
Recommendation of the AT&T Board. The AT&T Board recommends that AT&T
shareholders vote FOR the AT&T Comcast charter proposal. AT&T negotiated
vigorously to obtain corporate governance protections as part of the AT&T
Comcast transaction, and the AT&T Board believes that the corporate governance
provisions set forth in the AT&T Comcast charter are a significant improvement
compared to Comcast's current governance provisions. For example, the final
negotiated AT&T Comcast charter limits the voting power of the AT&T Comcast
Class B common stock to 33 1/3%, as compared to the current 86.6% voting power
of the Comcast Class B common stock in Comcast. The AT&T Comcast charter also
requires that the AT&T Comcast Board have a majority of independent directors,
which is not required by the Comcast charter. In addition, the holders of the
AT&T Comcast Class B common stock have agreed that they will not sell their
shares of AT&T Comcast Class B common stock at a premium for 10 years without
offering the same premium to all shareholders in a transaction approved or
accepted by a majority of the publicly held shares.
As set forth above under "AT&T's Reasons for the AT&T Comcast Transaction,"
despite these improvements and protections, the AT&T Board still viewed the AT&T
Comcast corporate governance provisions as a "negative factor" in their
consideration of the AT&T Comcast transaction. Nevertheless, the AT&T Board
concluded that the positive factors with respect to the AT&T Comcast transaction
outweighed the negative factors. Therefore, the AT&T Board approved and
recommends the AT&T Comcast transaction, including the corporate governance
arrangements that were vigorously negotiated as part of that transaction. As
noted above, approval of the AT&T Comcast charter proposal, including the
corporate governance provisions contained in the AT&T Comcast charter, is a
condition to completion of the AT&T Comcast transaction. The AT&T Board believes
that the AT&T Comcast transaction is in the best interests of AT&T shareholders
and, therefore, urges AT&T shareholders to vote FOR the AT&T Comcast charter
proposal.
Recommendation of the Comcast Board. The Comcast Board recommends that
Comcast shareholders vote FOR the AT&T Comcast charter proposal. The Comcast
Board believes that the corporate governance provisions set forth in the AT&T
Comcast charter represent an integral element of the AT&T Comcast transaction,
all the terms of which were agreed upon after lengthy negotiations between
Comcast and AT&T. The Comcast Board approved and recommends the AT&T Comcast
transaction. As noted above, approval of the AT&T Comcast charter proposal is a
condition to completion of the AT&T Comcast transaction. The Comcast Board
believes that the AT&T Comcast transaction is in the best interests of Comcast
shareholders and, therefore, urges Comcast shareholders to vote FOR the AT&T
Comcast charter proposal.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Subject to the limitations and qualifications described herein, the
following discussion constitutes the opinion of Wachtell, Lipton, Rosen & Katz,
counsel to AT&T, as to the material U.S. federal income tax consequences of the
AT&T Broadband spin-off and the mergers to United States Holders of AT&T common
stock and AT&T Broadband common stock and the opinion of Davis Polk & Wardwell,
counsel to Comcast, as to the material U.S. federal income tax consequences of
the mergers to United States Holders of Comcast common stock. This discussion is
based on the Code, the Treasury Regulations promulgated thereunder, judicial
opinions, published positions of the Internal Revenue Service, and all
II-16
other applicable authorities as of the date of this document, all of which are
subject to change (possibly with retroactive effect).
As used in this document, the term "United States Holder" means:
- a citizen or resident of the United States;
- a corporation, or other entity taxable as a corporation for U.S. federal
income tax purposes, created or organized in or under the laws of the
United States or of any political subdivision thereof; or
- an estate or trust the income of which is subject to United States
federal income taxation regardless of its source.
The term United States Holder also includes certain former citizens and
residents of the United States.
This discussion does not describe all of the tax consequences that may be
relevant to a holder in light of his particular circumstances or to holders
subject to special rules, such as:
- certain financial institutions;
- insurance companies;
- tax-exempt organizations;
- dealers in securities or foreign currencies;
- persons holding AT&T common stock, AT&T Broadband common stock or Comcast
common stock as part of a hedge;
- United States Holders whose functional currency is not the U.S. dollar;
- partnerships or other entities classified as partnerships for U.S.
federal income tax purposes;
- persons subject to the alternative minimum tax;
- shareholders who acquired their AT&T common stock, AT&T Broadband common
stock or Comcast common stock through the exercise of options or
otherwise as compensation or through a tax-qualified retirement plan; or
- holders of options granted under any AT&T or Comcast benefit plan.
In addition, this summary is limited to shareholders that hold their AT&T
common stock, AT&T Broadband common stock or Comcast common stock as capital
assets. This discussion also does not address any tax consequences arising under
the laws of any state, local or foreign jurisdiction.
Accordingly, each AT&T, AT&T Broadband and Comcast shareholder is strongly
urged to consult with a tax adviser to determine the particular federal, state,
local or foreign income or other tax consequences to him of the AT&T Broadband
spin-off and the mergers.
It is assumed for purposes of the following discussion that the private
letter ruling (or an opinion of counsel) on the AT&T Broadband spin-off and the
opinions of counsel on the mergers which are discussed below under
"-- Conditions to Closing" have been received.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE SEPARATION AND THE AT&T
BROADBAND SPIN-OFF
The tax consequences of the separation and the AT&T Broadband spin-off are
as follows:
- no gain or loss will be recognized by, and no amount will be included in
the income of, AT&T or AT&T Broadband upon the separation and the AT&T
Broadband spin-off other than gains related to certain intercompany
transactions that will be triggered by the AT&T Broadband spin-off;
II-17
- no gain or loss will be recognized by, and no amount will be included in
the income of, United States Holders of AT&T common stock upon their
receipt of shares of AT&T Broadband common stock in the AT&T Broadband
spin-off;
- a United States Holder of AT&T common stock will apportion the tax basis
of such holder's AT&T common stock on which AT&T Broadband common stock
is distributed between AT&T common stock and the AT&T Broadband common
stock received in the AT&T Broadband spin-off in proportion to the fair
market values of such AT&T common stock and AT&T Broadband common stock
on the date of the AT&T Broadband spin-off; and
- the holding period of the shares of AT&T Broadband common stock received
by a United States Holder of AT&T common stock in the AT&T Broadband
spin-off will include the period during which such holder held the AT&T
common stock on which the AT&T Broadband common stock is distributed.
Current Treasury Regulations require each holder of AT&T common stock who
receives AT&T Broadband common stock pursuant to the AT&T Broadband spin-off to
attach to his or her federal income tax return for the year in which the AT&T
Broadband spin-off occurs, a detailed statement setting forth such data as may
be appropriate in order to show the applicability of Section 355 of the Code to
the AT&T Broadband spin-off. AT&T will provide the appropriate information to
each of its shareholders of record.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS
Subject to the discussion below relating to the receipt of cash instead of
fractional shares, for U.S. federal income tax purposes, the tax consequences of
the mergers will be as follows:
- the mergers will constitute an exchange to which Section 351 of the Code
applies;
- no gain or loss will be recognized by Comcast, AT&T Broadband, the AT&T
Broadband merger subsidiary, or the Comcast merger subsidiary as a result
of the mergers;
- no gain or loss will be recognized by:
-- United States Holders of AT&T Broadband common stock on the exchange of
their AT&T Broadband common stock for AT&T Comcast common stock; or
-- United States Holders of Comcast common stock on the exchange of their
Comcast common stock for AT&T Comcast common stock;
- the aggregate adjusted basis of the AT&T Comcast common stock received in
the mergers by:
-- a United States Holder of AT&T Broadband common stock will be equal to
the aggregate adjusted basis of the United States Holder's AT&T
Broadband common stock exchanged for that AT&T Comcast common stock,
reduced by any tax basis allocable to the fractional share interests in
AT&T Comcast common stock for which cash is received; and
-- a United States Holder of Comcast common stock will be equal to the
aggregate adjusted basis of the United States Holder's Comcast common
stock exchanged for that AT&T Comcast common stock; and
- the holding period of the AT&T Comcast common stock received in the
mergers by:
-- a United States Holder of AT&T Broadband common stock will include the
holding period of the United States Holder's AT&T Broadband common
stock exchanged for that AT&T Comcast common stock; and
-- a United States Holder of Comcast common stock will include the holding
period of the United States Holder's Comcast common stock exchanged for
that AT&T Comcast common stock.
II-18
Cash Instead of Fractional Shares. AT&T Comcast will not issue any
fractional shares in the AT&T Broadband merger. Instead, any fractional
interests AT&T Broadband shareholders otherwise would have been entitled to
receive will be sold and the proceeds will be paid to those shareholders. The
receipt of cash instead of a fractional share of AT&T Comcast common stock by a
United States Holder of AT&T Broadband common stock will result in taxable gain
or loss to such United States Holder for U.S. federal income tax purposes based
upon the difference between the amount of cash received by such United States
Holder and the United States Holder's adjusted tax basis in the fractional share
as set forth above. The gain or loss will constitute capital gain or loss and
will constitute long-term capital gain or loss if the United States Holder's
holding period is greater than one year as of the date of the mergers. The
deductibility of capital losses is subject to limitations.
Backup Withholding. Under the Code, if you are a non-corporate AT&T
Broadband shareholder and you receive cash instead of fractional shares of AT&T
Comcast common stock, you may be subject, under certain circumstances, to backup
withholding at the rates provided for in the Code with respect to such cash
unless you provide proof of an applicable exemption or a correct taxpayer
identification number, and otherwise comply with applicable requirements of the
backup withholding rules. Amounts withheld under the backup withholding rules
are not additional taxes and may be refunded or credited against your U.S.
federal income tax liability; provided that you furnish the required information
to the Internal Revenue Service.
Reporting Requirements. A United States Holder of Comcast common stock or
AT&T Broadband common stock receiving AT&T Comcast common stock as a result of
the mergers may be required to retain records related to such United States
Holder's Comcast common stock or AT&T Broadband common stock, as the case may
be, and file with its federal income tax return a statement setting forth facts
relating to the mergers.
CONDITIONS TO CLOSING
It is a condition to both the AT&T Broadband spin-off and the mergers that
AT&T has obtained one or more private letter rulings from the Internal Revenue
Service, which will continue in effect at the time of the AT&T Broadband
spin-off and mergers, to the effect that:
- the separation and the AT&T Broadband spin-off will be tax-free to AT&T
and its shareholders under Sections 355 and 368(a) of the Code,
- the mergers will not cause the separation and the AT&T Broadband spin-off
to fail to be qualified as a tax-free transaction pursuant to Section 355
of the Code, and
- the separation and the AT&T Broadband spin-off will not cause the
distribution by AT&T of all of the common stock of AT&T Wireless or of
Liberty Media to fail to qualify as tax-free transactions pursuant to
Sections 355 and 368(a) of the Code.
AT&T has filed a private letter ruling request in respect of the matters
described in the immediately preceding bullet points with the Internal Revenue
Service. The private letter ruling condition may be waived if AT&T and Comcast
mutually agree to obtain an opinion to the same effect from tax counsel of a
nationally recognized reputation mutually acceptable to AT&T and Comcast. The
receipt of such private letter ruling or opinion of counsel and its continuing
validity are subject to factual representations and assumptions. Neither AT&T
nor AT&T Broadband nor Comcast is aware of any facts or circumstances that would
cause such representations and assumptions to be untrue. An opinion of counsel
represents counsel's best legal judgment and is not binding on the Internal
Revenue Service or any court.
It is a condition to the Comcast merger that Comcast receive an opinion
from Davis Polk & Wardwell, dated the date of the mergers, and it is a condition
to the AT&T Broadband merger that AT&T receive an opinion from Wachtell, Lipton,
Rosen & Katz, dated the date of the mergers, each to the effect that, on the
basis of the facts, representations and assumptions set forth in such opinion,
the mergers will constitute an exchange to which Section 351 of the Code
applies. Any change in currently applicable law, which may or may not be
retroactive, or the failure of any factual representations or
II-19
assumptions to be true, correct and complete in all material respects, could
affect the validity of the Davis Polk & Wardwell and Wachtell, Lipton, Rosen &
Katz tax opinions.
An opinion of counsel represents counsel's best legal judgment and is not
binding on the Internal Revenue Service or any court. No ruling has been or will
be sought from the Internal Revenue Service as to the U.S. federal income tax
consequences of the mergers and, as a result, there can be no assurance that the
Internal Revenue Service will not disagree with, or challenge, any of the
conclusions described below.
AT&T does not intend to waive the receipt of a private letter ruling (or an
opinion of counsel) on the AT&T Broadband spin-off and its counsel's opinion on
the mergers as a condition to its obligation to complete the AT&T Broadband
spin-off and the AT&T Broadband merger, and will not waive the receipt of such
ruling and opinion(s) as a condition to its obligation to complete the AT&T
Broadband spin-off and AT&T Broadband merger without recirculating this document
in order to resolicit shareholder approval. Comcast does not intend to waive the
receipt of a private letter ruling (or an opinion of counsel) on the AT&T
Broadband spin-off and its counsel's opinion on the mergers as a condition to
its obligation to complete the Comcast merger, and will not waive the receipt of
such ruling and opinion(s) as a condition to its obligation to complete the
Comcast merger without recirculating this document in order to resolicit
shareholder approval.
Both counsel intend to deliver, at the date of the mergers, an opinion on
the mergers that satisfies the requirements described above.
REGULATORY MATTERS
It is a condition to Comcast's and AT&T's obligations to complete the AT&T
Comcast transaction that all regulatory approvals required to complete the AT&T
Comcast transaction be obtained, except where the failure to obtain any such
approvals would not reasonably be expected to have a material adverse effect on
Comcast, AT&T's broadband business or AT&T's communications business. See
"Description of the AT&T Comcast Transaction Agreements -- The Merger
Agreement -- Conditions to the Completion of the Mergers" and "Description of
the AT&T Comcast Transaction Agreements -- The Separation and Distribution
Agreement -- Conditions to the Completion of the Separation and the AT&T
Broadband Spin-off." Comcast and AT&T have agreed to use their best efforts to
obtain all regulatory approvals that are necessary or advisable in connection
with the AT&T Comcast transaction. In addition, Comcast and AT&T have also
agreed to take all actions necessary to obtain termination of the applicable
waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
relating to the AT&T Comcast transaction and to obtain all consents of the FCC
required to complete the AT&T Comcast transaction. See "Description of the AT&T
Comcast Transaction Agreements -- The Merger Agreement -- Covenants -- Covenant
to Obtain Regulatory Approvals."
The material regulatory requirements affecting the AT&T Comcast transaction
are summarized below. Although Comcast and AT&T have not yet received the
regulatory approvals discussed below, Comcast and AT&T anticipate that they will
obtain regulatory approvals sufficient to complete the AT&T Comcast transaction
by the end of 2002.
Antitrust Considerations. The mergers are subject to the requirements of
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which
prevents specified transactions from being completed until required information
and materials are furnished to the U.S. Department of Justice, or DOJ, and the
Federal Trade Commission, or FTC, and specified waiting periods are terminated
or expire. On January 22, 2002, Comcast and AT&T filed the required information
and materials to notify the DOJ and the FTC of the mergers. On February 21,
2002, Comcast and AT&T received a request from the DOJ, the reviewing agency,
for additional information and documentary material regarding the mergers.
Comcast and AT&T intend to cooperate with DOJ staff in producing the requested
documents and other information. Unless extended by agreement of the parties,
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 waiting period will
expire thirty calendar days after Comcast and AT&T certify to the DOJ that they
have substantially complied with the DOJ's request for additional information.
II-20
The DOJ, the FTC and, under certain circumstances, states or private
parties may challenge the mergers on antitrust grounds, either before or after
expiration of the waiting period. Accordingly, at any time before or after the
completion of the mergers, either the DOJ or the FTC could take action under the
antitrust laws as it deems necessary or desirable in the public interest, or
states or other persons could take action under the antitrust laws, including
seeking to enjoin the mergers. There can be no assurance that a challenge to the
mergers will not be made or that, if a challenge is made, that Comcast and AT&T
will prevail.
Federal Communications Commission. Pursuant to the Communications Act of
1934, as amended, the transfer of control of licenses issued by the FCC
typically requires prior FCC approval. Comcast and AT&T each directly or
indirectly hold FCC licenses. On February 28, 2002, Comcast and AT&T filed
applications with the FCC seeking approval for the transfer of control to AT&T
Comcast of the applicable FCC licenses. The FCC is conducting a proceeding to
review the information and materials filed by Comcast and AT&T in support of
their applications. Interested members of the public are entitled to participate
in this proceeding, and a number of parties that oppose the mergers have filed
formal comments or petitions to deny. Comcast and AT&T will file with the FCC a
response to these comments and petitions. There can be no assurance that Comcast
and AT&T will prevail in the FCC's proceeding and receive the FCC's approval to
the transfer of control of the applicable licenses.
State and Local Governmental Authorities. The mergers will also require
Comcast and AT&T to obtain the approval of a number of state and local
governmental authorities. Comcast and AT&T have filed the required applications
with these state and local authorities. These filings seek the level of review
and consent appropriate under the laws and regulations of each state and local
franchising authority's franchise agreement. Where approval or consent is
required for transfer of control of cable television franchises, the governing
legal standard addresses the legal, technical and financial and, in
Massachusetts, managerial qualifications of the company acquiring control. For
transfers of control of regulated telephony service providers, the governing
legal standard is typically whether the transaction is "in the public interest."
Most of these state and local authorities have not completed their reviews of
the mergers.
States and local franchising authorities may, in connection with the
approval process, seek to impose conditions or limitations upon the companies.
As a result, depending on the nature of any conditions imposed by state
authorities or local franchise authorities, these conditions could jeopardize or
delay completion of the mergers. Additionally, if Comcast and AT&T decide to
complete the mergers notwithstanding any conditions imposed by state authorities
or local franchise authorities, the expected benefits of the mergers may be
reduced.
Other Regulatory Filings. Comcast and AT&T conduct operations in a number
of jurisdictions where other regulatory filings or approvals may be required or
advisable in connection with the completion of the AT&T Comcast transaction.
Comcast and AT&T are currently in the process of reviewing whether other filings
or approvals may be required or desirable in these other jurisdictions. If
Comcast and AT&T conclude other filings or approvals are required or desirable,
it is anticipated that such filings will be completed and such approvals will be
sought. However, the failure to complete such filings or to obtain such
approvals is not expected to have a material effect on the combined company.
There can be no assurances that Comcast and AT&T will obtain all of the
regulatory approvals described above that are necessary to complete the AT&T
Comcast transaction or that the granting of these approvals will not involve the
imposition of conditions on the completion of the AT&T Comcast transaction or
require changes to the terms of the AT&T Comcast transaction.
DESCRIPTION OF NEW CREDIT FACILITIES
On May 3, 2002, AT&T Broadband and AT&T Comcast, as co-borrowers, entered
into definitive credit agreements with a syndicate of lenders led by JPMorgan
Chase Bank, as administrative agent, for an aggregate of approximately $12.8
billion in order to obtain the financing necessary to complete the AT&T Comcast
transaction. The following summary of the new credit facilities is qualified in
its entirety
II-21
by reference to the complete texts of the new credit facilities, which are
incorporated by reference and attached as exhibits to the registration statement
in which this document is included.
The new credit facilities include (1) a term loan facility of approximately
$3.18 billion, (2) a revolving loan facility of approximately $2.645 billion
which provides for revolving credit loans and swing line loans and under which
letters of credit may be issued and (3) a bridge loan facility of $7.0 billion.
Availability of borrowings and letters of credit under the new credit facilities
will be subject to satisfaction of conditions precedent on or before March 31,
2003, including, among other customary conditions, (1) the AT&T Comcast
transaction shall occur substantially simultaneously and (2) AT&T Comcast shall
have an investment-grade credit rating. The term loan will mature two years
after the effective date of the new credit facilities, the revolving loan will
mature five years after the effective date of the new credit facilities and the
bridge loan will mature one year after the effective date of the new credit
facilities.
Loans under the new credit facilities will bear interest per year, at the
option of AT&T Comcast, at:
- the base rate plus a margin ranging from 0% to 0.875% based upon AT&T
Comcast's credit rating or the alternate eurodollar rate plus a margin
ranging from 0.475% to 1.875% based upon AT&T Comcast's credit rating, in
either case for borrowings under the term loan;
- the base rate plus a margin ranging from 0% to 0.625% based upon AT&T
Comcast's credit rating or the alternate eurodollar rate plus a margin
ranging from 0.225% to 1.625% based upon AT&T Comcast's credit rating, in
either case for borrowings under the revolving loan; and
- the base rate plus a margin ranging from 0% to 0.875% based upon AT&T
Comcast's credit rating or the alternate eurodollar rate plus a margin
ranging from 0.475% to 1.875% based upon AT&T Comcast's credit rating, in
either case for borrowings under the bridge loan.
Prior to the effective date of the new credit facilities (or the date of
termination of the commitments under the facilities, if earlier), AT&T Comcast
will pay commitment fees at a rate equal to 0.125% per year on each lender's
commitments under each facility. The fees will accrue from April 26, 2002 and
will be payable on the effective date of the new credit facilities (or the date
of termination of the commitments under the facilities, if earlier).
After the effective date of the new credit facilities, AT&T Comcast will
pay commitment fees at a rate per year ranging from 0.085% to 0.25% based upon
AT&T Comcast's credit rating on the daily average unused portion of the
revolving credit facility. These fees are payable quarterly in arrears.
AT&T Comcast will pay utilization fees at a rate equal to (1) for each day
that the outstanding revolving loans exceed 33% of the combined revolving
commitments on such day, 0.125% or (2) for each day that the outstanding
revolving loans exceed 66% of the combined revolving commitments on such day,
0.25%. These fees are payable quarterly in arrears.
The term loan is repayable during the second year after the effective date
of the new credit facilities in four consecutive quarterly installments of $500
million, $750 million, $750 million and approximately $1.18 billion.
Each of Comcast Cable Communications, Inc., MediaOne Group, Inc., AT&T
Broadband, LLC, AT&T Comcast, AT&T Broadband and each restricted subsidiary that
becomes a party to the guarantee agreement will be a guarantor of the new credit
facilities.
The new credit facilities contain customary covenants and restrictions on
AT&T Comcast and its restricted subsidiaries' ability to engage in specified
activities, including, but not limited to (1) limitations on subsidiary
indebtedness, (2) limitations on liens, (3) limitations on fundamental changes,
(4) limitations on upstreaming and (5) so long as the bridge facility remains in
effect, limitations on prepayments of other material long-term indebtedness.
After the effective date of the new credit facilities, availability of
borrowings and letters of credit under the revolving loan facility will be
subject to satisfaction of customary conditions.
II-22
The new credit facilities also contain financial covenants requiring AT&T
Comcast to maintain (1) a minimum coverage of interest expense and (2) a maximum
leverage ratio.
As noted above, under the terms of the new credit facilities, the
obligations of the lenders to provide the financing upon completion of the AT&T
Comcast transaction are subject to a number of conditions, including the
condition that AT&T Comcast obtain an investment-grade credit rating.
Accordingly, there can be no assurance that AT&T Broadband and AT&T Comcast will
be able to obtain the financing necessary to complete the AT&T Comcast
transaction. See "Summary and Overview of the Transactions -- Risk
Factors -- Risk Factors Relating to the AT&T Comcast Transaction -- AT&T Comcast
and its Subsidiaries May Not Be Able to Obtain the Necessary Financing At All or
on Terms Acceptable to it."
APPRAISAL RIGHTS
Holders of Comcast Class A common stock, Comcast Class A Special common
stock and AT&T common stock are not entitled to appraisal rights in connection
with the AT&T Comcast transaction.
FEDERAL SECURITIES LAWS CONSEQUENCES; STOCK TRANSFER RESTRICTION AGREEMENTS
The shares of AT&T Comcast common stock to be issued in connection with the
mergers will be registered under the Securities Act and will be freely
transferable under the Securities Act, except for shares of AT&T Comcast common
stock issued to any person who is deemed to be an "affiliate" of Comcast at the
time of the Comcast special meeting or AT&T Broadband at the time of the AT&T
annual meeting. Persons who may be deemed to be affiliates of Comcast or AT&T
Broadband include individuals or entities that control, are controlled by or are
under the common control of Comcast or AT&T Broadband, as applicable, and may
include executive officers and directors of Comcast or AT&T Broadband, as
applicable, as well as significant shareholders of Comcast or AT&T Broadband, as
applicable. Affiliates may not sell their shares of AT&T Comcast common stock
acquired in connection with the mergers except pursuant to:
- an effective registration statement under the Securities Act covering the
resale of those shares;
- an exemption under paragraph(d) of Rule 145 under the Securities Act; or
- any other applicable exemption under the Securities Act.
AT&T Comcast's registration statement on Form S-4, of which this document
forms a part, does not cover the resale of shares of AT&T Comcast common stock
to be received by affiliates of Comcast or AT&T Broadband in the mergers.
ACCOUNTING TREATMENT
The mergers will be accounted for as an acquisition by Comcast under the
purchase method of accounting. Under this method of accounting, the assets and
liabilities of AT&T Broadband not previously owned by Comcast or its affiliates
will be recorded at their fair value, and any excess of Comcast's purchase price
over the fair value of AT&T Broadband's tangible net assets not previously owned
by Comcast or its affiliates will be recorded as intangible assets, including
goodwill.
The identification of Comcast as the acquiring entity was made after
careful consideration of all facts and circumstances, including the following:
Voting Rights in the New Combined Company. Sural LLC, which is controlled
by Brian L. Roberts, President of Comcast, will own approximately 33.34% of AT&T
Comcast's voting power (including a 33 1/3% non-dilutable interest in AT&T
Comcast Class B common stock) and approximately 0.8% of AT&T Comcast's economic
interest. In addition, as the holder of the AT&T Comcast Class B common stock,
Sural will have an approval right over (1) any merger of AT&T Comcast with
another company or any other transaction, in each case that requires AT&T
Comcast shareholder approval under applicable law, or any other transaction that
would result in any person or group owning shares representing in excess of 10%
II-23
of the combined voting power of the resulting or surviving corporation, or any
issuance of securities (other than pursuant to director or officer stock option
or purchase plans) requiring AT&T Comcast shareholder approval under the rules
and regulations of any stock exchange or quotation system; (2) any issuance of
AT&T Comcast Class B common stock or any securities exercisable or exchangeable
for or convertible into AT&T Comcast Class B common stock; and (3) charter
amendments (such as a charter amendment to opt in to any of the Pennsylvania
antitakeover statutes) and other actions (such as the adoption, amendment or
redemption of a shareholder rights plan) that limit the rights of holders of
AT&T Comcast Class B common stock or any subsequent transferee of AT&T Comcast
Class B common stock to transfer, vote or otherwise exercise rights with respect
to AT&T Comcast capital stock. After Sural's voting interest, the next largest
voting interest held by a single shareholder will be 4.95% held by Microsoft. No
single former AT&T shareholder will have any significant ownership or voting
interest following the completion of the AT&T Comcast transaction. AT&T
shareholders will own approximately 54.8% of AT&T Comcast's economic interest
upon completion of the AT&T Comcast transaction. If the Preferred Structure is
implemented, AT&T shareholders will own approximately 60.6% of AT&T Comcast's
voting power upon completion of the AT&T Comcast transaction. If the Alternative
Structure is implemented, AT&T shareholders will own approximately 56.6% of AT&T
Comcast's voting power upon completion of the AT&T Comcast transaction. The
percentages included in this paragraph assume that the Microsoft transaction
described in this document is completed and that AT&T Comcast is not required to
make any of the potential additional payments of AT&T Comcast stock described in
this document.
Governance Arrangement Relating to the Board of Directors. Upon completion
of the AT&T Comcast transaction, the initial AT&T Comcast Board will have twelve
members, five of whom will be designated by Comcast from the existing Comcast
Board, five of whom will be designated by AT&T from the existing AT&T Board and
two of whom will be jointly designated by Comcast and AT&T and will be
independent persons. Except for pre-approved designees, the individuals
designated by each of Comcast and AT&T will be mutually agreed upon by Comcast
and AT&T. Ralph J. Roberts, Brian L. Roberts, Sheldon M. Bonovitz, Julian A.
Brodsky and Decker Anstrom are pre-approved Comcast director designees and C.
Michael Armstrong is the sole pre-approved AT&T director designee. All of the
initial director designees will hold office until the 2004 annual meeting of
AT&T Comcast shareholders, or the "Initial Term," which will be held in April
2004. After the Initial Term, the entire AT&T Comcast Board will be elected
annually. See "Description of Governance Arrangements Following the AT&T Comcast
Transaction -- AT&T Comcast Board of Directors."
Upon completion of the AT&T Comcast transaction, AT&T Comcast will have a
Directors Nominating Committee that will have the power to nominate individuals
for election as AT&T Comcast directors at the 2004 annual meeting of
shareholders and thereafter. The composition of the Directors Nominating
Committee will depend on whether Brian L. Roberts is the Chairman of the Board
or CEO of AT&T Comcast. At any time that Brian L. Roberts is a member of the
Directors Nominating Committee, he will be Chairman of that committee.
Nominations of the Directors Nominating Committee will be submitted directly to
the AT&T Comcast shareholders without any requirement of AT&T Comcast Board
approval or ratification.
During the Initial Term, if Brian L. Roberts is the Chairman of the Board
or the CEO, the Directors Nominating Committee will consist of Brian L. Roberts,
one Comcast director designee who is an independent person selected by the
Comcast director designees and two independent persons who are selected from the
AT&T director designees by the AT&T director designees who are independent
persons and the Comcast/AT&T joint director designees after consultation with
Brian L. Roberts. During the Initial Term, if Brian L. Roberts is not the
Chairman of the Board or the CEO, the Directors Nominating Committee will
consist of two Comcast director designees, one of whom shall be an independent
person, who are selected by the Comcast director designees and two independent
persons who are selected from the AT&T director designees by the AT&T director
designees who are independent persons and the Comcast/AT&T joint director
designees after consultation with a Comcast director designee selected by the
two Comcast director designees selected to serve on the Directors Nominating
Committee. If the Directors Nominating Committee is able to reach agreement on a
full slate of nominations for the 2004
II-24
annual meeting of AT&T Comcast shareholders, each of the individuals selected as
a nominee who is an AT&T Comcast director then in office will maintain the
status of a "Comcast director designee," "AT&T director designee" or
"Comcast/AT&T joint director designee," as the case may be, and each of the
other individuals, if any, selected as a nominee will have the status determined
by the Directors Nominating Committee; provided that five (5) of the nominees
have the status of a "Comcast director designee," five (5) of the nominees have
the status of a "AT&T director designee" and two (2) of the nominees have the
status of a "Comcast/AT&T joint director designee." If the Directors Nominating
Committee is unable to reach agreement on a full slate of nominations for the
2004 annual meeting of AT&T Comcast shareholders, each of the AT&T Comcast
directors then in office will be nominated for election as a director at the
2004 annual meeting of AT&T Comcast shareholders and will maintain the status of
a "Comcast director designee," "AT&T director designee" or "Comcast/AT&T joint
director designee," as the case may be. In the event that any of such directors
declines to stand for election as a director at the 2004 annual meeting of AT&T
Comcast shareholders, a replacement nominee will be selected by (i) if the
director declining to stand for election is a Comcast director designee, a
majority of the Comcast director designees then in office (other than the
Comcast director designee declining to stand for election), (ii) if the director
declining to stand for election is an AT&T director designee, a majority of the
AT&T director designees then in office (other than the AT&T director designee
declining to stand for election) and (iii) if the director declining to stand
for election is a Comcast/AT&T joint director designee, the other Comcast/AT&T
joint director designee then in office, subject to the prior approval of the
AT&T Comcast Board (other than the Comcast/AT&T joint director designee
declining to stand for election); provided that if each of the Comcast/AT&T
joint director designees declines to stand for election as a director at the
2004 annual meeting of AT&T Comcast shareholders, replacement nominees will be
selected by the AT&T Comcast Board (other than the Comcast/AT&T joint director
designees). If a replacement nominee is selected to replace a declining director
pursuant to the preceding sentence, such replacement nominee shall be deemed to
have the status of the declining director as a "Comcast director designee,"
"AT&T director designee" or "Comcast/AT&T joint director designee," as the case
may be. If a person is elected as a director at the 2004 annual meeting of AT&T
Comcast shareholders who was not nominated pursuant to the above provisions,
such person will be deemed to have the status of the former director he or she
was elected in lieu of. If multiple persons are elected as directors at the 2004
annual meeting of AT&T Comcast shareholders who were not nominated pursuant to
the above provisions and it is not possible to determine whom they were elected
in lieu of, their status as "Comcast director designees," "AT&T director
designees," or "Comcast/AT&T joint director designees" will be determined by the
entire AT&T Comcast Board; provided that there will be five (5) Comcast director
designees, five (5) AT&T director designees and two (2) Comcast/AT&T joint
director designees and the status of the other directors will not be affected as
a result of such determination.
During the period beginning at the 2004 annual meeting of AT&T Comcast
shareholders and ending at the 2005 annual meeting of AT&T Comcast shareholders,
or the "2004 Term," which will be held in April 2005, if Brian L. Roberts is the
Chairman of the Board or the CEO, the Directors Nominating Committee will
consist of Brian L. Roberts, one Comcast director designee who is an independent
person selected by the Comcast director designees and three independent persons
who are selected by the Comcast director designees from the AT&T director
designees and the Comcast/AT&T joint director designees. During the 2004 Term,
if Brian L. Roberts is not the Chairman of the Board or the CEO, the Directors
Nominating Committee will consist of two Comcast director designees, one of whom
shall be an independent person, who are selected by the Comcast director
designees and three independent persons who are selected by the Comcast director
designees from the AT&T director designees and the Comcast/AT&T joint director
designees.
After the 2004 Term, if Brian L. Roberts is the Chairman of the Board or
the CEO, the Directors Nominating Committee will consist of Brian L. Roberts and
four other directors who are independent persons selected by Brian L. Roberts;
provided that no more than one Comcast director designee may be selected by
Brian L. Roberts as a member of the Directors Nominating Committee prior to the
seventh anniversary of the date that such director was initially elected to the
AT&T Comcast Board. After the 2004 Term, if Brian L. Roberts is not the Chairman
of the Board or the CEO, the AT&T Comcast Board
II-25
will determine the composition of the Directors Nominating Committee. See
"Description of Governance Arrangements Following the AT&T Comcast
Transaction -- Directors Nominating Committee."
Governance Arrangements Relating to Management. Upon completion of the
AT&T Comcast transaction, AT&T Comcast will have an Office of the Chairman
comprised of the Chairman of the Board and the CEO from the completion of the
AT&T Comcast transaction until the earlier to occur of (1) the 2005 annual
meeting of AT&T Comcast shareholders and (2) the date on which C. Michael
Armstrong ceases to be the Chairman of the Board. The Office of the Chairman
will be AT&T Comcast's principal executive deliberative body with responsibility
for corporate strategy, policy and direction, governmental affairs and other
significant matters. While the Office of the Chairman is in effect, the Chairman
of the Board and the CEO will advise and consult with each other with respect to
those matters. See "Description of Governance Arrangements Following the AT&T
Comcast Transaction -- Office of the Chairman."
Upon the completion of the AT&T Comcast transaction, C. Michael Armstrong,
AT&T's Chairman of the Board, will be Chairman of the Board of AT&T Comcast. C.
Michael Armstrong will serve as Chairman of the Board until the 2005 annual
meeting of AT&T Comcast shareholders, but he will serve as non-executive
Chairman of the Board after April 1, 2004 and until the 2005 annual meeting of
AT&T Comcast shareholders. After the 2005 annual meeting of AT&T Comcast
shareholders, or if C. Michael Armstrong ceases to serve as Chairman of the
Board prior to that date, Brian L. Roberts will be Chairman of the Board.
Removal of the Chairman of the Board will require the vote of at least 75% of
the entire AT&T Comcast Board until the earlier to occur of (1) the date on
which neither C. Michael Armstrong nor Brian L. Roberts is Chairman of the Board
and (2) the sixth anniversary of the 2004 annual meeting of AT&T Comcast
shareholders.
Upon completion of the AT&T Comcast transaction, Brian L. Roberts will be
the CEO of AT&T Comcast. Brian L. Roberts will also be President for as long as
he is the CEO. The powers and responsibilities of the CEO and President will
include:
- the supervision and management of AT&T Comcast's business and operations,
- all matters related to officers and employees, including hiring and
termination,
- all rights and powers typically exercised by a corporation's chief
executive officer and president, and
- the authority to call special meetings of the AT&T Comcast Board.
The powers and responsibilities of the CEO will also include the right to select
the initial senior management of AT&T Comcast in consultation with the Chairman
of the Board. Removal of the CEO will require the vote of at least 75% of the
entire AT&T Comcast Board until the earlier to occur of (1) the date on which
Brian L. Roberts ceases to be the CEO and (2) the sixth anniversary of the 2004
annual meeting of AT&T Comcast shareholders. See "Description of Governance
Arrangements Following the AT&T Comcast Transaction -- Management."
Other Factors. Comcast made an unsolicited offer to purchase all of AT&T
Broadband on July 8, 2001. Subsequent to Comcast's offer, AT&T solicited bids
from other potential purchasers. See "The AT&T Comcast Transaction -- Background
of the AT&T Comcast Transaction."
The headquarters of AT&T Comcast will be at Comcast's current headquarters
in Philadelphia, Pennsylvania. An executive office will be maintained in the New
York metropolitan area until at least April 2005.
Comcast's current investment in shares of AT&T common stock, to the extent
still held by Comcast at the time of the record date for the AT&T Broadband
spin-off, will be exchanged into a number of shares of AT&T common stock after
completion of the AT&T Comcast transaction that will provide Comcast with an
interest in the communications business of AT&T that, subject to the limitations
described under "Description of the AT&T Comcast Transaction Agreements -- The
Merger Agreement -- Covenants -- Covenant Regarding Comcast's AT&T Stock," is
equal in value to the interest
II-26
Comcast held in the combined communications and broadband business of AT&T prior
to the AT&T Comcast transaction. Therefore, Comcast will continue to have an
investment in the "selling company." Conversely, AT&T Broadband's current
investment in Comcast will either be retired to treasury after the completion of
the AT&T Comcast transaction or used to settle related debt.
Notwithstanding that the former AT&T Broadband shareholders will, in the
aggregate, receive 60.6% of AT&T Comcast's voting power, AT&T Comcast believes
that this fact is outweighed by the totality of the other facts and
circumstances referred to above, with the most significance being given to the
non-dilutable voting power of the AT&T Comcast Class B common stock, which will
be owned by Sural LLC, which is controlled by Brian L. Roberts, Brian L.
Roberts' role on the Directors Nominating Committee, Brian L. Roberts' position
as President and CEO and Brian L. Roberts' ability to select senior management
in consultation with the Chairman of the AT&T Comcast Board.
LITIGATION
In February 2002, certain shareholders of Comcast and AT&T initiated two
purported class actions in the Supreme Court of the State of New York, County of
New York, against Comcast, AT&T, and AT&T Comcast, alleging that the initial
term of office of the directors of AT&T Comcast violates section 1724 of the
Pennsylvania Business Corporation Law regarding the term of office of directors
of non-classified boards. The plaintiffs seek, among other relief, compensatory
damages, fees and expenses, and an order enjoining completion of the mergers. On
February 28, 2002, the two actions were consolidated under the caption Norman
Salsitz, Michael Grening, IRA, Samual Mayer and Sam Weitschner v. Comcast
Corporation, AT&T Corp., and AT&T Comcast Corporation, Index No. 2002-600659,
before Justice Helen E. Freedman. On March 14, 2002, the defendants moved to
dismiss the consolidated action for failure to state a cause of action. On April
17, 2002, the court granted the defendants' motion to dismiss finding that AT&T
Comcast's proposed governance plan did not violate Pennsylvania law. On April
22, 2002, the plaintiffs appealed the decision of the court. The companies
intend to defend vigorously the lower court's decision.
II-27
CHAPTER THREE
FINANCIAL INFORMATION RELATING TO THE AT&T COMCAST TRANSACTION
AT&T COMCAST CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Combined Condensed Balance Sheet of AT&T
Comcast as of December 31, 2001 and Unaudited Pro Forma Combined Condensed
Statement of Operations of AT&T Comcast for the year ended December 31, 2001
give effect to the AT&T Comcast transaction. The pro forma financial statements
reflect the fact that the AT&T Comcast transaction is accounted for under the
purchase method of accounting.
The Unaudited Pro Forma Combined Condensed Balance Sheet assumes the AT&T
Comcast transaction occurred on December 31, 2001. The Unaudited Pro Forma
Combined Condensed Statement of Operations assumes the AT&T Comcast transaction
occurred on January 1, 2001. The unaudited pro forma financial data is based on
the historical consolidated financial statements of Comcast and the historical
combined financial statements of AT&T Broadband Group under the assumptions and
adjustments set forth in the accompanying explanatory notes.
AT&T and Comcast have determined that the AT&T Comcast transaction will be
accounted for as an acquisition by Comcast of AT&T Broadband Group. See "The
AT&T Comcast Transaction -- Accounting Treatment." As Comcast is considered the
accounting acquiror, the historical basis of Comcast's assets and liabilities
will not be affected by the AT&T Comcast transaction. For purposes of developing
the Unaudited Pro Forma Combined Condensed Balance Sheet as of December 31,
2001, AT&T Broadband Group's assets, including identifiable intangible assets,
and liabilities have been recorded at their estimated fair values and the excess
purchase price has been assigned to goodwill. The fair values assigned in these
pro forma financial statements are preliminary and represent management's best
estimates of current fair value which are subject to revision upon completion of
the AT&T Comcast transaction. Management of both companies currently knows of no
events or circumstances other than those disclosed in these pro forma notes that
would require a material change to the preliminary purchase price allocation.
However, a final determination of required purchase accounting adjustments will
be made upon the completion of a study to be undertaken by AT&T Comcast in
conjunction with independent appraisers to determine the fair value of certain
of AT&T Broadband Group's assets, including identifiable intangible assets, and
liabilities. Assuming completion of the AT&T Comcast transaction, the actual
financial position and results of operations will differ, perhaps significantly,
from the pro forma amounts reflected herein due to a variety of factors,
including access to additional information, changes in value not currently
identified and changes in operating results between the dates of the pro forma
financial data and the date on which the AT&T Comcast transaction takes place.
See Note (b) to Unaudited Pro Forma Combined Condensed Balance Sheet.
Comcast shareholders will receive shares of AT&T Comcast Class A common
stock, AT&T Comcast Class B common stock and AT&T Comcast Class A Special common
stock in exchange for shares of Comcast Class A common stock, Comcast Class B
common stock and Comcast Class A Special common stock, respectively, based on an
exchange ratio of 1 to 1. AT&T Comcast will issue stock options to purchase
shares of AT&T Comcast common stock in exchange for all outstanding stock
options of Comcast, based on an exchange ratio of 1 to 1. See "Certain Legal
Information -- Comparison of AT&T, Comcast and AT&T Comcast Shareholder Rights"
for a description and comparison of the rights of each class of common stock.
The estimated aggregate consideration and Comcast's transaction costs
directly related to the AT&T Comcast transaction total $49,384.8 million. This
includes the fair value of the issuance of approximately 1,231.0 million shares
of AT&T Comcast common stock to AT&T shareholders in exchange for all of AT&T's
interests in AT&T Broadband Group, the fair value of the issuance of 115.0
million shares of AT&T Comcast common stock to Microsoft in exchange for AT&T
Broadband shares that Microsoft will
III-1
receive immediately prior to the completion of the AT&T Comcast transaction in
settlement of their $5 billion aggregate principal amount in quarterly income
preferred securities (QUIPS), the fair value of AT&T Comcast stock options and
stock appreciation rights issued in exchange for AT&T Broadband stock options
and stock appreciation rights and Comcast's estimated transaction costs directly
related to the AT&T Comcast transaction. The fair value of the AT&T Comcast
shares to be issued in the AT&T Broadband merger is based on a price per share
of $35.97 which reflects the weighted-average market price of Comcast Class A
Special common stock during the period beginning two days before and ending two
days after the AT&T Comcast transaction was announced. In the limited
circumstances described under "Description of the AT&T Comcast Transaction
Agreements -- The Merger Agreement -- Merger Consideration --
Potential Additional Payments," the number of shares of AT&T Comcast common
stock to be issued to certain AT&T securityholders in connection with the AT&T
Comcast transaction is subject to adjustment. In the event this occurs, the fair
value of all of the shares to be issued would be based on the market price of
Comcast Class A Special common stock on the closing date. In addition to the
consideration paid, the consolidated debt of AT&T Comcast will include the debt
of AT&T Broadband Group.
AT&T Comcast intends to review the synergies of the combined business,
which may result in a plan to realign or reorganize certain of AT&T Broadband
Group's existing operations. The costs of implementing such a plan, if it were
to occur, have not been reflected in the accompanying pro forma financial
statements. The impact of a potential realignment, assuming such a plan were in
place at the consummation date of the AT&T Comcast transaction, could increase
or decrease the amount of goodwill and intangible assets recognized by AT&T
Comcast in accordance with Emerging Issues Task Force No. 95-3, "Recognition of
Liabilities in Connection with a Purchase Business Combination." The Unaudited
Combined Condensed Statement of Operations excludes any benefits that may result
from synergies that may be derived, or the elimination of duplicative efforts.
Among the provisions of Statement of Financial Accounting Standards No.
141, "Business Combinations," new criteria have been established for determining
whether intangible assets should be recognized separately from goodwill.
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), provides, among other guidelines, that goodwill
and intangible assets with indefinite lives will not be amortized, but rather
will be tested for impairment on at least an annual basis. Management of both
companies believes that cable franchise operating rights have indefinite lives
based upon an analysis utilizing the criteria in paragraph 11 of SFAS 142. The
pro forma adjustments to the Unaudited Pro Forma Combined Condensed Statement of
Operations reflect the elimination of AT&T Broadband Group's amortization
expense related to goodwill and cable franchise operating rights since this
acquisition will be accounted for under the provisions of SFAS 142.
Comcast incurred goodwill and cable franchise operating rights amortization
expense of approximately $2,007.7 million for the year ended December 31, 2001.
The historical consolidated financial statements of Comcast included in the
Unaudited Pro Forma Combined Condensed Statement of Operations include the
amortization expense related to Comcast's goodwill and cable franchise operating
rights, which has not been eliminated in the pro forma adjustments. Effective
January 1, 2002, Comcast will, in accordance with the provisions of SFAS 142, no
longer amortize goodwill and cable franchise operating rights.
The pro forma financial data presented assumes the AT&T Comcast transaction
is completed under the Preferred Structure (see "Description of the AT&T Comcast
Transaction Agreements -- The Merger Agreement -- Merger Consideration -- The
Preferred Structure"). However, if the AT&T Comcast transaction were completed
under the Alternative Structure (see "Description of the AT&T Comcast
Transaction Agreements -- The Merger Agreement -- Merger Consideration -- The
Alternative Structure"), this would have no impact on the pro forma financial
statements as presented. Management of both companies believes that the
assumptions used provide a reasonable basis on which to present the unaudited
pro forma financial data. Both companies have completed acquisitions and
dispositions that are not significant, individually or in the aggregate, and,
accordingly, have not been included in the
III-2
accompanying unaudited pro forma financial data. The unaudited pro forma
financial data may not be indicative of the financial position or results that
would have occurred if the AT&T Comcast transaction had been in effect on the
dates indicated or which may be obtained in the future.
The unaudited pro forma financial data should be read in conjunction with
the historical consolidated financial statements and accompanying notes thereto
for Comcast, and the historical combined financial statements and accompanying
notes thereto for AT&T Broadband Group, which have been incorporated by
reference or included herein.
III-3
AT&T COMCAST CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 2001
HISTORICAL
HISTORICAL AT&T PRO FORMA PRO FORMA
COMCAST(A) BROADBAND(A) ADJUSTMENTS AT&T COMCAST
----------- ------------- ----------- ------------
(DOLLARS IN MILLIONS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................. $ 350.0 $ $ $ 350.0
Investments................................ 2,623.2 668.0 3,291.2
Accounts receivable, net................... 967.4 584.0 1,551.4
Inventories, net........................... 454.5 454.5
Other current assets....................... 153.7 398.0 57.5 (b1) 609.2
--------- ---------- ---------- ----------
Total current assets..................... 4,548.8 1,650.0 57.5 6,256.3
--------- ---------- ---------- ----------
1,801.6 (b2)
INVESTMENTS.................................. 1,679.2 21,913.0 (1,701.0)(d) 23,692.8
--------- ---------- ---------- ----------
PROPERTY AND EQUIPMENT, net.................. 7,011.1 14,519.0 21,530.1
--------- ---------- ---------- ----------
INTANGIBLE ASSETS
Goodwill................................... 7,507.3 20,102.0 (1,500.5)(b3) 26,108.8
Cable franchise operating rights........... 20,167.8 45,320.0 (2,501.0)(b4) 62,986.8
Other intangible assets.................... 2,833.4 2,833.4
--------- ---------- ---------- ----------
30,508.5 65,422.0 (4,001.5) 91,929.0
Accumulated amortization................... (5,999.2) (3,242.0) 3,242.0 (b5) (5,999.2)
--------- ---------- ---------- ----------
24,509.3 62,180.0 (759.5) 85,929.8
--------- ---------- ---------- ----------
OTHER NON-CURRENT ASSETS, net................ 383.4 2,925.0 57.5 (b6) 3,365.9
--------- ---------- ---------- ----------
$38,131.8 $103,187.0 $ (543.9) $140,774.9
========= ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable........................... $ 698.2 $ 678.0 $ $ 1,376.2
Accrued expenses and other current
liabilities.............................. 1,695.5 2,169.0 1,024.6 (b7) 4,889.1
Deferred income taxes...................... 275.4 275.4
57.5 (b8)
Short-term debt............................ 3,959.0 (924.8)(c) 3,091.7
Current portion of long-term debt.......... 460.2 2,824.0 (2,109.4)(c) 1,174.8
--------- ---------- ---------- ----------
Total current liabilities................ 3,129.3 9,630.0 (1,952.1) 10,807.2
--------- ---------- ---------- ----------
357.5 (b8)
(106.7)(b9)
LONG-TERM DEBT, less current portion......... 11,741.6 16,502.0 3,034.2 (c) 31,528.6
--------- ---------- ---------- ----------
DEFERRED INCOME TAXES........................ 6,375.7 25,810.0 291.5 (b10) 32,477.2
--------- ---------- ---------- ----------
(179.0)(b11)
OTHER NON-CURRENT LIABILITIES................ 1,532.0 1,059.0 (274.1)(b12) 2,137.9
--------- ---------- ---------- ----------
MINORITY INTEREST............................ 880.2 3,302.0 (2,100.0)(b13) 2,082.2
--------- ---------- ---------- ----------
Company-Obligated Convertible Quarterly
Income Preferred Securities of Subsidiary
Trust Holding Solely Subordinated Debt
Securities of AT&T......................... 4,720.0 (4,720.0)(b14)
--------- ---------- ---------- ----------
STOCKHOLDERS' EQUITY
1,346.0 (b15)
Common stock............................... 945.1 (47.3)(d) 2,243.8
(1,653.7)(d)
Additional capital......................... 11,752.0 47,623.8 (b15) 57,722.1
Retained earnings.......................... 1,631.5 1,631.5
Accumulated other comprehensive income..... 144.4 144.4
Combined attributed net assets............. 42,164.0 (42,164.0)(b16)
--------- ---------- ---------- ----------
Total stockholders' equity............... 14,473.0 42,164.0 5,104.8 61,741.8
--------- ---------- ---------- ----------
$38,131.8 $103,187.0 $ (543.9) $140,774.9
========= ========== ========== ==========
See notes to Unaudited Pro Forma Combined Condensed Balance Sheet
III-4
AT&T COMCAST CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(a) These columns reflect the historical balance sheets of the respective
companies. Certain reclassifications have been made to the combined
historical financial statements of AT&T Broadband Group to conform to the
presentation expected to be used by AT&T Comcast.
(b) This entry reflects the preliminary allocation of the purchase price to
identifiable net assets acquired and the excess purchase price to goodwill.
COMMON ADDITIONAL
CALCULATION OF CONSIDERATION STOCK CAPITAL TOTAL
---------------------------- -------- ---------- ----------
Issuance of common stock to AT&T shareholders (1,231.0
million shares* $35.97)................................. $1,231.0(i) $43,048.1 $ 44,279.1
Issuance of common stock to Microsoft Corporation (115.0
million shares* $35.97)................................. 115.0 4,021.6 4,136.6
Fair value of AT&T Comcast stock options resulting from
the conversion of AT&T Broadband stock options in the
AT&T Broadband merger based on Black-Scholes option
pricing model........................................... 554.1 554.1
-------- --------- ----------
(b15) Comcast common stock equity consideration................. 1,346.0 47,623.8 48,969.8
(b8) Transaction costs (assumed to be funded -- $57.5
short-term debt and $357.5 long-term debt).............. 415.0
----------
Total consideration..................................... $ 49,384.8
==========
Preliminary estimate of fair value of identifiable net
assets acquired
(b16) Book value of AT&T Broadband Group........................ $ 42,164.0
Elimination of gross AT&T Broadband Group goodwill........ (20,102.0)
(b1) Current portion of deferred financing fees................ 57.5
(b2) Preliminary estimate of adjustment to fair value of
investments............................................. 1,801.6
(b4) Preliminary estimate of adjustment to fair value of cable
franchise operating rights.............................. (2,501.0)
(b5) Elimination of AT&T Broadband Group accumulated
amortization............................................ 3,242.0
(b6) Long-term portion of deferred financing fees.............. 57.5
(b7) Preliminary estimate of current tax liability arising from
the transaction......................................... (1,024.6)
(b9) Preliminary estimate of adjustment to fair value of AT&T
Broadband Group assumed long-term debt.................. 106.7
(b10) Preliminary estimate of adjustment to deferred tax
liability on adjustments at combined federal and state
statutory rate.......................................... (291.5)
(b11) Certain liabilities retained by AT&T related to
Excite@Home............................................. 179.0
(b12) Preliminary estimate of adjustment to fair value of other
non-current liabilities................................. 274.1
(b13) Liabilities retained by AT&T related to TCI Pacific
Preferred shares........................................ 2,100.0
(b14) Redemption of Microsoft Corporation QUIPS................. 4,720.0
----------
Preliminary estimate of fair value of identifiable net
assets acquired......................................... 30,783.3
----------
Acquisition goodwill...................................... $ 18,601.5
==========
Calculation of goodwill acquisition adjustment
Acquisition goodwill...................................... $ 18,601.5
Gross value of AT&T Broadband Group goodwill.............. (20,102.0)
----------
(b3) Goodwill acquisition adjustment........................... $ (1,500.5)
----------
(i) Maximum number of shares of common stock that could be
issued in the AT&T Broadband merger................... 1,235.0
Share equivalent of intrinsic value of AT&T Broadband
stock options and stock appreciation rights........... (4.0)
--------
Common stock to be issued to AT&T shareholders........ 1,231.0
========
Certain programming and other contracts of AT&T Broadband Group and Comcast
may, by their terms, be assumed, altered or terminated as a result of the
completion of the AT&T Comcast transaction. However, due to confidentiality
provisions in those contracts as well as legal restrictions, those terms
cannot be shared between the two parties as of the date of this document.
Therefore, management cannot currently estimate the impact, if any, of
favorable or unfavorable contracts that
III-5
may result from the ultimate allocation of purchase price. See note (l) to
the Unaudited Pro Forma Combined Condensed Statement of Operations for a
sensitivity analysis of purchase price allocation.
(c) Represents the refinancing of existing short-term debt due to AT&T
($3,959.0) and certain components of the current portion of
long-term debt ($2,109.4) with new debt of AT&T Comcast. The
refinancing is assumed to be funded half with short-term debt and
half with long-term debt.
(d) Represents the reclassification of AT&T Broadband Group's investment
in Comcast as follows:
Elimination of Comcast stock held by AT&T Broadband
Group................................................... $ (1,701.0)
Reclassification of Comcast stock held by AT&T Broadband
Group to equity (par value common stock $47.3 and
additional capital $1,653.7)............................ 1,701.0
----------
$ --
==========
III-6
AT&T COMCAST CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
HISTORICAL PRO FORMA
HISTORICAL AT&T INTERCOMPANY PRO FORMA AT&T
COMCAST(A) BROADBAND(A) ADJUSTMENTS ADJUSTMENTS(D) COMCAST(L)
---------- ------------ ------------ -------------- ----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
REVENUES
Service revenues(m).............................. $ 5,756.9 $10,132.0 $(108.9)(b) $ $15,780.0
Net sales from electronic retailing.............. 3,917.3 3,917.3
--------- --------- ------- --------- ---------
9,674.2 10,132.0 (108.9) 19,697.3
--------- --------- ------- --------- ---------
COSTS AND EXPENSES
Operating (excluding depreciation)............... 2,905.8 5,459.0 (62.8)(b) 8,302.0
Cost of goods sold from electronic retailing
(excluding depreciation)....................... 2,514.0 2,514.0
Selling, general and administrative(m)........... 1,552.6 2,582.0 (22.6)(b) 4,112.0
Depreciation..................................... 1,141.8 2,626.0 3,767.8
Amortization..................................... 2,306.2 2,154.0 (1,882.9)(e) 2,577.3
Asset impairment, restructuring and other
charges........................................ 1,494.0 1,494.0
--------- --------- ------- --------- ---------
10,420.4 14,315.0 (85.4) (1,882.9) 22,767.1
--------- --------- ------- --------- ---------
OPERATING LOSS..................................... (746.2) (4,183.0) (23.5) 1,882.9 (3,069.8)
OTHER INCOME (EXPENSE)
95.2 (f)
Interest expense................................. (731.8) (1,735.0) 23.1 (g) (2,348.5)
Investment income (expense)...................... 1,061.7 (1,947.0) (18.7)(b) (904.0)
(106.0)(h)
Equity in net income (losses) of affiliates...... (28.5) 148.0 (e) 13.5
Other income (expense)........................... 1,301.0 (927.0) 374.0
--------- --------- ------- --------- ---------
1,602.4 (4,609.0) (18.7) 160.3 (2,865.0)
--------- --------- ------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY
INTEREST, EXTRAORDINARY ITEMS AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE...................... 856.2 (8,792.0) (42.2) 2,043.2 (5,934.8)
(573.7)(i)
INCOME TAX (EXPENSE) BENEFIT....................... (470.2) 3,857.0 (750.3)(c) 37.0 (h) 2,099.8
--------- --------- ------- --------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST,
EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE................................ 386.0 (4,935.0) (792.5) 1,506.5 (3,835.0)
Net loss from equity investments................... (69.0) 69.0 (h)
MINORITY INTEREST INCOME (EXPENSE)................. (160.4) 833.0 (24.0)(b) 160.0 (j) 808.6
--------- --------- ------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE........... $ 225.6 $(4,171.0) $(816.5) $ 1,735.5 $(3,026.4)
========= ========= ======= ========= =========
Earnings (loss) per share from continuing
operations -- basic.............................. $ 0.24 $ (1.35)
Earnings (loss) per share from continuing
operations -- assuming dilution.................. $ 0.23 $ (1.35)
Weighted average number of common shares
outstanding -- basic............................. 949.7 1,298.7 (k) 2,248.4
Weighted average number of common shares
outstanding -- assuming dilution................. 964.5 1,302.7 (k) 2,267.2
See Notes to Unaudited Pro Forma Combined Condensed Statement of Operations
III-7
AT&T COMCAST CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(a) These columns reflect the historical statement of operations of the
respective companies.
(b) Adjustment reflects the elimination of historical intercompany transactions
between Comcast and AT&T Broadband Group as follows: amounts charged by
Comcast to AT&T Broadband Group for programming, the gains and losses
resulting from the sales of certain cable systems by AT&T Broadband Group
to Comcast, and Excite@Home transactions.
(c) Represents the elimination of the aggregate historical federal and state
income tax effects recorded by Comcast and AT&T Broadband Group on Note (b)
adjustments above.
(d) AT&T Broadband Group has certain intercompany agreements with AT&T Corp.
which will be terminated as of the date of the AT&T Comcast transaction.
The costs of replacing these services is uncertain. However, the impact of
the termination of these arrangements is not expected to be material.
(e) Represents the elimination of AT&T Broadband Group's historical goodwill
and cable franchise operating rights amortization expense for consolidated
subsidiaries and equity method investments. Under the accounting rules set
forth in SFAS 142 issued by the Financial Accounting Standards Board in
June 2001, goodwill and intangibles with indefinite lives are not amortized
against earnings other than in connection with an impairment.
(f) Represents the net effect on interest expense resulting from the financings
described in Note (c) to the Unaudited Pro Forma Combined Condensed Balance
Sheet. Pro forma interest expense was calculated based on the interest
rates of the historical debt outstanding plus the interest rates in the
planned credit facilities. The pro forma financial information assumes the
financings occurred on January 1, 2001. Amortization of deferred financing
costs was calculated based on the expected amounts and terms of the new
facilities. Short-term rates are assumed to be 4% and long term rates are
assumed to be 7%. Assuming interest rates changed by 0.125%, the related
interest expense and pre-tax impact on earnings would be $7.5 million for
the year ended December 31, 2001.
(g) Represents the decrease in interest expense as a result of the adjustment
of AT&T Broadband Group's long-term debt to its fair value as described in
Note (b9) to the Unaudited Pro Forma Combined Condensed Balance Sheet. The
difference between the fair value and the face amount of each borrowing is
amortized as reduction to interest expense over the remaining term of the
borrowing.
(h) Represents the reclassification of losses in equity investments to conform
with the presentation currently used by Comcast.
(i) Represents the aggregate pro forma income tax effect of Notes (e) through
(g) above at the combined federal and state statutory rate.
(j) Represents the elimination of the historical impact of the QUIPS exchanged
for AT&T Broadband common stock.
(k) For basic earnings per share, this adjustment represents the issuance of
AT&T Comcast shares to AT&T shareholders and Microsoft Corporation offset
by shares of Comcast owned by AT&T Broadband Group which are classified as
treasury shares (see Note (d) to the Unaudited Pro Forma Combined Condensed
Balance Sheet). In addition, earnings per share assuming dilution has been
adjusted to include the dilutive effects of AT&T Comcast stock options
issued in exchange for the AT&T Broadband stock options.
III-8
(l) The pro forma combined condensed financial statements reflect a preliminary
allocation to tangible assets, liabilities, goodwill and other intangible
assets. The final purchase price allocation may result in different
allocations for tangible and intangible assets than that presented in these
pro forma combined condensed financial statements. The following table
shows the absolute dollar effect on pro forma net income (loss) applicable
to common shares and net income (loss) per share assuming dilution for
every $500 of purchase price allocated to amortizable assets or certain
liabilities over assumed weighted-average useful lives. An increase in the
purchase amount allocated to amortizable assets or a decrease in the amount
allocated to certain liabilities will result in a decrease to net income. A
decrease in the amount allocated to amortizable assets or an increase in
the amount allocated to certain liabilities will result in an increase to
net income.
YEAR ENDED
WEIGHTED AVERAGE LIFE DECEMBER 31, 2001
- --------------------- -----------------
Five years..................................................
Net income................................................ $61.5
Per share................................................. $0.03
Ten years...................................................
Net income................................................ $30.8
Per share................................................. $0.01
Twenty years................................................
Net income................................................ $15.4
Per share................................................. $0.01
(m) Comcast's historical consolidated statement of operations reflects franchise
fees collected from cable subscribers as a reduction of the related
franchise fee expense included within selling, general and administrative
expenses. Upon the adoption of EITF 01-14, "Income Statement
Characterization of Reimbursements Received for 'Out-of-Pocket' Expenses
Incurred," on January 1, 2002, Comcast will reclassify such amounts to
service revenues. The change in classification will have no impact on the
unaudited pro forma operating loss. The effect of the reclassification on
the Unaudited Pro Forma Combined Condensed Statement of Operations for the
year ended December 31, 2001 would be to increase service revenues and
selling, general and administrative expenses by $192.3 million. See Note 3
to Comcast's consolidated financial statements incorporated herein by
reference.
III-9
CHAPTER FOUR
OPINIONS OF FINANCIAL ADVISORS
OPINIONS OF COMCAST'S FINANCIAL ADVISORS
At the meeting of the Comcast Board on December 19, 2001, each of Morgan
Stanley, JPMorgan and Merrill Lynch rendered its opinion to the Comcast Board
that, as of that date and based upon and subject to the assumptions,
qualifications and limitations set forth therein, the conversion ratios in the
Comcast merger applicable to holders of Comcast common stock, in the aggregate,
were fair from a financial point of view to holders of Comcast common stock,
taken together. Each of Morgan Stanley, JPMorgan and Merrill Lynch has consented
to the inclusion of their respective opinions as Annexes G, H and I,
respectively, to this document.
THE FULL TEXT OF THE OPINIONS OF MORGAN STANLEY, JPMORGAN AND MERRILL
LYNCH, EACH DATED DECEMBER 19, 2001, WHICH SET FORTH, AMONG OTHER THINGS, THE
ASSUMPTIONS MADE, THE PROCEDURES FOLLOWED, MATTERS CONSIDERED, AND
QUALIFICATIONS AND LIMITATIONS OF THE REVIEWS UNDERTAKEN BY EACH OF MORGAN
STANLEY, JPMORGAN AND MERRILL LYNCH IN RENDERING THEIR RESPECTIVE OPINIONS ARE
ATTACHED AS ANNEXES G, H AND I, RESPECTIVELY, TO THIS DOCUMENT AND ARE
INCORPORATED INTO THIS DOCUMENT BY REFERENCE. THE SUMMARY OF THE MORGAN STANLEY,
JPMORGAN AND MERRILL LYNCH FAIRNESS OPINIONS SET FORTH IN THIS DOCUMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF EACH OF THE OPINIONS.
COMCAST SHAREHOLDERS SHOULD READ THESE OPINIONS CAREFULLY AND IN THEIR ENTIRETY.
EACH OF MORGAN STANLEY, JPMORGAN AND MERRILL LYNCH PROVIDED ITS OPINION FOR THE
INFORMATION AND ASSISTANCE OF THE COMCAST BOARD IN CONNECTION WITH ITS
CONSIDERATION OF THE PROPOSED AT&T COMCAST TRANSACTION. NONE OF THE MORGAN
STANLEY, JPMORGAN OR MERRILL LYNCH OPINIONS IS A RECOMMENDATION TO ANY COMCAST
SHAREHOLDER AS TO HOW ANY SHAREHOLDER SHOULD VOTE WITH RESPECT TO THE PROPOSED
AT&T COMCAST TRANSACTION OR ANY OTHER MATTER AND SHOULD NOT BE RELIED UPON BY
ANY COMCAST SHAREHOLDER AS SUCH.
OPINION OF MORGAN STANLEY
In connection with rendering its opinion, Morgan Stanley, among other
things:
- reviewed certain publicly available financial statements and other
business and financial information of or relating to Comcast, AT&T and
AT&T Broadband;
- reviewed certain internal financial statements and other financial and
operating data concerning Comcast prepared by the management of Comcast;
- reviewed certain financial forecasts, including information relating to
certain strategic, financial and operational benefits anticipated from
the proposed AT&T Comcast transaction, prepared by the management of
Comcast;
- discussed the past and current operations and financial condition and the
prospects of Comcast, including the strategic, financial and operational
benefits anticipated from the proposed AT&T Comcast transaction, with the
management of Comcast;
- reviewed certain internal financial statements and other financial
operating data concerning AT&T and AT&T Broadband (including, without
limitation, the structure, composition, operations, assets, liabilities
and pro forma historical balance sheets and income statements of AT&T
Broadband) prepared by the managements of AT&T and AT&T Broadband and
Comcast;
- reviewed certain financial forecasts (including, without limitation, as
to the pro forma forecasted balance sheets and income statements of AT&T
Broadband), and including information relating to certain strategic,
financial and operational benefits anticipated from the proposed AT&T
Comcast transaction, prepared by the managements of AT&T and AT&T
Broadband and of Comcast;
- discussed the past and current operations and financial condition and the
prospects of AT&T Broadband, including the strategic, financial and
operational benefits anticipated from the proposed AT&T Comcast
transaction, with the managements of AT&T, AT&T Broadband and Comcast;
IV-1
- reviewed the reported market prices and trading activity for Comcast
common stock and AT&T common stock;
- compared the financial performance of Comcast and the prices and trading
activity of Comcast common stock with that of certain other comparable
publicly traded companies and their securities;
- compared the financial performance of AT&T Broadband and the prices and
trading activity of the AT&T common stock with that of certain other
comparable publicly traded companies and their equity securities;
- reviewed the financial terms, to the extent publicly available, of
certain comparable transactions;
- participated in discussions and negotiations among representatives of
Comcast, AT&T, AT&T Broadband and their financial and legal advisors;
- reviewed final drafts of each of the merger agreement and the separation
and distribution agreement; and
- considered such other factors and performed such other analyses as it
deemed appropriate.
In connection with its review, Morgan Stanley assumed and relied upon,
without any responsibility for independent verification or liability therefor,
the accuracy and completeness of all information that was publicly available or
supplied or otherwise made available to it by Comcast, AT&T or AT&T Broadband or
otherwise reviewed by or for it for the purposes of the Morgan Stanley opinion.
With respect to the financial forecasts, including information relating to
certain strategic, financial and operational benefits anticipated from the
proposed AT&T Comcast transaction, prepared and furnished to or discussed with
it by Comcast, AT&T or AT&T Broadband, Morgan Stanley assumed that they had been
reasonably prepared on bases reflecting the best currently available estimates
and good faith judgments of Comcast's, AT&T's and AT&T Broadband's managements
as to the expected future financial performance of Comcast, AT&T Broadband or
AT&T Comcast, as the case may be, and the strategic, financial and operational
benefits anticipated from the proposed AT&T Comcast transaction. Morgan Stanley
expressed no view as to such financial forecast information, including the
strategic, financial and operational benefits anticipated from the proposed AT&T
Comcast transaction, or the assumptions on which they were based. In addition,
Morgan Stanley assumed that the mergers are intended as tax-free exchanges under
Section 351 of the Code and that the separation and the AT&T Broadband spin-off
will qualify as tax-free transactions under Sections 355 and 368(a) of the Code,
in each case for United States federal income tax purposes, and that the Section
355(e) top-up described under "Description of the AT&T Comcast Transaction
Agreements -- The Merger Agreement -- Merger Consideration -- Potential
Additional Payments" will not occur. Furthermore, Morgan Stanley assumed no
responsibility for conducting a physical inspection of the properties or
facilities of Comcast, AT&T or AT&T Broadband or for making or obtaining any
independent valuation or appraisal of the assets or liabilities of Comcast, AT&T
or AT&T Broadband, nor was Morgan Stanley furnished with any such valuations or
appraisals. The Morgan Stanley opinion is necessarily based on financial,
economic, market and other conditions as in effect on, and the information made
available to it as of, the date of its opinion. Subsequent developments may
affect its opinion and Morgan Stanley does not have any obligation to update,
revise, or reaffirm its opinion.
For purposes of rendering its opinion, Morgan Stanley assumed, in all
respects material to its analysis, that the proposed AT&T Comcast transaction
will be consummated as described in the merger agreement and the separation and
distribution agreement, that all the representations and warranties of each
party contained in the merger agreement and the separation and distribution
agreement were true and correct, that each party to the merger agreement and the
separation and distribution agreement will perform all of the covenants and
agreements required to be performed by it thereunder without any consents or
waivers of the other parties thereto, that all conditions to the consummation of
the proposed AT&T Comcast transaction will be satisfied without waiver thereof,
and that if the parties elect to consummate the proposed AT&T Comcast
transaction by means of an alternative structure of the type described under
"Description of the AT&T Comcast Transaction Agreements -- The Merger
Agreement -- Covenants -- Alternative Structure," such alternative structure
will not differ from the structure reflected in the merger
IV-2
agreement and the separation and distribution agreement in any respect material
to its analysis. Morgan Stanley noted that it is not a legal, tax or regulatory
expert and relied upon, without assuming any responsibility for independent
verification or liability therefor, the assessment of Comcast's legal, tax and
regulatory advisors with respect to the legal, tax and regulatory matters
related to the proposed transaction. Morgan Stanley also assumed that the
definitive merger agreement and the definitive separation and distribution
agreement will not differ in any material respects from the drafts thereof
furnished to and reviewed by it. Morgan Stanley further assumed that all
governmental, regulatory or other consents and approvals (contractual or
otherwise) necessary for or in connection with the consummation of the proposed
AT&T Comcast transaction will be obtained without any adverse effect on Comcast,
AT&T Broadband or AT&T Comcast, or on the contemplated benefits of the proposed
AT&T Comcast transaction, in any respect material to its analysis. In arriving
at its opinion, Morgan Stanley was not authorized to solicit, and did not
solicit, interest from any party with respect to a business combination or other
extraordinary transaction involving Comcast.
The Morgan Stanley opinion does not address the underlying decision by
Comcast to engage in the proposed AT&T Comcast transaction or the prices at
which Comcast common stock or AT&T Comcast common stock will trade after the
announcement or consummation of the proposed AT&T Comcast transaction, and
Morgan Stanley does not express any opinion or recommendation as to how
shareholders of Comcast should vote at shareholders' meetings held in connection
with the proposed AT&T Comcast transaction or any other matter.
OPINION OF JPMORGAN
In connection with rendering its opinion, JPMorgan, among other things:
- reviewed the final drafts of each of the merger agreement and the
separation and distribution agreement provided to it by Comcast;
- reviewed certain publicly available business and financial information
concerning Comcast, AT&T and AT&T Broadband and the industries in which
they operate;
- reviewed certain internal, non-public financial and operating data,
analyses and forecasts prepared by the managements of Comcast, AT&T and
AT&T Broadband relating to the businesses of Comcast, on the one hand,
and AT&T Broadband, on the other (including, without limitation, the
structure, composition, operations, assets, liabilities and pro forma
historical and forecasted balance sheets and income statements of AT&T
Broadband), as well as the estimated amount and timing of the cost
savings and related expenses and synergies expected to result from the
proposed AT&T Comcast transaction furnished to it by Comcast, AT&T and
AT&T Broadband;
- compared the proposed financial terms of the proposed AT&T Comcast
transaction with the publicly available financial terms of certain
transactions involving companies it deemed relevant;
- compared the financial and operating performance of Comcast and AT&T
Broadband with publicly available information concerning certain other
companies it deemed relevant and reviewed the current and historical
market prices of Comcast common stock and AT&T common stock and certain
publicly traded securities of such other companies;
- participated in certain discussions and negotiations among
representatives of Comcast, AT&T and AT&T Broadband and their financial
and legal advisors; and
- performed such other financial studies and analyses and considered such
other information as it deemed appropriate for the purposes of this
opinion.
In addition, JPMorgan held discussions with certain members of the
management of Comcast, AT&T and AT&T Broadband with respect to certain aspects
of the proposed AT&T Comcast transaction and the foregoing matters, including
the past and current business operations of Comcast, AT&T and AT&T Broadband,
the financial condition and future prospects and operations of Comcast and AT&T
Broadband, the effects of the proposed AT&T Comcast transaction, including the
estimated synergies, on the financial
IV-3
condition and future prospects of Comcast, AT&T Broadband and AT&T Comcast, and
certain other matters JPMorgan believed necessary or appropriate to its inquiry.
In giving its opinion, JPMorgan relied upon and assumed, without any
responsibility for independent verification or liability therefor, the accuracy
and completeness of all information that was publicly available or furnished to
it by Comcast, AT&T or AT&T Broadband or otherwise reviewed by or for it.
JPMorgan did not conduct any valuation or appraisal of any assets or liabilities
of Comcast, AT&T or AT&T Broadband, nor were any such valuations or appraisals
provided to it. In addition, JPMorgan did not assume any obligation to conduct
any inspection of the properties or facilities of Comcast, AT&T or AT&T
Broadband. In relying on financial analyses and forecasts provided to it,
including the estimated synergies, JPMorgan assumed that they had been
reasonably prepared based on assumptions reflecting the best currently available
estimates and judgments by the managements of Comcast, AT&T and AT&T Broadband
as to the expected future results of operations and financial condition of
Comcast, AT&T Broadband and AT&T Comcast and as to such other matters, including
the estimated synergies, to which such analyses or forecasts relate. JPMorgan
expressed no view as to such analyses or forecasts, including the estimated
synergies, or the assumptions on which they were based. JPMorgan also assumed
that the mergers will qualify as tax-free exchanges under Section 351 of the
Code and that the separation and the AT&T Broadband spin-off will qualify as
tax-free transactions under Sections 355 and 368(a) of the Code, in each case
for United States federal income tax purposes, and that the Section 355(e)
top-up described under "Description of the AT&T Comcast Transaction
Agreements -- The Merger Agreement -- Merger Consideration -- Potential
Additional Payments" will not occur.
For purposes of rendering its opinion, JPMorgan assumed, in all respects
material to its analysis, that the proposed AT&T Comcast transaction will be
consummated as described in the merger agreement and the separation and
distribution agreement, that all the representations and warranties of each
party contained in the merger agreement and the separation and distribution
agreement were true and correct, that each party to the merger agreement and the
separation and distribution agreement will perform all of the covenants and
agreements required to be performed by it thereunder without any consents or
waivers of the other parties thereto, that all conditions to the consummation of
the proposed AT&T Comcast transaction will be satisfied without waiver thereof,
and that if the parties elect to consummate the proposed AT&T Comcast
transaction by means of an alternative structure of the type described under
"Description of the AT&T Comcast Transaction Agreements -- The Merger
Agreement -- Covenants -- Alternative Structure," such alternative structure
will not differ from the structure reflected in the merger agreement and the
separation and distribution agreement in any respect material to its analysis.
JPMorgan noted that it is not a legal, tax or regulatory expert and relied upon,
without assuming any responsibility for independent verification or liability
therefor, the assessment of Comcast's legal, tax and regulatory advisors with
respect to the legal, tax and regulatory matters related to the proposed
transaction. JPMorgan also assumed that the definitive merger agreement and the
definitive separation and distribution agreement will not differ in any material
respects from the drafts thereof furnished to and reviewed by it. JPMorgan
further assumed that all governmental, regulatory or other consents and
approvals (contractual or otherwise) necessary for or in connection with the
consummation of the proposed AT&T Comcast transaction will be obtained without
any adverse effect on Comcast, AT&T Broadband or AT&T Comcast, or on the
contemplated benefits of the proposed transaction, in any respect material to
its analysis.
The JPMorgan opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to it as of, the
date of its opinion. Subsequent developments may affect its opinion and JPMorgan
does not have any obligation to update, revise, or reaffirm its opinion. The
JPMorgan opinion is limited to the fairness, from a financial point of view, to
holders of Comcast common stock, taken together, of the Comcast conversion
ratios in the Comcast merger, in the aggregate, and JPMorgan does not express
any opinion as to the underlying decision by Comcast to engage in the proposed
AT&T Comcast transaction. JPMorgan does not express any opinion as to the price
at which Comcast common stock or AT&T Comcast common stock will trade at any
future time and JPMorgan is not expressing any opinion or recommendation as to
how shareholders of Comcast should vote at shareholders' meetings held in
connection with the proposed AT&T Comcast transaction or any other
IV-4
matter. In arriving at its opinion, JPMorgan was not authorized to solicit, and
did not solicit, interest from any party with respect to a business combination
or other extraordinary transaction involving Comcast.
OPINION OF MERRILL LYNCH
In connection with rendering its opinion, Merrill Lynch, among other
things:
- reviewed certain publicly available business and financial information
relating to Comcast, AT&T and AT&T Broadband that it deemed to be
relevant;
- reviewed certain information, including financial forecasts, relating to
the business, earnings, cash flow, assets, liabilities and prospects of
Comcast, AT&T and AT&T Broadband (including, without limitation, the
structure, composition, operations, assets, liabilities and pro forma
historical and forecasted balance sheets and income statements of AT&T
Broadband), as well as the amount and timing of the cost savings and
related expenses and synergies expected to result from the proposed AT&T
Comcast transaction furnished to it by Comcast, AT&T and AT&T Broadband;
- conducted discussions with members of management and representatives of
Comcast, AT&T and AT&T Broadband concerning the matters described above,
as well as their businesses and prospects before and after giving effect
to the proposed AT&T Comcast transaction and the expected synergies;
- reviewed the market prices and valuation multiples for Comcast common
stock and AT&T common stock and compared them with those of certain
publicly traded companies that it deemed to be relevant;
- reviewed the results of operations of Comcast and AT&T Broadband and
compared them with those of certain publicly traded companies that it
deemed to be relevant;
- compared the proposed financial terms of the AT&T Comcast transaction
with the financial terms of certain other transactions that it deemed to
be relevant;
- participated in certain discussions and negotiations among
representatives of Comcast, AT&T and AT&T Broadband and their financial
and legal advisors;
- reviewed the potential pro forma impact of the proposed AT&T Comcast
transaction;
- reviewed the final drafts of each of the merger agreement and the
separation and distribution agreement, respectively; and
- reviewed such other financial studies and analyses and took into account
such other matters as it deemed necessary, including Merrill Lynch's
assessment of general economic, market and monetary conditions.
In preparing its opinion, Merrill Lynch assumed and relied on the accuracy
and completeness of all information supplied or otherwise made available to it,
discussed with or reviewed by or for it, or publicly available, and Merrill
Lynch did not assume any responsibility for independently verifying such
information or liability therefor, or undertake an independent evaluation or
appraisal of any of the assets or liabilities of Comcast, AT&T or AT&T Broadband
and was not furnished with any such evaluation or appraisal. In addition,
Merrill Lynch did not assume any obligation to conduct any physical inspection
of the properties or facilities of Comcast, AT&T or AT&T Broadband. With respect
to the financial forecast information and the expected synergies furnished to or
discussed with it by Comcast, AT&T or AT&T Broadband, Merrill Lynch assumed that
they have been reasonably prepared and reflect the best currently available
estimates and judgment of Comcast's, AT&T's or AT&T Broadband's managements as
to the expected future financial performance of Comcast, AT&T Broadband or AT&T
Comcast, as the case may be, and the expected synergies. Merrill Lynch expressed
no view as to such financial forecast information, including the expected
synergies, or the assumptions on which they were based. Merrill Lynch further
assumed that the mergers will qualify as tax-free exchanges under Section 351 of
the Code and that the separation and the AT&T Broadband spin-off will qualify as
tax-free transactions under Sections 355 and
IV-5
368(a) of the Code, in each case for United States federal income tax purposes,
and that the Section 355(e) top-up described under "Description of the AT&T
Comcast Transaction Agreements -- The Merger Agreement -- Merger
Consideration -- Potential Additional Payments" will not occur. Merrill Lynch
also assumed that the final form of the merger agreement and the separation and
distribution agreement will be substantially similar to the last draft reviewed
by it.
The Merrill Lynch opinion is necessarily based upon market, economic and
other conditions as they existed and could be evaluated on, and on the
information made available to it as of, the date of its opinion. Subsequent
developments may affect its opinion and Merrill Lynch does not have any
obligation to update, revise, or reaffirm its opinion. Merrill Lynch assumed
that all governmental, regulatory or other consents and approvals (contractual
or otherwise) necessary for or in connection with the consummation of the
proposed AT&T Comcast transaction will be obtained without any adverse effect on
Comcast, AT&T Broadband or AT&T Comcast or on the contemplated benefits of the
proposed AT&T Comcast transaction, in any respect material to its analysis. For
purposes of rendering its opinion, Merrill Lynch assumed, in all respects
material to its analysis, that the proposed AT&T Comcast transaction will be
consummated as described in the merger agreement and the separation and
distribution agreement, that all the representations and warranties of each
party contained in the merger agreement and the separation and distribution
agreement are true and correct, that each party to the merger agreement and the
separation and distribution agreement will perform all of the covenants and
agreements required to be performed by it thereunder without any consents or
waivers of the other parties thereto, that all conditions to the consummation of
the proposed AT&T Comcast transaction will be satisfied without waiver thereof,
and that if the parties elect to consummate the proposed AT&T Comcast
transaction by means of an alternative structure of the type described under
"Description of the AT&T Comcast Transaction Agreements -- The Merger
Agreement -- Covenants -- Alternative Structure," such alternative structure
will not differ from the structure reflected in the merger agreement and the
separation and distribution agreement in any respect material to its analysis.
Merrill Lynch noted that they are not legal, tax or regulatory experts and
relied upon, without assuming any responsibility for independent verification or
liability therefor, the assessment of Comcast's legal, tax and regulatory
advisors with respect to the legal, tax and regulatory matters related to the
proposed AT&T Comcast transaction. In arriving at its opinion, Merrill Lynch was
not authorized to solicit, and did not solicit, interest from any party with
respect to a business combination or other extraordinary proposed transaction
involving Comcast.
The Merrill Lynch opinion does not address the merits of the underlying
decision by Comcast to engage in the proposed AT&T Comcast transaction and
Merrill Lynch does not express any opinion as to the prices at which the shares
of Comcast common stock or AT&T Comcast common stock will trade following the
announcement or consummation of the proposed AT&T Comcast transaction, as the
case may be. Furthermore, Merrill Lynch does not express any opinion or
recommendation as to how shareholders of Comcast should vote at shareholders'
meetings held in connection with the proposed AT&T Comcast transaction or any
other matter.
JOINT FINANCIAL ANALYSES OF COMCAST'S FINANCIAL ADVISORS
At the December 19, 2001 meeting of the Comcast Board, Morgan Stanley,
JPMorgan and Merrill Lynch reviewed with the members of the Comcast Board the
updated financial terms of the proposed AT&T Comcast transaction and the
application of those terms to the financial analyses prepared by Morgan Stanley,
JPMorgan and Merrill Lynch previously presented to the Comcast Board. Such terms
and analyses were summarized in a written presentation prepared for the meeting
by Morgan Stanley, JPMorgan and Merrill Lynch and delivered along with their
respective opinions to Comcast.
The following is a summary of the material analyses contained in the
presentation that was delivered to Comcast. Some of the summaries of the
financial analyses include information presented in tabular format. The tables
are not intended to stand alone, and in order to more fully understand the
financial analyses used by Morgan Stanley, JPMorgan and Merrill Lynch, the
tables must be read together with the full text of each summary.
IV-6
PUBLIC MARKET BROADBAND VALUATION
Morgan Stanley, JPMorgan and Merrill Lynch reviewed and analyzed certain
public market trading multiples for five publicly traded broadband companies
(Comcast, Cox Communications, Inc., Charter Communications, Inc., Adelphia
Communications Corporation and Cablevision Systems Corporation). The multiples
analyzed were derived by dividing the adjusted aggregate market value of each of
the companies (based on closing stock prices on December 18, 2001) by (i)
estimated year-end 2001 number of subscribers, (ii) estimated 2002 cable
revenues and (iii) estimated 2002 cable EBITDA. Morgan Stanley, JP Morgan and
Merrill Lynch also calculated the estimated 2002 cable EBITDA multiple divided
by estimated 2002-2005 cable EBITDA compound annual growth rates (hereinafter
referred to as EBITDA Multiple to Growth Ratio). For purposes of calculating
these multiples, Morgan Stanley, JPMorgan and Merrill Lynch adjusted the
aggregate market value of each of the companies to exclude the value of certain
of such company's non-cable or non-operating assets, based on Morgan Stanley
equity research (except as set forth below). Morgan Stanley, JPMorgan and
Merrill Lynch calculated the financial multiples and ratios based on publicly
available financial data as of December 18, 2001, Morgan Stanley equity research
estimates and, as to the value to be attributed to Comcast's non-cable assets,
Comcast management estimates, which were consistent with Wall Street research
estimates. Morgan Stanley, JPMorgan and Merrill Lynch then derived reference
ranges of such multiples from this analysis. A summary of the principal public
market trading multiples and the reference ranges of multiples that Morgan
Stanley, JPMorgan and Merrill Lynch derived are set forth below:
MULTIPLE OF ADJUSTED MARKET VALUE TO
REFERENCE RANGE
COMCAST COX CHARTER ADELPHIA CABLEVISION OF MULTIPLES
------- ------ ------- -------- ----------- ------------------
2001 Subscribers....... $4,139 $3,977 $3,707 $3,673 $4,397 $3,500 - $4,400
2002E Cable Revenue.... 5.9x 5.3x 5.5x 5.2x 5.2x 5x - 6x
2002E Cable EBITDA..... 14.0x 13.8x 12.0x 13.2x 14.1x 13x - 15x
EBITDA Multiple to
Growth Ratio......... 0.91x 1.06x 0.80x 0.71x 0.82x 0.8x - 1.1x
Using these derived reference ranges of multiples, Morgan Stanley, JPMorgan
and Merrill Lynch calculated implied valuation ranges for AT&T Broadband by
applying the reference ranges of multiples to the (i) year-end expected 2001
number of subscribers for AT&T Broadband (based on information provided by AT&T
and AT&T Broadband's management), (ii) estimated 2002 AT&T Broadband revenues
(based on Comcast management's estimates), (iii) estimated 2002 AT&T Broadband
EBITDA (based on Comcast management's estimates) and (iv) estimated 2002 AT&T
Broadband EBITDA based on applying an EBITDA margin of 35% to Comcast
management's estimate of 2002 AT&T Broadband revenues. Morgan Stanley, JPMorgan
and Merrill Lynch also calculated the estimated AT&T Broadband EBITDA Multiple
to Growth Ratio using Comcast management's estimate of AT&T Broadband's 2002 to
2005 EBITDA growth rate. Based on such analysis, Morgan Stanley, JPMorgan and
Merrill Lynch derived ranges of implied value for AT&T Broadband of $58 billion
to $70 billion on a 2001 subscriber multiples basis, $62 billion to $72 billion
on a 2002 estimated cable revenue multiples basis, $46 billion to $52 billion on
a 2002 estimated cable EBITDA multiples basis, $57 billion to $64 billion on a
2002 estimated cable EBITDA (adjusted for 35% margin) multiples basis, and $59
billion to $77 billion on an EBITDA Multiple to Growth Ratio basis, each as
compared to the implied value for AT&T Broadband in the proposed AT&T Comcast
transaction of approximately $73.2 billion (based on the closing price of
Comcast Common Stock on December 18, 2001). Morgan Stanley, JPMorgan and Merrill
Lynch noted that the derived ranges of implied public market values were
strictly public market ranges and that no control premium had been attributed in
this analysis.
The foregoing companies, in the judgment of each of Morgan Stanley,
JPMorgan and Merrill Lynch and based in part on conversations with the
managements of Comcast, AT&T and AT&T Broadband,
IV-7
were comparable to AT&T Broadband for purposes of this analysis. Morgan Stanley,
JPMorgan and Merrill Lynch noted that because of the differences between the
business mix, operations and other characteristics of AT&T Broadband and the
comparable companies, Morgan Stanley, JPMorgan and Merrill Lynch did not believe
that a purely quantitative comparable company analysis would be particularly
meaningful in this context. Rather, Morgan Stanley, JPMorgan and Merrill Lynch
believed an appropriate use of the comparable company analysis would also
involve qualitative judgments concerning differences between the financial and
operating characteristics of AT&T Broadband and the comparable companies, which
would affect the public trading values of the common stock of the comparable
companies, which judgments were applied in rendering the respective opinions of
Morgan Stanley, JPMorgan and Merrill Lynch.
PRIVATE MARKET VALUATION
Precedent Transactions. Morgan Stanley, JPMorgan and Merrill Lynch
reviewed and analyzed selected precedent transactions involving other companies
in the broadband industry that they deemed relevant and calculated the per
subscriber multiples paid in the selected transactions based on the transaction
values and the subscriber numbers from publicly available company press releases
and reports and/or public analyst research. The following table sets forth the
transactions that were reviewed in connection with this analysis:
SELECTED PRECEDENT TRANSACTIONS
TRANSACTION ANNOUNCEMENT DATE ACQUIROR TARGET
- ----------------------------- --------------- ---------------------
Apr-99 AT&T MediaOne
May-99 Charter Falcon
May-99 Cox TCA
May-99 Charter Fanch
May-99 Comcast AT&T (select markets)
Jun-99 Charter Bresnan
Jul-99 Cox Gannett
Jul-99 Cox AT&T (select markets)
Nov-99 Comcast Lenfest
Dec-99 Adelphia Cablevision (Ohio)
Apr-00 AT&T Cablevision (Boston)
Jan-01 Comcast AT&T (select markets)
Jan-01 Insight Midwest AT&T/Insight
The high, mean, median and low per subscriber multiples calculated in these
selected transactions were $5,378, $4,491, $4,500 and $3,500, respectively.
Morgan Stanley, JPMorgan and Merrill Lynch then derived from these selected
transactions a reference range of per subscriber multiples of $4,200 to $5,000,
and applying this range of multiples to the expected year-end 2001 number of
subscribers for AT&T Broadband based on information provided by AT&T and AT&T
Broadband's management, Morgan Stanley, JPMorgan and Merrill Lynch calculated an
implied valuation range for AT&T Broadband of $67 billion to $78 billion, as
compared to the implied value for AT&T Broadband in the proposed AT&T Comcast
transaction of $73.2 billion (based on the closing price of Comcast common stock
on December 18, 2001).
Among other factors, Morgan Stanley, JPMorgan and Merrill Lynch indicated
that the merger and acquisition transaction environment varies over time because
of macroeconomic factors such as interest rate and equity market fluctuations
and microeconomic factors such as industry results and growth expectations.
Morgan Stanley, JPMorgan and Merrill Lynch noted that no transaction reviewed
was
IV-8
identical to the proposed AT&T Comcast transaction and that, accordingly, these
analyses involve complex considerations and judgments concerning differences in
financial and operating characteristics of AT&T Broadband and other factors that
would affect the acquisition values in the comparable transactions, including
the size and demographic and economic characteristics of the markets of each
company and the competitive environment in which it operates.
AT&T Broadband DCF Valuation. Morgan Stanley, JPMorgan and Merrill Lynch
performed a five-year discounted cash flow analysis on AT&T Broadband as of
December 31, 2001 based on financial forecasts and estimates provided by
Comcast's management, excluding the effect of certain strategic, financial and
operational benefits anticipated in the proposed transaction according to
Comcast management. In conducting this discounted cash flow analysis, Morgan
Stanley, JPMorgan and Merrill Lynch utilized discount rates of between 9% and
11%, and last twelve months ("LTM") terminal EBITDA multiples of between 15x and
17x. The discount rates utilized in this analysis were chosen based upon an
analysis of the weighted average cost of capital of Comcast and other comparable
companies as well as Wall Street equity research.
Morgan Stanley, JPMorgan and Merrill Lynch also performed a separate
discounted cash flow analysis of the effect of certain strategic, financial and
operational benefits anticipated in the proposed transaction (or synergies)
based on information provided by the managements of Comcast, AT&T and AT&T
Broadband. In conducting this second discounted cash flow analysis, Morgan
Stanley, JPMorgan and Merrill Lynch utilized discount rates between 9% and 11%
and perpetual growth rates of between 3% and 4%. The discount rates utilized in
this analysis were chosen based upon an analysis of the weighted average cost of
capital of Comcast and other comparable companies as well as Wall Street equity
research.
Based on the aforementioned projections and assumptions, the discounted
cash flow analysis of AT&T Broadband yielded a range of implied values for AT&T
Broadband of $62 billion to $74 billion excluding synergies and $73 billion to
$92 billion including synergies, as compared to the implied value for AT&T
Broadband in the proposed AT&T Comcast transaction of $73.2 billion (based on
the closing price of Comcast common stock on December 18, 2001).
CONTRIBUTION ANALYSIS
Morgan Stanley, JPMorgan and Merrill Lynch calculated the implied relative
equity contributions of AT&T Broadband and Comcast to the combined company based
on their respective contributions of estimated 2001 year-end subscribers,
estimated 2002 to 2005 cable revenue and estimated 2002 to 2005 cable EBITDA, in
each case adjusted for the relative contribution of AT&T Broadband and Comcast,
respectively, to the leverage of the combined company. Such analysis was done
both with and without taking into account the transaction synergies estimated by
the managements of AT&T, AT&T Broadband and Comcast. Morgan Stanley, JPMorgan
and Merrill Lynch then compared the results of this analysis to the pro forma
equity ownership implied by the proposed AT&T Comcast transaction prior to the
conversion of the QUIPS. Based on the foregoing analysis, AT&T Broadband's
implied equity contribution ranged from 43.0% to 54.9% excluding synergies, and
50.7% to 61.0% including synergies, as compared to the pro forma AT&T Broadband
shareholder ownership of 55.8% in the proposed transaction (or 56.6% assuming
the issuance by AT&T Comcast of the maximum potential number of additional
shares of AT&T Comcast stock to AT&T Broadband shareholders provided in the
merger agreement under certain circumstances if the stock issued to AT&T
Broadband shareholders in the proposed AT&T Comcast transaction is not included
in the S&P 500 Index).
DCF CONTRIBUTION ANALYSIS
Morgan Stanley, JPMorgan and Merrill Lynch also derived an implied AT&T
Broadband ownership in the combined entity based on an analysis of the
respective discounted cash flow contributions of AT&T Broadband and Comcast to
the combined company both with and without taking into account the synergies
estimated by the managements of AT&T, AT&T Broadband and Comcast.
IV-9
Morgan Stanley, JPMorgan and Merrill Lynch conducted a five-year discounted
cash flow analysis of each of Comcast and AT&T Broadband as of December 31,
2001. For AT&T Broadband, the analysis was based on the same assumptions as in
the AT&T Broadband DCF Valuation described above, including utilizing the same
discount rates and LTM terminal EBITDA multiples as in that analysis. For
Comcast, the analysis was based on financial information and projections from
Morgan Stanley equity research dated November 1, 2001, and utilized discount
rates of 9% to 11% and LTM terminal EBITDA multiples of 14x to 16x. The assumed
discount rates were chosen based on an analysis of the weighted average cost of
capital of Comcast and other comparable companies as well as Wall Street equity
research.
Morgan Stanley, JPMorgan and Merrill Lynch then compared the low and high
discounted cash flow values of each of AT&T Broadband and Comcast to derive a
range of implied discounted cash flow equity contribution for AT&T Broadband.
Based on the foregoing analysis, AT&T Broadband's implied discounted cash flow
equity contribution ranged from 41% to 53% excluding synergies, and 47.5% to
60.5% including synergies.
GENERAL
In connection with the review of the proposed AT&T Comcast transaction by
the Comcast Board, Morgan Stanley, JPMorgan and Merrill Lynch performed a
variety of financial and comparable analyses for purposes of rendering their
respective opinions. The preparation of a fairness opinion is a complex process
and is not susceptible to partial analysis or summary description. In arriving
at their respective opinions, Morgan Stanley, JPMorgan and Merrill Lynch
considered the results of all of their analyses as a whole and did not attribute
any particular weight to any analysis or factor considered by them. Furthermore,
Morgan Stanley, JPMorgan and Merrill Lynch believe that the summary provided and
the analyses described above must be considered as a whole and that selecting
any portion of their analyses, without considering all of them, would create an
incomplete view of the process underlying their analyses and opinions. As a
result, the ranges of valuations resulting from any particular analysis or
combination of analyses described above were merely utilized to create points of
reference for analytical purposes and should not be taken to be the view of
Morgan Stanley, JPMorgan or Merrill Lynch with respect to the actual value of
Comcast, AT&T Broadband or AT&T Comcast.
In performing their analyses, Morgan Stanley, JPMorgan and Merrill Lynch
made numerous assumptions with respect to industry performance, general business
and economic conditions and other matters, many of which are beyond the control
of Morgan Stanley, JPMorgan, Merrill Lynch, Comcast, AT&T or AT&T Broadband. Any
estimates contained in the analyses of Morgan Stanley, JPMorgan and Merrill
Lynch are not necessarily indicative of future results or actual values, which
may be significantly more or less favorable than those suggested by such
estimates. The analyses performed were prepared solely as part of the analyses
of Morgan Stanley, JPMorgan and Merrill Lynch of the fairness of the Comcast
conversion ratios in the Comcast merger, in the aggregate, from a financial
point of view to the Comcast shareholders, taken together, and were prepared in
connection with the delivery by Morgan Stanley, JPMorgan and Merrill Lynch of
their respective opinions, each dated December 19, 2001, to the Comcast Board.
The analyses do not purport to be appraisals or to reflect the prices at which
Comcast common stock or AT&T Comcast common stock will trade following the
announcement or consummation of the proposed transaction. The Comcast conversion
ratios and other terms of the proposed AT&T Comcast transaction were determined
through arms' length negotiations among Comcast, AT&T and AT&T Broadband and
were approved by the Comcast Board. Morgan Stanley, JPMorgan and Merrill Lynch
provided advice to Comcast during such negotiations. However, Morgan Stanley,
JPMorgan and Merrill Lynch did not recommend any specific conversion ratios or
other form of consideration to Comcast or that any specific conversion ratios or
other form of consideration constituted the only appropriate consideration for
the proposed AT&T Comcast transaction.
The opinions of Morgan Stanley, JPMorgan and Merrill Lynch were one of many
factors taken into consideration by the Comcast Board in making its
determination to approve the proposed AT&T Comcast transaction. The analyses of
Morgan Stanley, JPMorgan and Merrill Lynch summarized above should not be viewed
as determinative of the opinion of the Comcast Board with respect to the value
of Comcast,
IV-10
AT&T Broadband or AT&T Comcast or of whether the Comcast Board would have been
willing to agree to different conversion ratios or other forms of consideration.
The foregoing summary does not purport to be a complete description of the
analyses performed by Morgan Stanley, JPMorgan and Merrill Lynch.
The Comcast Board selected Morgan Stanley, JPMorgan and Merrill Lynch as
its financial advisors because of their reputations as internationally
recognized investment banking and advisory firms with substantial experience in
transactions similar to this proposed transaction and because Morgan Stanley,
JPMorgan and Merrill Lynch are familiar with Comcast and its business. As part
of its investment banking and financial advisory business, each of Morgan
Stanley, JPMorgan and Merrill Lynch is continually engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes.
Each of Morgan Stanley, JPMorgan and Merrill Lynch provides a full range of
financial advisory and securities services and in the past, each of Morgan
Stanley, JPMorgan and Merrill Lynch and their respective affiliates have
provided financial advisory and financing services for Comcast and AT&T and
their affiliates and have received fees for the rendering of such services and
also may provide such services to Comcast, AT&T or AT&T Comcast and their
affiliates in the future for which it would expect to receive fees. In addition,
in the course of its business, each of Morgan Stanley, JPMorgan and Merrill
Lynch may (or its affiliates may) actively trade the debt and equity securities
of Comcast or AT&T or, after the proposed AT&T Comcast transaction, AT&T Comcast
for its own accounts or for the accounts of its customers and, accordingly, may
at any time hold long or short positions in such securities.
Under the terms of separate letter agreements, each dated July 8, 2001,
Comcast engaged each of Morgan Stanley, JPMorgan and Merrill Lynch to act as its
financial advisor in connection with the contemplated AT&T Comcast transaction.
Pursuant to the terms of these letters, Comcast has agreed to pay Morgan Stanley
a financial advisory fee of (a) $6 million upon the execution of its letter
agreement and (b) $34 million upon completion of the AT&T Comcast transaction
and to pay each of JPMorgan and Merrill Lynch a financial advisory fee of (a)
$5.25 million upon the execution of its letter agreement and (b) $29.75 million
upon completion of the AT&T Comcast transaction. Comcast has also agreed to
reimburse each of Morgan Stanley, JPMorgan and Merrill Lynch for its reasonable
out-of-pocket expenses incurred in connection with the engagement, including
attorney's fees, and to indemnify each of Morgan Stanley, JPMorgan and Merrill
Lynch and their related parties from and against certain liabilities, including
liabilities under the federal securities laws.
IV-11
OPINIONS OF AT&T'S FINANCIAL ADVISORS
CREDIT SUISSE FIRST BOSTON'S OPINION
Credit Suisse First Boston has acted as a financial advisor to AT&T in
connection with the mergers. AT&T selected Credit Suisse First Boston based on
Credit Suisse First Boston's experience, expertise and reputation. Credit Suisse
First Boston is an internationally recognized investment banking firm and is
regularly engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, leveraged buyouts, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes.
In connection with Credit Suisse First Boston's engagement, AT&T requested
that Credit Suisse First Boston consider the fairness, from a financial point of
view, of the AT&T Broadband exchange ratio provided for in the AT&T Broadband
merger to holders of AT&T Broadband common stock immediately prior to the
mergers, other than Comcast and its affiliates. On December 19, 2001, at a
meeting of the AT&T Board held to consider the mergers, Credit Suisse First
Boston rendered to the AT&T Board an oral opinion, which opinion was confirmed
by delivery of a written opinion dated December 19, 2001, to the effect that, as
of that date and based on and subject to the matters described in its opinion,
the AT&T Broadband exchange ratio was fair, from a financial point of view, to
holders of AT&T Broadband common stock immediately prior to the mergers, other
than Comcast and its affiliates.
THE FULL TEXT OF CREDIT SUISSE FIRST BOSTON'S WRITTEN OPINION, DATED
DECEMBER 19, 2001, TO THE AT&T BOARD, WHICH DESCRIBES THE PROCEDURES FOLLOWED,
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN,
IS ATTACHED AS ANNEX J AND IS INCORPORATED INTO THIS DOCUMENT BY REFERENCE.
HOLDERS OF AT&T COMMON STOCK ARE ENCOURAGED TO READ THIS OPINION CAREFULLY IN
ITS ENTIRETY. CREDIT SUISSE FIRST BOSTON'S OPINION IS ADDRESSED TO THE AT&T
BOARD AND RELATES ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE
AT&T BROADBAND EXCHANGE RATIO, AND DOES NOT ADDRESS ANY OTHER ASPECT OF THE
PROPOSED MERGERS OR ANY RELATED TRANSACTIONS, INCLUDING THE AT&T BROADBAND
SPIN-OFF, AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO ANY
MATTER RELATING TO THE MERGERS OR ANY RELATED TRANSACTIONS. THE SUMMARY OF
CREDIT SUISSE FIRST BOSTON'S OPINION IN THIS DOCUMENT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION.
In arriving at its opinion, Credit Suisse First Boston reviewed:
- the merger agreement;
- the separation and distribution agreement;
- other related documents;
- publicly available business and financial information relating to AT&T
Broadband and Comcast; and
- other information relating to AT&T Broadband and Comcast, including
financial forecasts, in the case of Comcast, as adjusted by the
management of AT&T Broadband and reviewed by AT&T and, in the case of
potential cost savings and synergies, as adjusted by the managements of
AT&T and AT&T Broadband, provided to or discussed with Credit Suisse
First Boston by AT&T, AT&T Broadband and Comcast.
Credit Suisse First Boston also met with the managements of AT&T, AT&T
Broadband and Comcast to discuss the businesses and prospects of AT&T Broadband
and Comcast. Credit Suisse First Boston also considered:
- financial data of AT&T Broadband and financial and stock market data of
Comcast, and compared those data with similar data for other publicly
held companies in businesses similar to AT&T Broadband and Comcast;
- to the extent publicly available, the financial terms of other business
combinations and other transactions announced or effected; and
IV-12
- other information, financial studies, analyses and investigations and
financial, economic and market criteria that it deemed relevant.
In connection with its review, Credit Suisse First Boston did not assume
any responsibility for independent verification of any of the information that
it reviewed or considered and relied on that information being complete and
accurate in all material respects. Credit Suisse First Boston was advised, and
assumed:
- with respect to the financial forecasts, including adjustments to the
forecasts, and other information and data, that the forecasts were
reasonably prepared on bases reflecting the best currently available
estimates and judgments of the managements of AT&T, AT&T Broadband and
Comcast as to the future financial performance of AT&T Broadband and
Comcast, the potential cost savings and synergies, including the amount,
timing and achievability of the cost savings and synergies, and strategic
benefits anticipated by the managements of AT&T, AT&T Broadband and
Comcast to result from the mergers and related transactions and the other
matters covered by the forecasts.
Credit Suisse First Boston also assumed, with AT&T's consent, that:
- in the course of obtaining the necessary regulatory and third party
approvals and consents for the proposed mergers and related transactions,
no modification, delay, limitation, restriction or condition will be
imposed that would have an adverse effect on AT&T, AT&T Broadband or
Comcast or the contemplated benefits of the proposed mergers or related
transactions in any respect meaningful to its analyses;
- the mergers and related transactions, including the AT&T Broadband
spin-off, will be consummated in accordance with the terms of the merger
agreement, the separation and distribution agreement and related
documents, without waiver, modification or amendment of any material
terms, conditions or agreements, and in compliance with all applicable
laws, including, in the case of the AT&T Broadband spin-off, laws
relating to insolvency and fraudulent conveyance and to the payments of
dividends; and
- the mergers would be treated as a tax-free exchange, and that the AT&T
Broadband spin-off would qualify as a tax-free distribution, for federal
income tax purposes.
Credit Suisse First Boston was not requested to make, and did not make, an
independent evaluation or appraisal of the assets or liabilities, contingent or
otherwise, of AT&T, AT&T Broadband or Comcast, and Credit Suisse First Boston
was not furnished with any evaluations or appraisals. Credit Suisse First
Boston's opinion was necessarily based on information available to it, and
financial, economic, market and other conditions as they existed and could be
evaluated, on the date of Credit Suisse First Boston's opinion.
Credit Suisse First Boston did not express any opinion as to:
- what the value of the securities of AT&T Broadband or AT&T Comcast
actually will be when issued; or
- the prices at which the securities of AT&T Broadband or AT&T Comcast
would trade at any time.
Credit Suisse First Boston's opinion did not address:
- any aspect of the mergers other than the AT&T Broadband exchange ratio to
the extent specified in its opinion;
- any related transactions, including the AT&T Broadband spin-off;
- the relative merits of the mergers or any related transactions as
compared to other business strategies that might have been available to
AT&T or AT&T Broadband; or
- the underlying business decision of AT&T to proceed with the mergers or
any related transactions.
IV-13
In connection with its engagement, Credit Suisse First Boston was requested
to approach, and held preliminary discussions with, third parties to solicit
indications of interest in the possible acquisition of all or a part of AT&T
Broadband. Although Credit Suisse First Boston evaluated the AT&T Broadband
exchange ratio from a financial point of view, Credit Suisse First Boston was
not requested to, and did not, recommend the specific consideration payable in
the AT&T Broadband merger, which consideration was determined between AT&T and
Comcast. Except as described above, AT&T imposed no other limitations on Credit
Suisse First Boston with respect to the investigations made or procedures
followed in rendering its opinion.
GOLDMAN SACHS' OPINION
On December 19, 2001, Goldman Sachs delivered its oral opinion, which it
subsequently confirmed in writing as of the same date, to the AT&T Board that,
based upon and subject to the matters described in the Goldman Sachs opinion and
based upon such other matters as Goldman Sachs considered relevant, as of that
date and based on the market conditions of that date, the AT&T Broadband
exchange ratio, as defined in the opinion, pursuant to the merger agreement was
fair from a financial point of view to holders, other than Comcast and its
affiliates, of AT&T Broadband common stock immediately prior to the mergers.
THE FULL TEXT OF GOLDMAN SACHS' WRITTEN OPINION, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN
CONNECTION WITH ITS OPINION, IS ATTACHED HERETO AS ANNEX K AND IS INCORPORATED
HEREIN BY REFERENCE. GOLDMAN SACHS PROVIDED ITS OPINION AND ITS ADVISORY
SERVICES FOR THE INFORMATION AND ASSISTANCE OF THE AT&T BOARD IN CONNECTION WITH
ITS CONSIDERATION OF THE AT&T BROADBAND MERGER. GOLDMAN SACHS EXPRESSED NO
OPINION AS TO, AMONG OTHER THINGS, ANY RELATED TRANSACTION, INCLUDING THE AT&T
BROADBAND SPIN-OFF, AND ITS OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
SHAREHOLDER AS TO ANY MATTER RELATING TO THE MERGERS OR ANY RELATED
TRANSACTIONS. THE GOLDMAN SACHS OPINION IS NECESSARILY BASED UPON INFORMATION
AVAILABLE TO GOLDMAN SACHS AND FINANCIAL, ECONOMIC, MARKET AND OTHER CONDITIONS
AS THEY EXIST AND CAN BE EVALUATED AS OF THE DATE OF ITS OPINION, AND GOLDMAN
SACHS ASSUMES NO DUTY TO UPDATE OR REVISE ITS OPINION BASED ON CIRCUMSTANCES OR
EVENTS AFTER THE DATE OF THE OPINION. WE URGE YOU TO READ THE GOLDMAN SACHS
OPINION IN ITS ENTIRETY.
In connection with its opinion, Goldman Sachs reviewed, among other things:
- the merger agreement;
- the separation and distribution agreement;
- annual reports to shareholders and annual reports on Form 10-K of AT&T
and Comcast for the five years ended December 31, 2000;
- the preliminary proxy statement of AT&T dated July 3, 2001;
- other communications from AT&T and Comcast to their respective
shareholders;
- internal financial analyses and forecasts for Comcast prepared by its
management, as adjusted by AT&T Broadband management and reviewed by AT&T
management;
- internal financial analyses and forecasts for AT&T Broadband prepared by
AT&T Broadband management and reviewed and/or adjusted by AT&T
management; and
- cost savings and operating synergies projected to result from the
transactions contemplated by the merger agreement as prepared by the
managements of Comcast and AT&T Broadband and as further adjusted by the
managements of AT&T Broadband and AT&T.
Goldman Sachs also held discussions with members of the senior management
of AT&T, AT&T Broadband and Comcast regarding their assessment of the strategic
rationale for, and the potential benefits
IV-14
of, the transaction contemplated by the merger agreement and the past and
current business operations, financial condition and future prospects of their
respective companies. In addition, Goldman Sachs:
- reviewed the reported price and trading activity for the shares of AT&T
common stock, Comcast Class A common stock and Comcast Class A Special
common stock;
- compared financial information for AT&T Broadband and financial and stock
market information for Comcast with similar information for various other
companies the securities of which are publicly traded; and
- reviewed the financial terms of various recent business combinations in
the cable industry specifically and in other industries generally and
performed other studies and analyses as it considered appropriate.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial, accounting and other information and data discussed with or reviewed
by it and assumed the accuracy and completeness thereof for purposes of its
opinion. In that regard, Goldman Sachs assumed, with the consent of the AT&T
Board, that the forecasts and the synergies had been reasonably prepared on a
basis reflecting the best currently available judgments and estimates of the
managements of AT&T and AT&T Broadband. In addition, Goldman Sachs did not make
an independent evaluation or appraisal of the assets and liabilities of AT&T,
AT&T Broadband or Comcast or any of their subsidiaries and was not furnished
with any evaluation or appraisal.
For purposes of its analyses, Goldman Sachs was advised and assumed, with
the consent of the AT&T Board, that:
- all governmental, regulatory or other consents and approvals necessary
for the consummation of the transactions contemplated by the merger
agreement and the separation and distribution agreement will be obtained
without any adverse effect on AT&T, AT&T Broadband and Comcast or AT&T
Comcast following the mergers or the contemplated benefits of the
transactions in any respect meaningful to its analyses;
- the mergers and the other transactions contemplated by the merger
agreement and the separation and distribution agreement will be
consummated in accordance with the terms of these agreements, and without
waiver, modification or amendment of any material terms, conditions or
agreements and in compliance with all applicable laws including, in the
case of the AT&T Broadband spin-off, laws relating to insolvency and
fraudulent conveyance and to the payment of dividends; and
- for federal income tax purposes, the AT&T Broadband spin-off will qualify
as a tax-free distribution and the mergers will be treated as a tax-free
reorganization.
Goldman Sachs expressed no opinion as to:
- any aspect of the mergers other than the AT&T Broadband exchange ratio to
the extent specified in its opinion;
- any related transaction, including the AT&T Broadband spin-off;
- AT&T's underlying business decision to effect the mergers or any related
transactions;
- the prices at which the shares of AT&T Broadband common stock or of AT&T
Comcast Class A common stock, AT&T Comcast Class A Special common stock
or AT&T Comcast Class C common stock may trade at any time if and when
they are issued and trade publicly; or
- the relative merits of the transactions contemplated by the merger
agreement and the separation and distribution agreement as compared to
any alternative business transaction that might be available to AT&T or
to AT&T Broadband.
Goldman Sachs, as part of its investment banking business, is continually
engaged in performing financial analyses with respect to the valuation of
businesses and their securities in connection with
IV-15
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities and private placements
as well as for estate, corporate and other purposes.
AT&T selected Goldman Sachs as its financial advisor because it is an
internationally recognized investment banking firm that has substantial
experience in transactions similar to the mergers.
FINANCIAL ANALYSES
In preparing their respective opinions to the AT&T Board, Credit Suisse
First Boston and Goldman Sachs performed a variety of financial and comparative
analyses, including those described below. The summary of the analyses of Credit
Suisse First Boston and Goldman Sachs described below is not a complete
description of the analyses underlying their opinions. The preparation of a
fairness opinion is a complex process involving various determinations as to the
most appropriate and relevant methods of financial analysis and the application
of those methods to the particular circumstances and, therefore, a fairness
opinion is not readily susceptible to partial analysis or summary description.
In arriving at their respective opinions, Credit Suisse First Boston and Goldman
Sachs made qualitative judgments as to the significance and relevance of each
analysis and factor that it considered. Accordingly, Credit Suisse First Boston
and Goldman Sachs believe that their analyses must be considered as a whole and
that selecting portions of their analyses and factors or focusing on information
presented in tabular format, without considering all analyses and factors or the
narrative description of the analyses, could create a misleading or incomplete
view of the processes underlying their analyses and opinions.
In their analyses, Credit Suisse First Boston and Goldman Sachs considered
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of AT&T, AT&T
Broadband and Comcast. No company, transaction or business used in Credit Suisse
First Boston's and Goldman Sachs' analyses as a comparison is identical to AT&T,
AT&T Broadband, Comcast or the proposed mergers, and an evaluation of the
results of those analyses is not entirely mathematical. Rather, the analyses
involve complex considerations and judgments concerning financial and operating
characteristics and other factors that could affect the acquisition, public
trading or other values of the companies, business segments or transactions
analyzed. The estimates contained in the analyses of Credit Suisse First Boston
and Goldman Sachs and the ranges of valuations resulting from any particular
analysis are not necessarily indicative of actual values or predictive of future
results or values, which may be significantly more or less favorable than those
suggested by the analyses. In addition, analyses relating to the value of
businesses or securities do not purport to be appraisals or to reflect the
prices at which businesses or securities actually may be sold. Accordingly, the
analyses and estimates of Credit Suisse First Boston and Goldman Sachs are
inherently subject to substantial uncertainty.
The opinions of Credit Suisse First Boston and Goldman Sachs were only one
of many factors considered by the AT&T Board in its evaluation of the proposed
mergers and should not be viewed as determinative of the views of the AT&T Board
or management with respect to the mergers or the AT&T Broadband exchange ratio.
The following is a summary of the material financial analyses underlying
the opinions of Credit Suisse First Boston and Goldman Sachs delivered to the
AT&T Board. THE FINANCIAL ANALYSES SUMMARIZED BELOW INCLUDE INFORMATION
PRESENTED IN TABULAR FORMAT. IN ORDER TO FULLY UNDERSTAND CREDIT SUISSE FIRST
BOSTON'S AND GOLDMAN SACHS' FINANCIAL ANALYSES, THE TABLES MUST BE READ TOGETHER
WITH THE TEXT OF EACH SUMMARY. THE TABLES ALONE DO NOT CONSTITUTE A COMPLETE
DESCRIPTION OF THE FINANCIAL ANALYSES. CONSIDERING THE DATA IN THE TABLES BELOW
WITHOUT CONSIDERING THE FULL NARRATIVE DESCRIPTION OF THE FINANCIAL ANALYSES,
INCLUDING THE METHODOLOGIES AND ASSUMPTIONS UNDERLYING THE ANALYSES, COULD
CREATE A MISLEADING OR INCOMPLETE VIEW OF CREDIT SUISSE FIRST BOSTON'S AND
GOLDMAN SACHS' FINANCIAL ANALYSES.
SELECTED COMPANIES ANALYSIS
Credit Suisse First Boston and Goldman Sachs compared financial and
operating data of AT&T Broadband's core cable business, which excludes assets
relating to Time Warner Entertainment and various
IV-16
other cable joint ventures, referred to as AT&T Broadband Cable, to
corresponding data for the following five publicly traded companies in the cable
industry:
- Adelphia Communications Corporation
- Cablevision Systems Corporation
- Charter Communications, Inc.
- Comcast Corporation
- Cox Communications, Inc.
Credit Suisse First Boston and Goldman Sachs reviewed enterprise values,
calculated as equity value plus net debt, as a multiple of calendar years 2002
and 2003 estimated earnings before interest, taxes, depreciation and
amortization, commonly referred to as EBITDA. All multiples were based on
closing stock prices on December 18, 2001. Credit Suisse First Boston and
Goldman Sachs then applied a range of selected multiples derived from the
selected companies of calendar years 2002 and 2003 estimated EBITDA to
corresponding financial data of AT&T Broadband Cable, both with and without
giving effect to, in the case of calendar year 2003, a $7.5 billion potential
initial public offering of 19.0% of AT&T Broadband occurring at year-end 2002,
referred to as the IPO. Credit Suisse First Boston and Goldman Sachs also
applied a range of selected multiples derived from the selected companies to
AT&T Broadband Cable's calendar year 2004 estimated EBITDA, after giving effect
to the IPO, the result of which was then discounted to 2001 year-end present
value using a discount rate of 15%. Estimated financial data for AT&T Broadband
Cable were based on internal estimates of AT&T Broadband's management and
estimated financial data for the selected companies were based on publicly
available research analysts' estimates. This analysis indicated an implied
enterprise reference range for AT&T Broadband Cable of approximately $31.0
billion to $60.0 billion. Using this enterprise reference range, Credit Suisse
First Boston and Goldman Sachs then derived an implied reference range per 2001
AT&T Broadband Cable subscriber. This analysis indicated the following implied
reference range per 2001 AT&T Broadband Cable subscriber, as compared to the per
2001 AT&T Broadband Cable subscriber value implied by the AT&T Broadband merger
consideration attributable to AT&T Broadband Cable.
PER 2001 AT&T BROADBAND CABLE
IMPLIED REFERENCE RANGE SUBSCRIBER VALUE IMPLIED BY THE AT&T
PER 2001 AT&T BROADBAND BROADBAND MERGER CONSIDERATION
CABLE SUBSCRIBER ATTRIBUTABLE TO AT&T BROADBAND CABLE
----------------------- ------------------------------------
AT&T Broadband Cable............ $2,301 - $4,380 $4,604
Credit Suisse First Boston and Goldman Sachs also reviewed the per
subscriber values for the selected companies for the first three fiscal quarters
of 2001 and estimated fiscal fourth quarter of 2001. Credit Suisse First Boston
and Goldman Sachs then derived an implied reference range per 2001 subscriber
for the selected companies. This analysis indicated the following implied
reference range per 2001 subscriber for the selected companies, as compared to
the per 2001 AT&T Broadband Cable subscriber value implied by the AT&T Broadband
merger consideration attributable to AT&T Broadband Cable:
PER 2001 AT&T BROADBAND CABLE
IMPLIED REFERENCE RANGE SUBSCRIBER VALUE IMPLIED BY THE AT&T
PER 2001 SUBSCRIBER FOR BROADBAND MERGER CONSIDERATION
SELECTED COMPANIES ATTRIBUTABLE TO AT&T BROADBAND CABLE
----------------------- ------------------------------------
$3,250 - $4,000 $4,604
DISCOUNTED CASH FLOW ANALYSIS
Credit Suisse First Boston and Goldman Sachs calculated the present value
of the stand-alone, unlevered, after-tax free cash flows that AT&T Broadband
Cable could generate for the fiscal years 2002 to 2005. Credit Suisse First
Boston and Goldman Sachs performed this analysis based on four scenarios, AT&T
Broadband management case I, AT&T Broadband management case II, AT&T Broadband
alternate case I, and AT&T Broadband alternate case II. AT&T Broadband
management case I was based
IV-17
on internal estimates of AT&T Broadband's management. AT&T Broadband management
case II included adjustments to AT&T Broadband management case I based on
discussions with AT&T's management to reflect, among other things, the dilutive
effect of various financing alternatives. AT&T Broadband alternate case I
included adjustments to AT&T Broadband management case I based on discussions
with AT&T's management to reflect, among other things, the potential for
decreased revenue and profitability of AT&T Broadband Cable. AT&T Broadband
alternate case II included adjustments to AT&T Broadband alternate case I based
on discussions with AT&T's management to reflect, among other things, the
dilutive effect of various financing alternatives.
Credit Suisse First Boston and Goldman Sachs calculated a range of
estimated terminal values for AT&T Broadband Cable by applying selected EBITDA
multiples ranging from 12.0x to 14.0x to AT&T Broadband Cable's calendar year
2005 estimated EBITDA. The estimated free cash flows and calculated terminal
values were then discounted to present value using a discount rate of 11.0%.
This analysis indicated an implied enterprise reference range for AT&T
Broadband Cable of approximately $49.0 billion to $68.0 billion, based on the
four scenarios described above. Using this enterprise reference range, Credit
Suisse First Boston and Goldman Sachs then derived an implied reference range
per 2001 AT&T Broadband Cable subscriber. This analysis indicated the following
implied reference range per 2001 AT&T Broadband Cable subscriber, as compared to
the per 2001 AT&T Broadband Cable subscriber value implied by the AT&T Broadband
merger consideration attributable to AT&T Broadband Cable:
PER 2001 AT&T BROADBAND CABLE
IMPLIED REFERENCE RANGE SUBSCRIBER VALUE IMPLIED BY THE AT&T
PER 2001 AT&T BROADBAND BROADBAND MERGER CONSIDERATION
CABLE SUBSCRIBER ATTRIBUTABLE TO AT&T BROADBAND CABLE
----------------------- ------------------------------------
AT&T Broadband Cable............ $3,619 - $4,978 $4,604
Credit Suisse First Boston and Goldman Sachs also calculated the present
value of the unlevered, after-tax free cash flows that AT&T Broadband could
generate for fiscal years 2002 to 2005, on a stand-alone basis, based on AT&T
Broadband management case I, and the present value of the unlevered, after-tax
free cash flows that AT&T Comcast, pro forma for the mergers, could generate for
fiscal years 2002 to 2005. Estimated financial data for AT&T Broadband were
based on AT&T Broadband management case I. Estimated financial data for Comcast
were based on internal estimates of Comcast's management, as adjusted by AT&T
Broadband's management and reviewed by AT&T's management, to reflect, among
other things, the potential for decreased revenue and profitability of Comcast,
referred to as Comcast adjusted management case.
Credit Suisse First Boston and Goldman Sachs calculated a range of
estimated terminal values for AT&T Broadband, on a stand-alone basis, and AT&T
Comcast, after giving effect to the mergers, by applying an EBITDA multiple of
13.0x, the midpoint of the 12.0x to 14.0x range used in calculating the terminal
values, to AT&T Broadband's and AT&T Comcast's calendar year 2005 estimated
EBITDA. The estimated free cash flows and calculated terminal values were then
discounted to present value using a discount rate of 11.0%.
This analysis indicated the following approximate implied per share equity
values for AT&T Broadband common stock on a stand-alone basis, before and after
giving effect to the dilutive effect of various financing alternatives which
were based on discussions with AT&T's management, and the following implied per
share equity value reference range for AT&T Comcast, before and after taking
into account various levels of potential cost savings and other synergies
anticipated by the managements of AT&T, AT&T Broadband and Comcast to result
from the mergers:
STAND-ALONE STAND-ALONE AT&T COMCAST
(WITHOUT FINANCING) (WITH FINANCING) IMPLIED PER SHARE
IMPLIED PER SHARE IMPLIED PER SHARE EQUITY VALUE
EQUITY VALUE EQUITY VALUE REFERENCE RANGE
------------------- ----------------- -----------------
AT&T Broadband common stock........ $13.78 $12.09 $14.06 - $16.17
IV-18
CONTRIBUTION ANALYSIS
Credit Suisse First Boston and Goldman Sachs reviewed the relative
contributions of AT&T Broadband and of Comcast to AT&T Comcast's unlevered,
after-tax free cash flows for calendar years 2002 through 2005. Estimated
financial data for AT&T Broadband were based on AT&T Broadband management case
I, described above under the caption "Discounted Cash Flow Analysis." Estimated
financial data for Comcast were based on the Comcast adjusted management case,
described above under the caption "Discounted Cash Flow Analysis."
Credit Suisse First Boston and Goldman Sachs then computed the relative
contribution of AT&T Broadband and of Comcast to the discounted cash flow equity
reference range of AT&T Comcast. This analysis indicated the following range of
contribution percentages by AT&T Broadband to AT&T Comcast's discounted cash
flow equity reference range, as compared to the approximate fully diluted equity
ownership percentage of AT&T Broadband's shareholders:
AT&T BROADBAND PERCENTAGE IMPLIED AT&T BROADBAND SHAREHOLDER
CONTRIBUTION TO DISCOUNTED CASH FLOW OWNERSHIP PERCENTAGE FOLLOWING
EQUITY REFERENCE RANGE CONSUMMATION OF THE MERGERS
------------------------------------ ----------------------------------
50.2%-58.1% 56.0%
If the Microsoft transaction described under "Description of the AT&T
Comcast Transaction Agreements -- The Exchange Agreement and Instrument of
Admission -- QUIPS Exchange" is completed, the ownership percentage of AT&T
Comcast attributable to the AT&T Broadband shareholders immediately following
the mergers would increase due to the number of AT&T Broadband shares issued to
Microsoft as a result of the Microsoft transaction, and the ownership
attributable to AT&T Broadband shareholders implied by the contribution analysis
would increase accordingly.
Credit Suisse First Boston and Goldman Sachs also reviewed the relative
contributions of AT&T Broadband Cable and of Comcast to AT&T Comcast's first
three fiscal quarters of 2001 EBITDA and estimated fiscal fourth quarter of 2001
EBITDA and estimated calendar years 2002 through 2004 EBITDA and to AT&T
Comcast's estimated calendar year 2001 cable subscribers and number of homes
capable of cable subscription, based on AT&T Broadband management case I and
Comcast adjusted management case, both described above under the caption
"Discounted Cash Flow Analysis." Credit Suisse First Boston and Goldman Sachs
noted that this analysis indicated a range of contribution percentages by AT&T
Broadband to AT&T Comcast of 37.9% to 57.0%.
OTHER FACTORS
In the course of preparing its opinion, Credit Suisse First Boston and
Goldman Sachs also reviewed and considered other information and data,
including:
- the enterprise reference range and reference range per 2001 AT&T
Broadband Cable subscriber of AT&T Comcast, after giving effect to the
mergers, implied by a range of selected EBITDA multiples for calendar
years 2003 and 2004, after taking into account potential synergies
anticipated by the managements of AT&T, AT&T Broadband and Comcast to
result from the mergers and discounting the 2004 calendar year results to
2001 year-end present values using a discount rate of 15%;
- the estimated percentage changes in the current per share price of
Comcast common stock after giving effect to the mergers, assuming a range
of selected EBITDA multiples for calendar year 2003, before and after
taking into account potential synergies anticipated by the managements of
AT&T, AT&T Broadband and Comcast to result from the mergers; and
- the possible credit rating of AT&T Comcast, taking into account, among
other things, AT&T Comcast's estimated debt to EBITDA multiple for
calendar years 2002, 2003 and 2004, after taking into account potential
synergies anticipated by the managements of AT&T, AT&T Broadband and
Comcast to result from the mergers.
IV-19
MISCELLANEOUS
AT&T has agreed to pay each of Credit Suisse First Boston and Goldman Sachs
customary fees for their financial advisory services in connection with the
proposed mergers, which fees currently are estimated to be approximately $55.8
million in the aggregate for each of Credit Suisse First Boston and Goldman
Sachs. AT&T also has agreed to reimburse Credit Suisse First Boston and Goldman
Sachs for their reasonable out-of-pocket expenses, including fees and expenses
of legal counsel, and to indemnify Credit Suisse First Boston and Goldman Sachs
and related parties against liabilities, including liabilities under the federal
securities laws, arising out of their respective engagements.
Credit Suisse First Boston and its affiliates in the past have provided,
and currently are providing, financial and investment banking services to AT&T
and some of its affiliates, and in the past have provided financial and
investment banking services to Comcast and some of its affiliates unrelated to
the proposed mergers, for which services Credit Suisse First Boston and its
affiliates have received, and expect to receive, compensation.
Goldman Sachs is familiar with AT&T having provided investment banking
services to AT&T from time to time, including:
- having acted as financial advisor to AT&T in connection with (i) its
acquisition of Teleport Communications Group Inc. in July 1998, (ii) its
acquisition of Tele-Communications Inc. in March 1999, (iii) its
divestiture of a 50% interest in Lenfest Communications Inc. in January
2000, (iv) its divestiture of cable assets to Cox Communications, Inc. in
March 2000, (v) its acquisition of MediaOne Group in June 2000, (vi) its
acquisition of assets from Cablevision Systems Corporation in January
2001, (vii) its analysis, consideration and negotiation of revisions to
AT&T's put arrangements with Cox Communications, Inc. and Comcast
involving At Home Corporation in May 2001, (viii) its distribution of the
outstanding shares of common stock of AT&T Wireless Inc. held by AT&T to
holders of AT&T common stock in July 2001, (ix) its debt-for-equity
exchange offer involving AT&T's remaining stake in AT&T Wireless in July
2001, and (x) its transaction with BT Group plc relating to the unwinding
of the Concert joint venture announced in October 2001;
- having acted as joint lead arranger in connection with the loan
syndication of AT&T's senior credit facility in April 1999, aggregate
principal amount $30 billion, and joint lead arranger of its corporate
revolving credit facility in December 2000, aggregate principal amount
$25 billion, and in December 2001, aggregate principal amount $8 billion;
- having acted as joint bookrunner in connection with (i) the public
offering of AT&T Wireless Group tracking stock of AT&T in April 2000,
(ii) the public offering pursuant to Rule 144A of $1.65 billion aggregate
principal amount of Notes of AT&T due August 2002 in August 2001, and
(iii) the public offering pursuant to Rule 144A of $10.1 billion
aggregate principal amount of Notes of AT&T in multiple tranches and
currencies in November 2001;
- having acted as sole bookrunner in connection with the public offerings
pursuant to Rule 144A of (i) $3.0 billion of aggregate principal amount
of Notes of AT&T due July 2000 in July 1999 and (ii) $6.0 billion of
aggregate principal amount of Notes of AT&T in multiple tranches due July
2001 in July 2000;
- having acted as dealer with respect to AT&T's commercial paper program;
- having acted as financial advisor to AT&T in connection with the
restructuring announced by AT&T in 2000; and
- having acted as a financial advisor to AT&T in connection with, and
having participated in some of the negotiations leading up to, the merger
agreement, the separation and distribution agreement and the agreements
referred to therein.
IV-20
Goldman Sachs has also provided investment banking services to Comcast and
its affiliates from time to time, including:
- having acted as co-manager with respect to the public offering of PHONES
in March 1999, aggregate principal amount $870 million;
- having acted as joint lead agent on the $4.45 billion aggregate principal
amount consent solicitation for various Comcast debt securities in July
2000; and
- having acted as co-manager with respect to the public offerings of (i)
$0.5 billion aggregate principal amount of Comcast's 6.375% Senior
Unsecured Notes due 2006 and $1.0 billion aggregate principal amount of
Comcast's 3.75% Senior Notes due 2011 in January 2001, (ii) $0.75 billion
aggregate principal amount of Comcast's 6.875% Senior Notes due 2009 in
May 2001, and (iii) $0.75 billion aggregate principal amount of Comcast's
7.125% Senior Notes due 2013 in June 2001. Goldman Sachs may provide
investment banking and advisory services to AT&T, Comcast and their
respective affiliates in the future.
Pursuant to prepaid variable forward contracts between AT&T, a subsidiary
of AT&T Broadband and affiliates of Credit Suisse First Boston, the subsidiary
of AT&T Broadband is obligated to deliver to an affiliate of Credit Suisse First
Boston either shares of Comcast Class A Special common stock or, following the
mergers, AT&T Comcast Class A Special common stock or cash in an amount derived
from the value of the shares that would otherwise be delivered. The prepaid
variable forward contracts were entered into in the normal course of Credit
Suisse First Boston's equity trading business which regularly provides hedging
and monetization services to Credit Suisse First Boston's clients. In the
ordinary course of business, each of Credit Suisse First Boston and Goldman
Sachs and their affiliates may actively trade securities, including derivative
securities, of AT&T and Comcast and their respective affiliates and in the
future may actively trade securities, including derivative securities, of AT&T
Comcast and its affiliates for their own accounts and for the accounts of
customers and, accordingly, may at any time hold long or short positions in
those securities.
IV-21
CHAPTER FIVE
DESCRIPTION OF THE AT&T COMCAST TRANSACTION AGREEMENTS
Except for the employee benefits agreement, this chapter describes the
material terms of each of the AT&T Comcast transaction agreements. For a
description of the material terms of the employee benefits agreement, see
"Employee Benefits Matters -- Other Benefits Matters -- Employee Benefits
Agreement."
THE MERGER AGREEMENT
The following summary of the merger agreement, as amended, is qualified in
its entirety by reference to the complete text of the merger agreement, as
amended, which is incorporated by reference and attached as Annex A to this
document.
STRUCTURE OF THE MERGERS
AT&T Broadband Acquisition Corp., a wholly owned subsidiary of AT&T
Comcast, will merge with and into AT&T Broadband, with AT&T Broadband continuing
as the surviving corporation and a wholly owned subsidiary of AT&T Comcast. This
merger is referred to in this document as the "AT&T Broadband merger." At
approximately the same time, Comcast Acquisition Corp., a wholly owned
subsidiary of AT&T Comcast, will merge with and into Comcast, with Comcast
continuing as the surviving corporation and a wholly owned subsidiary of AT&T
Comcast. This merger is referred to in this document as the "Comcast merger."
After completion of the mergers, the shareholders of Comcast and AT&T Broadband
will be shareholders of AT&T Comcast.
TIMING OF CLOSING
The closing date for the AT&T Comcast transaction will occur as soon as
practicable, and, in any event, within five business days, after satisfaction or
waiver of all conditions to the mergers set forth in the merger agreement. The
mergers will become effective after the separation and the AT&T Broadband
spin-off on the closing date for the transaction at a time that is mutually
agreeable to Comcast and AT&T.
MERGER CONSIDERATION
The Preferred Structure. If holders of Comcast Class A common stock,
voting as a single class, approve the preferred structure proposal:
- each share of AT&T Broadband common stock that is outstanding
immediately prior to the completion of the mergers will be converted in
the AT&T Broadband merger into the right to receive a number of shares
of AT&T Comcast Class A common stock determined by a formula described
under "-- Calculation of the AT&T Broadband Exchange Ratio" (if the AT&T
Broadband exchange ratio were determined as of the date of this
document, it would be approximately 0.35); and
- each share of Comcast Class A common stock, Comcast Class B common stock
and Comcast Class A Special common stock that is outstanding immediately
prior to the completion of the mergers will be converted in the Comcast
merger into the right to receive one share of AT&T Comcast Class A
common stock, AT&T Comcast Class B common stock and AT&T Comcast Class A
Special common stock, respectively.
The AT&T Comcast capital structure described above is referred to in this
document as the "Preferred Structure." The rights of the classes of AT&T Comcast
common stock under the Preferred Structure are described under "Certain Legal
Information -- Description of AT&T Comcast Capital Stock."
V-1
The Alternative Structure. If holders of Comcast Class A common stock,
voting as a single class, do not approve the preferred structure proposal:
- each share of AT&T Broadband common stock that is outstanding
immediately prior to the completion of the mergers will be converted in
the AT&T Broadband merger into the right to receive a number of shares
of AT&T Comcast Class C common stock determined by a formula described
under "-- Calculation of the AT&T Broadband Exchange Ratio" (if the AT&T
Broadband exchange ratio were determined as of the date of this
document, it would be approximately 0.35); and
- each share of Comcast Class A common stock, Comcast Class B common stock
and Comcast Class A Special common stock that is outstanding immediately
prior to the completion of the mergers will be converted in the Comcast
merger into the right to receive one share of AT&T Comcast Class A
common stock, AT&T Comcast Class B common stock and AT&T Comcast Class A
Special common stock, respectively.
The AT&T Comcast capital structure described above is referred to in this
document as the "Alternative Structure." The rights of the classes of AT&T
Comcast common stock under the Alternative Structure are described in "Certain
Legal Information -- Description of AT&T Comcast Capital Stock."
The consideration each shareholder will receive under the Preferred
Structure and the Alternative Structure is summarized in the following table:
SHARE HELD PREFERRED STRUCTURE ALTERNATIVE STRUCTURE
---------- ------------------- ---------------------
- -------------------------------------------------------------------------------------------
AT&T Broadband The AT&T Broadband exchange ratio The AT&T Broadband exchange ratio
common stock of a share of AT&T Comcast Class A of a share of AT&T Comcast Class C
common stock common stock
- -------------------------------------------------------------------------------------------
Comcast Class A 1 share of AT&T Comcast Class A 1 share of AT&T Comcast Class A
common stock common stock common stock
- -------------------------------------------------------------------------------------------
Comcast Class A 1 share of AT&T Comcast Class A 1 share of AT&T Comcast Class A
Special common Special common stock Special common stock
stock
- -------------------------------------------------------------------------------------------
Comcast Class B 1 share of AT&T Comcast Class B 1 share of AT&T Comcast Class B
common stock common stock common stock
Potential Additional Payments. If, prior to the completion of the mergers,
Standard & Poor's has not committed that the class of AT&T Comcast common stock
to be issued in the AT&T Broadband merger will be included in the Standard &
Poor's 500 Index immediately after completion of the mergers and during 10
trading days randomly selected from a post-closing pricing period the average
trading price for such class of AT&T Comcast common stock is less than that of
the AT&T Comcast Class A Special common stock, AT&T Comcast will issue
additional shares of such class of AT&T Comcast common stock to the same AT&T
Broadband shareholders to offset such price differential; provided that (1) AT&T
Comcast will not be obligated pursuant to this provision to compensate AT&T
Broadband shareholders to the extent the price differential exceeds 3% and (2)
the number of shares of AT&T Comcast common stock that would otherwise be issued
pursuant to this provision will be reduced by the number of shares (if any)
issued by AT&T Comcast as described in the next paragraph. Notwithstanding the
foregoing, if the class of AT&T Comcast common stock issued in the AT&T
Broadband merger is included in the Standard & Poor's 500 Index prior to the
close of the pricing period, AT&T Comcast will have no obligation to issue
additional shares of AT&T Comcast common stock pursuant to this provision. The
post-closing pricing period used to determine whether any additional payment
will be made will be 10 trading days randomly selected by AT&T and Comcast from
the 20 trading days commencing on the later of (i) the fifth trading day after
the first date Standard & Poor's reweights the Standard & Poor's
V-2
500 Index after completion of the AT&T Comcast transaction and (ii) the 30th day
after the completion of the AT&T Comcast transaction; provided that the pricing
period will commence no later than the 45th calendar day after the completion of
the AT&T Comcast transaction.
If there is a disparity in the per share value of the class of AT&T Comcast
common stock issued in the AT&T Broadband merger and the AT&T Comcast Class A
Special common stock such that the shares of AT&T Comcast common stock issued to
the AT&T Broadband shareholders in the AT&T Broadband merger do not have a value
in excess of 50% of the total value of the shares of AT&T Comcast stock issued
in the mergers, AT&T Comcast will issue a number of additional shares of AT&T
Comcast stock to the same AT&T Broadband shareholders sufficient to ensure that
the AT&T Broadband shareholders will hold shares of AT&T Comcast stock
representing more than 50% of the value of all shares of AT&T Comcast stock
issued in the mergers. Unless AT&T receives a ruling from the Internal Revenue
Service that permits AT&T and Comcast to use the valuation methodology described
in the preceding paragraph, the value of the AT&T Comcast common stock will be
determined as of the closing date of the AT&T Comcast transaction. It is not
expected that any additional shares of AT&T Comcast common stock will be issued
as a result of the requirement described in this paragraph.
CALCULATION OF THE AT&T BROADBAND EXCHANGE RATIO
In connection with the AT&T Comcast transaction, AT&T Comcast will issue up
to 1.235 billion shares of AT&T Comcast common stock to the AT&T shareholders
who receive shares of AT&T Broadband common stock in the AT&T Broadband
spin-off. This number of shares does not include 115 million shares of AT&T
Comcast common stock that will be issued to Microsoft if the Microsoft
transaction occurs and assumes that AT&T Comcast is not required to make any
additional payments of AT&T Comcast common stock in connection with the AT&T
Comcast transaction. The portion of this number of shares of AT&T Comcast common
stock that each holder of AT&T Broadband common stock will receive in the AT&T
Broadband merger in exchange for each of such holder's shares of AT&T Broadband
common stock will be determined by the following formula:
1,235,000,000 -- (I+F)/C
X = ------------------------
O
The exchange ratio (identified as "X" above) is calculated by reference to
the number of shares of AT&T Broadband common stock that is outstanding at the
completion of the AT&T Comcast transaction (identified as "O" above). The merger
agreement provides that this number "O" will include any outstanding restricted
shares of AT&T Broadband common stock that are not forfeited upon completion of
the AT&T Comcast transaction but will exclude any shares of AT&T Broadband
common stock issued in the Microsoft transaction or held by a wholly owned
subsidiary of AT&T Broadband and any shares of AT&T Broadband common stock that
were not issued on account of the purported exercise by an AT&T shareholder of
appraisal rights in connection with the AT&T Comcast transaction, unless such
purported exercise has been withdrawn or such rights have been invalidated.
The exchange ratio is also calculated by reference to the cost to AT&T
Comcast of assuming certain stock options and stock appreciation rights that are
held by employees of AT&T Broadband and former employees of AT&T and AT&T
Broadband. This latter cost is taken into account in the formula by subtracting
the quantity (I+F)/C from 1.235 billion in the numerator where "I" is the value
of stock options and stock appreciation rights outstanding on the day the merger
agreement was signed and held by employees of AT&T Broadband immediately prior
to the closing date, "F" is the value of stock options and stock appreciation
rights held by former employees of AT&T and AT&T Broadband that are being
assumed by AT&T Comcast and "C" is the market price of a share of Comcast Class
A common stock immediately prior to completion of the AT&T Comcast transaction.
If the exchange ratio were determined as of the date of this document, it
would be approximately 0.35.
V-3
As described above, the exchange ratio is dependent on a number of factors
that may change between the date of this document and the date of completion of
the AT&T Comcast transaction, including the number of outstanding shares of AT&T
common stock, the value of options and stock appreciation rights and the price
of Comcast Class A common stock. The following is solely for purposes of
illustrating the effects that certain actions taken in this interim period may
have on the exchange ratio. Each paragraph of the following assumes that the
only variable of the exchange ratio that changes is the one listed in that
paragraph:
- If AT&T issues additional shares of AT&T common stock before the record
date for the AT&T Broadband spin-off, the number of shares of AT&T
Broadband common stock distributed in the AT&T Broadband spin-off will
increase and the exchange ratio will therefore decrease. Holders of AT&T
common stock should note that the merger agreement permits AT&T to issue
up to 275 million shares of AT&T common stock in connection with the
acquisition of shares of AT&T Canada and to satisfy obligations relating
to deferred compensation plans. Further, the merger agreement
contemplates that shares of AT&T common stock held by Comcast will not
participate in the AT&T Broadband spin-off but will instead be
effectively concentrated into shares of AT&T common stock after the AT&T
Broadband spin-off. See "-- Covenants -- Covenant Regarding Comcast's
AT&T Stock." To the extent Comcast disposes of its shares of AT&T common
stock prior to the record date for the AT&T Broadband spin-off, these
shares would participate in the AT&T Broadband spin-off and the exchange
ratio would be reduced. Comcast is permitted under the merger agreement
to sell its shares of AT&T common stock at any time and may do so prior
to or after the shareholder meetings. If AT&T issues all 275 million
shares of AT&T common stock discussed in this paragraph prior to
completion of the AT&T Comcast transaction, Comcast disposes of all its
shares of AT&T common stock prior to the record date for the AT&T
Broadband spin-off and the exchange ratio were determined as of the date
of this document adjusted for such issuances and dispositions, the
exchange ratio would be approximately 0.32.
- If the stock price of AT&T immediately prior to the AT&T Broadband
spin-off is less than the stock price of AT&T as of the date of this
document, it will cost less for AT&T Comcast to assume certain stock
options and stock appreciation rights and the exchange ratio will
increase.
- If the stock price of Comcast Class A common stock prior to the AT&T
Broadband spin-off is less than the stock price of Comcast Class A
common stock as of the date of this document, the cost to AT&T Comcast
of assuming certain stock options and stock appreciation rights, as
expressed in terms of shares of Comcast Class A common stock, will
increase and the exchange ratio will decrease.
EXCHANGE OF SHARES
AT&T and Comcast will jointly designate an exchange agent to coordinate (1)
the exchange of Comcast common stock in the Comcast merger for AT&T Comcast
common stock, (2) the distribution of AT&T Comcast common stock in respect of
the AT&T Broadband common stock converted in the AT&T Broadband merger and (3)
the payment of cash to the former holders of AT&T Broadband common stock instead
of fractional shares of AT&T Comcast common stock.
As soon as reasonably practicable after completion of the mergers, the
exchange agent will mail to each holder of record of a certificate that
immediately prior to the completion of the mergers represented outstanding
shares of Comcast common stock (1) a letter of transmittal and (2) instructions
for effecting the surrender of the Comcast certificates in exchange for shares
of AT&T Comcast common stock. Holders of certificates formerly representing
shares of Comcast common stock that surrender their certificates for
cancellation to the exchange agent, together with a properly completed letter of
transmittal and such other documents as may reasonably be required by the
exchange agent will receive the appropriate merger consideration. Holders of
certificates formerly representing shares of Comcast common stock will not be
entitled to receive any dividends or other distributions payable by AT&T Comcast
after the completion of the mergers until their certificates are surrendered.
Holders of Comcast common stock
V-4
that hold their shares in uncertificated form will have the appropriate merger
consideration delivered to them without having to take any action.
AT&T will declare to holders of AT&T common stock, NYSE symbol "T," a
dividend of one share of AT&T Broadband common stock for each such share of AT&T
common stock immediately prior to the completion of the mergers. Certificates
representing these shares of AT&T Broadband common stock will not be delivered.
Instead, as soon as reasonably practicable after the completion of the mergers,
the exchange agent will deliver to holders entitled to the dividend of AT&T
Broadband common stock the appropriate merger consideration payable to those
holders in respect of the AT&T Broadband common stock. Those holders will not be
required to deliver to the exchange agent certificates representing shares of
AT&T common stock or AT&T Broadband common stock prior to receipt of the shares
of AT&T Comcast common stock into which their shares of AT&T Broadband common
stock are converted in the AT&T Broadband merger. Holders of AT&T common stock,
NYSE symbol "T," will continue to hold their certificates or uncertificated
shares which, after completion of the AT&T Broadband spin-off, will represent an
interest in AT&T's communications services business or, if AT&T Consumer
Services Group tracking stock has been issued, AT&T Business Services Group and
AT&T's retained portion of the value of AT&T Consumer Services Group, if any. No
distribution of AT&T Broadband common stock will be made on shares of AT&T
Consumer Services Group tracking stock.
AT&T Comcast will not issue any fractional shares in the AT&T Broadband
merger. Instead, as promptly as practicable after the Fractional Shares Payment
Date (as defined below), the exchange agent will sell the Excess Shares (as
defined below) of AT&T Comcast common stock at then prevailing prices on The
Nasdaq Stock Market. "Fractional Shares Payment Date" means the closing date of
the AT&T Comcast transaction, if Standard & Poor's has then committed that the
AT&T Comcast Class A common stock (if the preferred structure proposal has been
approved) or the AT&T Comcast Class C common stock (if the preferred structure
proposal has not been approved) will be included in the Standard & Poor's 500
Index immediately after the completion of the AT&T Comcast transaction; provided
that if as of the completion of the AT&T Comcast transaction, Standard & Poor's
has not then committed that the AT&T Comcast Class A common stock (if the
preferred structure proposal has been approved) or the AT&T Comcast Class C
common stock (if the preferred structure proposal has not been approved) will be
included in the Standard & Poor's 500 Index immediately after the completion of
the AT&T Comcast transaction, then the "Fractional Shares Payment Date" will be
the earlier of (1) the date on which either the AT&T Comcast Class A common
stock (if the preferred structure proposal has been approved) or the AT&T
Comcast Class C common stock (if the preferred structure proposal has not been
approved) is included in the Standard & Poor's 500 Index and (2) the end of the
pricing period referred to in the first paragraph under "-- Merger
Consideration -- Potential Additional Payments." "Excess Shares" means (1) the
number of shares of AT&T Comcast common stock delivered to the exchange agent by
AT&T Comcast in respect of the AT&T Broadband merger less (2) the aggregate
number of whole shares of AT&T Comcast common stock to be distributed to holders
of AT&T Broadband common stock in the AT&T Broadband merger. As soon as
practicable after the determination of the amount of cash to be paid to holders
of AT&T Broadband common stock in lieu of any fractional share interests, the
exchange agent will deliver such amounts to the applicable holders of AT&T
Broadband common stock.
No fractional shares will be issuable in the Comcast merger because the
Comcast exchange ratio is 1:1.
In the event that any additional shares of AT&T Comcast common stock will
be issued as described under "-- Merger Consideration -- Potential Additional
Payments," AT&T Comcast will enter into appropriate arrangements with the
exchange agent providing for the delivery of such additional shares.
TREATMENT OF STOCK OPTIONS AND EQUITY-BASED AWARDS
AT&T Stock Options. Immediately prior to the AT&T Comcast transaction, as
a part of the AT&T Broadband spin-off, AT&T stock options will be converted as
described below pursuant to the employee benefits agreement (see "Employee
Benefits Matters -- Other Benefits Matters"). In connection with the
V-5
conversions, adjustments will be made to maintain the intrinsic value of the
original AT&T options immediately before and after the AT&T Broadband spin-off.
- AT&T stock options held by current employees of AT&T Broadband and
current employees of AT&T who become employees of AT&T Broadband in
connection with the AT&T Broadband spin-off will be converted into AT&T
Broadband stock options;
- AT&T stock options held by current employees of AT&T (other than current
employees of AT&T Broadband and current employees of AT&T who become
employees of AT&T Broadband in connection with the AT&T Broadband
spin-off) will be converted into adjusted AT&T stock options; and
- AT&T stock options held by non-employee directors of AT&T and former
employees of AT&T and AT&T Broadband will be converted into (1) adjusted
AT&T stock options and (2) AT&T Broadband stock options (an employee's
status as a current or former employee will be determined as of a
specific time on the date of the AT&T Broadband spin-off).
AT&T Broadband Stock Options. As of completion of the AT&T Comcast
transaction, each outstanding AT&T Broadband stock option will be converted, on
the same terms and conditions, into an option to acquire that number of shares
of AT&T Comcast Indexed Stock (as defined below) that has the same fair market
value immediately after the completion of the AT&T Comcast transaction as the
aggregate fair market value of shares of AT&T common stock subject to the
original AT&T Broadband stock option immediately prior to the AT&T Broadband
spin-off less, in the case of former employees of AT&T or AT&T Broadband, the
aggregate fair market value of the AT&T common stock subject to the adjusted
AT&T stock option granted pursuant to the employee benefits agreement. The per
share exercise price for each newly converted option will be equal to the
aggregate exercise price of the applicable AT&T Broadband stock option prior to
the AT&T Broadband spin-off (less, in the case of a former employee of AT&T or
AT&T Broadband, the aggregate exercise price of the adjusted AT&T stock option
referred to above) divided by the number of shares of AT&T Comcast Indexed Stock
underlying such option. As of completion of the AT&T Comcast transaction, each
AT&T Broadband stock option held by a current AT&T Broadband employee or a
current AT&T employee who becomes an AT&T Broadband employee in connection with
the AT&T Broadband spin-off will have vested and will remain exercisable for the
remainder of its original term (except for options granted after the date the
merger agreement was signed). As used in this document, "AT&T Comcast Indexed
Stock" means the class of AT&T Comcast common stock that is included in the
Standard & Poors' 500 Index on the first trading day after the completion of the
AT&T Comcast transaction; provided that (A) if the preferred structure proposal
has been approved and the AT&T Comcast Class A common stock and the AT&T Comcast
Class A Special common stock are both included in the Standard & Poors' 500
Index on the first trading day after the completion of the AT&T Comcast
transaction, "AT&T Comcast Indexed Stock" will mean the AT&T Comcast Class A
common stock or (B) if the preferred structure proposal has not been approved
and the AT&T Comcast Class C common stock and the AT&T Comcast Class A Special
common stock are both included in the Standard & Poors' 500 Index on the first
trading day after the completion of the AT&T Comcast transaction, "AT&T Comcast
Indexed Stock" will mean the AT&T Comcast Class C common stock.
EXAMPLE: Assumptions: (i) the current or former employee holds an option
to purchase 100 shares of AT&T common stock at an exercise price of $13 per
share; (ii) the closing price for a share of AT&T common stock on the date of
the AT&T Broadband spin-off is $15; (iii) immediately prior to the AT&T
Broadband spin-off, AT&T common stock trades "ex-distribution" at $5 per share;
(iv) AT&T common stock trades at $5 per share on the day following the AT&T
Broadband spin-off; and (v) as of completion of the AT&T Comcast transaction,
AT&T Comcast Indexed Stock trades at $30 per share.
If the AT&T stock option in question is held by a current AT&T Broadband
employee, as a result of the AT&T Comcast transaction, the AT&T stock option
will be converted into an option to purchase 50 shares of AT&T Comcast Indexed
Stock with an exercise price per share of $26.
V-6
If the AT&T stock option in question is held by a former employee of AT&T
or AT&T Broadband, as a result of the AT&T Comcast transaction, the AT&T stock
option will be converted into an option to purchase 33 shares of AT&T Comcast
Indexed Stock with an exercise price per share of $26 and an adjusted option to
purchase 100 shares of AT&T common stock with an exercise price of $4.33 per
share.
The hypothetical prices of AT&T common stock and AT&T Comcast Indexed Stock
used above have been assumed for purposes of this example only. Actual results
will vary depending on the price of AT&T common stock as of and immediately
after the AT&T Broadband spin-off and the price of AT&T Comcast Indexed Stock
after the AT&T Comcast transaction. In addition, results for individual
optionholders will vary depending on the number of shares underlying options
held by such individuals and the exercise price per share of these stock
options. Customary rounding adjustments were used in generating the numbers for
this example. For additional information on the method of conversion of AT&T
stock options pursuant to the AT&T Comcast transaction, see "-- AT&T Broadband
Stock Options" above and "Employee Benefits Matters -- Other Benefits
Matters -- Employee Benefits Agreement."
AT&T Restricted Stock and other AT&T Equity-Based Awards. Immediately
prior to the AT&T Comcast transaction, as a part of the AT&T Broadband spin-off,
AT&T restricted stock and other equity-based awards will be converted pursuant
to the employee benefits agreement as described below (see "Employee Benefits
Matters -- Other Benefits Matters"). In connection with the conversions,
adjustments will be made to maintain the fair market value of the original AT&T
restricted stock or other equity-based award immediately before and after the
AT&T Broadband spin-off.
- AT&T restricted shares held by current employees of AT&T (other than
current employees of AT&T Broadband and current employees of AT&T who
become employees of AT&T Broadband in connection with the AT&T Broadband
spin-off) will be converted into (1) adjusted AT&T restricted shares and
(2) equity-based awards based on AT&T Broadband common stock;
- AT&T restricted shares held by current employees of AT&T Broadband and
current employees of AT&T who become employees of AT&T Broadband in
connection with the AT&T Broadband spin-off will be converted into (1)
adjusted AT&T restricted shares and (2) AT&T Broadband restricted shares;
and
- Other equity-based awards based on AT&T common stock, regardless of by
whom held, will be converted into (1) adjusted equity-based awards based
on AT&T common stock and (2) equity-based awards based on AT&T Broadband
common stock.
AT&T Broadband Restricted Stock and other AT&T Broadband Equity-Based
Awards. As of the completion of the AT&T Comcast transaction, shares of AT&T
Broadband restricted stock will be converted into the right to receive AT&T
Comcast common stock on the terms and conditions applicable to AT&T Broadband
shareholders described above under "-- Merger Consideration." As of the
completion of the AT&T Comcast transaction, all other awards based on shares of
AT&T Broadband common stock will be converted, on the same terms and conditions,
into equivalent awards based on that number of shares of AT&T Comcast Indexed
Stock having the same fair market value immediately after the completion of the
AT&T Comcast transaction as the aggregate fair market value of shares of AT&T
common stock subject to the original AT&T equity awards immediately prior to the
completion of the AT&T Broadband spin-off. As of completion of the AT&T Comcast
transaction, all restricted shares and other equity-based awards based on either
AT&T or AT&T Broadband common stock held by current and former AT&T Broadband
employees and current AT&T employees who become AT&T Broadband employees in
connection with the AT&T Broadband spin-off will have vested (except for awards
granted after the date the merger agreement was signed).
Comcast Stock Options. As of the completion of the AT&T Comcast
transaction, each outstanding Comcast stock option will be converted into an
option to acquire, on the same terms and conditions, that number of shares of
AT&T Comcast Indexed Stock that has the same fair market value immediately after
the completion of the AT&T Comcast transaction as the aggregate fair market
value of shares of Comcast
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Class A Special common stock subject to the original Comcast stock option
immediately prior to the completion of the AT&T Comcast transaction. The per
share exercise price for each newly converted option will be equal to the
aggregate exercise price of the applicable Comcast stock option divided by the
number of shares of AT&T Comcast Indexed Stock underlying such option.
Comcast Restricted Stock and the Comcast Equity-Based Awards. As of the
completion of the AT&T Comcast transaction, Comcast restricted stock awards will
be converted, on the same terms and conditions, into, if the preferred structure
proposal has been approved, equivalent awards based upon shares of AT&T Comcast
Class A common stock or, if the preferred structure proposal has not been
approved, equivalent awards based upon shares of AT&T Comcast Class C common
stock. The number of shares of AT&T Comcast Class A common stock or AT&T Comcast
Class C common stock will be that number of shares of AT&T Comcast Class A
common stock or AT&T Comcast Class C common stock having the same fair market
value immediately after the completion of the AT&T Comcast transaction as the
aggregate fair market value of the shares of Comcast Class A Special common
stock subject to the original Comcast restricted stock awards immediately prior
to the completion of the AT&T Comcast transaction. As of the completion of the
AT&T Comcast transaction, other awards based on shares of Comcast Class A
Special common stock will be converted, on the same terms and conditions, into
equivalent awards based on that number of shares of AT&T Comcast Indexed Stock
having the same fair market value immediately after the completion of the
transaction as the aggregate fair market value of shares of Comcast Class A
Special common stock subject to the original Comcast equity awards immediately
prior to the completion of the AT&T Comcast transaction.
COVENANTS
Each of Comcast and AT&T has undertaken certain covenants in the merger
agreement. The following summarizes the more significant of these covenants.
Interim Operations. Comcast and AT&T (with respect to its broadband
business) have agreed to conduct their business in the ordinary course
consistent with past practice and to not engage in specified material
transactions, in each case prior to the completion of the AT&T Comcast
transaction, without the prior written consent of the other party (which consent
will not be unreasonably withheld). AT&T has also agreed not to enter into any
material agreement or arrangement relating to its interest in or amend or modify
in any material respect any of its existing material contracts relating to Time
Warner Entertainment, acquire, other than pursuant to a cashless exercise of an
option currently held by AT&T, additional interests in Time Warner Entertainment
or sell any part of its interest in Time Warner Entertainment, except solely for
cash or pursuant to the registration provisions of the Time Warner Entertainment
partnership agreement, in each case prior to the completion of the AT&T Comcast
transaction, without the prior written consent of Comcast, which consent will
not be unreasonably withheld. AT&T has further agreed to run its broadband
business for the benefit of the broadband business prior to the completion of
the AT&T Comcast transaction. Each party has also agreed to restrictions on its
ability to issue equity securities with some exceptions, including in the case
of AT&T the issuance of up to 275 million shares of AT&T common stock in
connection with the acquisition of shares of AT&T Canada and to satisfy
obligations relating to deferred compensation plans and in the case of Comcast
the issuance of shares of Comcast common stock having a value of up to $3
billion.
Covenant to Obtain Regulatory Approvals. AT&T and Comcast have agreed to
use their best efforts to promptly take all actions and to do all things
necessary, proper or advisable under applicable laws and regulations to complete
the AT&T Comcast transaction as soon as practicable. In addition, AT&T and
Comcast have agreed to take all actions necessary to obtain all required FCC
approvals and the expiration or termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976.
AT&T Board's Covenant to Recommend and Hold Meeting. The AT&T Board has
agreed to recommend approval of the AT&T transaction proposal and the AT&T
Comcast charter proposal.
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However, the AT&T Board is permitted to withdraw or modify, in a manner adverse
to Comcast, either of these recommendations if:
- AT&T is in compliance with its obligations to notify Comcast promptly
after its receipt of an Acquisition Proposal, as described below, and to
keep Comcast fully informed of the status and details of any such
Acquisition Proposal;
- the AT&T Board determines, after consulting with AT&T's outside legal
counsel, that it must take such action to comply with its fiduciary
duties under applicable law; and
- AT&T has delivered to Comcast a prior written notice advising Comcast
that it intends to take such action and describing its reasons for taking
such action, with the notice to be delivered not less than two business
days prior to the time such action is taken.
An "Acquisition Proposal" is defined in the merger agreement generally as
any offer or proposal by any third party for, or any indication of interest in,
certain transactions, including any transaction (1) the entering into or
consummation of which would reasonably be expected to be inconsistent in any
material respect with the AT&T Comcast transaction or (2) that would reasonably
be expected to prevent or materially delay, impede or adversely affect the AT&T
Comcast transaction; provided that certain transactions involving AT&T's
communications business that might delay completion of the AT&T Comcast
transaction will not be considered "Acquisition Proposals".
Subject to applicable law, AT&T is required to submit the merger agreement
to AT&T shareholders at the AT&T meeting even if the AT&T Board determines at
any time after the date of this document and prior to the AT&T meeting that the
AT&T transaction proposal or the AT&T Comcast charter proposal is no longer
advisable or recommends that AT&T shareholders reject the AT&T transaction
proposal or the AT&T Comcast charter proposal.
No Solicitation. AT&T is prohibited from soliciting or encouraging
Acquisition Proposals from third parties or from providing nonpublic information
to or engaging in negotiations with any third party that has made or is known by
AT&T to be considering making an Acquisition Proposal. However, AT&T may furnish
nonpublic information and engage in negotiations with a third party that has
made an unsolicited Acquisition Proposal if the AT&T Board determines, after
consultation with its financial advisors and outside legal counsel, that such
Acquisition Proposal would reasonably be expected to lead to a proposal that
would be more favorable to the AT&T shareholders than the AT&T Comcast
transaction; provided that prior to taking any of such actions:
- AT&T is in compliance with its obligations to notify Comcast promptly
after its receipt of an Acquisition Proposal and to keep Comcast fully
informed of the status and details of any such Acquisition Proposal;
- the AT&T Board determines, after consulting with AT&T's outside legal
counsel, that it must take such action to comply with its fiduciary
duties under applicable law; and
- such third party executes a confidentiality agreement with terms no less
favorable in the aggregate to AT&T than those contained in the
confidentiality agreement between AT&T and Comcast.
Comcast Board's Covenant to Recommend. The Comcast Board has agreed to
recommend approval and adoption of the merger agreement and the transactions
contemplated by the merger agreement to Comcast shareholders.
Interim Finance Committee. Comcast and AT&T have agreed to establish an
Interim Finance Committee composed of Lawrence S. Smith, Executive Vice
President of Comcast, and Charles H. Noski, Senior Executive Vice President and
Chief Financial Officer of AT&T, for the purpose of engaging in financial
planning for AT&T Broadband. The Interim Finance Committee will seek to arrange
financing in an amount sufficient to:
- pay to AT&T at the closing of the AT&T Comcast transaction all debt owed
to it by AT&T Broadband;
V-9
- refinance certain AT&T Broadband debt that will be called for redemption
on the closing date for the AT&T Comcast transaction or shortly
thereafter (see "-- TOPrS Covenant"); and
- provide appropriate cash reserves to fund the operations of AT&T
Broadband after the completion of the AT&T Comcast transaction.
If Comcast is unable to obtain the financing described above on the terms
agreed upon by the Interim Finance Committee or the Interim Finance Committee is
unable to agree on the terms of such financing, Comcast will arrange for a
senior credit facility with a term not exceeding five years to provide such
financing.
On May 3, 2002, with the approval of the Interim Finance Committee, AT&T
Broadband and AT&T Comcast entered into definitive credit agreements with a
syndicate of lenders providing for an aggregate of approximately $12.8 billion
in financing. For a description of these credit facilities, see "The AT&T
Comcast Transaction -- Description of New Credit Facilities."
TOPrS Covenant. AT&T Comcast has agreed that on the closing date for the
AT&T Comcast transaction, it will either call for redemption the AT&T Broadband
debt known by the acronym TOPrS that is then redeemable, and which has not been
redeemed prior to that date, and as to which AT&T has guaranteed certain
obligations, cause AT&T to be released from any such guarantee or post a letter
of credit in respect of such debt. With respect to any series of TOPrS that is
not redeemable on the closing date for the AT&T Comcast transaction and as to
which AT&T has guaranteed certain obligations, AT&T Comcast has agreed on the
earliest date on which such series of TOPrS may be redeemed to either redeem
such series of TOPrS, cause AT&T to be released from any such guarantee or post
a letter of credit in respect of such debt. As of the date of this filing, AT&T
has redeemed approximately $1.5 billion of the outstanding TOPrS and
approximately $500 million of the outstanding TOPrS remains subject to this
obligation.
QUIPS Failure. Comcast and AT&T have agreed that if on the date that would
otherwise be the closing date for the AT&T Comcast transaction the Microsoft
transaction does not occur (the "QUIPS Failure Date"), the closing date for the
AT&T Comcast transaction may be delayed for up to 180 days after the QUIPS
Failure Date. During this period, AT&T and Comcast will use commercially
reasonable efforts to complete the Microsoft transaction or, if it appears
reasonably likely that the Microsoft transaction will not occur, the transfer of
the obligations under the QUIPS (the "QUIPS Transfer") from AT&T to AT&T
Broadband, in either case on the closing date for the AT&T Comcast transaction.
If neither the Microsoft transaction nor the QUIPS Transfer occurs on the
closing date for the AT&T Comcast transaction during such period, AT&T Broadband
will pay AT&T an additional amount at closing equal to the fair market value of
the QUIPS, as determined pursuant to an appraisal process specified in the
merger agreement, and will indemnify AT&T for certain possible related
liabilities. In such event, Comcast will be permitted to sell assets and take
any other actions that are necessary or reasonably designed to enable it to
provide AT&T Broadband with sufficient funds to pay AT&T the QUIPS fair market
value.
Covenant Regarding Standard & Poor's 500 Index. AT&T Comcast, Comcast and
AT&T have each agreed to use their reasonable best efforts to cause the AT&T
Comcast common stock to be issued in the AT&T Broadband merger (i.e., AT&T
Comcast Class A common stock under the Preferred Structure and AT&T Comcast
Class C common stock under the Alternative Structure) to be included in the
Standard & Poor's 500 Index upon completion of the AT&T Comcast transaction or
as promptly thereafter as possible.
Covenant Permitting Certain AT&T Transactions. Comcast and AT&T have
agreed that AT&T may enter into an agreement relating to a transaction providing
for the sale or disposition of more than 50% of AT&T's communications businesses
that would delay completion of the mergers (a "Significant Excepted
Transaction") if such Significant Excepted Transaction would not reasonably be
expected to result in a delay in the completion of the mergers past March 1,
2003, the date on or after which Comcast or AT&T may elect to terminate the
merger agreement if the mergers have not closed (the "End Date"); provided
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that, in such event, at the request of Comcast, the End Date will be extended by
the reasonably expected period of delay in the completion of the mergers caused
by such Significant Excepted Transaction up to sixty days.
Comcast and AT&T have also agreed that AT&T may enter into an agreement
relating to a Significant Excepted Transaction that would reasonably be expected
to result in a delay in the completion of the mergers past the End Date but
which would not reasonably be expected to result in a delay in the completion of
the mergers to a date that is more than sixty days after the End Date; provided
that (1) Microsoft consents to extend the "end" date for the Microsoft
transaction to the date after the End Date (which date will be no later than
sixty days after the End Date) on which it is reasonably anticipated that the
mergers would be completed if the Significant Excepted Transaction were to
occur, (2) the End Date is extended to the new "end" date for the Microsoft
transaction and (3) AT&T, and not AT&T Broadband, agrees to pay any costs,
expenses or fees payable in connection with obtaining Microsoft's consent to the
extension of the "end" date for the Microsoft transaction.
AT&T has agreed that it will not enter into any agreement relating to a
Significant Excepted Transaction that would reasonably be expected to result in
a delay in the completion of the mergers to a date that is more than sixty days
after the End Date.
Headquarters. Upon completion of the transaction, Comcast and AT&T have
agreed that AT&T Comcast's headquarters will be in Philadelphia, Pennsylvania.
Until the 2005 annual meeting of AT&T Comcast shareholders, AT&T Comcast will
maintain an executive office in the New York City metropolitan area.
Alternative Structure. Comcast and AT&T have agreed that, at the request
of the other party, it will consider amending the terms of the merger agreement
to the extent necessary to provide for a structure or a sequencing of the
mergers that is more tax efficient or otherwise more advantageous than the
structure and sequencing of the mergers described in this document and is not
adverse to the other party.
Shareholder Rights Plan. Comcast and AT&T have agreed to cause AT&T
Comcast to adopt a shareholder rights plan upon completion of the AT&T Comcast
transaction. For a description of the terms of the shareholder rights plan that
AT&T Comcast will adopt, see "Certain Legal Information -- Description of AT&T
Comcast Shareholder Rights Plan."
Post-Transaction Governance Arrangements. Comcast and AT&T have agreed to
various governance arrangements for AT&T Comcast after the completion of the
AT&T Comcast transaction. For a description of these arrangements, see
"Description of Governance Arrangements Following the AT&T Comcast Transaction."
Indemnification and Insurance. Comcast and AT&T have agreed to various
indemnification and insurance arrangements for officers and directors of AT&T,
Comcast and their respective subsidiaries after the completion of the AT&T
Comcast transaction. For a description of these arrangements, see "Employee
Benefits Matters -- Interests of Directors and Officers in the AT&T Comcast
Transaction -- Indemnification and Insurance."
Employee Benefits Matters. Comcast and AT&T have agreed to various
employee benefits matters. For a description of these matters, see "Employee
Benefits Matters."
Agreement to Vote. Comcast has agreed to vote its shares of AT&T common
stock in favor of the AT&T Comcast transaction.
Covenant Regarding Comcast's AT&T Stock. Comcast and AT&T have agreed
that, prior to the AT&T Broadband spin-off, Comcast will exchange all of its
shares of AT&T common stock for shares of a newly created series of AT&T
exchangeable preferred stock. The AT&T exchangeable preferred stock will be
mandatorily exchangeable after the completion of the AT&T Comcast transaction
into shares of AT&T common stock. The exchange formula included in the merger
agreement will provide Comcast with an interest in the communications business
of AT&T that, subject to the cap described below, is equal in value to the
interest Comcast held in the combined communications and broadband business of
AT&T
V-11
prior to the AT&T Comcast transaction. Based on the closing price of AT&T common
stock of $13.70 per share on May 13, 2002, the most recent practicable date
prior to the printing and mailing of this document, Comcast's AT&T interest had
a value of approximately $1.144 billion. Comcast has agreed to cap the shares of
AT&T common stock, or shares of any class of AT&T stock issued as a dividend on
shares of AT&T common stock, it is eligible to receive pursuant to the exchange
formula included in the merger agreement at 10% of the outstanding shares of
AT&T common stock, or any class of stock issued as a dividend on AT&T common
stock. Comcast has also agreed that if as a result of the mandatory exchange it
holds in excess of 5% of the outstanding shares of AT&T common stock, or any
class of stock issued as a dividend on AT&T common stock, then (1) it will sell
the excess shares within a year of the exchange and (2) prior to the sale of the
excess shares it will vote them on any matter submitted to shareholders in the
same proportion as all other shareholders.
Redemption of TCI Pacific Preferred Stock. In accordance with the merger
agreement, on March 18, 2002, TCI Pacific called for redemption all outstanding
shares of TCI Pacific preferred stock and on April 26, 2002, TCI Pacific
redeemed all outstanding shares of TCI Pacific preferred stock not previously
exchanged for shares of AT&T common stock.
Sural. Comcast and AT&T have agreed that Sural LLC, which is controlled by
Brian L. Roberts, President of Comcast, may elect to merge with AT&T Comcast or
one of its subsidiaries immediately prior to the mergers. If such election is
made, the members of Sural LLC, in exchange for their outstanding interests in
Sural LLC, would receive in the aggregate the same number of shares of each
class of AT&T Comcast common stock that Sural LLC would have received in the
Comcast merger had it not made such election.
REPRESENTATIONS AND WARRANTIES
The merger agreement includes substantially reciprocal representations and
warranties made by Comcast and AT&T customary for a transaction similar to the
AT&T Comcast transaction. The representations and warranties contained in the
merger agreement will not survive the completion of the AT&T Comcast transaction
or a termination of the merger agreement.
CONDITIONS TO THE COMPLETION OF THE MERGERS
Conditions to the Obligations of Comcast and AT&T. The obligations of each
party to the merger agreement to complete the mergers are subject to the
satisfaction or waiver, to the extent permissible, of the following conditions:
- approval of the AT&T transaction proposal and the AT&T Comcast charter
proposal by AT&T shareholders and the Comcast transaction proposal and
the AT&T Comcast charter proposal by Comcast shareholders;
- expiration or termination of any applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976;
- absence of a material legal prohibition on the AT&T Comcast transaction;
- approval for the listing on The Nasdaq Stock Market of the shares of AT&T
Comcast common stock to be issued in the mergers, other than the shares
of AT&T Comcast Class B common stock, or to be reserved for issuance in
connection with the mergers;
- receipt of all required regulatory approvals other than those the failure
of which to be obtained would not reasonably be expected to have a
Material Adverse Effect, as described below, on Comcast or AT&T's
broadband business;
- absence of any order or statute, rule or regulation restraining or
prohibiting the effective operation of the business of AT&T Comcast, AT&T
Broadband or Comcast after the completion of the mergers that would
reasonably be expected to have a Material Adverse Effect on Comcast or
AT&T's broadband business;
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- completion of the separation and the AT&T Broadband spin-off;
- execution of all of the transaction agreements described or referred to
in this document;
- receipt and continuing effectiveness of an Internal Revenue Service
ruling or rulings (or, if Comcast and AT&T mutually agree, an opinion
from tax counsel acceptable to AT&T and Comcast) to the effect that, for
U.S. federal income tax purposes, the separation and the AT&T Broadband
spin-off will be tax-free, the mergers will not cause the separation and
the AT&T Broadband spin-off to fail to qualify as tax-free, and the
separation and the AT&T Broadband spin-off will not cause the
distribution by AT&T of all of the common stock of AT&T Wireless or of
Liberty Media to fail to qualify as tax-free transactions; and
- AT&T shall have obtained Note Consents, or defeased, purchased or
acquired debt, in respect of series representing at least 90% in
aggregate principal amount of the securities issued under the AT&T
indenture, dated September 7, 1990, and outstanding as of December 19,
2001. At December 19, 2001, there was approximately $12.7 billion in
aggregate principal amount outstanding under the AT&T indenture.
Additional Conditions to the Obligations of AT&T. The obligations of AT&T
to consummate the AT&T Broadband merger are also subject to the satisfaction or
waiver, to the extent permissible, of the following conditions:
- material accuracy of the representations and warranties of Comcast,
including with respect to the absence of a Material Adverse Effect on
Comcast;
- performance by Comcast in all material respects of its obligations under
the merger agreement;
- receipt by AT&T of an opinion of Wachtell, Lipton, Rosen & Katz to the
effect that the combination of AT&T Broadband and Comcast will qualify as
a tax-free transaction; and
- performance by Sural in all material respects of its obligations under
the support agreement.
Additional Conditions to the Obligations of Comcast. The obligations of
Comcast to consummate the Comcast merger are also subject to the satisfaction or
waiver, to the extent permissible, of the following conditions:
- material accuracy of the representations and warranties of AT&T,
including with respect to the absence of a Material Adverse Effect on
AT&T Broadband;
- performance by AT&T in all material respects of its obligations under the
merger agreement; and
- receipt by Comcast of an opinion of Davis Polk & Wardwell to the effect
that the combination of AT&T Broadband and Comcast will qualify as a
tax-free transaction.
"Material Adverse Effect" with respect to Comcast or AT&T's broadband
business means a material adverse effect on the financial condition, assets or
results of operations of Comcast or AT&T's broadband business, as applicable,
taken as a whole, excluding any effect resulting from or arising in connection
with (1) changes or conditions generally affecting the industries in which
Comcast or AT&T's broadband business, as applicable, operate, (2) changes in
general economic, regulatory or political conditions or (3) the announcement of
the merger agreement or of the transactions contemplated by the merger
agreement.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated in any of the following
circumstances:
- The merger agreement may be terminated by mutual written agreement of
Comcast and AT&T.
- The merger agreement may be terminated by either Comcast or AT&T if:
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-- either the Comcast transaction proposal or the AT&T Comcast charter
proposal is not approved by Comcast shareholders or either the AT&T
transaction proposal or the AT&T Comcast charter proposal is not
approved by AT&T shareholders;
-- the mergers have not been completed by March 1, 2003; provided that the
party seeking to terminate the merger agreement pursuant to this
provision has not breached any provision of the merger agreement
resulting in the failure of the mergers to be completed by such date;
-- the other party breaches the merger agreement such that the related
closing conditions cannot be satisfied by March 1, 2003; or
-- any material law or regulation makes completion of the AT&T Comcast
transaction illegal or a permanent injunction prohibiting completion of
the AT&T Comcast transaction is entered.
- AT&T may terminate the merger agreement if the closing date for the AT&T
Comcast transaction has not occurred within 30 days of the QUIPS Failure
Date; provided that AT&T may terminate the merger agreement pursuant to
this provision only (1) on two business days' notice delivered to Comcast
prior to the 45th day after the QUIPS Failure Date and (2) if prior to
the effectiveness of the termination Comcast does not agree to close the
AT&T Comcast transaction by the 60th day after the QUIPS Failure Date.
- Comcast may terminate the merger agreement if:
-- the AT&T Board withdraws or modifies, in a manner adverse to Comcast,
its recommendation of either the AT&T transaction proposal or the AT&T
Comcast charter proposal; or
-- AT&T willfully and materially breaches its obligations set forth under
"-- Covenants -- AT&T Board's Covenant to Recommend and Hold Meeting"
or "-- Covenants -- No Solicitation."
If the merger agreement is terminated as provided above, the merger
agreement will become void without liability on the part of any party unless
such party has intentionally breached a covenant or other agreement included in
the merger agreement or knowingly breached a representation or warranty included
in the merger agreement. However, the provisions of the merger agreement
described below relating to termination fees and expenses will continue in
effect after any termination of the merger agreement.
TERMINATION FEES
AT&T will pay a wholly owned subsidiary of Comcast a termination fee in the
amount of $1.5 billion in cash if the merger agreement is terminated because:
- the AT&T Board withdraws or modifies, in a manner adverse to
Comcast, its recommendation of either the AT&T transaction proposal
or the AT&T Comcast charter proposal; or
- AT&T willfully and materially breaches its obligations set forth
under "-- Covenants -- AT&T Board's Covenant to Recommend and Hold
Meeting" or "-- Covenants -- No Solicitation."
In addition, AT&T will pay a wholly owned subsidiary of Comcast the
termination fee specified above if the merger agreement is terminated as a
result of AT&T shareholders having failed to approve either the AT&T transaction
proposal or the AT&T Comcast charter proposal at the AT&T shareholders meeting,
an Acquisition Proposal was pending at the time of the AT&T shareholders meeting
and, within one year of the AT&T shareholders meeting, AT&T enters into an
agreement relating to an alternative material transaction.
Comcast will pay AT&T a termination fee in the amount of $1.5 billion in
cash if the merger agreement is terminated because the Comcast Board withdraws
or modifies, in a manner adverse to AT&T, its recommendation of either the
Comcast transaction proposal or the AT&T Comcast charter proposal or if Comcast
shareholders fail to approve either the Comcast transaction proposal or the AT&T
Comcast charter proposal.
V-14
EXPENSES
All costs and expenses incurred in connection with the AT&T Comcast
transaction will be paid by the party incurring the cost or expense; provided
that (1) AT&T will pay any costs and expenses incurred by AT&T Broadband that
are in excess of $120 million (exclusive of any costs and expenses incurred by
AT&T Broadband as described in clauses (2), (3), (4) and (5) of this sentence),
(2) AT&T Broadband will pay any costs and expenses incurred in connection with
any financing arrangement entered into by AT&T Broadband as described under
"-- Covenants -- Interim Finance Committee," except that Comcast will pay any
costs and expenses incurred in connection with the credit facilities referred to
in the first sentence of the second paragraph under "Summary and Overview of the
Transactions -- Risk Factors -- Risk Factors Relating to the AT&T Comcast
Transaction -- AT&T Comcast and its Subsidiaries May Not Be Able to Obtain the
Necessary Financing At All or on Terms Acceptable to it," (3) AT&T Broadband
will pay any costs and expenses, to the extent not paid by AT&T Comcast,
incurred in connection with redeeming or refinancing the TOPrS, releasing AT&T
from any obligations in respect of the TOPrS or posting a letter of credit in
support of such AT&T obligations, in each case as described under
"-- Covenants -- TOPrS Covenant," (4) AT&T Broadband will pay 50% of any costs
and expenses in excess of $50 million incurred by AT&T or any of its
subsidiaries in connection with obtaining the Note Consents (through either a
one-time cash payment of a consent fee or through a coupon increase or a
combination thereof), and (5) AT&T and Comcast each will pay 50% of any fees and
expenses, other than attorneys' and accounting fees and expenses, incurred in
relation to the printing, filing and mailing of this document and the
registration statement in which this document is included.
AMENDMENTS AND WAIVERS
Any provision of the merger agreement may be amended or waived prior to the
completion of the mergers if, but only if, such amendment or waiver is in
writing and is signed, in the case of an amendment, by each of the parties to
the merger agreement or, in the case of a waiver, by each of the parties to the
merger agreement against whom the waiver is to be effective. After the adoption
of the merger agreement by shareholders of Comcast or AT&T, no amendment or
waiver of any provision of the merger agreement may be made or given that
requires the approval of shareholders of Comcast or AT&T, respectively, unless
such required approval is obtained.
V-15
THE SEPARATION AND DISTRIBUTION AGREEMENT
The following summary of the separation and distribution agreement, as
amended, is qualified in its entirety by reference to the complete text of the
separation and distribution agreement, as amended, which is incorporated by
reference and attached as Annex B to this document.
THE SEPARATION
Assignment. AT&T will assign and transfer to AT&T Broadband all of AT&T's
and its subsidiaries' right, title and interest in all of the assets of AT&T's
broadband business which are not already held by AT&T Broadband or an AT&T
Broadband subsidiary. The assets comprising AT&T's broadband business are
generally determined in the following manner:
- Assets reflected in the AT&T Broadband Group balance sheet dated as of
December 31, 2000 are assets of AT&T's broadband business, except as
described below.
- Assets reflected in the AT&T Communications balance sheet dated as of
December 31, 2000 are assets of AT&T's communications business, except as
described below.
- Certain assets are specifically assigned to AT&T's broadband business
regardless of whether or not they are reflected in the AT&T Broadband
Group balance sheet dated as of December 31, 2000.
- Certain assets are specifically assigned to AT&T's communications
business regardless of whether or not they are reflected in the AT&T
Communications balance sheet dated as of December 31, 2000.
- Assets that are not reflected in the AT&T Broadband Group balance sheet
or the AT&T Communications balance sheet, in each case dated as of
December 31, 2000, or specifically assigned to AT&T's broadband business
or AT&T's communications business are assigned to the business to which
they primarily relate.
Assumption. At the same time as the assignment, AT&T Broadband will assume
all of the liabilities of AT&T's broadband business that are not already
liabilities of AT&T Broadband or an AT&T Broadband subsidiary. The liabilities
of AT&T's broadband business are generally determined in the following manner:
- Liabilities reflected in the AT&T Broadband Group balance sheet dated as
of December 31, 2000 are liabilities of AT&T's broadband business, except
as described below.
- Liabilities reflected in the AT&T Communications balance sheet dated as
of December 31, 2000 are liabilities of AT&T's communications business,
except as described below.
- Certain liabilities are specifically assigned to AT&T's broadband
business regardless of whether or not they are reflected in the AT&T
Broadband Group balance sheet dated as of December 31, 2000.
- Certain liabilities are specifically assigned to AT&T's communications
business regardless of whether or not they are reflected in the AT&T
Communications balance sheet dated as of December 31, 2000.
- Certain liabilities such as liabilities arising out of the AT&T Comcast
transaction or involving At Home or AT&T Wireless (to the extent AT&T is
not indemnified by AT&T Wireless for such liabilities) are divided evenly
between AT&T's broadband business and AT&T's communications business
regardless of whether or not they are reflected in the AT&T Broadband
Group balance sheet or the AT&T Communications balance sheet, in each
case dated as of December 31, 2000.
- Liabilities that are not reflected in the AT&T Broadband Group balance
sheet or the AT&T Communications balance sheet, in each case dated as of
December 31, 2000, or specifically assigned to AT&T's broadband business
or AT&T's communications business are assigned to the business to which
they primarily relate.
V-16
THE AT&T BROADBAND SPIN-OFF
After the separation, AT&T will spin off AT&T Broadband by distributing to
each holder of record of a share of AT&T common stock, NYSE symbol "T," on the
record date for the AT&T Broadband spin-off, except for those holders that have
purported to exercise appraisal rights under New York law, one share of AT&T
Broadband common stock for each share of AT&T common stock held. The record date
for the AT&T Broadband spin-off will be the close of business on the date of
completion of the mergers unless otherwise agreed by AT&T and Comcast. No
distribution of AT&T Broadband common stock will be made upon AT&T Consumer
Services Group tracking stock.
Since the AT&T Broadband merger will occur shortly after the AT&T Broadband
spin-off, AT&T shareholders will not be sent stock certificates representing the
shares of AT&T Broadband common stock distributed to them in the AT&T Broadband
spin-off. Instead, AT&T will cause the distribution agent for AT&T Broadband
common stock issued in the AT&T Broadband spin-off to hold AT&T Broadband common
stock in trust for AT&T shareholders as of the record date pending conversion of
AT&T Broadband common stock into shares of AT&T Comcast common stock pursuant to
the AT&T Broadband merger. After the AT&T Broadband merger, the applicable AT&T
shareholders will receive in uncertificated form the shares of AT&T Comcast
common stock into which their shares of AT&T Broadband common stock were
converted, and cash in lieu of fractional shares, as described under "-- The
Merger Agreement -- Exchange of Shares."
TIMING OF THE SEPARATION AND THE AT&T BROADBAND SPIN-OFF
The separation and the AT&T Broadband spin-off are scheduled to occur on
the closing date for the mergers. See "-- The Merger Agreement -- Timing of
Closing." On the closing date, the separation will occur prior to the AT&T
Broadband spin-off which will occur prior to the mergers.
REPAYMENT OF INTRACOMPANY DEBT
AT&T Broadband has agreed to pay to AT&T at the completion of the AT&T
Comcast transaction an amount equal to the amount of debt that it or any AT&T
Broadband subsidiary owes to AT&T or any AT&T subsidiary, other than AT&T
Broadband or any AT&T Broadband subsidiary, in exchange for a contribution of
such debt to AT&T Broadband's capital and for the contribution of the AT&T
Broadband business. As described under "-- The Merger
Agreement -- Covenants -- Interim Finance Committee," Comcast has agreed to
arrange for the financing necessary to permit AT&T Broadband to repay debt owed
by AT&T Broadband and its subsidiaries to AT&T and its subsidiaries, other than
AT&T Broadband and its subsidiaries. On May 3, 2002, AT&T Broadband and AT&T
Comcast entered into definitive credit agreements arranged by Comcast with a
syndicate of lenders providing for the financing that is anticipated to be
necessary to repay this intracompany debt, which as of December 31, 2001, was
$3.96 billion. Absent additional deleveraging activities, it is expected that
this figure will grow to fund capital expenditures, operations and third party
debt maturities and redemptions through the completion of the AT&T Comcast
transaction. See "Summary and Overview of the Transactions -- Risk
Factors -- Risk Factors Relating to the AT&T Comcast Transaction -- AT&T Comcast
and its Subsidiaries May Have Difficulty Obtaining Necessary Financing At All or
on Terms Acceptable to it."
AT&T has agreed to repay at the completion of the AT&T Comcast transaction
any debt that it or any of its subsidiaries, other than AT&T Broadband or any
AT&T Broadband subsidiary, owes to AT&T Broadband or any AT&T Broadband
subsidiary.
POST-SPIN-OFF TRANSACTIONS
The ability of AT&T and AT&T Broadband to engage in certain acquisitions,
redeem stock, issue equity securities or take any other action or actions that
in the aggregate would be reasonably likely to have the effect of causing or
permitting one or more persons to acquire directly or indirectly stock
representing a 50% or greater interest, within the meaning of Section 355(e) of
the Code, in AT&T or AT&T Broadband or otherwise jeopardize the non-recognition
of taxable gain or loss for U.S. federal
V-17
income tax purposes to AT&T, AT&T affiliates and AT&T shareholders in connection
with the separation and the AT&T Broadband spin-off may be limited for a period
of 25 months following the AT&T Broadband spin-off.
DISPOSITION OF TIME WARNER ENTERTAINMENT INTEREST
Upon any disposition of all or any portion of its interest in Time Warner
Entertainment after the signing of the merger agreement, AT&T Broadband has
agreed to pay AT&T 50% of the proceeds received from such disposition in excess
of the threshold amount described in the next sentence reduced by taxes on 50%
of such excess. The threshold amount is equal to the balance, plus 7% simple
interest per annum on the balance, of $10.2 billion reduced by the aggregate
proceeds of any previous dispositions of any portion of the Time Warner
Entertainment interest.
If the Time Warner Entertainment interest has not been fully disposed of
within 54 months of the completion of the AT&T Comcast transaction, the
remaining Time Warner Entertainment interest will be appraised at fair market
value. To the extent that the amount of such appraisal exceeds the threshold
amount specified above, AT&T Broadband has agreed to pay AT&T 50% of such
excess, on a tax-adjusted basis.
CONDITIONS TO THE COMPLETION OF THE SEPARATION AND THE AT&T BROADBAND SPIN-OFF
The obligations of AT&T to complete the separation and the AT&T Broadband
spin-off are subject to the satisfaction or waiver, to the extent permissible,
of certain conditions, including:
- receipt of all required regulatory approvals other than those the failure
of which to be obtained would not reasonably be expected to have a
Material Adverse Effect with respect to AT&T's broadband business or
AT&T's communications business (as defined under "-- The Merger
Agreement -- Conditions to the Completion of the Mergers" but with
respect to AT&T's communications business);
- satisfaction of all conditions necessary to permit the AT&T Broadband
spin-off to qualify as a tax-free distribution to AT&T, AT&T Broadband
and the AT&T shareholders and absence of any condition likely to prevent
the AT&T Broadband spin-off from qualifying as a tax-free distribution to
AT&T, AT&T Broadband and the AT&T shareholders;
- absence of a legal prohibition on the separation or the AT&T Broadband
spin-off;
- approval of the AT&T Broadband spin-off by AT&T shareholders; and
- satisfaction of all of the other conditions to the mergers specified
under "-- The Merger Agreement -- Conditions to the Completion of the
Mergers" other than the condition that the separation and the AT&T
Broadband spin-off have been completed and other than the additional
conditions to Comcast's obligations to effect the mergers.
MUTUAL RELEASE; INDEMNIFICATION
Mutual Release of Pre-Closing Claims. AT&T and AT&T Broadband have each
agreed to release the other from any and all claims that it may have against the
other party arising from any acts or events occurring or failing to occur prior
to the completion of the AT&T Broadband spin-off, subject to certain exceptions
specified in the separation and distribution agreement.
Indemnification by AT&T. After completion of the AT&T Broadband spin-off,
AT&T will indemnify AT&T Broadband from any and all liabilities relating to,
arising out of or resulting from any of the following:
- the failure of AT&T or any of its subsidiaries or any other person to pay
any liabilities, or perform under any contracts, of AT&T's communications
business;
- the assets or contracts of AT&T's communications business; and
V-18
- any breach of the separation and distribution agreement or any of the
ancillary agreements by AT&T.
Indemnification by AT&T Broadband. After completion of the AT&T Broadband
spin-off, AT&T Broadband will indemnify AT&T from any and all liabilities
relating to, arising out of or resulting from any of the following:
- the failure of AT&T Broadband or any of its subsidiaries or any other
person to pay any liabilities, or perform under any contracts, of AT&T's
broadband business;
- the assets or contracts of AT&T's broadband business;
- any breach of the separation and distribution agreement or any of the
ancillary agreements by AT&T Broadband; and
- if neither the Microsoft transaction nor the QUIPS Transfer occurs, any
liabilities relating to, arising out of or resulting from any action
commenced by Microsoft claiming that the transaction violates the terms
of the QUIPS; however, in the event that AT&T is required to repay the
QUIPS as a result of such action, the indemnified liability in respect of
the repayment will be reduced by the amount of the QUIPS fair market
value plus any accrued interest on the QUIPS since the date of
determination of the QUIPS fair market value. See "-- The Merger
Agreement -- Covenants -- QUIPS Failure."
Tax Indemnification. Subject to the exceptions described below, AT&T
Broadband will indemnify AT&T against 50% of the taxes and related costs
assessed against AT&T resulting from the disqualification of the separation and
the AT&T Broadband spin-off as tax-free transactions under Section 355 of the
Code.
If such disqualification results from a transaction involving the stock or
assets of AT&T Broadband occurring after the AT&T Broadband spin-off, from AT&T
Broadband's failure to remain actively engaged in a trade or business or from
the failure of any representation made with respect to AT&T Broadband in
connection with certain tax opinions and Internal Revenue Service rulings, then
AT&T Broadband will be required to indemnify AT&T against all such taxes and
related costs.
If such disqualification results from a transaction involving the stock or
assets of AT&T occurring after the AT&T Broadband spin-off, from AT&T's failure
to remain actively engaged in a trade or business or from the failure of any
representation made with respect to AT&T in connection with certain tax opinions
and Internal Revenue Service rulings, then AT&T Broadband is not required to
indemnify AT&T against any such taxes or related costs.
AT&T Broadband will also indemnify AT&T against 50% of the taxes and
related costs resulting from the Liberty Media or AT&T Wireless spin-offs
failing to be tax-free, unless either spin-off becomes taxable as a result of an
action taken by AT&T or AT&T Broadband, in which case the acting party bears
full responsibility for any resulting AT&T liabilities. AT&T Broadband's
obligation described in the preceding sentence is reduced by AT&T Broadband's
share of any indemnification that AT&T receives from Liberty Media or AT&T
Wireless as a result of the relevant spin-off failing to qualify as tax-free.
Other Indemnification. Subject to the next sentence, AT&T and AT&T
Broadband will indemnify each other for 50% of any liability resulting from any
untrue statement or omission of a material fact in any registration statement
relating to the AT&T Broadband spin-off or in any other filing made by AT&T or
AT&T Broadband with the Securities and Exchange Commission in connection with
the separation, the AT&T Broadband spin-off, the AT&T Broadband merger or any
related agreements. AT&T will indemnify AT&T Broadband and AT&T Comcast for any
liability resulting from any untrue statement or omission of a material fact in
any registration statement relating to the Consumer Services charter amendment
proposal, any other proposal related to the creation of AT&T Consumer Services
Group tracking stock, the
V-19
reverse stock split proposal or any AT&T 2002 annual meeting proposal other than
the AT&T transaction proposal or the AT&T Comcast charter proposal.
TERMINATION
The separation and distribution agreement may be terminated by AT&T if the
merger agreement has terminated.
AMENDMENTS AND WAIVERS
Any provision of the separation and distribution agreement may be amended
or waived prior to the completion of the AT&T Comcast transaction if, but only
if, such amendment or waiver is in writing and is signed, in the case of an
amendment, by AT&T, AT&T Broadband and Comcast or, in the case of a waiver, by
the party to the separation and distribution agreement against whom the waiver
is to be effective and Comcast.
V-20
THE SUPPORT AGREEMENT
In connection with the merger agreement, AT&T, Comcast, AT&T Comcast, Sural
LLC and Brian L. Roberts have entered into a support agreement relating to the
shares of Comcast voting stock held by Sural prior to the completion of the AT&T
Comcast transaction and the shares of AT&T Comcast voting stock that will be
held by Sural after completion of the AT&T Comcast transaction. All of such
shares are referred to in this section as the "Comcast Shares". As of the date
of this document, Sural held shares of Comcast voting stock representing
approximately 86.7% of Comcast's voting power. The following summary of the
support agreement, as amended, is qualified in its entirety by reference to the
complete text of the support agreement, as amended, which is incorporated by
reference and attached as an exhibit to the registration statement in which this
document is included.
VOTING AGREEMENT
Sural has agreed to vote the Comcast Shares:
- in favor of the Comcast transaction proposal, the AT&T Comcast charter
proposal and the preferred structure proposal;
- against any action or agreement that would reasonably be expected to
result in a breach of any covenant, representation or warranty or any
other obligation or agreement of Comcast under the merger agreement or
that would reasonably be expected to result in any of the conditions to
the obligations of the parties under the merger agreement not being
fulfilled;
- in favor of any other matter relating to the consummation of the
transactions contemplated by the merger agreement with respect to which
Sural may be entitled to vote; and
- against any other matter that would reasonably be expected to prevent,
interfere with or delay consummation of the transactions contemplated by
the merger agreement.
COVENANTS
No Inconsistent Agreements. Sural has agreed that it will not enter into
any voting agreement or grant a proxy or power of attorney or take any other
action with respect to the Comcast Shares which is inconsistent with the terms
of the support agreement. Brian L. Roberts has agreed that he will not enter
into any voting agreement or grant a proxy or power of attorney or take any
other action with respect to any units of membership interests in Sural which is
inconsistent with the terms of the support agreement.
Dispositions Prior to Completion of the AT&T Comcast Transaction. Sural
has agreed that prior to the completion of the AT&T Comcast transaction it will
not transfer ownership of any of the Comcast Shares, except to certain permitted
transferees who agree to be bound by the same transfer restrictions.
Dispositions After Completion of the AT&T Comcast Transaction. Sural has
agreed that from and after the completion of the AT&T Comcast transaction until
the tenth anniversary of the completion of the AT&T Comcast transaction it will
not transfer ownership of any of its shares of AT&T Comcast Class B common
stock, except to certain permitted transferees who agree to be bound by the same
transfer restrictions or in a transaction that (1) permits AT&T Comcast's other
shareholders to dispose of all of their shares of AT&T Comcast stock for the
same per share consideration as Sural receives for its shares of AT&T Comcast
Class B common stock (or, if higher, any of its shares of any other class of
AT&T Comcast common stock) and (2) is approved by the disinterested holders of
AT&T Comcast's voting stock. Brian L. Roberts has also agreed that from and
after the completion of the AT&T Comcast transaction until the tenth anniversary
of the completion of the AT&T Comcast transaction he will not transfer ownership
of any of his securities or other equity interests in Sural, except to certain
permitted transferees who agree to be bound by the same transfer restrictions or
in a transaction that (1) permits AT&T Comcast's other shareholders to dispose
of all of their shares of AT&T Comcast stock for the same per share
consideration as the effective per share consideration that Brian L. Roberts
receives, as a result of his ownership interest in Sural, for each of the shares
of AT&T Comcast Class B common stock held
V-21
by Sural, or, if higher, any of the shares of any other class of AT&T Comcast
common stock and (2) is approved by the disinterested holders of AT&T Comcast's
voting stock. Following the tenth anniversary of the completion of the AT&T
Comcast transaction, subject to applicable law, holders of AT&T Comcast Class B
common stock will be permitted to transfer their shares of AT&T Comcast Class B
common stock in a transaction in which they receive a premium that is
disproportionate to the premium, if any, received by the other holders of AT&T
Comcast stock for their shares of AT&T Comcast stock.
Interested Party Transactions. AT&T Comcast has agreed that, except as
described in the next sentence, after the completion of the AT&T Comcast
transaction neither it nor any of its subsidiaries will enter into any material
transaction with Brian L. Roberts or any of his associates or any permitted
transferee unless such transaction is approved by AT&T Comcast's disinterested
directors. Compensation arrangements between Brian L. Roberts or any of his
associates on the one hand and AT&T Comcast or any of its subsidiaries on the
other hand will require the approval of the disinterested directors of the
compensation committee of the AT&T Comcast Board.
Additional Voting Agreements. Sural has agreed that from and after the
completion of the AT&T Comcast transaction until the 2005 annual meeting of AT&T
Comcast shareholders, it will vote its shares of AT&T Comcast Class B common
stock against any proposed amendment to the governance arrangements set forth in
the AT&T Comcast charter. See "Description of Governance Arrangements Following
the AT&T Comcast Transaction."
Sural has also agreed to vote its shares of AT&T Comcast Class B common
stock in favor of the nominees selected by the Directors Nominating Committee,
or otherwise nominated by AT&T Comcast, for election as directors at the 2004
annual meeting of AT&T Comcast shareholders; provided that if a shareholder
(other than Brian L. Roberts or a shareholder associated with or otherwise
acting on behalf of or in concert with Brian L. Roberts) nominates individuals
who are independent persons for election as directors at such annual meeting,
Sural may instead elect to vote its shares of AT&T Comcast Class B common stock
in such election of directors in the same proportion as holders of shares of
AT&T Comcast common stock, other than AT&T Comcast Class B common stock and any
other voting shares of AT&T Comcast owned by Brian L. Roberts or Sural or any
permitted transferee, vote in such election of directors.
Sural has further agreed that if Brian L. Roberts dies or becomes incapable
of performing his duties prior to the fifth anniversary of the completion of the
AT&T Comcast transaction, then, unless Ralph J. Roberts has sole voting power in
respect of the election of directors with respect to all outstanding shares of
AT&T Comcast Class B common stock, from the date of Brian L. Roberts's death or
inability to perform his duties until the fifth anniversary of the completion of
the AT&T Comcast transaction, Sural will vote its shares of AT&T Comcast Class B
common stock in any election of AT&T Comcast directors in the same proportion as
holders of shares of AT&T Comcast common stock, other than AT&T Comcast Class B
common stock and any other voting shares of AT&T Comcast owned by Brian L.
Roberts or Sural or any permitted transferee, vote in such election of
directors.
Each permitted transferee of any of the shares of AT&T Comcast Class B
common stock will also be required to agree, as a condition to such transfer, to
the voting obligations described in the three preceding paragraphs.
ENFORCEMENT
The support agreement provides that any determination with respect to
Sural's, Brian L. Roberts's or AT&T Comcast's compliance with the support
agreement or otherwise with respect to the items described in "-- Covenants," in
each case after the completion of the AT&T Comcast transaction, including any
determination as to the enforcement action to be taken by AT&T Comcast in
connection with such determination, will be made for AT&T Comcast by the
disinterested, independent persons on the AT&T Comcast Board; provided that any
Comcast director designee, including any replacement Comcast director designee,
or any director who was a Comcast director designee or any spouse, parent,
sibling, lineal
V-22
descendant, aunt, uncle, cousin, other close relative of Brian L. Roberts or
their respective spouses will not be considered a disinterested, independent
person.
AMENDMENTS
Any provision of the support agreement may be amended if such amendment is
in writing and is signed by each of the parties to the support agreement.
However, no amendment of any provision described under "-- Covenants" or
"-- Enforcement" will be effective without the approval of:
- a majority of the disinterested, independent persons on the AT&T Comcast
Board; provided that any Comcast director designee, including any
replacement Comcast director designee, or any director who was a Comcast
director designee or any spouse, parent, sibling, lineal descendant,
aunt, uncle, cousin, other close relative of Brian L. Roberts or their
respective spouses will not be considered disinterested, independent
persons; and
- holders of a majority of the votes cast by holders of all of the classes
of AT&T Comcast capital stock entitled to vote, other than the AT&T
Comcast Class B common stock and any other voting shares of AT&T Comcast
owned by Brian L. Roberts, Sural or any permitted transferee.
TERMINATION
The support agreement terminates on the earlier to occur of (1) one day
after the tenth anniversary of the completion of the AT&T Comcast transaction
and (2) any termination of the merger agreement.
V-23
THE EXCHANGE AGREEMENT AND INSTRUMENT OF ADMISSION
In connection with the AT&T Comcast transaction, Comcast and Microsoft
entered into an exchange agreement dated December 7, 2001. On December 19, 2001,
following execution of the merger agreement, AT&T and AT&T Comcast each became a
party to the exchange agreement by executing the instrument of admission. On
March 11, 2002, Comcast, AT&T, AT&T Comcast and Microsoft amended the exchange
agreement and instrument of admission. The following summary of the exchange
agreement and the instrument of admission, in each case as amended, is qualified
in its entirety by reference to the complete texts of the exchange agreement and
the instrument of admission, in each case as amended, which are incorporated by
reference and attached as exhibits to the registration statement in which this
document is included.
QUIPS EXCHANGE
QUIPS. Microsoft (through a wholly owned subsidiary) holds $5 billion in
aggregate liquidation preference amount of 5% Convertible Quarterly Income
Preferred Securities (referred to in this document by their acronym "QUIPS") of
AT&T Finance Trust I, a Delaware business trust. The QUIPS are convertible into
$5 billion aggregate face amount of 5% Junior Convertible Subordinated
Debentures due 2029 of AT&T, which are in turn convertible into AT&T common
stock.
The Exchange. In connection with the AT&T Broadband spin-off, Microsoft
has agreed to exchange the QUIPS for a number of shares of AT&T Broadband common
stock that, subject to the limitation described in the next sentence, will be
converted in the AT&T Broadband merger into 115 million shares of AT&T Comcast
Class A common stock under the Preferred Structure (or AT&T Comcast Class C
common stock under the Alternative Structure). To the extent necessary so that
Microsoft and its affiliates will not hold more than 4.95% of AT&T Comcast's
voting power as a result of the AT&T Comcast transaction, Microsoft has agreed
to accept shares of the non-voting AT&T Comcast Class A Special common stock in
the AT&T Broadband merger instead of an equivalent number of shares of voting
AT&T Comcast common stock. If Microsoft transfers shares of voting AT&T Comcast
common stock or its voting interest in AT&T Comcast is diluted below 4.95%,
subject to certain conditions, Microsoft will have the right to cause AT&T
Comcast to exchange the shares of non-voting AT&T Comcast Class A Special common
stock received in the AT&T Broadband merger for shares of voting AT&T Comcast
common stock provided that its voting interest in AT&T Comcast does not exceed
4.95% after the exchange.
INTERNET ACCESS
Until the fifth anniversary of the Microsoft transaction, subject to the
completion of the Microsoft transaction and the AT&T Comcast transaction, AT&T
Comcast has agreed that if AT&T Comcast offers a high-speed Internet access
agreement to any third party, then it will be obligated to offer an agreement on
nondiscriminatory terms with respect to the same cable systems to Microsoft for
its Internet service provider, The Microsoft Network. Because Comcast has
entered into an access agreement with United Online and AT&T Broadband has
entered into an access agreement with each of Earthlink, Internet Central and
Connected Data Systems, upon completion of the Microsoft transaction and the
AT&T Comcast transaction AT&T Comcast will be required, with respect to each
such agreement with another ISP, to offer an access agreement to Microsoft on
terms no less favorable than those provided to the other ISP with respect to the
specific cable systems covered under the agreement with the other ISP.
COVENANTS
Each of Comcast, Microsoft, AT&T and AT&T Comcast has undertaken certain
covenants in the exchange agreement. The following summarizes the more
significant of these covenants.
Merger Documentation. Comcast has agreed that, without the prior written
consent of Microsoft, which consent will not be unreasonably withheld, Comcast
will not agree to any amendment or waiver of any provision of any of the AT&T
Comcast transaction agreements that would reasonably be expected to (1) conflict
with any provision of the exchange agreement, the agreements relating to the
set-top box
V-24
commitment described below or any access agreement entered into between
Microsoft and AT&T Comcast pursuant to the most favored nation provision
described above or (2) be materially adverse to Microsoft's rights under the
exchange agreement or the benefits that Microsoft reasonably expects to realize
from the exchange agreement, in the case of (2), to the extent that any such
amendment or waiver would have an effect on Microsoft that is materially
disproportionate to the effect it would have on other AT&T Broadband or AT&T
Comcast shareholders.
Lockup. Prior to six months after completion of the Microsoft transaction,
subject to certain exceptions, Microsoft has agreed that neither Microsoft nor
any of its wholly owned subsidiaries will sell, or enter into any agreement,
arrangement or negotiations relating to the sale of, any of the shares of AT&T
Comcast common stock that it receives in connection with the Microsoft
transaction.
Indemnity. Comcast has agreed to indemnify Microsoft against any claim by
Comcast, AT&T or any shareholder of Comcast, AT&T or AT&T Comcast for any loss
arising as a result of the AT&T Broadband spin-off or the mergers failing to be
tax-free, except to the extent such a failure results directly from a breach by
Microsoft of its covenant described under "-- Lockup" or of the failure of a
related representation and warranty made by Microsoft in the exchange agreement.
CONDITIONS TO THE COMPLETION OF THE MICROSOFT TRANSACTION
Conditions to the Obligations of Microsoft. The obligations of Microsoft
to complete the Microsoft transaction are subject to the satisfaction or waiver,
to the extent permissible, of the following conditions:
- absence of a material legal prohibition on the Microsoft transaction or
the mergers;
- except as provided in the next bullet point, satisfaction or waiver of
all conditions to the mergers and the reasonable satisfaction of
Microsoft that the mergers will occur immediately following the Microsoft
transaction;
- satisfaction, but not waiver, of the condition to the mergers that there
has been no Material Adverse Effect with respect to AT&T's broadband
business;
- material accuracy of the representations and warranties of Comcast, AT&T
and AT&T Comcast contained in the exchange agreement or made pursuant to
the exchange agreement;
- performance by Comcast, AT&T and AT&T Comcast of all of their respective
obligations under the exchange agreement;
- approval for the listing on The Nasdaq Stock Market of the shares of AT&T
Comcast common stock to be issued in the mergers, other than the shares
of AT&T Comcast Class B common stock;
- delivery by AT&T and Comcast of opinions of counsel relating to various
corporate matters; and
- after completion of the AT&T Broadband spin-off, AT&T Broadband holds
substantially all of the assets and liabilities of AT&T's broadband
business.
Conditions to the Obligations of Comcast and AT&T. The obligations of
Comcast and AT&T to complete the Microsoft transaction are subject to the
satisfaction or waiver, to the extent permissible, of the following conditions:
- satisfaction or waiver of all conditions to the mergers and the
reasonable satisfaction of Comcast that the mergers will occur;
- material accuracy of the representations and warranties of Microsoft
contained in the exchange agreement;
- performance by Microsoft of all of its obligations under the exchange
agreement; and
- delivery by Microsoft of an opinion of counsel relating to various
corporate matters.
V-25
TERMINATION
The exchange agreement may be terminated by either Comcast or Microsoft in
any of the following circumstances:
- the merger agreement has been terminated;
- any law or regulation makes completion of the Microsoft transaction
illegal or a permanent injunction prohibiting completion of the Microsoft
transaction is entered; or
- the mergers have not been completed by March 1, 2003.
INTERACTIVE TECHNOLOGY AGREEMENT
In connection with the exchange agreement, Microsoft and Comcast Cable
Communications, Inc. have entered into a three-year agreement pursuant to which
the parties will conduct a trial during 2002 of an interactive television
platform, including set-top box middleware. If the trial results meet agreed
technical standards, the platform meets defined competitive requirements and a
launch would meet Comcast Cable's reasonable business objectives, Comcast Cable
has agreed that it will commercially launch the Microsoft platform to at least
25% of its newly installed middleware customer base.
V-26
THE TAX SHARING AGREEMENT
The following summary of the tax sharing agreement is qualified in its
entirety by reference to the complete text of the tax sharing agreement, which
is incorporated by reference into this document and attached as an exhibit to
the registration statement in which this document is included.
IN GENERAL
AT&T Broadband is currently included in AT&T's federal consolidated income
tax group and AT&T Broadband's tax liability will be included in the
consolidated federal income tax liability of AT&T for 2002 until the time of the
AT&T Broadband spin-off. The tax sharing agreement provides for tax sharing
payments between AT&T Broadband and AT&T for periods prior to the AT&T Broadband
spin-off, based on the taxes or tax benefits of hypothetical affiliated groups
consisting of the businesses, assets and liabilities that make up AT&T
Broadband, on the one hand, and all other businesses, assets and liabilities of
AT&T, on the other hand. Each group is generally responsible for the taxes
attributable to its lines of business and entities comprising its group.
AT&T and AT&T Broadband have agreed that the consolidated tax liability
(before credits) of the hypothetical group will be allocated to each group based
on such group's contribution to consolidated taxable income. This allocation
will take into account losses, deductions and other tax attributes that are
utilized by the hypothetical group even if these attributes could not be
utilized on a stand-alone basis. Tax sharing payments in respect of the
consolidated tax liability of the hypothetical group, after allocation of
consolidated tax credits, will be made between AT&T and AT&T Broadband
consistent with the allocations under the tax sharing agreement. As between AT&T
and AT&T Broadband, certain tax items are specially allocated to the AT&T group
and AT&T Broadband group under the tax sharing agreement.
AT&T BROADBAND SPIN-OFF
AT&T and AT&T Broadband have agreed that taxes related to intercompany
transactions that are triggered by the AT&T Broadband spin-off will be generally
allocated to AT&T Broadband.
NON-INCOME TAX LIABILITIES
AT&T and AT&T Broadband have agreed that joint non-income tax liabilities
will generally be allocated between AT&T and AT&T Broadband based on the amount
of such taxes attributable to each group's line of business. If the line of
business with respect to which the liability is appropriately associated cannot
be readily determined, the tax liability will be allocated to the AT&T group.
AUDIT ADJUSTMENTS
AT&T and AT&T Broadband have agreed that taxes resulting from audit
adjustments will generally be allocated between the two groups based on line of
business. In general, AT&T controls audits and administrative matters related to
pre-spin-off periods.
POST-SPIN-OFF TAX ATTRIBUTES
Generally, AT&T Broadband may not carry back a loss, credit or other tax
attribute from a post-spin-off period to a pre-spin-off period, unless AT&T
Broadband obtains AT&T's consent (which, in the case of significant net
operating or capital loss carrybacks, may not be unreasonably withheld) and then
only to the extent permitted by applicable law.
AMENDMENTS AND WAIVERS
Any provision of the tax sharing agreement may be amended or waived prior
to the completion of the transaction if, but only if, such amendment or waiver
is in writing and is signed, in the case of an amendment, by AT&T, AT&T
Broadband and Comcast or, in the case of a waiver, by the party to the tax
sharing agreement against whom the waiver is to be effective and Comcast.
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THE ANCILLARY AGREEMENTS
In addition to the other agreements described in this section, AT&T and
AT&T Broadband have entered into various other commercial agreements in
connection with the AT&T Comcast transaction. A brief summary of these
agreements follows:
NETWORK SERVICE AGREEMENTS.
AT&T and AT&T Broadband have entered into four principal network service
agreements as follows.
- Master Carrier Agreement. This agreement reflects the rates, terms and
conditions on which AT&T Business Services Group will provide voice, data
and Internet services to AT&T Broadband, including both wholesale
services (those used as a component in AT&T Broadband's services to its
customers) and "administrative" services (for internal AT&T Broadband
usage). Pricing is market based, with provisions defining an ongoing
process to ensure that the prices remain competitive.
- First Amended and Restated Local Network Connectivity Services
Agreement. This agreement reflects the rates, terms and conditions on
which AT&T Business Services Group will provide certain local network
connectivity services to AT&T Broadband for use in providing local
telephone services to AT&T Broadband's subscribers. This agreement
consists of two parts:
-- a capital lease from AT&T Business Services Group to AT&T Broadband of
certain network switching and transport assets to be used exclusively
by AT&T Broadband for a term of up to ten years, commencing January 1,
2001 for initial assets leased under the agreement; and
-- an operating agreement for the provision of local network connectivity,
management and operational services in support of AT&T Broadband's
local cable telephone services, with a minimum term of five years
commencing January 1, 2001.
- Master Facilities Agreement. This agreement permits AT&T or any of its
subsidiaries to use existing fiber facilities owned or leased by AT&T
Broadband or its controlled affiliates, together with related services.
In addition, AT&T Broadband will construct and lease to AT&T new fiber
facilities in the areas served by AT&T Broadband's cable systems for use
in providing telecommunications services. The term of the build-out
period will expire on January 8, 2012. Subject to certain termination
rights specified in this agreement, the term of AT&T's right to use
facilities leased under this agreement will expire on January 8, 2028,
renewable at AT&T's option for successive 20-year terms in perpetuity.
- Interconnection and Intercarrier Compensation Term Sheet. This
agreement, which has a five-year initial term commencing January 1, 2001,
specifies the terms of interconnection of the parties' networks, and
compensation for:
-- the origination or termination of interexchange traffic for the other
party; and
-- the exchange of local traffic between the parties' local customers.
High Speed Internet Services Binding Term Sheet. This agreement reflects
the rates, terms and conditions on which AT&T will provide specified processes,
procedures and services to support AT&T Broadband in its provision of broadband
Internet services to AT&T Broadband subscribers. This agreement has a four-year
initial term commencing December 4, 2001.
Intellectual Property Agreement. This agreement specifies the ownership
and license rights granted by each party to the other in specified patents,
software, copyrights and trade secrets. Among other rights granted, the effect
of this agreement is to allow AT&T Broadband and AT&T to continue to have the
same rights to use the intellectual property that they had at the time of the
separation and AT&T Broadband spin-off.
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Other Agreements to be Executed. AT&T and AT&T Comcast will enter into a
corporate name agreement immediately prior to the completion of the AT&T Comcast
transaction pursuant to which AT&T will grant to AT&T Comcast the right to use
the term "AT&T" as part of its full corporate name, but prohibit any use of
"AT&T" as a trade name, trademark, or service mark, or in a domain name other
than specified domain names permitted for certain purposes. Such grant of rights
will be perpetual unless terminated as a result of the Roberts family's voting
power falling below 33% or pursuant to any other terms of the agreement.
Subject to the terms of the separation and distribution agreement, prior to
the completion of the AT&T Comcast transaction, AT&T and AT&T Broadband may also
enter into other agreements in connection with the AT&T Comcast transaction.
V-29
CHAPTER SIX
AT&T CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The AT&T Corp. Management's Discussion and Analysis of Financial Condition
and Results of Operations set forth below was included in AT&T's Annual Report
on Form 10-K for the year ended December 31, 2001 (as amended on May 3, 2002).
The AT&T groups referred to in this joint proxy statement/prospectus differ in
various financial and other respects from the segments described in this
section. For financial and other information on the AT&T groups, see the
information set forth elsewhere in this joint proxy statement/prospectus.
OVERVIEW
AT&T is among the world's communications leaders, providing voice, data and
video communications services to large and small businesses, consumers and
government agencies. AT&T provides domestic and international long distance,
regional and local communications services, cable (broadband) television and
Internet communication services.
RESTRUCTURING OF AT&T
On October 25, 2000, AT&T announced a restructuring plan designed to fully
separate or issue separately tracked stocks intended to reflect the financial
performance and economic value of each of AT&T's four major operating units.
On December 19, 2001, AT&T and Comcast Corporation (Comcast) announced an
agreement to combine AT&T Broadband with Comcast. Under the terms of the
agreement, AT&T will spin-off AT&T Broadband and simultaneously merge it with
Comcast, forming a new company to be called AT&T Comcast Corporation (AT&T
Comcast). AT&T shareowners will receive a number of shares of AT&T Comcast
common stock based on an exchange ratio calculated pursuant to a formula
specified in the merger agreement. If determined as of the date of the merger
agreement, the exchange ratio would have been approximately 0.34, assuming the
AT&T shares held by Comcast are included in the number of shares of AT&T common
stock outstanding. Assuming Comcast retains its AT&T shares and converts them
into exchangeable preferred stock of AT&T as contemplated by the merger
agreement, the exchange ratio would be approximately 0.35. Assuming certain
conditions, AT&T shareowners will own an approximate 55% economic stake and an
approximate 61% voting interest in the new company, calculated as of the date of
the merger agreement. The merger of AT&T Broadband and Comcast is subject to
regulatory review, approval by both companies' shareowners and certain other
conditions, and is expected to close by the end of 2002. AT&T also intends to
proceed with the creation of a tracking stock for its AT&T Consumer Services
business, which is expected to be distributed to AT&T shareowners following
shareowner approval. AT&T has not yet determined the timing of the distribution,
which may be made within a year of shareowner approval or may be made
thereafter, depending on market conditions. Additionally, the AT&T board of
directors could decide not to proceed with the distribution of the tracking
stock, or could proceed at a time or in a manner different from its current
intentions.
These restructuring activities are complicated and involve a substantial
number of steps and transactions, including obtaining various approvals, such as
Internal Revenue Service (IRS) rulings. AT&T anticipates, however, that the
transactions associated with AT&T's restructuring plan will be tax-free to U.S.
shareowners. Future financial conditions, superior alternatives or other factors
may arise or occur that make it inadvisable to proceed with part or all of
AT&T's restructuring plans. Any or all of the elements of AT&T's restructuring
plan may not occur as AT&T currently expects or in the time frames that it
currently contemplates, or at all. Alternative forms of restructuring, including
sales of interests in these businesses, would reduce what is available for
distribution to AT&T shareowners in the restructuring.
On May 25, 2001, AT&T completed an exchange offer of AT&T common stock for
AT&T Wireless stock. Under the terms of the exchange offer, AT&T issued 1.176
shares of AT&T Wireless Group tracking stock in exchange for each share of AT&T
common stock validly tendered. A total of
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372.2 million shares of AT&T common stock were tendered in exchange for 437.7
million shares of AT&T Wireless Group tracking stock. In conjunction with the
exchange offer, AT&T recorded an $80 premium as a reduction to net income
available to common shareowners. The premium represents the excess of the fair
value of the AT&T Wireless Group tracking stock issued over the fair value of
the AT&T common stock exchanged.
On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a
separate, independently traded company. All AT&T Wireless Group tracking stock
was converted into AT&T Wireless common stock on a one-for-one basis and 1,136
million shares of AT&T Wireless common stock held by AT&T were distributed to
AT&T common shareowners on a basis of 0.3218 of a share of AT&T Wireless for
each AT&T share outstanding. AT&T common shareowners received whole shares of
AT&T Wireless and cash payments for fractional shares. The IRS ruled that the
transaction qualified as tax-free for AT&T and its shareowners for U.S. federal
income tax purposes, with the exception of cash received for fractional shares.
For accounting purposes, the deemed effective split-off date was June 30, 2001.
At the time of split-off, AT&T retained approximately $3 billion, or 7.3%, of
AT&T Wireless common stock, about half of which was used in a debt-for-equity
exchange in July in 2001. The remaining portion of these holdings was monetized
in October and December through the issuance of debt that is exchangeable into
Wireless shares (or their cash equivalents) at maturity. The split-off of AT&T
Wireless resulted in a noncash tax-free gain of $13.5 billion, which represented
the difference between the fair value of the AT&T Wireless tracking stock at the
date of the split-off and AT&T's book value in AT&T Wireless Services. This gain
was recorded in the third quarter of 2001 as a "Gain on disposition of
discontinued operations" in the Consolidated Statement of Income.
On August 10, 2001, AT&T completed the split-off of Liberty Media
Corporation as an independent, publicly traded company (since AT&T did not exit
the line of business that Liberty Media Group (LMG) operated in, LMG was not
accounted for as a discontinued operation). AT&T redeemed each outstanding share
of Class A and Class B LMG tracking stock for one share of Liberty Media
Corporation's Series A and Series B common stock, respectively. The IRS ruled
that the split-off of Liberty Media Corporation qualified as a tax-free
transaction for AT&T, Liberty Media and their shareowners. For accounting
purposes, the deemed effective split-off date was July 31, 2001.
TRACKING STOCKS
During the periods 1999 through 2001, AT&T had one or more tracking stocks
outstanding. In 1999, in connection with the acquisition of Tele-Communications,
Inc. (TCI), AT&T issued a separate tracking stock to reflect 100% of the
performance of LMG. In 2000, AT&T issued a tracking stock to track the financial
performance of AT&T Wireless Group. The shares initially issued tracked
approximately 16% of the performance of AT&T Wireless Group.
A tracking stock is designed to provide financial returns to its holders
based on the financial performance and economic value of the assets it tracks.
Ownership of shares of AT&T common stock, AT&T Wireless Group tracking stock or
Liberty Media Class A or B tracking stock did not represent a direct legal
interest in the assets and liabilities of any of the groups, but an ownership of
AT&T in total. The specific shares represented an interest in the economic
performance of the net assets of each of the groups.
The earnings attributable to AT&T Wireless Group are excluded from the
earnings available to AT&T Common Stock Group and are reflected as "Income
(loss) from discontinued operations," net of applicable taxes of AT&T Wireless
Group in the Consolidated Statements of Income. Similarly, the earnings and
losses related to LMG are excluded from the earnings available to AT&T Common
Stock Group. The remaining results of operations of AT&T, including the
financial performance of AT&T Wireless Group not represented by the tracking
stock, are referred to as the AT&T Common Stock Group and are represented by
AT&T common stock.
AT&T did not have a controlling financial interest in LMG for financial
accounting purposes; therefore, its ownership in LMG was reflected as an
investment accounted for under the equity method in
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AT&T's consolidated financial statements. The amounts attributable to LMG are
reflected in the accompanying consolidated financial statements as "Equity
(losses) earnings from Liberty Media Group" and "Investment in Liberty Media
Group and related receivables, net" prior to its split-off from AT&T.
AT&T Wireless Group was an integrated business of AT&T, and LMG was a
combination of certain assets and businesses of AT&T; neither was a stand-alone
entity prior to its split-off from AT&T.
MERGER WITH MEDIAONE GROUP, INC.
AT&T completed the merger with MediaOne Group, Inc. (MediaOne) on June 15,
2000, in a cash and stock transaction valued at approximately $45 billion. AT&T
issued approximately 603 million shares of AT&T common stock, of which 60
million were treasury shares, and made cash payments of approximately $24
billion.
The merger was recorded under the purchase method of accounting, whereby
the assets and liabilities of MediaOne Group were recorded at fair value on the
date of the acquisition. Accordingly, the results of MediaOne have been included
with the financial results of AT&T, within AT&T Broadband, since the date of
acquisition. In accordance with the purchase method of accounting, periods prior
to the merger were not restated to include the results of MediaOne.
FORWARD-LOOKING STATEMENTS
This document may contain forward-looking statements with respect to AT&T's
restructuring plan, financial condition, results of operations, cash flows,
dividends, financing plans, business strategies, operating efficiencies or
synergies, budgets, capital and other expenditures, network build out and
upgrade, competitive positions, availability of capital, growth opportunities
for existing products, benefits from new technologies, availability and
deployment of new technologies, plans and objectives of management, and other
matters.
These forward-looking statements, including, without limitation, those
relating to the future business prospects, revenue, working capital, liquidity,
capital needs, network build out, interest costs and income, are necessarily
estimates reflecting the best judgment of senior management and involve a number
of risks and uncertainties that could cause actual results to differ materially
from those suggested by the forward-looking statements. These forward-looking
statements should, therefore, be considered in light of various important
factors that could cause actual results to differ materially from estimates or
projections contained in the forward-looking statements including, without
limitation:
- the risks associated with the implementation of AT&T's restructuring
plan, which is complicated and involves a substantial number of different
transactions each with separate conditions, any or all of which may not
occur as AT&T currently intends, or which may not occur in the timeframe
it currently expects,
- the risks associated with each of AT&T's main business units, operating
as independent entities as opposed to as part of an integrated
telecommunications provider following completion of AT&T's restructuring
plan, including the inability of these groups to rely on the financial
and operational resources of the combined company and these groups having
to provide services that were previously provided by a different part of
the combined company,
- the impact of existing and new competitors in the markets in which these
groups compete, including competitors that may offer less expensive
products and services, desirable or innovative products, technological
substitutes, or have extensive resources or better financing,
- the impact of oversupply of capacity resulting from excessive deployment
of network capacity,
- the ongoing global and domestic trend toward consolidation in the
telecommunications industry, which may have the effect of making the
competitors of these entities larger and better financed and afford these
competitors with extensive resources and greater geographic reach,
allowing them to compete more effectively,
VI-3
- the effects of vigorous competition in the markets in which the company
operates, which may decrease prices charged, increase churn and change
customer mix, profitability and average revenue per user,
- the ability to enter into agreements to provide services, and the cost of
entering new markets necessary to provide services,
- the ability to establish a significant market presence in new geographic
and service markets,
- the availability and cost of capital and the consequences of increased
leverage,
- the impact of any unusual items resulting from ongoing evaluations of the
business strategies of the company,
- the requirements imposed on AT&T or latitude allowed to competitors by
the Federal Communications Commission (FCC) or state regulatory
commissions under the Telecommunications Act of 1996 or other applicable
laws and regulations,
- the risks associated with technological requirements, technology
substitution and changes and other technological developments,
- the results of litigation filed or to be filed against the company,
- the possibility of one or more of the markets in which the company
competes being impacted by changes in political, economic or other
factors, such as monetary policy, legal and regulatory changes or other
external factors over which these groups have no control, and
- the risks related to AT&T's investments and joint ventures.
The words "estimate," "project," "intend," "expect," "believe," "plan" and
similar expressions are intended to identify forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of this document. Moreover, in the future, AT&T,
through its senior management, may make forward-looking statements about the
matters described in this document or other matters concerning AT&T.
The discussion and analysis that follows provides information management
believes is relevant to an assessment and understanding of AT&T's consolidated
results of operations for the years ended December 31, 2001, 2000 and 1999, and
financial condition as of December 31, 2001 and 2000.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
AT&T's financial statements are prepared in accordance with accounting
principles that are generally accepted in the United States. The preparation of
these financial statements requires management to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenue and expenses as
well as the disclosure of contingent assets and liabilities. Management
continually evaluates its estimates and judgments including those related to
revenue recognition, allowances for doubtful accounts, useful lives of property,
plant and equipment, internal use software and intangible assets, investments,
derivative contracts, pension and other postretirement benefits and income
taxes. Management bases its estimates and judgments on historical experience and
other factors that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions or
conditions. AT&T believes that of its significant accounting policies, the
following may involve a higher degree of judgment or complexity:
Revenue recognition -- AT&T only records revenue for transactions which are
considered to be part of our central, ongoing operations. AT&T recognizes long
distance and local voice and data services revenue based upon minutes of traffic
processed or contracted fee schedules including sales of prepaid calling cards.
Cable video and nonvideo installation revenue is recognized in the period the
installation services are provided to the extent of direct selling costs. Any
remaining amount is deferred and recognized over the estimated average period
that customers are expected to remain connected to the cable distribution
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systems. Customer activation fees, along with the related costs up to but not
exceeding the revenues, are deferred and amortized over the customer
relationship period. AT&T recognizes other products and services revenue when
the products are delivered and accepted by customers and when services are
provided in accordance with contract terms. For contracts where we provide
customers with an indefeasible right to use network capacity, we recognize
revenue ratably over the stated life of the agreement. Any sales of installed
fiber are not recognized as revenue. AT&T considers these transactions to be
sales of property, plant and equipment and record any gain or loss in "Other
income (expense)" in the Consolidated Statements of Income.
Allowances for doubtful accounts -- AT&T maintains allowances for doubtful
accounts for estimated losses which result from the inability of our customers
to make required payments. AT&T bases its allowances on the likelihood of
recoverability of accounts receivable based on past experience and taking into
account current collection trends that are expected to continue. If economic or
specific industry trends worsen beyond AT&T's estimates, it would increase its
allowances for doubtful accounts by recording additional expense. Accounts
receivable are fully reserved for when past due 180 days or more.
Estimated useful lives of property, plant and equipment, internal use
software and intangible assets -- AT&T estimates the useful lives of property,
plant and equipment, internal use software and intangible assets in order to
determine the amount of depreciation and amortization expense to be recorded
during any reporting period. The useful lives are estimated at the time the
asset is acquired and are based on historical experience with similar assets as
well as taking into account anticipated technological or other changes. If
technological changes were to occur more rapidly than anticipated or in a
different form than anticipated, the useful lives assigned to these assets may
need to be shortened, resulting in the recognition of increased depreciation and
amortization expense in future periods. Alternatively, these types of
technological changes could result in the recognition of an impairment charge to
reflect the write-down in value of the asset. AT&T reviews these types of assets
for impairment annually, or when events or circumstances indicate that the
carrying amount may be not be recoverable over the remaining lives of the
assets. In assessing impairments, AT&T uses cash flows which take into account
management's estimates of future operations. Beginning January 1, 2002, in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets," AT&T will no longer
amortize goodwill, excess basis related to equity-method investments and
franchise costs, but will test these assets at least annually for impairment.
Investments -- AT&T holds investments in other companies which it accounts
for under either the cost method or equity method of accounting. Many of these
companies are publicly traded and have volatile share prices however, some of
these companies are not publicly traded and therefore the value may be difficult
to determine. For investments that are not publicly traded we estimate fair
value using market-based (comparable sales) and income-based (discounted cash
flow) methods. In addition, AT&T has monetized some of these investments by
issuing debt that is tied to the trading price of the security, and which can be
settled in shares or cash. Some of AT&T's cost-method investments are classified
as "trading" securities under SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," and are marked-to-market through the income
statement. However, other cost method investments are classified as
"available-for-sale" under SFAS No. 115 and are marked-to-market through other
comprehensive income on the balance sheet. AT&T records an investment impairment
charge on its "available-for-sale" and equity-method investments when we believe
the decline in the investment value is other than temporary. When determining an
other than temporary decline, AT&T considers, among other items, the length of
time the trading price has been below its carrying value, the financial
condition of the investee company, including the industry in which they operate,
and AT&T's ability or intent to retain the investment. If the financial
condition of the investee company or the industry in which it operates were to
be materially different than AT&T's expectation, AT&T would record an expense to
reflect the other than temporary decline in value of the investment. At December
31, 2001, unrealized losses on "available-for-sale" securities included in
"Other comprehensive income" as a component of shareowners' equity were
approximately $0.3 billion (pretax).
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Derivative contracts -- AT&T enters into derivative contracts to mitigate
market risk from changes in interest rates, foreign currency exchange rates and
equity prices. Certain exchangeable debt (debt exchangeable into or tied to the
value of securities AT&T owns) contain embedded derivatives that require
accounting separate from the debt instrument, while other exchangeable debt has
derivatives issued in conjunction with net purchased options. The fair value of
option based derivatives is determined using the Black-Scholes option pricing
model, which is based on a set of inputs, including the price of the underlying
stock, volatility of the underlying stock and interest rates. These inputs are
based on prevailing market indications that are either directly observable in
the market, received from qualified investment banking firms or are internally
calculated. Changes in these inputs would result in a change in the fair value
of the option contracts. Changes in the fair value of option contracts accounted
for as cash flow hedges would be recorded, net of income taxes, within Other
Comprehensive Income on the balance sheet. Changes in the fair value of option
contracts undesignated for accounting purposes would be recorded within other
income (expense) on the income statement. Generally, fair value calculations of
other derivative contracts (e.g., interest rate swaps and foreign exchange
forwards) require less judgment and are valued based on market interest rates
and foreign exchange rates.
Pension and postretirement benefits -- The amounts recognized in the
financial statements related to pension and postretirement benefits are
determined on an actuarial basis, which utilizes many assumptions in the
calculation of such amounts. A significant assumption used in determining AT&T's
net pension credit (income) and postretirement expense is the expected long-term
rate of return on plan assets. In 2001, AT&T assumed an expected long-term rate
of return on plan assets of 9.5%. On average, AT&T's actual return on plan
assets over the long-term has substantially exceeded 9.5%; however, in the past
two years, the plan's assets have experienced rates of return substantially
lower than 9.5%. For 2002, AT&T will lower its expected long-term rate of return
assumption from 9.50% to 9.0%, reflecting the generally expected moderation of
long-term rates of return in the financial markets. AT&T expects this decrease
in the expected long-term rate of return to decrease operating income by
approximately $0.1 billion.
Another estimate that affects AT&T's net pension credit and postretirement
expense is the discount rate used in the annual actuarial valuations of pension
and postretirement benefit plan obligations. At the end of each year, AT&T
determines the appropriate discount rate, which represents the interest rate
that should be used to determine the present value of future cash flows
currently expected to be required to settle the pension and postretirement
benefit obligations. The discount rate is generally based on the yield on
high-quality corporate fixed-income investments. At December 31, 2001, AT&T
lowered its discount rate to 7.25% from 7.5% at December 31, 2000. Changes in
the discount rate do not have a material impact on AT&T's results of operations.
Income taxes -- AT&T records deferred tax assets and liabilities using
enacted tax rates for the effect of temporary differences between the book and
tax bases of assets and liabilities. If enacted tax rates changed, AT&T would
adjust its deferred tax assets and liabilities, through the provision for income
taxes in the period of change, to reflect the enacted tax rate expected to be in
effect when the deferred tax items reverse. A one percentage point change in the
enacted tax rates would increase or decrease net income by approximately $0.7
billion. AT&T records a valuation allowance on deferred tax assets to reflect
the expected future tax benefits to be realized. In determining the appropriate
valuation allowance, AT&T takes into account the level of expected future
taxable income and available tax planning strategies. If future taxable income
was lower than expected or if expected tax planning strategies were not
available as anticipated, AT&T may record additional valuation allowance through
income tax expense in the period such determination was made. At December 31,
2001, AT&T had long-term deferred tax assets (included within long-term deferred
tax liabilities) of $5.4 billion, which included a valuation allowance of $57
million.
CONSOLIDATED RESULTS OF OPERATIONS
The comparison of 2001 results with 2000 results was affected by events
such as acquisitions and dispositions that occurred in these two years. For
example, included in 2001 was a full year of MediaOne results; however, 2000
included MediaOne's results only since the June 15, 2000, date of acquisition.
In
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addition, AT&T had dispositions of certain cable systems during each year and
disposed of international businesses during 2000. Cable systems and businesses
disposed of in 2000 were included in 2000 results for part of the year and not
in 2001 results. Likewise, cable systems disposed of in 2001 were included in
2000 results for the full year and in 2001 results for part of the year. Also,
At Home Corp. (Excite@Home) affected the comparison of annual results.
For the period January 1, 2000, through August 31, 2000, Excite@Home was
accounted for as an equity method investment. For the period September 1, 2000,
through December 31, 2000, Excite@Home was fully consolidated as a result of
corporate governance changes, which gave AT&T the right to designate six of the
11 Excite@Home board members, and therefore, a controlling interest. In 2001,
Excite@Home was fully consolidated for the period January 1, 2001, through
September 28, 2001, the date Excite@Home filed for Chapter 11 bankruptcy
protection. As a result of the bankruptcy and AT&T removing four of its six
members from the Excite@Home board of directors, AT&T no longer consolidated
Excite@Home as of September 30, 2001. The consolidation of Excite@Home
(effective September 1, 2000) resulted in the inclusion of 100% of its results
in each line item of AT&T's Consolidated Balance Sheets and Consolidated
Statements of Income. The approximate 77% of Excite@Home not owned by AT&T is
shown in the 2000 Consolidated Balance Sheet within "Minority Interest" and as a
component of "Minority interest income (expense)" in the 2001 and 2000
Consolidated Statements of Income. As a result of the significant losses
incurred by Excite@Home, the minority interest balance was fully utilized (in
September); therefore, in September 2001 AT&T recognized more than its 23% share
of losses of Excite@Home. Under the equity method of accounting, any earnings or
losses are included as a component of "Net losses related to other equity
investments" in the Consolidated Statement of Income. Beginning October 1, 2001,
AT&T no longer records equity earnings or losses related to Excite@Home since
AT&T recognized losses in excess of its investment in Excite@Home.
Effective July 1, 2000, the FCC eliminated Primary Interexchange Carrier
Charges (PICC or per-line charges) that AT&T pays for residential and
single-line business customers. The elimination of these per-line charges
resulted in lower access expense as well as lower revenue, since AT&T has
historically billed its customers for these charges.
The comparison of 2000 results with 1999 results was also affected by the
acquisition of MediaOne and the elimination PICC. In addition, AT&T acquired TCI
and the IBM Global Network (now AT&T Global Network Services or AGNS) during
1999. Therefore, twelve months of their results are included in 2000's results,
but are included for only a part of 1999 (since their respective dates of
acquisition). Dispositions of certain cable systems and international businesses
occurred during 1999 and 2000, affecting comparability. The consolidation of
Excite@Home, effective September 1, 2000, also affected comparability. Prior to
September 1, 2000, Excite@Home was accounted for as an equity method investment.
Finally, the comparison of 2000 results with 1999 results was impacted by
the launch of Concert on January 5, 2000, AT&T's global joint venture with
British Telecommunications plc (BT). AT&T contributed all of its international
gateway-to-gateway assets and the economic value of approximately 270
multinational customers specifically targeted for direct sales by Concert. As a
result, 2000 results do not include the revenue and expenses associated with
these customers and businesses, while 1999 does, and 2000 results include our
proportionate share of Concert's earnings in "Net losses related to other equity
investments" in the Consolidated Statements of Income. On October 16, 2001, AT&T
and BT announced that they had reached binding agreements to unwind Concert.
Under the Concert dissolution agreement with BT, AT&T will reclaim customer
contracts and assets that were initially contributed to the venture, including
international transport facilities and gateway assets. In addition, AT&T
Business Services will obtain ownership of certain frame relay assets located in
the Asia Pacific region that BT initially contributed to the venture. AT&T
Business Services expects to combine these assets with its existing
international networking and other assets. The unwind of Concert is expected to
close by the end of the first half of 2002.
VI-7
REVENUE
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
DOLLARS IN MILLIONS
AT&T Business Services.................................. $28,024 $28,900 $28,692
AT&T Consumer Services.................................. 15,079 18,894 21,753
AT&T Broadband.......................................... 9,799 8,226 5,070
Corporate and other..................................... (352) (487) (542)
------- ------- -------
Total Revenue........................................... $52,550 $55,533 $54,973
======= ======= =======
Total revenue decreased 5.4%, or $3.0 billion, in 2001 compared with 2000.
The decline was largely driven by accelerating declines in long distance voice
revenue of approximately $5.7 billion. Partially offsetting the decline was
revenue of approximately $2.2 billion, primarily attributable to growth in data
and Internet protocol (IP), local and outsourcing services within AT&T Business
Services, and increased revenue from AT&T Broadband, primarily telephony,
high-speed data, expanded basic cable and digital video. Also offsetting the
decline was revenue of approximately $0.3 billion largely due to net
acquisitions (primarily MediaOne), and the consolidation of Excite@Home,
partially offset by the elimination of PICC. AT&T expects long distance revenue
to continue to be negatively impacted by ongoing competition and product
substitution and while we expect data and IP revenue to continue to grow, AT&T
expects the growth rate to slow. Revenue in 2002 will be positively impacted by
the inclusion of revenue resulting from the unwind of Concert, including revenue
from multinational customers and foreign-billed revenue previously contributed
to Concert. In addition, AT&T expects revenue from AT&T Broadband to increase.
Total revenue increased 1.0%, or $0.6 billion, in 2000 compared with 1999
primarily driven by a growing demand for AT&T's IP, outsourcing within AT&T
Business Services and growth in AT&T Broadband of approximately $2.2 billion, as
well as the impact of acquisitions and the consolidation of Excite@Home,
partially offset by the impact of Concert, dispositions and the elimination of
PICC of approximately $1.5 billion. These revenue increases were partially
offset by continued declines in long distance voice revenue of approximately
$2.9 billion.
Revenue by segment is discussed in greater detail in the segment results
section.
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
DOLLARS IN MILLIONS
Access and other connection............................. $12,136 $13,140 $14,439
Access and other connection expenses decreased 7.6%, or $1.0 billion, in
2001 compared with 2000. Included within access and other connection expenses
are costs that AT&T pays to connect calls on the facilities of other service
providers, as well as the Universal Service Fund contributions and per-line
charges mandated by the FCC. Approximately $1.6 billion of the decrease was due
to mandated reductions in per-minute access-rates, lower per-line charges and
lower international connection rates. In July 2000, per-line charges that AT&T
paid for residential and single-line business customers were eliminated by the
FCC. These reductions were partially offset by a $0.6 billion increase due to
overall volume growth primarily related to local and international services and
higher Universal Service Fund contributions. Since most of these charges are
passed through to the customer, the per-minute access-rate and per-line charge
reductions and the increased Universal Service Fund contributions have generally
resulted in a corresponding impact on revenue.
In 2002, access and other connection expenses will continue to decline as a
result of mandated reductions in per minute access rates, lower universal
service fund contributions and lower long distance call volumes. These
reductions will be partially offset by an increase in local connectivity
expenses primarily due to growth in local services. In addition, the unwind of
Concert will also result in lower access and other connections expenses, since
in 2001 the charge from Concert was recorded as access and
VI-8
other connection expenses and in 2002 as AT&T takes back assets, it will record
the expenses in each line item based on how the assets and customers are served
and managed.
Access and other connection expenses decreased 9.0% to $13.1 billion in
2000, compared with $14.4 billion in 1999. Mandated reductions in per-minute
access costs and decreased per-line charges resulted in lower costs of
approximately $1.5 billion. Also contributing to the decrease was more efficient
network usage. These decreases were partially offset by approximately $0.6
billion of higher costs due to volume increases, and $0.5 billion as a result of
higher Universal Service Fund contributions.
Costs paid to telephone companies outside of the United States to connect
calls made to countries outside of the United States (international settlements)
are also included within access and other connection expenses. International
interconnection charges decreased approximately $0.5 billion in 2000, as a
result of the commencement of operations of Concert. Concert incurred most of
AT&T's international settlements and earned most of its foreign-billed revenue,
previously incurred and earned directly by AT&T. In 2000, Concert billed AT&T a
net expense composed of international settlement (interconnection) expense and
foreign-billed revenue. The amount charged by Concert in 2000 was lower than
interconnection expense incurred in 1999, since AT&T recorded these transactions
as revenue and expense, as applicable. Partially offsetting the decline were
costs incurred related to Concert products that AT&T now sells to its customers.
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
DOLLARS IN MILLIONS
Costs of services and products.......................... $13,960 $12,795 $11,013
Costs of services and products include the costs of operating and
maintaining our networks, costs to support our outsourcing contracts (including
cost of equipment sold), programming for cable services, the provision for
uncollectible receivables and other service-related costs.
These costs increased $1.2 billion, or 9.1%, in 2001 compared with 2000.
Approximately $0.6 billion of the increase was driven by net acquisitions,
primarily MediaOne, and the consolidation of Excite@Home. Also contributing to
the increase was approximately $0.8 billion of higher costs associated with our
growth businesses, primarily at AT&T Business Services, including the cost of
equipment sold within our outsourcing solutions business, and higher cable
television programming costs. In addition, costs increased approximately $0.3
billion due to estimated losses on certain long-term contracts at AT&T Business
Services and a lower pension credit (income) and higher postretirement expense
in 2001 resulting from a decreased return on plan assets. These increases were
partially offset by approximately $0.4 billion of lower costs associated with
lower revenue, primarily lower volumes at AT&T Business Services, including
AT&T's international operations and lower payphone compensation costs.
In 2002, costs of services and products are expected to increase slightly
as a result of the unwind of Concert, significantly offset by the
deconsolidation of Excite@Home.
Costs of services and products increased $1.8 billion, or 16.2%, in 2000
compared with 1999. Nearly $1.9 billion of the increase was due to acquisitions
and the impact of consolidating Excite@Home, net of the impact of Concert and
divestments of international businesses. The expense also increased due to
higher costs associated with new outsourcing contracts of approximately $0.5
billion and approximately $0.3 billion of higher cable television programming
costs principally due to rate increases and higher costs associated with new
broadband services. These increases were partially offset by approximately $0.9
billion of cost savings from continued cost control initiatives and a higher
pension credit in 2000, primarily driven by a higher pension trust asset base,
resulting from increased investment returns.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
--------- -------- ---------
DOLLARS IN MILLIONS
Selling, general and administrative...................... $10,832 $9,752 $10,894
VI-9
Selling, general and administrative (SG&A) expenses increased $1.1 billion,
or 11.1%, in 2001 compared with 2000. Approximately $0.2 billion of the increase
was due to expenses associated with acquisitions, primarily MediaOne, net of the
impact of dispositions. Increased expenses in support of growth businesses,
primarily data and IP, broadband, and local voice services, drove approximately
$0.8 billion of the increase. These expenses included customer care, facilities
and other related expenses, advertising, research and development and other
general and administrative expenses. Also included in the increased SG&A
expenses were transaction costs of approximately $0.2 billion associated with
AT&T's restructuring announced in October 2000. A lower pension credit (income)
and higher postretirement expense resulting from decreased return on plan
assets, combined with higher compensation accruals contributed approximately
$0.3 billion to the increase. Partially offsetting these increases were lower
costs associated with the impact of cost control efforts and decreased customer
care and billing expenses of approximately $0.8 billion primarily from AT&T
Consumer Services.
As a result of the unwind of Concert as well as lower pension credit
(income), selling, general and administrative expenses are expected to increase
slightly in 2002.
Selling, general and administrative expenses decreased $1.1 billion, or
10.5%, in 2000 compared with 1999. Approximately $2.0 billion of the decrease
was due to savings from continued cost-control initiatives and a higher pension
credit in 2000, primarily driven by a higher pension trust asset base, resulting
from increased historical investment returns. Partially offsetting this decrease
was approximately $0.5 billion of higher expenses associated with our growing
broadband business, and nearly $0.5 billion of expenses associated with
acquisitions and the consolidation of Excite@Home, net of the impact of Concert
and dispositions.
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
2001 2000 1999
------ ------ ------
DOLLARS IN MILLIONS
Depreciation and other amortization........................ $6,865 $5,924 $5,137
Depreciation and other amortization expenses increased $0.9 billion, or
15.9%, in 2001 compared with 2000. Approximately $0.4 billion of the increase
was attributable to the acquisition of MediaOne and the consolidation of
Excite@Home, partially offset by net dispositions, primarily cable systems. The
remaining increase was primarily due to a higher asset base resulting from
continued infrastructure investments.
Depreciation and other amortization expenses are expected to increase in
2002 reflecting the infrastructure investments made in 2001 as well as the
impact of the unwind of Concert.
In 2000, depreciation and other amortization expenses rose $0.8 billion, or
15.3%, compared with 1999. Approximately $0.5 billion of the increase was due to
acquisitions and the consolidation of Excite@Home, net of dispositions and the
impact of Concert. The remaining increase was primarily due to a higher asset
base resulting from continued infrastructure investment.
Total capital expenditures for 2001, 2000 and 1999 were $8.4 billion, $10.5
billion and $11.2 billion, respectively. AT&T continues to focus the vast
majority of its capital spending on its growth businesses of broadband, data and
IP, and local.
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
2001 2000 1999
------ ------ ------
DOLLARS IN MILLIONS
Amortization of goodwill, franchise costs and other
purchased intangibles.................................... $2,473 $2,665 $1,057
Amortization of goodwill, franchise costs and other purchased intangibles
decreased $0.2 billion, or 7.2%, in 2001 compared with 2000. The decrease was
primarily due to a lower goodwill balance relating to Excite@Home as a result of
the impairment charges recorded in the fourth quarter of 2000 and the first
quarter of 2001, partially offset by the acquisition of MediaOne. Franchise
costs represent the value
VI-10
attributable to agreements with local authorities that allow access to homes in
AT&T Broadband's service areas. Other purchased intangibles arising from
business combinations primarily included customer relationships.
In 2002, AT&T will no longer amortize goodwill or franchise costs in
accordance with the provisions of SFAS No. 142. Accordingly, amortization of
goodwill, franchise costs and other purchased intangibles will be significantly
lower in 2002. A further discussion of the impacts of SFAS No. 142 is included
in "New Accounting Pronouncements" in this document.
In 2000, amortization of goodwill, franchise costs and other purchased
intangibles increased $1.6 billion, or 152.3%, compared with the prior year.
This increase was largely attributable to the consolidation of Excite@Home, as
well as acquisitions, primarily MediaOne and TCI.
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
2001 2000 1999
------ ------ ----
DOLLARS IN MILLIONS
Net restructuring and other charges......................... $2,530 $7,029 $975
During 2001, AT&T recorded $2,530 million of net restructuring and other
charges including approximately $1,330 million of restructuring and exit costs
associated with AT&T's continued cost reduction initiatives and $1,200 million
of asset impairment charges which were primarily related to Excite@Home.
The $1,330 million of charges for restructuring and exit plans were
comprised of $1,014 million for employee separations and benefit plan
curtailment costs, $322 million for facility closings and $27 million related to
termination of contractual obligations. The restructuring and exit plans support
AT&T's cost reduction efforts through headcount reductions across all segments
of the business, primarily network support and customer care functions in AT&T
Business Services, continued cost reduction efforts by Excite@Home (which was
still consolidated into AT&T's results until September 2001), in addition to
impacts of the MediaOne merger. These charges were slightly offset by the
reversal in December 2001 of $33 million related to the business restructuring
plans for fourth quarter 1999 and first quarter 2000.
Included in the $1,014 million of employee separations were $200 million of
benefit plan curtailment costs associated with employee separations as part of
these exit plans. Approximately 18 thousand employees will be separated in
conjunction with these exit plans, approximately one-half of which are
management and one-half are nonmanagement employees. Nearly 17 thousand employee
separations related to involuntary terminations and more than one thousand
related to voluntary terminations. Approximately 50% of the employees affected
by the 2001 restructuring charges left their positions as of December 31, 2001,
and the remaining will leave the company throughout 2002. Termination benefits
of approximately $341 million were paid throughout 2001.
The $1,200 million of asset impairments consisted of $1,032 million
associated with the write-down of goodwill and other intangibles, warrants
granted in connection with distributing the @Home service and fixed assets.
These charges were due to continued deterioration in the business climate of,
and reduced levels of venture capital funding activity for, Internet advertising
and other Internet-related companies, continued significant declines in the
market values of Excite@Home's competitors in the Internet advertising industry,
and changes in its operating and cash flow forecasts for the remainder of 2001.
These charges were also impacted by Excite@Home's decision to sell or shut down
narrowband operations. As a result of the foregoing, and other factors,
Excite@Home entered into bankruptcy proceedings in September 2001. In addition,
AT&T recorded a related goodwill impairment charge of $139 million associated
with its acquisition goodwill of Excite@Home. Since AT&T consolidated, but only
owned approximately 23% of Excite@Home, a portion of the charges recorded by
Excite@Home was not included as a reduction to AT&T's net income, but rather was
eliminated in AT&T's 2001 Consolidated Statement of Income as a component of
"Minority interest income (expense)." Additionally, AT&T recorded asset
impairment charges of $29 million related to the write-down of unrecoverable
support assets where the carrying value was no longer supported by estimated
future cash flows.
VI-11
The restructuring and exit plans did not yield cash savings (net of
severance benefit payouts) in 2001. In subsequent years, the net cash savings
will increase, due to the timing of actual separations and associated payments,
until the completion of the exit plan at which time AT&T expects to yield
approximately $1.1 billion of cash savings per year. Accordingly, there was no
benefit to operating income (net of the restructuring charges recorded) in 2001.
In subsequent years, the operating income benefit will continue to increase, due
to timing of actual separations, until the completion of the exit plan, at which
time AT&T expects a benefit to operating income of approximately $1.2 billion
per year.
As a result of continuing realignment within AT&T Broadband, AT&T expects
to record a restructuring charge in the first quarter of 2002 in the range of
$50 million to $100 million.
During 2000, AT&T recorded $7,029 million of net restructuring and other
charges including $6,179 million of asset impairment charges related to
Excite@Home, $759 million for restructuring and exit costs associated with
AT&T's initiative to reduce costs, and $91 million related to the government-
mandated disposition of AT&T Communications (U.K.) Ltd., which would have
competed directly with Concert.
The asset impairment charges related to Excite@Home resulted from the
deterioration of the market conditions and market valuations of Internet-related
companies during the fourth quarter of 2000, which caused Excite@Home to
conclude that intangible assets related to their acquisitions of
Internet-related companies may not be recoverable. Accordingly, Excite@Home
conducted a detailed assessment of the recoverability of the carrying amounts of
acquired intangible assets. This assessment resulted in a determination that
certain acquired intangible assets, including goodwill, related to these
acquisitions, including Excite, were impaired as of December 31, 2000. As a
result, Excite@Home recorded impairment charges of $4,609 million in December
2000, representing the excess of the carrying amount of the impaired assets over
their fair value.
The impairment was allocated to each asset group based on a comparison of
carrying values and fair values. The impairment write-down within each asset
group was allocated first to goodwill, and if goodwill was reduced to zero, to
identifiable intangible assets in proportion to carrying values.
Since AT&T consolidated but only owned approximately 23% of Excite@Home,
77% of the charge recorded by Excite@Home was not included as a reduction to
AT&T's net income, but rather was eliminated in AT&T's 2000 Consolidated
Statement of Income as "Minority interest income (expense)."
Also as a result of the foregoing, AT&T recorded a goodwill and
acquisition-related impairment charge of $1,570 million associated with the
acquisition of our investment in Excite@Home. The write-down of AT&T's
investment to fair value was determined utilizing discounted expected future
cash flows.
The $759 million charge for restructuring and exit plans was primarily due
to headcount reductions, mainly in AT&T Business Services, including network
operations, primarily for the consolidation of customer-care and call centers,
as well as synergies created by the MediaOne merger.
Included in exit costs was $503 million of cash termination benefits
associated with the separation of approximately 7,300 employees as part of
voluntary and involuntary termination plans. Approximately one-half of the
separations were management employees and one-half were non-management
employees. Approximately 6,700 employee separations were related to involuntary
terminations and approximately 600 to voluntary terminations.
AT&T also recorded $62 million of network lease and other contract
termination costs associated with penalties incurred as part of notifying
vendors of the termination of these contracts during the year, and net losses of
$32 million related to the disposition of facilities primarily due to synergies
created by the MediaOne merger.
Also included in restructuring and exit costs in 2000 was $144 million of
benefit plan curtailment costs associated with employee separations as part of
these exit plans. Further, AT&T recorded an asset impairment charge of $18
million related to the write-down of unrecoverable assets in certain businesses
where the carrying value was no longer supported by estimated future cash flows.
VI-12
During 1999, AT&T recorded $975 million of net restructuring and other
charges. A $594 million in-process research and development charge was recorded
reflecting the estimated fair value of research and development projects at TCI,
as of the date of the acquisition, which had not yet reached technological
feasibility or had no alternative future use. The projects identified related to
efforts to offer voice over IP, product-integration efforts for advanced set-top
devices, cost-savings efforts for broadband-telephony implementation, and
in-process research and development related to Excite@Home. AT&T estimated the
fair value of in-process research and development for each project using an
income approach, which was adjusted to allocate fair value based on the
project's percentage of completion. Under this approach, the present value of
the anticipated future benefits of the projects was determined using a discount
rate of 17%. For each project, the resulting net present value was multiplied by
a percentage of completion based on effort expended to date versus projected
costs to complete.
Also in 1999, a $145 million charge for restructuring and exit costs was
recorded as part of AT&T's initiative to reduce costs. The restructuring and
exit plans primarily focused on the maximization of synergies through headcount
reductions in AT&T Business Services, including network operations, primarily
for the consolidation of customer-care and call centers.
Included in exit costs was $142 million of cash termination benefits
associated with the separation of approximately 2,800 employees as part of
voluntary and involuntary termination plans. Approximately one-half of the
separations were management employees and one-half were non-management
employees. Approximately 1,700 employee separations were related to involuntary
terminations and approximately 1,100 to voluntary terminations.
AT&T also recorded net losses of $307 million related to the
government-mandated disposition of certain international businesses that would
have competed directly with Concert, and $50 million related to a contribution
agreement AT&T Broadband entered into with Phoenixstar, Inc. That agreement
requires AT&T Broadband to satisfy certain liabilities owed by Phoenixstar and
its subsidiaries. The remaining obligation under this contribution agreement and
an agreement that MediaOne had is $35 million, which was fully accrued for at
December 31, 2001. In addition, AT&T recorded benefits of $121 million related
to the settlement of pension obligations for former employees who accepted
AT&T's 1998 voluntary retirement incentive program (VRIP) offer.
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
2001 2000 1999
------ ------ -------
DOLLARS IN MILLIONS
Operating income.......................................... $3,754 $4,228 $11,458
In 2001, operating income decreased $0.5 billion, or 11.2%. The decline was
primarily attributable to accelerating declines in the long distance business.
In addition, the acquisition of MediaOne and net dispositions negatively
impacted operating income by $0.7 billion. Significantly offsetting these
decreases was the net impact of Excite@Home (including the effect of lower asset
impairments).
Operating income decreased $7.2 billion, or 63.1%, in 2000 compared with
1999. The decrease was primarily due to higher net restructuring and other
charges of $6.1 billion. Also contributing to the decrease was the impact of the
acquisition of MediaOne and the consolidation of Excite@Home, which lowered
operating income by $1.5 billion. A majority of the impact of operating losses
and the restructuring charge generated by Excite@Home was offset in "Minority
interest income (expense)" in the Consolidated Statement of Income, reflecting
the approximate 77% of Excite@Home AT&T does not own. Partially offsetting these
decreases were cost-control initiatives and a larger pension credit associated
with AT&T's mature long distance businesses and related support groups,
partially offset by lower long distance revenue.
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
2001 2000 1999
------- ------ ----
DOLLARS IN MILLIONS
Other (expense) income...................................... $(1,547) $1,150 $826
VI-13
Other (expense) income in 2001 was an expense of $1.5 billion compared with
income of $1.2 billion in 2000. The unfavorable variance of $2.7 billion was
driven primarily by higher investment impairment charges of $0.8 billion, mostly
consisting of impairments of Vodafone plc and Time Warner Telecom. Also
contributing to the higher expense was an expense of $0.8 billion reflecting
mark-to-market charges in conjunction with the adoption of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" and $0.8 billion
of lower net gains on the sales of businesses and investments.
Other (expense) income improved $0.3 billion, or 39.3%, in 2000 compared
with 1999. This improvement was primarily due to greater net gains on sales of
businesses and investments of approximately $0.7 billion, and higher
investment-related income of approximately $0.3 billion. The higher gains on
sales were driven by significant gains associated with the swap of cable
properties with Comcast and Cox, the sale of AT&T's investment in Lenfest and
related transactions, which gains aggregated approximately $0.5 billion. In
1999, AT&T recorded significant gains associated with the sale of its Language
Line Services business and a portion of our ownership interest in AT&T Canada,
which aggregated approximately $0.3 billion. Offsetting the improvements to
other (expense) income in 2000 was an approximate $0.5 billion charge reflecting
the increase in the fair value of put options held by Comcast and Cox related to
Excite@Home stock, and approximately $0.2 billion of higher investment
impairment charges.
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
2001 2000 1999
------ ------ ------
DOLLARS IN MILLIONS
Interest expense........................................... $3,242 $2,964 $1,503
In 2001, interest expense increased $0.3 billion, or 9.4%. The increase was
due primarily to a higher average debt balance in 2001, compared with 2000. The
higher average debt balance was primarily a result of AT&T's June 2000
acquisition of MediaOne, including outstanding debt of MediaOne and debt issued
to fund the MediaOne acquisition. The impact of MediaOne was partially offset by
AT&T's debt reduction efforts in 2001.
Interest expense increased 97.2%, or $1.5 billion, in 2000 compared with
1999. The increase was primarily due to a higher average debt balance as a
result of our June 2000 acquisition of MediaOne, including outstanding debt of
MediaOne and debt issued to fund the MediaOne acquisition, and AT&T's March 1999
acquisition of TCI.
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
2001 2000 1999
----- ------ ------
DOLLARS IN MILLIONS
(Benefit) provision for income taxes........................ $(791) $3,284 $4,016
The effective income tax rate is the (benefit) provision for income taxes
as a percent of (loss) income from continuing operations before income taxes.
The effective income tax rate was 76.4% in 2001, 136.1% in 2000 and 37.3% in
1999. In 2001, the effective tax rate was positively impacted by a significant
net tax benefit related to Excite@Home, including a benefit from the
deconsolidation and the put obligation settlement with Cox and Comcast,
partially offset by the prior consolidation of its operating losses (which
included asset impairment charges) for which AT&T was unable to record tax
benefits. Also positively impacting the effective tax rate was the net impact of
a tax-free exchange with Comcast of AT&T stock held by Comcast for an entity
owning certain cable systems and the resulting reduction of a previously
established deferred tax liability. In addition, a benefit was recognized
associated with the tax-free gain from the disposal of a portion of AT&T's
retained interest in AT&T Wireless in a debt-for-equity exchange.
In 2000, the effective tax rate was negatively impacted by Excite@Home, for
which AT&T was unable to record tax benefits associated with its pretax losses.
Therefore, the $4.6 billion restructuring charges taken by Excite@Home in 2000
had no associated tax benefit. AT&T also recorded a related
VI-14
nondeductible asset impairment charge of $1.6 billion associated with its
acquisition of Excite@Home and a nondeductible charge to reflect the increase in
the fair value of the put options related to Excite@Home held by Comcast and
Cox, both of which negatively impacted the effective tax rate. The 2000
effective tax rate was positively impacted by a tax-free gain resulting from an
exchange of AT&T stock for an entity owning certain cable systems and other
assets with Cox and the benefit of the write-off of the related deferred tax
liability.
The 1999 effective tax rate was negatively impacted by a non-tax-deductible
research and development charge, but positively impacted by a change in the net
operating loss utilization tax rules that resulted in a reduction in the
valuation allowance and the income tax provision.
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
2001 2000 1999
---- ------ -----
DOLLARS IN MILLIONS
Minority interest income (expense).......................... $963 $4,103 $(126)
Minority interest income (expense), which is recorded net of income taxes,
represents an adjustment to AT&T's income to reflect the less than 100%
ownership of consolidated subsidiaries as well as dividends on preferred stock
issued by subsidiaries of AT&T. Minority interest income (expense) decreased
$3.1 billion in 2001 compared with 2000 primarily due to lower losses generated
by Excite@Home, mainly as a result of lower goodwill impairment charges recorded
by Excite@Home in 2001 compared with 2000. As a result of significant losses
incurred by Excite@Home, AT&T fully utilized the minority interest balance
during the third quarter of 2001; therefore, AT&T no longer recorded minority
interest income related to Excite@Home.
The $4.2 billion increase in minority interest income (expense) in 2000
resulted from the consolidation of Excite@Home effective September 1, 2000. The
minority interest income in 2000 primarily reflects losses generated by
Excite@Home, including the goodwill impairment charge, that were attributable to
the approximate 77% of Excite@Home not owned by AT&T.
The income tax benefit within minority interest income (expense) was $100
million in both 2001 and 2000, and a benefit of $54 million in 1999.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2001 2000 1999
------- ------ -------
DOLLARS IN MILLIONS
Equity (losses) earnings from Liberty Media Group........ $(2,711) $1,488 $(2,022)
Equity (losses) earnings from LMG, which are recorded net of income taxes,
were a loss of $2.7 billion in 2001, compared with earnings of $1.5 billion in
2000. The decline of $4.2 billion was largely driven by gains on dispositions
recorded in 2000, including gains associated with the mergers of various
companies that LMG had investments in, as well as higher stock compensation
expense in 2001 compared with 2000. Partially offsetting these declines were
lower impairment charges recorded on LMG's investments to reflect other than
temporary declines in value. Equity losses for 2001 reflect results through July
31, 2001, the deemed effective date of the split-off.
Equity (losses) earnings from LMG were earnings of $1.5 billion in 2000,
compared with losses of $2.0 billion in 1999. The improvement was primarily due
to gains on dispositions, including gains associated with the mergers of various
companies that LMG had investments in. Gains were recorded for the difference
between the carrying value of LMG's interest in the acquired company and the
fair value of securities received in the merger. In addition, lower stock
compensation expense in 2000 compared with 1999 contributed to the improvement.
These were partially offset by impairment charges recorded on
VI-15
LMG's investments to reflect other than temporary declines in value and higher
losses relating to LMG's equity affiliates.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
2001 2000 1999
------ ---- ----
DOLLARS IN MILLIONS
Net losses related to other equity investments.............. $4,850 $588 $756
Net losses related to other equity investments were $4.9 billion in 2001
compared with $0.6 billion in 2000, an increase of approximately $4.3 billion.
The increase was driven primarily by higher net equity investment impairment
charges of $4.3 billion. The pretax impairment charges were $7.0 billion and
consisted primarily of $3.0 billion in charges related to the estimated loss on
AT&T's commitment to purchase the shares of AT&T Canada AT&T does not own, a
$2.9 billion impairment charge related to the unwind of Concert and an
impairment of AT&T's investment in Net2Phone of $1.1 billion. In addition, AT&T
recorded higher equity losses of $0.7 billion from Concert and Net2Phone. These
losses were partially offset by $0.6 billion in losses recorded for Excite@Home
in the first eight months of 2000 when AT&T recorded the investment as an equity
method investment. Excite@Home was fully consolidated beginning in September
2000.
In 2000, net losses related to other equity investments were $0.6 billion,
a 22.2% improvement compared with 1999. This improvement was primarily a result
of higher earnings from AT&T's investment in Cablevision Systems Corp.
(Cablevision) of approximately $0.2 billion due to gains from cable-system
sales. Partially offsetting this improvement were losses from AT&T's stake in
TWE, which AT&T acquired in connection with the MediaOne merger, and greater
equity losses from Excite@Home, which aggregated approximately $0.1 billion.
The income tax benefit recorded on net losses related to other equity
investments was $0.4 billion in both 2001 and 2000, and a benefit of $0.5
billion in 1999. The amortization of excess basis associated with
nonconsolidated investments, recorded as a reduction of income, totaled $0.2
billion in 2001, and $0.5 billion in both 2000 and 1999. Effective January 1,
2002, in accordance with the provisions of SFAS No. 142, AT&T will no longer
amortize excess basis related to nonconsolidated investments.
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
2001 2000 1999
------- ---- ----
DOLLARS IN MILLIONS
Gain on disposition of discontinued operations.............. $13,503 $-- $--
In 2001, AT&T realized a gain on the disposition of discontinued operations
of $13.5 billion, representing the difference between the fair value of the AT&T
Wireless tracking stock on July 9, 2001, the date of the split-off, and AT&T's
book value in AT&T Wireless Services.
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
2001 2000 1999
----- ----- -----
DOLLARS IN MILLIONS
Cumulative effect of accounting change...................... $904 $-- $--
Cumulative effect of accounting change, net of applicable income taxes, is
comprised of $0.4 billion for AT&T Group (other than LMG) and $0.5 billion for
LMG in 2001. The $0.4 billion recorded by AT&T, excluding LMG, was attributable
primarily to fair value adjustments of equity derivative instruments embedded in
indexed debt instruments and warrants held in public and private companies due
to the adoption of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities."
VI-16
The $0.5 billion recorded by LMG represents the impact of separately
recording the embedded call option obligations associated with LMG's senior
exchangeable debentures due to the adoption of SFAS No. 133.
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
2001 2000 1999
----- ----- -----
DOLLARS IN MILLIONS
Dividend requirements of preferred stock.................... $652 $-- $--
Dividend requirements of preferred stock were $0.7 billion in 2001. The
preferred stock dividend represented interest in connection with convertible
preferred stock issued to NTT DoCoMo in January of 2001 as well as accretion of
the beneficial conversion feature associated with this preferred stock. The
beneficial conversion feature was recorded upon the issuance of the NTT DoCoMo
preferred stock and represented the excess of the fair value of the preferred
shares issued over the proceeds received. On July 9, 2001, in conjunction with
the split-off of AT&T Wireless Group, these preferred shares were converted into
AT&T Wireless common stock. As a result, AT&T fully amortized the remaining
beneficial conversion feature balance.
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
2001 2000 1999
----- ----- -----
DOLLARS IN MILLIONS
Premium on exchange of AT&T Wireless tracking stock......... $80 $-- $--
The premium on exchange of AT&T Wireless tracking stock was $80 million in
2001. The premium, which is a reduction of net income available to common
shareowners, represents the excess of the fair value of the AT&T Wireless
tracking stock issued over the fair value of the AT&T common stock exchanged and
was calculated based on the closing share prices of AT&T common stock and AT&T
Wireless tracking stock on May 25, 2001.
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
2001 2000 1999
------- ------ ------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
AT&T Common Stock Group -- per basic share:
(Loss) earnings from continuing operations................ (1.33) 0.76 1.91
AT&T Common Stock Group earnings.......................... 2.50 0.89 1.77
AT&T Common Stock Group -- per diluted share:
(Loss) earnings from continuing operations................ (1.33) 0.75 1.87
AT&T Common Stock Group earnings.......................... 2.50 0.88 1.74
In 2001, AT&T had a loss from continuing operations before cumulative
effect of accounting change per diluted share of $1.33, compared with earnings
of $0.75 per diluted share in 2000. The decline of $2.08 per diluted share was
primarily attributable to an unfavorable variance in net losses related to other
equity investments, other (expense) income and lower operating income, excluding
net restructuring and other charges, in 2001 compared with 2000, partially
offset by lower net restructuring and other charges in 2001.
Earnings per diluted share (EPS) attributable to continuing operations of
the AT&T Common Stock Group were $0.75 in 2000 compared with $1.87 in 1999, a
decrease of 59.9%. The decrease was primarily due to higher restructuring and
asset impairment charges and the MediaOne acquisition, including the impact of
shares issued, operating losses of MediaOne and additional interest expense.
Also contributing to the decrease was the impact of Excite@Home, including the
mark-to-market adjustment related to the put options held by Comcast and Cox.
These decreases were partially offset by improvements in other (expense) income,
primarily associated with higher net gains on sales of businesses and
investments, and higher investment-related income, and lower losses from equity
investments. Also impacting EPS was higher operating income associated with our
mature long distance businesses.
VI-17
In 2001, diluted EPS of AT&T Common Stock Group of $2.50 included a loss
from continuing operations as discussed above of $1.33, income from discontinued
operations of $0.03, a gain on the disposition of discontinued operations of
$3.70 and income related to the cumulative effect of accounting change of $0.10.
In 2000, diluted EPS of AT&T Common Stock Group of $0.88 included earnings from
continuing operations as discussed above of $0.75 and income from discontinued
operations of $0.13. In 1999, diluted EPS of AT&T Common Stock Group of $1.74
included earnings from continuing operations as discussed above of $1.87 and a
loss from discontinued operations of $0.13.
LMG reported a loss per share, excluding the cumulative effect of an
accounting change, of $0.84 in 2001 through its split-off from AT&T on August
10, 2001. In 2000, LMG reported earnings per basic and diluted share of $0.58.
The decline of $1.42 per share was primarily due to gains on dispositions
reported in 2000, including gains associated with the mergers of various
companies that LMG had investments in. Partially offsetting the decline were
charges recorded on LMG's investments in 2000.
EPS for LMG was $0.58 in 2000, compared with a loss of $0.80 per share in
1999. The increase in EPS was primarily due to gains on dispositions, including
gains associated with the mergers of various companies that LMG had investments
in. In addition, lower stock compensation expense in 2000 compared with 1999
contributed to the increase. These increases were partially offset by impairment
charges recorded on LMG's investments to reflect other than temporary declines
in value and higher losses relating to LMG's equity affiliates.
In 2001, EPS for the AT&T Wireless Group, through its split-off date from
AT&T on July 9, 2001, was $0.08 per basic and diluted share. EPS for AT&T
Wireless Group for the period from April 27, 2000, the stock offering date,
through December 31, 2000, was $0.21 per basic and diluted share.
DISCONTINUED OPERATIONS
Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the consolidated financial statements of AT&T reflect the
disposition of AT&T Wireless, which was split-off from AT&T on July 9, 2001, as
discontinued operations. Accordingly, the revenue, costs and expenses, and cash
flows of AT&T Wireless through June 30, 2001, the effective split-off date for
accounting purposes, have been excluded from the respective captions in the
2001, 2000 and 1999 Consolidated Statements of Income and Consolidated
Statements of Cash Flows and have been reported as "Income (loss) from
discontinued operations," net of applicable income taxes; and as "Net cash
provided by (used in) discontinued operations." The assets and liabilities of
AT&T Wireless have been excluded from the respective captions in the December
31, 2000 Consolidated Balance Sheet, and are reported as "Net assets of
discontinued operations." The gain associated with the disposition of AT&T
Wireless is recorded as "Gain on disposition of discontinued operations," in the
Consolidated Statement of Income.
SEGMENT RESULTS
In support of the services AT&T provided in 2001, AT&T segments its results
by the operating units that support its primary lines of business: AT&T Business
Services, AT&T Consumer Services and AT&T Broadband. The balance of AT&T's
operations, excluding LMG, is included in a corporate and other category.
Although not a segment, AT&T also discusses the results of LMG prior to its
split-off as an independent company.
EBIT and EBITDA are the primary measures used by AT&T's chief operating
decision makers to measure AT&T's operating results and to measure segment
profitability and performance. AT&T calculates EBIT as operating income (loss)
plus other income (expense), pretax minority interest income (expense) and net
pretax losses related to other equity investments. EBITDA is defined as EBIT,
excluding minority interest income (expense) other than Excite@Home's minority
interest income (expense), plus depreciation and amortization. Interest and
income taxes are not factored into the segment profitability measure used by the
chief operating decision makers; therefore, trends for these items are
VI-18
discussed on a consolidated basis. Management believes EBIT and EBITDA are
meaningful to investors because they provide analyses of operating results using
the same measures used by AT&T's chief operating decision makers. In addition,
AT&T believes that both EBIT and EBITDA allow investors a means to evaluate the
financial results of each segment in relation to total AT&T. EBIT for AT&T was a
deficit of $4.8 billion and earnings of $8.4 billion and $10.9 billion for the
years ended December 31, 2001, 2000 and 1999, respectively. EBITDA for AT&T was
$4.7 billion, $17.1 billion and $17.7 billion for the years ended December 31,
2001, 2000 and 1999, respectively. AT&T's calculations of EBIT and EBITDA may or
may not be consistent with the calculation of these measures by other public
companies. EBIT and EBITDA should not be viewed by investors as an alternative
to generally accepted accounting principles (GAAP) measures of income as a
measure of performance or to cash flows from operating, investing and financing
activities as a measure of liquidity. In addition, EBITDA does not take into
account changes in certain assets and liabilities as well as interest and income
taxes which can affect cash flow.
The discussion of segment results includes revenue, EBIT, EBITDA, capital
additions and total assets. The discussion of EBITDA for AT&T Broadband is
modified to exclude other income (expense) and net pretax losses related to
equity investments. Total assets for each segment generally include all assets,
except intercompany receivables. Prepaid pension assets and corporate-owned or
leased real estate are generally held at the corporate level, and therefore are
included in the corporate and other group. In addition, all impacts of the
adoption of SFAS No. 133, as well as the ongoing investment and derivative
revaluation, are reflected in the corporate and other group. The net assets of
discontinued operations and the related income (loss) and gain on disposition
are not reflected in the corporate and other group. Capital additions for each
segment include capital expenditures for property, plant and equipment,
acquisitions of licenses, additions to nonconsolidated investments, increases in
franchise costs and additions to internal-use software.
In connection with AT&T's corporate restructuring program set forth in late
2000, AT&T's existing segments reflect certain managerial changes that were
implemented during 2001. The changes are as follows: AT&T Business Services was
expanded to include the results of international operations and ventures. In
addition, certain corporate costs that were previously recorded within the
corporate and other group have been allocated to the respective segments in an
effort to ultimately have the results of these businesses reflect all direct
corporate costs as well as overhead for shared services. All prior period
results have been restated to reflect these changes.
Reflecting the dynamics of its business, AT&T continuously reviews its
management model and structure, which may result in additional adjustments to
our operating segments in the future.
VI-19
AT&T BUSINESS SERVICES
AT&T Business Services offers a variety of global communications services
to small and medium-sized businesses, large domestic and multinational
businesses and government agencies. AT&T Business' services include long
distance, international, toll-free and local voice; data and IP networking;
managed networking services and outsourcing solutions; and wholesale transport
services (sales of services to service resellers).
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
DOLLARS IN MILLIONS
External revenue
Services revenue...................................... $27,056 $27,972 $28,070
Equipment and product sales revenue................... 228 185 17
Total external revenue.................................. $27,284 $28,157 $28,087
Internal revenue........................................ 740 743 605
Total revenue........................................... 28,024 28,900 28,692
EBIT.................................................... (2,154) 5,990 5,248
EBITDA.................................................. 1,949 10,200 9,468
Capital additions....................................... 5,456 6,839 9,091
AT DECEMBER 31,
-----------------
2001 2000
------- -------
Total assets............................................ $40,339 $42,747
REVENUE
In 2001, AT&T Business Services revenue decreased $0.9 billion, or 3.0%, to
$28.0 billion. A decline in long distance voice revenue of approximately $2.1
billion drove the revenue decline. Significantly offsetting the decline was
approximately $1.4 billion of growth in data and IP services, local voice
services and outsourcing solutions, including equipment sales.
In 2000, AT&T Business Services revenue grew $0.2 billion, or 0.7%,
compared with 1999. Strength in data and IP services as well as growth in
outsourcing solutions contributed $1.8 billion to the increase. This growth was
largely offset by an approximate $0.9 billion decline in long distance voice
services as a result of continued pricing pressures in the industry and
approximately $0.5 billion due to the net impacts of Concert, international
dispositions and acquisitions.
In 2001, long distance voice revenue declined at a low-teen percentage rate
reflecting the continuing impact of pricing pressures, mitigated somewhat by
volume growth. While volumes grew at a low single-digit percentage rate, the
rate of growth declined from a high single-digit percentage growth rate in 2000,
reflecting the economic weakness impacting many key industry sectors, including
travel, financial services, technology and retail, as well as the impact of
wireless and e-mail substitution. These factors, along with pricing pressures,
are expected to continue to negatively impact revenue in 2002. In 2000, long
distance voice services revenue declined at a mid single-digit percentage rate
after excluding the impact of Concert. The decline was primarily due to a
declining average price per minute reflecting the competitive forces within the
industry. Partially offsetting this decline was the high single-digit percentage
growth rate in volumes.
Data and IP services (including related product sales) grew at a low
double-digit percentage rate in 2001 compared with 2000. The growth was led by
packet services, which include frame relay, IP and Asynchronous Transfer Mode
(ATM). Packet services grew at a rate in the mid-20 percent range. Total IP
services (a component of packet services), which include IP connectivity
services, Virtual Private Network (VPN) services and hosting services, also grew
in the mid-20 percent rate range. The rate of growth of data services revenue
declined in 2001 due primarily to a slow-down in the rate of growth of
VI-20
high-speed private line services and frame relay services as well as a decline
in international private line services. In 2002, AT&T expect data and IP revenue
to grow; however, AT&T expects the growth rate to decline from the 2001 growth
rate.
The 2000 data and IP services growth rate (including related product
sales), as compared with 1999, was impacted by acquisitions and the formation of
Concert. Excluding these impacts, data services grew at a high-teens percentage
rate. Growth was led by the continued strength of frame relay services; IP
services, which include IP-connectivity services and VPN services; and
high-speed private-line services.
Local voice services revenue grew more than 20% in 2001 compared with 2000,
and grew nearly 20% in 2000 compared with 1999. In 2001, AT&T added more than
670 thousand access lines and added more than 867 thousand lines in 2000. Access
lines at the end of 2001 and 2000 were more than 2.9 million and nearly 2.3
million, respectively. Access lines enable AT&T to provide local service to
customers by allowing direct connection from customer equipment to the AT&T
network. At the end of 2001, AT&T served more than 6,300 buildings on-network
(buildings where AT&T owns the connection that runs into the building),
representing an increase of approximately 3.2% over 2000. At the end of 2000,
AT&T served more than 6,100 buildings on-network, compared with slightly more
than 5,800 buildings at the end of 1999. In 2002, AT&T expects local voice
services revenue to grow; however, AT&T expects the growth rate to decline from
the 2001 growth rate.
AT&T Business Services internal revenue was essentially flat in 2001
compared with 2000, and increased $138 million, or 22.7%, in 2000 compared with
1999. The impact of internal revenue is included in the revenue by product
discussions, above. In 2001, AT&T Business Services had lower internal revenue
due to the split-off of AT&T Wireless on July 9, 2001, as these sales are now
reported as external revenue. This decrease was almost entirely offset by
greater sales of services to other AT&T units, primarily AT&T Broadband. The
increase in 2000 was the result of greater sales of business long distance
services to other AT&T units that resell such services to their external
customers, primarily AT&T Broadband and AT&T Wireless.
EBIT/EBITDA
In 2001, EBIT decreased $8.1 billion, or 136.0%, compared with 2000. EBITDA
declined $8.3 billion, or 80.9%, in 2001 compared with 2000. The declines in
EBIT and EBITDA were primarily due to charges of $3.0 billion in 2001, related
to the estimated loss on AT&T's commitment to purchase the remaining public
shares of AT&T Canada, and charges of $2.9 billion in 2001 related to the unwind
of Concert. Also reflected in the declines was the impact of pricing pressure
within the long distance voice business, as well as a shift from higher margin
long distance services to lower margin growth services. In 2002, EBIT and EBITDA
are expected to improve, primarily due to the 2001 charges AT&T recorded related
to AT&T Canada and the unwind of Concert, partially offset by lower net gains
recorded in other (expense) income and lower operating income, reflecting
continued softness in the long distance market.
EBIT improved $0.7 billion, or 14.2%, and EBITDA improved $0.7 billion, or
7.7%, in 2000 compared with 1999. The improvements reflect an increase in
revenue and lower costs as a result of AT&T's continued cost-control efforts,
partially offset by the formation of Concert and the acquisition of AGNS.
OTHER ITEMS
Capital additions decreased $1.4 billion in 2001, and decreased $2.3
billion in 2000. In 2001, the decrease was a result of lower capital
expenditures for the AT&T world-wide intelligent network, as well as a reduced
investment in Concert. In 2000 the decrease was a result of lower spending for
AT&T's network and lower infusions into nonconsolidated international
investments.
Total assets decreased $2.4 billion, or 5.6%, at December 31, 2001,
compared with December 31, 2000. The decrease was primarily due to a decline in
AT&T's investments in nonconsolidated subsidiaries, primarily due to the
write-down of AT&T's investment in Concert and equity losses from Concert, and
VI-21
reduced receivables resulting from lower revenue and increased collection
efforts. These declines were partially offset by an increase in property, plant
and equipment.
AT&T CONSUMER SERVICES
AT&T Consumer Services provides a variety of communications services to
residential customers including domestic and international long distance;
transaction based long distance, such as operator assisted service and prepaid
phone cards; local and local toll (intrastate calls outside the immediate local
area); and dial-up Internet.
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
DOLLARS IN MILLIONS
Revenue................................................. $15,079 $18,894 $21,753
EBIT.................................................... 4,875 6,893 7,619
EBITDA.................................................. 5,075 7,060 7,803
Capital additions....................................... 140 148 299
AT DECEMBER 31,
-----------------
2001 2000
------- -------
Total assets............................................ $ 2,141 $ 3,150
REVENUE
AT&T Consumer Services revenue declined $3.8 billion, or 20.2%, in 2001
compared with 2000. The decline was primarily due to a $3.7 billion decline in
traditional voice services, such as domestic and international dial services
(long distance calls where the number "1" is dialed before the call), and
domestic calling card services. The traditional voice services were negatively
impacted by an acceleration of wireless and e-mail product substitution, and the
impact of ongoing competition, which has led to a loss of market share. In
addition, the continued migration of customers to lower-priced products and
optional calling plans has also negatively impacted revenue. As a result of the
acceleration of substitution and competition, calling volumes declined at a low
double-digit percentage rate in 2001. The revenue decline also reflects a $0.5
billion impact due to the elimination of per-line charges in July 2000.
Partially offsetting these revenue declines was revenue growth of $0.6 billion
for prepaid card and local services. AT&T expects product substitution,
competition (including the continued entry of the Regional Bell Operating
Companies into the long distance market) and customer migration to lower-priced
calling plans and products to continue to negatively impact AT&T Consumer
Services revenue in 2002.
In 2000, AT&T Consumer Services revenue decreased 13.1%, or $2.9 billion,
compared with 1999. Approximately $0.9 billion of the decline was due to the
elimination of per-line charges in 2000 and the impact of Concert. The remainder
of the decline was primarily due to a decline in traditional voice services,
reflecting the ongoing competitive nature of the consumer long distance
industry, which has resulted in pricing pressures and a loss of market share.
Also negatively impacting revenue was product substitution and market migration
away from direct-dial wireline and higher-priced calling-card services to the
rapidly growing wireless services and lower-priced prepaid-card services. As a
result, calling volumes declined at a mid single-digit percentage rate in 2000.
EBIT/EBITDA
EBIT declined $2.0 billion, or 29.3%, and EBITDA declined $2.0 billion, or
28.1%, in 2001 compared with 2000. In 2001, EBIT and EBITDA margins declined to
32.3% and 33.7%, from 36.5% and 37.4% in 2000, respectively. As customers
substitute long distance calling with wireless and e-mail services and migrate
to lower priced calling plans and lower margin products, they tend to remain
AT&T Consumer Services customers. These customers generate less revenue,
however, the billing, customer care and fixed costs remain, resulting in lower
EBIT margins. The margin decline was also impacted by a slight increase
VI-22
in marketing spending targeted at high value customers, partially offset by a
$0.2 billion settlement of disputes relating to obligations resulting from the
sale of AT&T Universal Card Services to Citigroup in 1998, as well as cost
control initiatives. In 2002, AT&T expects the impacts of revenue decline to
continue to negatively impact EBIT and EBITDA.
EBIT and EBITDA both declined $0.7 billion, or 9.5%, in 2000 compared with
1999. The declines primarily reflect the decline in the long distance business,
offset somewhat by cost-control initiatives. In addition, the declines reflect
$0.2 billion of lower gains on sales of businesses, due primarily to the 1999
sale of Language Line Services, and higher restructuring charges. Reflecting
AT&T's cost-control initiatives, EBIT and EBITDA margins in 2000 improved to
36.5% and 37.4%, respectively, compared with 35.0% and 35.9%, respectively, in
1999.
OTHER ITEMS
In 2001, capital additions decreased $8 million, or 5.2%, compared with
2000. Capital additions decreased $0.2 billion, or 50.6%, in 2000 compared with
1999 as a result of reduced spending on internal-use software, as most of the
functionality upgrades were completed in 1999.
Total assets declined $1.0 billion, or 32.0%, in 2001. The decline was
primarily due to lower accounts receivable, reflecting lower revenue.
AT&T BROADBAND
AT&T Broadband offers a variety of services through its cable (broadband)
network, including traditional analog video and advanced services, such as
digital video, high-speed data and broadband telephony.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
--------- --------- --------
DOLLARS IN MILLIONS
External revenue...................................... $ 9,785 $ 8,212 $ 5,069
Internal revenue...................................... 14 14 1
Total revenue......................................... 9,799 8,226 5,070
EBIT.................................................. (3,215) (1,240) (1,545)
EBITDA*............................................... 2,040 1,639 733
Capital additions..................................... 3,607 4,968 4,759
AT DECEMBER 31,
-------------------
2001 2000
-------- --------
Total assets.......................................... $103,060 $114,848
- ---------------
* EBITDA for AT&T Broadband excludes net losses related to equity investments
and other income (expense).
Results of operations for the year ended December 31, 2001, include a full
twelve months of MediaOne operations, while the year ended December 31, 2000,
includes the results of MediaOne since its acquisition on June 15, 2000, and the
year ended December 31, 1999, does not include any results of MediaOne.
Additionally, the results of operations for the year ended December 31, 1999,
include 10 months of TCI's results, reflecting its acquisition in March 1999,
while 2000 and 2001 include a full 12 months of TCI's results.
REVENUE
AT&T Broadband revenue grew $1.6 billion in 2001, or 19.1%, compared with
2000. Approximately $0.6 billion of the increase was due to the acquisition of
MediaOne, partially offset by the net dispositions of cable systems. In
addition, the increase was attributable to revenue growth from advanced services
VI-23
(broadband telephony and high-speed data) of approximately $0.6 billion and
growth in other video services, primarily expanded basic cable and digital
video, of approximately $0.4 billion. AT&T expects 2002 revenue to increase as
demand for advanced services continues to grow.
AT&T Broadband revenue grew $3.2 billion in 2000, or 62.3%, compared with
1999. Approximately $2.8 billion of the increase in revenue was due to the
acquisition of MediaOne in 2000 and TCI in 1999. In addition, revenue from
advanced services and a basic-cable rate increase contributed approximately $0.4
billion to the revenue increase.
At December 31, 2001, AT&T Broadband serviced approximately 13.6 million
basic cable customers, passing approximately 24.6 million homes, compared with
16.0 million basic cable customers, passing approximately 28.3 million homes at
December 31, 2000. The decrease in the number of homes passed and basic cable
customers primarily reflect the net disposition of cable systems in 2001. In
addition, the number of basic cable customers declined due to the impacts of
competition. At December 31, 2001, AT&T provided digital video service to
approximately 3.5 million customers, high-speed data service to approximately
1.5 million customers and broadband telephony service to approximately 1.0
million customers. This compares with approximately 2.8 million digital-video
customers, approximately 1.1 million high-speed data customers, and
approximately 547 thousand broadband telephony customers at December 31, 2000.
These amounts reflect the acquisition of MediaOne. At December 31, 1999, AT&T
Broadband serviced approximately 11.4 million basic cable customers, passing
approximately 19.7 million homes. At December 31, 1999, AT&T provided digital
video service to approximately 1.8 million customers, high-speed data service to
approximately 207 thousand customers and broadband telephony service to nearly
8,300 customers.
EBIT/EBITDA
The EBIT deficit in 2001 increased $2.0 billion to $3.2 billion from the
2000 deficit of $1.2 billion. The increased deficit was largely due to the
impacts of the acquisition of MediaOne and the net dispositions of cable systems
of approximately $0.8 billion, as well as a $0.9 billion impact of net losses on
the sales of businesses and investments recorded in 2001 compared with net gains
recorded in 2000. In 2001, AT&T recorded net losses from the sale of cable
properties to Comcast, as well as a loss on the sale of part of AT&T's ownership
interest in Cablevision. In 2000, AT&T recorded a gain on the sale of Lenfest
and gains on the sales of properties to Cox and Comcast. Also contributing to
the increased deficit were higher depreciation and amortization, programming and
advertising expenses and higher restructuring and other charges of approximately
$0.8 billion, as well as greater investment impairment charges of $0.4 billion.
These increases to the deficit were partially offset by $0.3 billion of lower
pretax equity losses, improved EBIT of approximately $0.4 billion in other video
services, primarily expanded basic cable and digital video, and improved EBIT in
advanced services of approximately $0.2 billion.
EBITDA, which excludes net losses related to equity investments and other
income (expense), was $2.0 billion in 2001, an improvement of $0.4 billion
compared with $1.6 billion in 2000. This improvement was primarily due to the
acquisition of MediaOne of $0.4 billion and improved EBITDA in other video
services, primarily expanded basic cable and digital video, of approximately
$0.4 billion and improved EBITDA in advanced services of approximately $0.2
billion. Partially offsetting this improvement was the impact of net
dispositions of cable systems of $0.4 billion, increased programming and
advertising expenses of $0.2 billion, and higher restructuring and other charges
of $0.1 billion.
In 2002, AT&T expects EBITDA, which excludes net losses related to equity
investments and other income (expense), to increase as a result of expense
reductions generated from previous years' restructuring charges as well as
continued growth from advanced services (broadband telephony and high-speed
data).
EBIT in 2000 was a deficit of $1.2 billion, an improvement of $0.3 billion,
or 19.7% compared with 1999. This improvement was due to approximately $0.5
billion of higher gains on sales of businesses and investments, primarily gains
on the swap of cable properties with Cox and Comcast and the sale of AT&T's
investment in Lenfest, and $0.4 billion lower restructuring charges primarily
associated with an
VI-24
in-process research and development charge recorded in connection with the 1999
acquisition of TCI. Also contributing to the improvement were lower pretax
losses from equity investments of $0.5 billion, due in part to a $0.3 billion
improvement from AT&T's investment in Cablevision due to gains from cable-system
sales. These improvements were largely offset by the impact of the acquisition
of MediaOne and TCI of approximately $0.5 billion and higher expenses associated
with high-speed data and broadband telephony services of approximately $0.4
billion.
EBITDA, which excludes net losses related to equity investments and other
income, was $1.6 billion in 2000, an improvement of $0.9 billion compared with
1999. This improvement was due to the impact of the MediaOne and TCI
acquisitions of $0.7 billion and lower restructuring charges of $0.4 billion.
Higher expenses associated with high-speed data and broadband telephony of
approximately $0.2 billion partially offset these increases.
OTHER ITEMS
Capital additions decreased $1.4 billion, or 27.4%, to $3.6 billion in
2001, from $5.0 billion in 2000. This decrease was primarily driven by a $0.9
billion decrease in capital expenditures combined with a $0.5 billion decrease
in infusions into nonconsolidated investments. The 2001 spending was primarily
related to the growth and support of advanced services and plant upgrade
expenditures.
Capital additions increased 4.4% to $5.0 billion in 2000, from $4.8 billion
in 1999. The increase was due to higher capital expenditures of $0.8 billion,
primarily due to MediaOne, which was almost entirely offset by decreased
contributions to various nonconsolidated investments of $0.7 billion. The 2000
spending was primarily related to the growth and support of advanced services
and plant upgrade expenditures. In 1999, spending was largely directed toward
cable-distribution systems, focusing on the upgrade of cable plant assets, as
well as equity infusions into various investments.
Total assets at December 31, 2001, decreased $11.8 billion, or 10.3%, to
$103.1 billion compared with $114.8 billion at December 31, 2000. The decrease
in total assets was primarily due to lower franchise costs as a result of the
net disposition of cable systems and the current year amortization; lower
investments, primarily related to the impairment of and settlement of
exchangeable notes with Vodafone ADRs, the sale of certain investments,
including shares of Cablevision and Rainbow Media and unfavorable mark-to-market
adjustments on certain investments; and lower other assets primarily due to
unfavorable mark-to-market adjustments on certain derivative instruments, and
the amortization of purchased intangibles.
CORPORATE AND OTHER
This group reflects the results of corporate staff functions, the
elimination of transactions between segments, as well as the impacts of
Excite@Home.
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- -------
DOLLARS IN MILLIONS
Revenue................................................. $ (352) $ (487) $(542)
EBIT.................................................... (4,324) (3,279) (441)
EBITDA.................................................. (3,737) (2,382) 37
Capital additions....................................... 327 1,683 271
AT DECEMBER 31,
-----------------
2001 2000
------- -------
Total assets.............................................. $19,742 $12,101
VI-25
REVENUE
Revenue for corporate and other primarily includes negative revenue of $0.8
billion in both 2001 and 2000, representing the elimination of intercompany
revenue, and revenue of Excite@Home of $0.4 billion in 2001 and $0.2 billion in
2000. The increase in revenue of Excite@Home is primarily due to nine months of
revenue included in AT&T's 2001 results compared with four months of revenue
included in AT&T's 2000 results. The elimination of intercompany revenue was
essentially flat in 2001 compared with 2000, however, AT&T had a higher
elimination of intercompany revenue in 2001 resulting from increased sales from
AT&T Business Services and Excite@Home to AT&T Broadband, offset by lower
intercompany revenue from AT&T Wireless due to its split-off on July 9, 2001.
Corporate and other revenue was negative $0.5 billion in both 2000 and
1999. Revenue in 2000 primarily included $0.8 billion of negative revenue,
representing the elimination of intercompany revenue, and revenue of Excite@Home
of $0.2 billion. Revenue in 1999 primarily included $0.6 billion of negative
revenue representing the elimination of intercompany revenue.
EBIT/EBITDA
EBIT and EBITDA deficits in 2001 increased $1.0 billion and $1.4 billion to
deficits of $4.3 billion and $3.7 billion, respectively. The deficit increases
were largely due to $1.5 billion of greater investment impairment charges, which
included a $1.1 billion impairment charge for Net2Phone and a $0.3 billion
impairment charge for Time Warner Telecom recorded in 2001; and $0.8 billion of
expense due to the adoption, in 2001, of SFAS No. 133. Also contributing to the
deficit increases were higher restructuring and other charges (other than
Excite@Home) and higher transaction costs associated with AT&T's restructuring
announced in October 2000, totaling $0.4 billion; lower net gains on sales of
investments and lower interest income, totaling $0.4 billion; and a lower
pension credit (income) and higher postretirement expense of $0.3 billion. These
increases to the deficits were largely offset by the improved EBIT and EBITDA of
Excite@Home of $2.6 billion primarily due to the goodwill impairment charges
recorded in 2000 by Excite@Home and AT&T related to Excite@Home, partially
offset by a $0.3 billion greater loss in 2001 on the Excite@Home put obligation
with Cox and Comcast.
In 2000, EBIT and EBITDA deficits increased $2.8 billion and $2.4 billion
to $3.3 billion and $2.4 billion, respectively. The increases in the deficits
were largely related to Excite@Home. In 2000, restructuring and other charges,
net of minority interest, were $2.9 billion higher primarily due to goodwill
impairment charges recorded by Excite@Home and AT&T related to Excite@Home.
Other impacts included a charge of approximately $0.5 billion for the fair
market value increase of put options held by Comcast and Cox related to
Excite@Home, and operating losses from Excite@Home. Partially offsetting these
declines was an increase in the pension credit due to a higher pension trust
asset base resulting from increased investment returns, and lower expenses
associated with AT&T's continued efforts to reduce costs, which aggregated
approximately $0.6 billion. In addition, higher net gains on sales of
investments and an increase in interest income increased EBIT and EBITDA by
approximately $0.6 billion.
OTHER ITEMS
Capital additions decreased $1.4 billion in 2001 and increased $1.4 billion
in 2000. The spike in capital additions in 2000 was driven by AT&T's investment
in Net2Phone.
Total assets increased $7.6 billion, to $19.7 billion in 2001. The increase
was primarily driven by a higher cash balance at December 31, 2001, mainly a
result of proceeds received from AT&T's $10 billion bond offering in November
2001, and an investment in AT&T Wireless (which was monetized in the fourth
quarter of 2001). These increases were partially offset by the impact of
Excite@Home, the write-down of AT&T's investment in Net2Phone and the transfer
of a loan to Concert to the AT&T Business Services segment, which was written
off in the third quarter of 2001.
VI-26
LIBERTY MEDIA GROUP
LMG produces, acquires and distributes entertainment, educational and
informational programming services through all available formats and media. LMG
is also engaged in electronic-retailing services, direct-marketing services,
advertising sales relating to programming services, infomercials and transaction
processing. LMG was split-off from AT&T on August 10, 2001. The operating
results of LMG were reflected as "Equity (losses) earnings from Liberty Media
Group" in the Consolidated Statements of Income prior to its split-off from
AT&T. AT&T's investment in LMG was included in the Consolidated Balance Sheet at
December 31, 2000. Losses from LMG were $2.7 billion in 2001 through July 31,
2001, the deemed effective split-off date for accounting purposes, compared with
earnings of $1.5 billion in 2000. The decline was primarily due to gains on
dispositions reported in 2000, including gains associated with the mergers of
various companies that LMG had investments in. Gains were recorded for the
difference between the carrying value of LMG's interest in the acquired company
and the fair value of securities received in the merger. Partially offsetting
the decline were charges recorded on LMG's investments in 2000, to reflect other
than temporary declines in value. In 2001, LMG also recorded income of $0.5
billion for the cumulative effect of accounting change representing the impact
of separately recording the embedded call option obligations associated with
LMG's senior exchangeable debentures due to the adoption of SFAS No. 133.
In 2000, earnings from LMG were $1.5 billion, compared with losses of $2.0
billion from the date of acquisition through December 31, 1999. The improvement
was primarily due to gains on dispositions, including gains associated with the
mergers of various companies that LMG had investments in. In addition, lower
stock compensation expense in 2000 compared with 1999 contributed to the
improvement, partially offset by impairment charges recorded on LMG's
investments to reflect other than temporary declines in value and higher losses
relating to LMG's equity affiliates.
LIQUIDITY
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
DOLLARS IN MILLIONS
CASH FLOWS:
Provided by operating activities of continuing
operations............................................ $10,558 $11,665 $10,509
Used in investing activities of continuing operations... (1,860) (30,045) (23,884)
(Used in) provided by financing activities of continuing
operations............................................ (3,030) 25,732 13,854
Provided by (used in) discontinued operations........... 4,860 (8,306) (2,594)
Net cash provided by operating activities of $10.6 billion for the year
ended December 31, 2001, primarily included the $12.8 billion of income from
continuing operations, adjusted to exclude noncash income items and net gains on
sales of businesses and investments, and a decrease in accounts receivable of
$0.7 billion, partially offset by net changes in other operating assets and
liabilities of $2.2 billion and a decrease in accounts payable of $0.8 billion.
Net cash provided by operating activities of $11.7 billion for the year ended
December 31, 2000, primarily included income from continuing operations,
excluding noncash income items and the adjustment for net gains on sales of
businesses and investments of $15.1 billion, partially offset by an increase in
accounts receivable of $2.5 billion and a decrease in accounts payable of $0.6
billion. Net cash provided by operating activities of $10.5 billion for the year
ended December 31, 1999, primarily included income from continuing operations
excluding noncash income items and the adjustment for net gains on sales of
businesses and investments of $14.9 billion, partially offset by an increase in
accounts receivable of $2.4 billion and net changes in other operating assets
and liabilities of $1.8 billion.
AT&T's investing activities resulted in a net use of cash of $1.9 billion
in 2001, compared with $30.0 billion in 2000. During 2001, AT&T spent $9.3
billion on capital expenditures and $0.4 billion on nonconsolidated investments
and received approximately $4.9 billion, primarily from the net dispositions of
VI-27
cable systems, and approximately $3.0 billion from the sales of investments.
During 2000, AT&T used approximately $16.7 billion for acquisitions of
businesses, primarily MediaOne, and spent $11.5 billion on capital expenditures.
During 1999, AT&T spent approximately $11.9 billion on capital expenditures,
approximately $6.0 billion on acquisitions of businesses, primarily AGNS, and
contributed $5.5 billion of cash to LMG.
During 2001, net cash used in financing activities was $3.0 billion,
compared with net cash provided by financing activities of $25.7 billion in
2000. During 2001, AT&T made net debt payments of $6.4 billion, paid AT&T
Wireless $5.8 billion to settle an intercompany loan in conjunction with its
split-off from AT&T, and paid dividends of $0.5 billion. Partially offsetting
these outflows was the receipt of $9.8 billion from the issuance of convertible
preferred stock to NTT DoCoMo. During 2000, AT&T received $10.3 billion from the
AT&T Wireless Group tracking stock offering and had net borrowings of debt of
$19.5 billion. These were partially offset by the payment of $3.0 billion in
dividends. In 1999, AT&T had net borrowings of debt of $16.3 billion and
received $4.6 billion from the issuance of redeemable preferred securities.
These sources of cash were partially offset by the acquisition of treasury
shares of $4.6 billion and the payment of dividends of $2.7 billion.
Since the announced restructuring plans to create four new businesses,
AT&T's credit ratings have been under review by the applicable rating agencies.
As a result of this review, in 2001, AT&T's short-term and the long-term ratings
were downgraded as outlined below. These actions have resulted in an increased
cost of borrowings and decreased AT&T's access to the capital markets. AT&T's
current credit ratings are as follows:
SHORT-TERM CREDIT LONG-TERM CREDIT CHARACTERIZATION OF LONG-TERM
CREDIT RATING AGENCY RATING RATING CREDIT RATING
- -------------------- ----------------- ---------------- -----------------------------
Standard & Poor's........ A-2 BBB+ On credit watch with negative
implications
Moody's.................. P-2 A3 Under review with possibility
of downgrade
Fitch Ratings............ F-2 A- Rating watch negative
There are provisions in several of AT&T's debt instruments that require
AT&T to pay up to the $0.9 billion present value of future interest payments if
its credit ratings are downgraded below investment grade. AT&T does not believe
downgrades below investment grade are likely to occur.
In November 2001, AT&T completed a $10 billion private bond offering which
includes provisions that would allow bondholders to require AT&T to repurchase
the notes if certain conditions are not met in conjunction with the spin-off or
other separation of AT&T Broadband from AT&T at the time of notification to
bondholders of the intention to separate AT&T Broadband. These conditions
include a maximum debt to EBITDA ratio (adjusted) for pro forma AT&T, excluding
AT&T Broadband, of no more than 2.75 times. In addition, the Moody's and
Standard & Poor's credit ratings for pro forma AT&T, excluding AT&T Broadband,
are required to be at least Baa3 and BBB-, respectively, with such ratings
having at least a stable outlook.
On December 14, 2001, AT&T amended and restated a pre-existing
revolving-credit facility. The amended facility, which is syndicated to 30
banks, makes $8 billion available to AT&T for a 364-day term. At December 31,
2001, AT&T had not utilized this facility, and AT&T currently has the entire $8
billion facility available to it. The credit facility agreement contains a
financial covenant that requires AT&T to maintain a net debt-to-EBITDA ratio (as
defined in the credit agreement) not exceeding 3.00 to 1.00 for four consecutive
quarters ending on the last day of each fiscal quarter. At December 31, 2001,
AT&T was in compliance with this covenant. If AT&T were to become noncompliant
it could result in the cancellation of the credit facility with any amounts
outstanding under the credit facility becoming payable immediately.
The holder of certain private debt has an annual right to cause AT&T to
repay up to the $0.7 billion face value of the debt upon payment of an exercise
fee. In exchange for the elimination of this put right
VI-28
for 2002, AT&T will obtain a letter of credit collateralized by $0.4 billion of
cash which will be restricted in its use. The creditor could also accelerate
repayment of the debt if unfavorable local law changes were to occur in its
country of operation.
If AT&T's debt ratings are further downgraded or any of the risks or
covenants noted above are triggered, AT&T may not be able to obtain sufficient
financing in the timeframe required, and/or such replacement financing may be
more costly or have additional covenants than it had in connection with AT&T's
debt at December 31, 2001. In addition, if the financial markets become more
cautious regarding the industry/ratings category that AT&T operates in, AT&T's
ability to issue commercial paper would be further reduced. This could
negatively impact our ability to pursue acquisitions, make capital expenditures
to expand AT&T's network and cable plant or to pay dividends.
At December 31, 2001, AT&T had current assets of $22.5 billion and current
liabilities of $25.4 billion. Included in current assets was $10.6 billion of
cash and cash equivalents. Included in current liabilities was $13.0 billion of
debt maturing within one year, including $9.2 billion of commercial paper and
debt with an original maturity of one year or less. AT&T expects to fund its
operations primarily with cash from operations, cash on hand, commercial paper
and AT&T's securitization program. If economic conditions worsen or do not
improve and/or competition and product substitution accelerate beyond current
expectations, AT&T's cash flow from operations would decrease, negatively
impacting our liquidity.
In addition, potential sources of funds include the sale of AT&T's
ownership interest in TWE. On February 28, 2001, AT&T exercised its registration
rights in TWE and formally requested TWE to begin the process of converting the
limited partnership into a corporation with registered equity securities. On May
14, 2001, AT&T named Credit Suisse First Boston as its investment banker for the
registration process under the TWE partnership agreement. If the proposed
spin-off of AT&T Broadband occurs as currently structured, AT&T's investment in
TWE will be included in the net assets spun-off.
In the event AT&T's cash flow from operations or access to the commercial
paper markets are negatively impacted, AT&T has alternative funding available
through the utilization of its $8 billion credit facility, as long as AT&T is in
compliance with certain covenants discussed above and its $2.7 billion
receivables securitization program, which is limited by eligible receivables
that change from month to month.
Subsequent to December 31, 2001, AT&T notified holders of certain Trust
Originated Preferred Securities, originally issued by TCI and Mediaone, that it
will call these securities for early redemption on February 28, 2002, March 4,
2002 and April 1, 2002. These debt redemptions total approximately $1.4 billion
and will be funded with cash on hand. Such amounts are included within
"Short-term debt" on the Consolidated Balance Sheet at December 31, 2001.
On February 27, 2002, AT&T signed an agreement with AT&T Latin America
(ALA) that restructured approximately $725 million of ALA's short-term and
long-term debt and preferred stock held by AT&T, plus accrued interest and
dividends. At December 31, 2001, $72 million of the $725 million financing was
not drawn. ALA's senior secured vendor financing of $298 million became
effective on March 27, 2002. The AT&T provided debt and preferred facilities are
subordinated to the ALA senior secured vendor financing. The agreement between
AT&T and ALA, which also took effect on March 27, 2002, extends the maturity and
redemption dates of all ALA debt and preferred stock payable to AT&T to October
2008. In addition, while the vendor financing is outstanding, the agreement
defers interest payments on all AT&T debt and dividend payments on AT&T
preferred stock until October 2008.
If the proposed spin-off of AT&T Broadband occurs as currently structured,
the debt of TCI and MediaOne will be included in the net assets spun-off and
will be included in AT&T Comcast. The amount of this third-party debt at
December 31, 2001, was $19.3 billion. The intercompany debt of AT&T Broadband
payable to AT&T that is outstanding at the time of the spin-off will be repaid
immediately prior to the spin-off. At December 31, 2001 such intercompany debt
amounted to approximately $4.0 billion. In addition, AT&T's quarterly
convertible income preferred securities, which had a book value
VI-29
of $4.7 billion at December 31, 2001, will be included in the net assets
spun-off and will be included in AT&T Comcast.
The following summarizes AT&T's contractual cash obligations and commercial
commitments at December 31, 2001, and the effect such obligations are expected
to have on liquidity and cash flow in future periods.
PAYMENTS DUE BY PERIOD
-----------------------------------------------------
LESS THAN 2-3 4-5 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS YEARS
- ----------------------- ------- --------- --------- --------- -------
(DOLLARS IN MILLIONS)
Long-term debt, including current
maturities(a)..................... $35,008 $2,975 $5,850 $6,958 $19,225
Operating leases(b)................. 2,996 550 924 648 874
Unconditional purchase
Obligations(c)(d)(e)(f)(g)........ 8,532 810 894 910 5,918
------- ------ ------ ------ -------
Total Contractual Cash
Obligations....................... $46,536 $4,335 $7,668 $8,516 $26,017
======= ====== ====== ====== =======
- ---------------
(a) Long-term debt excludes debt that is exchangeable or collateralized by
securities (monetized debt) since AT&T has the option to settle this debt
in shares or cash. Amounts due less than one year were $679 million; two to
three years $4,918 million; and four to five years $3,312 million at
December 31, 2001. In addition, debt excludes discounts and excess of fair
value over the recorded value of debt in connection with the TCI and
MediaOne mergers.
(b) Under certain real estate operating leases, AT&T could be required to make
payments to the lessor up to $586 million at the end of the lease term
(lease terms range from 2002 through 2011). The actual amount paid, if any,
would be reduced by amounts received by the lessor upon remarketing of the
property.
(c) AT&T has contractual obligations to utilize network facilities from local
exchange carriers with terms greater than one year. These contracts are
based on volumes and have penalty fees if certain volume levels are not
met. AT&T assessed its minimum exposure based on penalties to exit the
contracts. At December 31, 2001, penalties to exit these contracts in any
given year totaled approximately $1.5 billion.
(d) AT&T has contractual obligations that extend through 2006 for services that
include computer application design, development and testing as well as the
operation of a data center that hosts many of the computer applications
operated throughout AT&T. These contracts are based on the level of services
AT&T requires and include termination fees if the level of services required
is reduced in excess of limits outlined in the agreements. These contracts
also include termination fee clauses if AT&T exits the contracts. Since
these contracts are based on the level of services AT&T requires, AT&T
assesses its minimum exposure based on the termination fees to exit the
contracts which decline each year throughout the term of the contracts. If
AT&T elects to exit these contracts, the maximum termination fees it would
be obligated to pay in the year of termination would be approximately $475
million in 2002, $360 million in 2003, $310 million in 2004, $240 million in
2005 or $165 million in 2006.
(e) In connection with the decision to unwind Concert, AT&T has agreed to
acquire the 9% interest of AT&T Canada owned by British Telecommunications
plc (BT) and assume BT's portion of the obligation to purchase the AT&T
Canada shares not already owned by AT&T and BT. AT&T does not know the
timing or amounts it will have to pay in connection with this obligation
but, in 2001, AT&T recorded a liability of $3.0 billion reflecting the
estimated loss on AT&T's commitment to purchase the publicly owned shares
of AT&T Canada.
(f) AT&T Broadband is party to an agreement under which it purchases certain
billing services from CSG Systems, Inc. ("CSG"). Unless terminated by
either party pursuant to terms of the agreement,
VI-30
the agreement expires on December 31, 2012. The agreement calls for monthly
payments which are subject to adjustments and conditions pursuant to the
terms of the underlying agreements.
(g) In 1997, AT&T Broadband's predecessor, TCI, entered into a 25-year
affiliation term sheet with Starz Encore Group pursuant to which AT&T may be
obligated to pay fixed monthly amounts in exchange for unlimited access to
all of the existing Encore and STARZ! programming. The future commitment,
which is calculated based on a fixed number of subscribers, increases
annually from $306 million in 2002 to $315 million in 2003 and will increase
annually through 2022 with inflation, subject to certain adjustments,
including increases in the number of subscribers. The amounts in the above
table do not take into account any increase in subscribers or expected
inflation. The affiliation term sheet further provides that to the extent
Starz Encore Group's programming costs increase above certain levels, AT&T's
payments under the term sheet will be increased in proportion to the excess.
Excess programming costs that may be payable by AT&T in future years are not
presently estimable and could be significant.
COMMITMENTS BY PERIOD
-----------------------------------------------------------
TOTAL AMOUNTS LESS THAN 2-3 4-5 AFTER 5
OTHER COMMERCIAL COMMITMENTS COMMITTED 1 YEAR YEARS YEARS YEARS
- ---------------------------- ------------- --------- --------- --------- -------
(DOLLARS IN MILLIONS)
Guarantees........................ $1,522 $55 $-- $-- $1,467
RISK MANAGEMENT
AT&T is exposed to market risk from changes in interest and foreign
exchange rates, as well as changes in equity prices associated with previously
affiliated companies. In addition, AT&T is exposed to market risk from
fluctuations in the prices of securities, some of which it has monetized through
the issuance of debt. On a limited basis, AT&T uses certain derivative financial
instruments, including interest rate swaps, options, forwards, equity hedges and
other derivative contracts, to manage these risks. AT&T does not use financial
instruments for trading or speculative purposes. All financial instruments are
used in accordance with board-approved policies.
AT&T enters into foreign currency contracts to minimize its exposure to
risk of adverse changes in currency exchange rates. AT&T is subject to foreign
exchange risk for foreign-currency-denominated transactions, such as debt
issued, recognized payables and receivables and forecasted transactions. As of
December 31, 2001, AT&T's foreign currency market exposures were principally
Canadian dollars, Euros, Japanese yen, Swiss francs and Brazilian reais.
The fair value of foreign exchange contracts is subject to the changes in
foreign currency exchange rates. For the purpose of assessing specific risks,
AT&T uses a sensitivity analysis to determine the effects that market risk
exposures may have on the fair value of AT&T's financial instruments and results
of operations. To perform the sensitivity analysis, AT&T assesses the risk of
loss in fair values from the effect of a hypothetical 10% change in the value of
foreign currencies, assuming no change in interest rates. For contracts
outstanding at December 31, 2001 and 2000, a 10% appreciation of the US dollar
against foreign currencies from the prevailing rates would have resulted in an
incremental pretax net unrealized loss of approximately $492 million and $6
million, respectively. The increase of the change from last year is primarily
due to approximately $5.3 billion of foreign exchange contracts entered into
relating to the commencement of a Euro Commercial Paper Program and AT&T's
obligation to purchase the outstanding AT&T Canada shares it does not own.
Because AT&T's foreign exchange contracts are entered into for hedging purposes,
AT&T believes that these losses would be largely offset by gains on the
underlying transactions.
The model to determine sensitivity assumes a parallel shift in all foreign
currency exchange rates, although exchange rates rarely move in the same
direction. Additionally, the amounts above do not necessarily represent the
actual changes in fair value AT&T would incur under normal market conditions,
because all variables other than the exchange rates are held constant in the
calculations.
VI-31
AT&T uses interest rate swaps to manage the impact of interest rate changes
on earnings and cash flows. AT&T monitors its interest rate risk on the basis of
changes in fair value. The fair value of AT&T's fixed-rate long-term debt is
sensitive to changes in interest rates. Interest rate changes would result in
gains or losses in the market value of the debt due to differences between the
market interest rates and rates at the inception of the obligation. AT&T
performs a sensitivity analysis on its fixed-rate long-term debt to assess the
risk of changes in fair value. The model to determine sensitivity assumes a
hypothetical 10% parallel shift in all interest rates. At December 31, 2001 and
2000, assuming a 10% increase in interest rates, the fair value of interest rate
swaps and the underlying hedged debt would have decreased by $22 million and $11
million, respectively.
In both 2001 and 2000, AT&T entered into combined interest rate forward
contracts to hedge foreign-currency-denominated debt. Assuming a 10% downward
shift in interest rates, the fair value of the contracts and the underlying
hedged debt would have changed by $112 million and $88 million, respectively.
Assuming a 10% downward shift in interest rates at December 31, 2001 and
2000, the fair value of unhedged debt would have increased by $1.4 billion and
$1.2 billion, respectively.
AT&T has certain notes which are indexed to the market price of equity
securities it owns. Certain of these notes contain embedded derivatives, while
other debt is issued in conjunction with net purchased options. Changes in the
market prices of these securities result in changes in the fair value of the
derivatives. Assuming a 10% downward change in the market price of these
securities, the fair value of the combined collars and underlying debt would
decrease by $661 million and $534 million at December 31, 2001, and 2000
respectively. Because these collars hedge the underlying equity securities
monetized, AT&T believes that the increase in the fair value of the collars
would be largely offset by decreases in the fair value of the underlying equity
securities. The changes in fair values referenced above do not represent the
actual changes in fair value AT&T would incur under normal market conditions
because all variables other than the equity prices were held constant in the
calculations.
AT&T uses equity hedges to manage its exposure to changes in equity prices
associated with stock appreciation rights (SARs) of previously affiliated
companies. Assuming a 10% decrease in equity prices of these companies, the fair
value of the equity hedges (net liability) would have increased by $27 million
and $29 million at December 31, 2001 and 2000, respectively. Because these
contracts are entered into for hedging purposes, AT&T believes that the decrease
in fair value would be largely offset by decreases in the underlying SAR
liabilities.
In order to determine the changes in fair value of AT&T's various financial
instruments, including options, equity collars and SARS, AT&T uses certain
financial modeling techniques, including Black-Scholes. AT&T applies rate
sensitivity changes directly to its interest rate swap transactions and forward
rate sensitivity to its foreign currency forward contracts.
The changes in fair value, as discussed above, assume the occurrence of
certain market conditions, which could have an adverse financial impact on the
Company. They do not consider the potential effect of changes in market factors
that would result in favorable impacts to AT&T, and do not represent projected
losses in fair value that AT&T expects to incur. Future impacts would be based
on actual developments in global financial markets. AT&T does not foresee any
significant changes in the strategies used to manage interest rate risk, foreign
currency rate risk or equity price risk in the near future.
FINANCIAL CONDITION
AT DECEMBER 31,
-------------------
2001 2000
-------- --------
DOLLARS IN MILLIONS
Total assets................................................ $165,282 $234,360
Total liabilities........................................... 105,322 121,611
Total shareowners' equity................................... 51,680 103,198
VI-32
Total assets decreased $69.1 billion, or 29.5%, to $165.3 billion at
December 31, 2001, from $234.4 billion at December 31, 2000. This decrease was
primarily due to the split-off of LMG in August 2001 and AT&T Wireless in July
2001. In addition, the decrease was due to lower investments and related
advances resulting from the write-down of Concert and Net2Phone, and unfavorable
mark-to-market adjustments on certain investments as well as the sale of other
investments; lower franchise costs as a result of the net disposition of cable
systems and amortization; and lower goodwill, primarily driven by the
impairments associated with Excite@Home, as well as amortization. Partially
offsetting these decreases was a higher cash balance, primarily reflecting
proceeds from AT&T's $10.0 billion bond offering in November 2001.
Total liabilities decreased $16.3 billion, or 13.4%, to $105.3 billion at
December 31, 2001, from $121.6 billion at December 31, 2000. This decrease was
primarily a result of lower debt, due to repayments, partially offset by AT&T's
bond offering. In addition, deferred income taxes were lower, primarily
resulting from deferred tax assets recorded as a result of the write-down of
Concert, AT&T's obligation to purchase all of the outstanding shares of AT&T
Canada and cable systems sales, partially offset by a higher deferred tax
liability associated with greater tax depreciation. Also contributing to the
total liability decrease was the settlement with AT&T common stock of the
Excite@Home put obligation with Cox and Comcast. Partially offsetting these
decreases was an increase in other long-term liabilities and deferred credits
recorded in the third quarter of 2001 for AT&T's obligation to purchase all of
the outstanding shares of AT&T Canada.
Minority interest decreased $1.3 billion, or 26.5%, to $3.6 billion at
December 31, 2001, from $4.8 billion at December 31, 2000. This decrease was
primarily due to Excite@Home. Due to the significant losses of Excite@Home, AT&T
fully utilized the minority interest balance during the third quarter of 2001,
and therefore no longer have a minority interest balance related to Excite@Home.
Total shareowners' equity decreased $51.5 billion, or 49.9%, to $51.7
billion at December 31, 2001, from $103.2 billion at December 31, 2000. This
decrease was primarily due to the split-off of LMG, the net impacts of the
split-off of AT&T Wireless and net losses from continuing operations. The
decrease was partially offset by the issuance of stock to settle the Excite@Home
put obligation with Cox and Comcast.
In September and December 2001, when AT&T declared its quarterly dividends
to the AT&T Common Stock Group shareowners, the company was in an accumulated
deficit position primarily as a result of the split-off of AT&T Wireless. As a
result, the company reduced additional paid-in capital by $0.3 billion, the
entire amount of the dividends declared.
The ratio of total debt to total capital for AT&T's continuing operations,
excluding LMG (debt of continuing operations divided by total debt of continuing
operations and equity excluding discontinued operations and LMG) was 47.7% at
December 31, 2001, compared with 57.2% at December 31, 2000. For purposes of
this calculation, equity includes the convertible trust preferred securities, as
well as subsidiary redeemable preferred stock and excludes the equity of
discontinued operations and LMG at December 31, 2000. In addition, included in
debt of continuing operations was approximately $8.6 billion and $8.7 billion of
notes at December 31, 2001 and 2000, respectively, which are exchangeable into
or collateralized by securities that AT&T owns. Excluding this debt, the debt
ratio for AT&T's continuing operations at December 31, 2001, was 43.4%, compared
with 53.6% at December 31, 2000. The lower debt, as well as increased equity
drove the decreases in the debt ratios.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" which supersedes Accounting Principles Board (APB) Opinion No. 16.
SFAS No. 141 requires all business combinations initiated after June 30, 2001,
to be accounted for under the purchase method. In addition, SFAS No. 141
establishes criteria for the recognition of intangible assets separately from
goodwill. The adoption of SFAS No. 141 will not have a material effect on AT&T's
results of operations, financial position or cash flows.
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" which supercedes APB Opinion No. 17. Under SFAS No. 142,
goodwill and indefinite-lived intangible assets will
VI-33
no longer be amortized, but rather will be tested for impairment upon adoption
and at least annually thereafter. In addition, the amortization period of
intangible assets with finite lives will no longer be limited to 40 years. SFAS
No. 142 is effective for AT&T as of January 1, 2002. In connection with the
adoption of this standard, AT&T's unamortized goodwill balance and excess basis
related to equity method investments will no longer be amortized, but will
continue to be tested for impairment. The goodwill balance as of December 31,
2001, was $24.7 billion, and the related amortization in 2001 was $0.9 billion.
The excess basis balance at December 31, 2001, was $8.8 billion, with related
amortization in 2001 of $207 million. In addition, AT&T has determined that its
franchise costs are indefinite-lived assets, as defined in SFAS No. 142, and
therefore will not be subject to amortization beginning in 2002. The balance of
AT&T's franchise costs as of December 31, 2001, was $42.8 billion and the
related amortization for 2001 was $1.2 billion. The adoption of SFAS No. 142
will have a significant impact on AT&T's future operating results due to the
cessation of goodwill and franchise cost amortization. For 2001, the
amortization of goodwill, excess basis and franchise costs had an approximate
impact of $0.45 per share. In accordance with SFAS No. 142, goodwill was tested
for impairment by comparing the fair value of AT&T's reporting units to their
carrying values. As of January 1, 2002, the fair value of the reporting units'
goodwill exceeded their carrying value, and therefore no impairment loss will be
recognized upon adoption. In accordance with SFAS No. 142, the franchise costs
were tested for impairment as of January 1, 2002, by comparing the fair value to
the carrying value (at market level). An impairment loss of $0.9 billion, net of
taxes of $0.5 billion will be recognized as a change in accounting principle in
the first quarter of 2002.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This standard requires that obligations associated with
the retirement of tangible long-lived assets be recorded as liabilities when
those obligations are incurred, with the amount of the liability initially
measured at fair value. Upon initially recognizing a liability for an asset
retirement obligation, an entity must capitalize the cost by recognizing an
increase in the carrying amount of the related long-lived asset. Over time, this
liability is accreted to its present value, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. SFAS No. 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002. For AT&T, this
means that the standard will be adopted on January 1, 2003. AT&T does not expect
that the adoption of this statement will have a material impact on AT&T's
results of operations, financial position or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" which supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". SFAS No. 144 applies to all long-lived assets, including
discontinued operations, and consequently amends APB opinion No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." Based on SFAS No. 121, SFAS No. 144 develops one accounting model
for long-lived assets that are to be disposed of by sale, as well as addresses
the principal implementation issues. SFAS No. 144 requires that long-lived
assets that are to be disposed of by sale be measured at the lower of book value
or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
SFAS No. 144 also amends Accounting Research Bulletin (ARB) No. 51,
"Consolidated Financial Statements" to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. SFAS No. 144 is
effective for AT&T as of January 1, 2002. The adoption of SFAS No. 144 will not
have a material impact on AT&T's results of operations, financial position or
cash flows.
SUBSEQUENT EVENTS
In March 2002, AT&T Canada announced the formation of a committee of the
board of directors to help AT&T Canada with issues they are facing in the
foreseeable future. Such issues include a significant regulatory decision
expected in the next month which could have a significant impact on the future
of
VI-34
sustainable competition in Canada; the effect of AT&T satisfying its obligation
to purchase the shares of AT&T Canada it does not own; and the impact of these
events on operating and financial results of AT&T Canada. In addition, the
committee appointed financial advisors to evaluate various scenarios regarding
issues, opportunities and alternatives for AT&T Canada. It is expected that the
outcome of these evaluations will have a negative effect on the underlying value
of AT&T Canada shares, which will result in AT&T recording up to $250 million of
additional losses on its commitment to purchase the publicly owned shares of
AT&T Canada, excluding any impact of the floor price accretion.
Effective April 1, 2002, Concert was unwound. Pursuant to the partnership
termination agreement, each of the partners generally reclaimed the customer
contracts and assets that were initially contributed to the joint venture.
VI-35
CHAPTER SEVEN
AT&T BROADBAND GROUP
DESCRIPTION OF AT&T BROADBAND GROUP
OVERVIEW
AT&T Broadband Group is one of the nation's largest broadband
communications businesses based on customers served as of December 31, 2001,
providing cable television, high-speed cable Internet services and telephone
services. AT&T Broadband Group's business consists primarily of the combined
assets and business of TCI, acquired by AT&T on March 9, 1999, and MediaOne,
acquired by AT&T on June 15, 2000. As of December 31, 2001, AT&T Broadband Group
owned and operated cable systems in 13 of the 20 largest Designated Marketing
Areas, which represented 82% of AT&T Broadband Group's total subscribers. AT&T
Broadband Group's wholly owned and consolidated broadband networks passed
approximately 24.6 million homes and served approximately 13.56 million video
customers as of December 31, 2001. AT&T Broadband Group continues to upgrade its
systems, 76% of which were upgraded to a capacity equal to or greater than 550
MHz and 77% of which were two-way capable as of December 31, 2001.
AT&T Broadband Group's broadband networks enable it to deliver a suite of
advanced entertainment, information and communications services, including its
digital cable, high-speed cable Internet and broadband telephone services. As of
December 31, 2001, AT&T Broadband Group provided a variety of advanced services,
including:
- digital cable, with over 3.47 million digital cable subscribers or 25.6%
of AT&T Broadband Group's basic subscribers,
- high-speed cable Internet service, with approximately 1.51 million
high-speed cable Internet service subscribers or 10.1% of marketable
homes, and
- broadband telephone service, with approximately 1.01 million local
telephone subscribers or 14.8% of marketable homes.
In addition to fees from residential customers for the services AT&T
Broadband Group offers, AT&T Broadband Group also derives revenues from the sale
of advertising time on satellite-delivered program services, such as ESPN, MTV
and CNN, and on local cable channels, as well as the payment of license and/or
launch fees by certain program services.
As of December 31, 2001:
- AT&T Broadband Group had 13.56 million basic subscribers, 94% of whom
were concentrated in AT&T Broadband Group's 20 largest markets,
- 40% of AT&T Broadband Group's subscribers were located in its three
largest markets: Boston, San Francisco and Chicago, and
- 10.67 million, or 78.7% of AT&T Broadband's subscribers, were in markets
where AT&T Broadband Group had more than 500,000 customers.
In addition to AT&T Broadband Group's wholly owned and consolidated cable
systems, AT&T Broadband Group also owns a number of investments in companies,
joint ventures and partnerships, the most significant of which are:
- Time Warner Entertainment, which owns and operates the business of Warner
Bros., Inc. and HBO and cable systems serving approximately 11 million
subscribers, and manages cable systems owned by AOL Time Warner serving
approximately 1.8 million subscribers;
- Insight Midwest, which owns and operates cable systems that serve
approximately 1.2 million subscribers in Indiana, Kentucky, Illinois,
Georgia and Ohio; and
VII-1
- Texas Cable Partners, which owns and operates cable systems that serve
approximately 1.1 million subscribers in Texas.
AT&T Broadband Corp. is a Delaware corporation that was organized in 2001,
with its principal executive offices at 188 Inverness Drive West, Englewood, CO
80112. Its telephone number is (303) 858-3000.
For financial information about AT&T Broadband Group, see "Selected
Financial Information -- AT&T Broadband Group" and the combined financial
statements of AT&T Broadband Group, which are included in Chapter 12 of this
document.
INDUSTRY OVERVIEW
AT&T Broadband Group operates in the communications industry, offering
cable television services (both analog and digital), high-speed cable Internet
services and telephone service, in each case primarily to residential and small
business customers. AT&T Broadband Group also is pursuing additional services,
including video-on-demand and interactive television that take advantage of its
broadband network.
Cable television is a service that delivers multiple channels of video and
audio programming to subscribers that pay a monthly fee for the services they
receive. Cable television systems receive video, audio and data signals
transmitted by nearby television broadcast stations, terrestrial microwave relay
services and communications satellites. These signals then are amplified and
distributed by coaxial cable and optical fiber to the premises of customers that
pay a fee for the service. In many cases, cable television systems also
originate and distribute local programming. Cable television systems typically
are constructed and operated pursuant to nonexclusive franchises awarded by
local franchising authorities for specified periods of time.
Cable television revenues principally are derived from monthly fees paid by
subscribers, sales of pay-per-view movies and events, sale of advertising time
on advertiser supported programming, payment of license and/or launch fees by
certain program services and installation charges.
High-speed cable Internet services deliver typical Internet service
provider, or ISP, services, such as e-mail, instant messaging, personal webspace
management and personalized home pages, and content. In some cases, AT&T
Broadband Group provides distinct localized content in addition to national
content. Subscribers pay a monthly fee for the services they receive, including
access to public areas on the Internet. Other revenue streams may be derived
from sales of premium content and services, advertising spots, premium placement
of media/service providers within the service, and installation service.
Cable telephone service is a technology that allows cable operators to
offer telephone service over the same hybrid fiber/coaxial network that supplies
television service. Cable telephone service systems have three basic
components -- a headend unit, which contains a master telephone switching
system; a customer premise unit, which is a connection box located on the
outside of the customer's home; and a management interface, which is a computer
server that resides at the headend and controls the telephony switching systems.
Cable operators connect to the public switched telephone network through an
interface in the headend unit that conforms to one of several standards. At the
customer premise unit, voice transmission is separated from the coaxial cable
that goes from the neighborhood splitter to the customer's home and routed to a
twisted copper pair connected to the customer's existing inside telephone
wiring.
AT&T Broadband Group is in the process of developing, testing or offering
on a limited basis a variety of new or expanded services, including video on
demand, interactive television, targeted advertising, multiple service tiers of
high-speed cable Internet service, home networking, multiple ISP offerings and a
set of communications services that are designed to work seamlessly over all
television, computer and telephone platforms.
VII-2
TECHNICAL OVERVIEW
As of December 31, 2001, AT&T Broadband Group's systems were comprised of
approximately 250,000 miles of network passing approximately 24.6 million homes,
resulting in a density of slightly less than 100 homes per mile. As of that
date, AT&T Broadband Group's systems were made up of an aggregate of 41 headends
in its top 20 markets. As of December 31, 2001, approximately 59% of AT&T
Broadband Group's network was equal to or greater than 750 MHz, approximately
17% of its network was greater than or equal to 550 MHz and less than 750 MHz,
and approximately 24% of its network was less than 550 MHz.
AT&T Broadband Group's network design calls for a digital two-way active
network with a fiber optic trunk system carrying signals via fiber optic cable
to nodes, or main points of contact that typically hang from telephone utility
poles, within its customers' neighborhoods. The signals are transferred to a
coaxial network at the node for delivery to its customers. AT&T Broadband Group
has designed the fiber system to be capable of subdividing the nodes if traffic
on the network requires additional capacity. This design allows its systems to
have the capability to run multiple separate channel lineups from a single
headend and to insert targeted advertisements into specific neighborhoods based
on node location.
The following chart outlines the status of the capacities of AT&T Broadband
Group's cable systems, historically and as of December 31, 2001:
PERCENT OF HOMES PASSED
----------------------------------------------
GREATER THAN OR EQUAL TO 750 OR PERCENT OF
LESS THAN 550 MHZ AND LESS THAN GREATER NETWORK TWO-
550 MHZ 750 MHZ MHZ WAY CAPABLE
--------- ------------------------ ------- ------------
As of December 31, 1999.......... 28% 22% 50% 55%
As of December 31, 2000.......... 21% 16% 63% 75%
As of December 31, 2001.......... 24% 17% 59% 77%
SERVICES
Cable Television Service. AT&T Broadband Group offers its customers a wide
array of traditional cable television services and programming offerings. AT&T
Broadband Group offers a basic level of service which typically includes from 15
to 25 channels of television programming. As of December 31, 2001, approximately
89% of AT&T Broadband Group's customers elected to pay an additional amount to
receive additional channels under its expanded basic service, which AT&T
Broadband Group calls its Standard Cable package. Premium channels, which AT&T
Broadband Group offers individually or in packages of several channels, are
optional add-ons to its basic service.
AT&T Broadband's cable television services include the following:
- Basic Service. All of AT&T Broadband Group's customers receive its basic
level of service, which generally consists of local broadcast television
and local community programming, including public, educational or
governmental, or PEG, programming, and may include a limited number of
satellite-delivered channels.
- Standard Cable. AT&T Broadband Group's Standard Cable package includes
basic service, plus expanded basic. This level of service includes a
group of satellite-delivered and non-broadcast channels such as ESPN,
CNN, Discovery Channel and Lifetime.
- Premium Channels. These channels provide unedited, commercial-free
movies, sports and other special event entertainment programming. AT&T
Broadband Group offers subscriptions to numerous premium channels,
including HBO, Cinemax, Starz!, Showtime and The Movie Channel,
individually or in packages.
- Pay-Per-View. These channels allow customers with addressable set-top
boxes to pay to view a single showing of a recently released movie or a
one-time special sporting event or music concert on an unedited,
commercial-free basis.
VII-3
Through AT&T Digital Cable, AT&T Broadband Group also offers additional
special interest networks, premium channels, pay-per-view, digital music and an
interactive on-screen guide, as described under "-- Advanced Services."
AT&T Broadband Group's basic subscribers, including its digital cable
customers, are served as follows:
DECEMBER 31,
-------------------------
1998 1999 2000 2001
---- ---- ---- ----
(IN MILLIONS)
Managed through AT&T Broadband Group's operating
divisions................................................ 11.4 11.3 15.9 13.5
Other non-managed subsidiaries of AT&T Broadband Group..... 0.5 0.1 0.1 0.1
---- ---- ---- ----
Total...................................................... 11.9 11.4 16.0 13.6
==== ==== ==== ====
In addition to the above, the FCC currently attributes AT&T Broadband Group
with the subscribers of various other entities as a consequence of AT&T
Broadband Group's investments in those entities.
The following table sets forth selected statistical data regarding AT&T
Broadband Group's cable television operations:
DECEMBER 31,
-----------------------------------------------------
1998 1999 2000 2001
----------- ----------- ----------- -----------
Homes passed by cable(1)(3)...... 19,889,000 19,668,000 28,303,000 24,614,000
Basic service subscribers(3)..... 11,948,000 11,408,000 16,041,000 13,560,000
Basic service subscribers as a
percentage of homes passed..... 60% 58% 57% 55%
Average monthly revenue per basic
service subscriber(2)(3)....... $ 32.24 $ 42.97 $ 47.63 $ 47.69
- ---------------
(1) Homes passed is based on homes actually marketed and does not include
multiple dwelling units passed by the cable plant that are not connected to
it.
(2) Based on video service revenues for the last month of the period, including
installation charges and certain other nonrecurring revenues, such as
pay-per-view, advertising and home shopping revenues.
(3) Year-end statistics regarding AT&T Broadband Group's subscribers and homes
passed by cable are materially affected by AT&T Broadband Group's
acquisition and divestiture program discussed under "-- Acquisitions and
Divestitures." Notable variations arose during 1998, when AT&T Broadband
Group contributed cable systems serving approximately 2,700,000 customers to
other persons, and during 2000, when AT&T Broadband Group acquired
approximately 5,000,000 customers from MediaOne.
Advanced Services. As network upgrades are activated, AT&T Broadband Group
offers new and advanced services, including interactive digital cable and
high-speed cable Internet service. In addition, AT&T Broadband Group offers
all-distance telephone services in selected markets.
Digital Cable. AT&T Broadband Group offers digital cable service, which
includes additional channels on its existing service tiers, the creation of new
service tiers and the introduction of multiple packages of premium services.
AT&T Broadband Group's digital cable service also includes an electronic program
guide, on demand pay-per-view and up to 30 channels of digital music. In
addition, AT&T Broadband Group offers more premium and special interest
networks. AT&T Broadband Group's interactive digital cable service also allows
it to offer TV-formatted information to its customers that has local content and
is targeted to a specific system or community. For example, through this service
AT&T Broadband Group offers local weather, sports, news and dining information.
VII-4
Below is a summary of operating statistics for digital cable services:
DECEMBER 31,
---------------------------------
1999 2000 2001
--------- --------- ---------
Digital cable customers............................. 1,800,000 2,815,000 3,475,000
Digital penetration as a percentage of basic service
subscribers....................................... 15.8% 17.5% 25.6%
AT&T Broadband Group offers its customers four digital packages -- Bronze,
Silver, Gold and Platinum. These packages allow viewers to select the level of
services they receive to fit their individual interests.
High-Speed Cable Internet. AT&T Broadband Group offers high-speed cable
Internet service for personal computers over its networks in all of its upgraded
two-way systems.
Below is a summary of AT&T Broadband Group's high-speed cable Internet
service operating statistics:
DECEMBER 31,
-----------------------------------
1999 2000 2001
--------- ---------- ----------
Data marketable homes passed...................... 4,974,000 14,523,000 14,937,000
Customers......................................... 207,000 1,060,000 1,512,000
Penetration....................................... 4.2% 7.3% 10.1%
AT&T Broadband Group's high-speed cable Internet service enables data to be
transmitted substantially faster than through conventional telephone modem
technologies, and the cable connection does not interfere with normal telephone
activity or usage. AT&T Broadband Group's high-speed cable Internet service
offers unlimited access to public areas on the Internet.
Until recently, AT&T Broadband Group and At Home Corporation were parties
to a master distribution agreement pursuant to which At Home provided AT&T
Broadband Group with broadband network services and content aggregation
necessary for the delivery of high-speed cable Internet services to AT&T
Broadband Group's customers. On September 28, 2001, At Home and its U.S.
subsidiaries filed for protection under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Northern District
of California. On November 30, 2001, the bankruptcy court granted a motion made
by At Home for authority to reject the master distribution agreement and other
similar agreements with other customers of At Home, thereby giving At Home the
authority to terminate service to AT&T Broadband Group and other customers at
any time. As a result, on December 1, 2001, At Home terminated service to AT&T
Broadband Group and, in response, AT&T Broadband Group converted its customers
to a new AT&T-managed network during December. AT&T Broadband Group currently
provides "AT&T Broadband Internet" branded high-speed cable Internet service to
its customers pursuant to an agreement with AT&T to provide certain network and
backbone support services to AT&T Broadband Group. In March 2002, AT&T Broadband
Group entered into an agreement with EarthLink pursuant to which EarthLink will
initially launch its high-speed Internet service in greater Boston and the
Seattle service areas.
Broadband Telephone Service. AT&T Broadband Group currently offers
broadband telephone services to customers in 15 markets using AT&T Broadband
Group's systems' direct, two-way connections to homes. AT&T Broadband Group
utilizes its broadband network to provide local telephone services and resell
AT&T long distance services. AT&T Broadband Group also provides broadband
telephone services for the systems operated by Insight Midwest which are located
in Kentucky, Indiana and Ohio.
VII-5
Below is a summary of AT&T Broadband Group's operating statistics for
broadband telephone services:
DECEMBER 31,
-----------------------------------
1999 2000 2001
------- --------- -------------
Telephone-ready homes passed....................... 721,000 6,103,000 6,833,000
Customers.......................................... 8,000 547,000 1,011,000
Penetration........................................ 1.1% 9.0% 14.8%
AT&T Broadband Group's broadband telephone service initiatives progressed
substantially in 2000 and 2001. During 2000, AT&T Broadband Group increased the
number of markets in which it offers telephone service from ten to 16, and
increased its customer base from 8,000 to 547,000. As of December 31, 2001, AT&T
Broadband Group offered broadband telephone services in: Atlanta, Boston, the
San Francisco Bay Area, Chicago, Dallas, Denver, Hartford, Jacksonville, Twin
Cities, Pittsburgh, Richmond, Seattle, Salt Lake City, Southern California and
Portland, Oregon. AT&T Broadband Group offers a variety of options and calling
plans with various price points. These options and calling plans range from
basic one line service to multiple lines with full feature functionality.
Advertising. AT&T Broadband Group sells advertising time on
satellite-delivered program services such as CNN, Discovery, ESPN and Lifetime,
and on local channels. In addition to the sale of advertising time to local and
regional advertisers, AT&T Broadband Group participates in the national spot
advertising marketplace through its sales representation arrangement with and
investment in National Cable Communications, LLC, a partnership that represents
cable systems in the sale of time to national spot advertisers.
STRATEGY
AT&T Broadband Group's strategy is to utilize the technological
capabilities of its broadband cable systems to be a full-service provider of
entertainment, information and communications services in the markets it serves.
To implement this strategy, AT&T Broadband Group continues to upgrade its cable
systems to allow it to deliver more information and entertainment services and
to provide for two-way communications capability. Continuing the upgrade of its
cable systems is expected to enhance AT&T Broadband Group's ability to increase
penetration of advanced services, including digital cable, high-speed cable
Internet service and all-distance telephone service. Providing quality customer
service also is a key element of AT&T Broadband Group's strategy. Throughout its
operations, AT&T Broadband Group focuses on achieving reliable customer service
with financial results comparable to the overall cable industry.
ACQUISITIONS AND DIVESTITURES
AT&T Broadband Group has sought to improve the geographic footprint of its
cable systems by selectively exchanging its cable systems for systems of other
cable operators or acquiring systems in close proximity to its systems. In this
regard, AT&T Broadband Group completed a significant number of transactions in
2000 and 2001 that substantially changed the size and profile of its cable
system network. The principal transactions are described below:
- In January 2000, a subsidiary of AT&T Broadband Group sold its entire 50%
interest in Lenfest to a subsidiary of Comcast. In consideration for its
50% interest, AT&T Broadband Group received 47,289,843 shares of Comcast
Special Class A common stock.
- In February 2000, AT&T Broadband Group redeemed a portion of its interest
in Bresnan Communications Group LLC for $285 million in cash. AT&T
Broadband Group then contributed its remaining interest in Bresnan to CC
VIII, LLC, in exchange for a preferred ownership interest.
- In March 2000, AT&T Broadband Group redeemed approximately 50.3 million
shares of AT&T common stock held by Cox in exchange for stock of a
subsidiary of AT&T Broadband Group
VII-6
owning cable television systems serving approximately 312,000 customers,
AT&T Broadband Group's interest of $1,088 million in certain investments,
$878 million of franchise costs and $503 million of other net assets.
- In April 2000, AT&T Broadband Group contributed 103,000 subscribers into
a joint venture with Midcontinent Media, Inc. in exchange for a 50%
interest in Midcontinent Communications, a general partnership.
- In June 2000, MediaOne merged into a subsidiary of AT&T, whereby AT&T
Broadband Group acquired approximately 5 million basic cable subscribers,
0.2 million digital video subscribers, 0.3 million high-speed cable
Internet service subscribers and 0.1 million broadband telephone service
subscribers.
- Effective December 31, 2000, AT&T Broadband Group transferred systems
serving approximately 770,000 subscribers primarily located in Washington
D.C., Florida, Georgia, Michigan, New Jersey and Pennsylvania to Comcast
in exchange for systems serving approximately 700,000 subscribers
primarily located in Sacramento, California, Longmont, Colorado, Florida,
Georgia and Chicago, Illinois.
- In January 2001, AT&T Broadband Group transferred 98,400 subscribers to
Insight Communications Company, Inc. In a subsequent transaction, AT&T
Broadband Group contributed 247,500 additional subscribers in the
Illinois markets to Insight Midwest, a partnership owned 50% by AT&T
Broadband Group and 50% by Insight Communications, and Insight
Communications also contributed additional subscribers to the
partnership. The expanded joint venture continues to be managed by
Insight Communications.
- In January 2001, AT&T Broadband Group acquired 358,000 subscribers in the
Boston metropolitan area from Cablevision and transferred 130,000 New
York subscribers, 44 million shares of AT&T common stock valued at
approximately $871 million and approximately $204 million in cash to
Cablevision.
- On January 5, 2001, AT&T Broadband Group completed an exchange whereby
AT&T Broadband Group contributed approximately 82,000 subscribers in the
Corpus Christi, Texas area to Texas Cable Partners, L.P., a partnership
in which AT&T Broadband Group holds a 50% partnership interest, and AT&T
Broadband received from Texas Cable Partners, L.P. approximately 97,000
subscribers in areas surrounding the Dallas, Texas metropolitan area.
- On March 1, 2001, AT&T Broadband Group completed an exchange with
CableOne, Inc. whereby AT&T Broadband received approximately 105,000
subscribers in the Santa Rosa/Modesta, California area from CableOne,
Inc.; and AT&T Broadband Group transferred approximately 149,000
subscribers in Idaho, Oregon, and Washington to CableOne, Inc.
- On April 30, 2001, a subsidiary of AT&T sold to Comcast certain cable
systems attributed to AT&T Broadband Group serving approximately 590,000
subscribers in Delaware, New Mexico, Maryland, New Jersey, Pennsylvania
and Tennessee in exchange for 63.9 million shares of AT&T common stock
valued at $1,423 million.
- On June 29, 2001, a subsidiary of AT&T sold to MediaCom Communications
Corporation cable systems attributed to AT&T Broadband Group serving
approximately 94,000 customers in Missouri for approximately $295 million
in net cash.
- Effective June 30, 2001, a subsidiary of AT&T transferred to Charter
cable systems attributed to AT&T Broadband Group serving approximately
563,000 customers in Alabama, California, Illinois, Missouri and Nevada.
AT&T Broadband Group, through its attributed entities, received $1,497
million in net cash, $222 million in cash restricted for future
acquisitions of cable systems, and a cable system in Florida serving
9,000 customers.
VII-7
- Effective June 30, 2001, AT&T, together with certain subsidiaries
attributed to AT&T Broadband Group transferred its 99.75% interest in an
entity owning the Baltimore, Maryland cable television system, serving
approximately 115,000 customers, to Comcast for approximately $510
million.
- On July 18, 2001, a subsidiary of AT&T sold to MediaCom cable systems
attributed to AT&T Broadband Group serving approximately 710,000
customers in Georgia, Iowa and Illinois for approximately $1,724 million
in net cash.
- On December 17, 2001, a subsidiary of AT&T and Adelphia closed a
transaction in which certain cable systems attributable to AT&T Broadband
Group serving approximately 128,000 customers in central Pennsylvania and
Ohio were sold to Adelphia for approximately $245 million in cash and
Adelphia Class A Common stock valued at approximately $73 million.
- On April 5, 2002, various subsidiaries of AT&T and Bresnan Broadband
Holdings, LLC ("Bresnan") entered into a definitive agreement pursuant to
which AT&T Broadband will sell to Bresnan cable systems serving
approximately 320,000 customers in Montana, Wyoming, Colorado, and Utah
for $735 million in cash, subject to customary adjustments.
SALES AND MARKETING
AT&T Broadband Group's marketing programs and campaigns offer a variety of
services packaged and tailored to its markets. AT&T Broadband Group markets its
services through promotional campaigns and local media and newspaper
advertising, through telemarketing, direct mail advertising, online selling and
in person selling. In addition, AT&T Broadband Group reserves a portion of its
inventory of locally inserted cable television advertising to market its
services.
PROGRAMMING SUPPLIERS
AT&T Broadband Group has various contracts to obtain basic and premium
programming from program suppliers whose compensation is typically based on a
fixed fee per customer or a percentage of its gross receipts for the particular
service. AT&T Broadband Group has entered into long-term agreements with several
programming suppliers, including ABC/Disney, AOL Time Warner, CBS/Viacom, NBC,
News Corp. and Starz! Encore. Certain of these agreements provide for a flat fee
or guaranteed payment obligation regardless of subscriber levels. AT&T Broadband
Group's programming contracts are generally for a fixed period of time and are
subject to negotiated renewal. Some program suppliers provide volume discount
pricing structures or offer marketing support to AT&T Broadband Group.
AT&T Broadband Group's programming costs have increased substantially in
recent years due to additional programming being provided to its customers,
increased costs to produce or purchase programming, inflationary increases and
other factors affecting the cable television industry.
AT&T Broadband Group also has various retransmission consent arrangements
with commercial broadcast stations, which expire at various times over the next
ten years, with a significant portion expiring prior to December 31, 2002. None
of these consent arrangements requires payment of fees for carriage. However,
AT&T Broadband Group does provide non-cash consideration, including entering
into agreements with certain broadcast networks to carry satellite-delivered
cable programming that is affiliated with the broadcast network.
AGREEMENTS WITH LIBERTY MEDIA
AT&T Broadband Group is a party to various arrangements with Liberty Media.
Effective August 2001, Liberty Media was split off from AT&T and is no longer an
affiliate of AT&T Broadband Group.
Preferred Vendor Status. AT&T Broadband Group has granted Liberty Media
preferred vendor status with respect to access, timing and placement of new
programming services. This means that AT&T Broadband Group must use its
reasonable efforts to provide digital basic distribution of new services created
by Liberty Media and its affiliates, on mutual "most favored nation" terms and
conditions, and
VII-8
otherwise consistent with industry practices, subject to the programming meeting
standards that are consistent with the type, quality and character of AT&T
Broadband Group's cable services as they may evolve over time.
Extension of Term of Affiliation Agreements. AT&T Broadband Group has
agreed to extend any existing affiliation agreement of Liberty Media and its
affiliates that expires on or before March 9, 2004, to a date not before March
9, 2009, if most favored nation terms are offered and the arrangements are
consistent with industry practice.
Interactive Video Services. AT&T Broadband Group has agreed to enter into
arrangements with Liberty Media for interactive video services under one of the
following two arrangements, which will be at the election of AT&T Broadband
Group:
- Pursuant to a five-year arrangement, renewable for an additional
four-year period on then-current most favored nation terms, AT&T
Broadband Group will make available to Liberty Media capacity equal to
one 6 MHz channel, in digital form and including interactive enablement,
first screen access and hot links to relevant web sites -- all to the
extent implemented by AT&T Broadband Group cable systems, to be used for
interactive, category-specific video channels that will provide
entertainment, information and merchandising programming. The foregoing,
however, will not compel AT&T Broadband Group to disrupt other
programming or other channel arrangements. The interactive video services
are to be accessible through advanced set-top boxes deployed by AT&T
Broadband Group, except that, unless specifically addressed in a mutually
acceptable manner, AT&T Broadband Group will have no obligation to deploy
set-top boxes of a type, design or cost materially different from that it
would otherwise have deployed. The content categories may include, among
others, music, travel, health, sports, books, personal finance,
automotive, home video sales and games.
- AT&T Broadband Group may enter into one or more mutually agreeable
ventures with Liberty Media for interactive, category-specific video
channels that will provide entertainment, information and merchandising
programming. Each venture will be structured as a 50/50 venture for a
reasonable commercial term, and will provide that, for the duration of
such term, Liberty Media and AT&T Broadband Group will not provide
interactive services in the category(s) of interactive video services
provided through the venture(s) other than the joint venture services in
the applicable categories. When the distribution of interactive video
services occurs through a venture arrangement, AT&T Broadband will share
in the revenue and expense of the provision of the interactive services
pro rata to its ownership interest in lieu of the commercial arrangements
described in the preceding paragraph. At the third anniversary of the
formulation of any such venture, AT&T Broadband Group may elect to
purchase Liberty Media's ownership interest in the venture at fair market
value. Liberty Media and AT&T Broadband Group have agreed to endeavor to
make any such transaction tax efficient to Liberty Media.
At the date of this document, AT&T Broadband Group has not entered into any
further agreements with Liberty Media regarding the distribution of specific
interactive television channels. As a result, the exact terms under which AT&T
Broadband Group may provide carriage of these channels has not been determined,
and AT&T Broadband Group has not made any election between the alternative
carriage arrangements described above. Although AT&T Broadband Group will
continue to endeavor to negotiate agreements with Liberty Media concerning
distribution of interactive channels within the framework of the above
arrangement, there can be no assurance that AT&T Broadband Group will be able to
conclude any such agreement on acceptable terms.
Affiliation Agreements. AT&T Broadband Group is party to affiliation
agreements pursuant to which it purchases programming from Liberty Media's
subsidiaries and affiliates. Some of these agreements provide for penalties and
charges in the event the supplier's programming is not carried on AT&T Broadband
Group's cable systems or not delivered to a contractually specified number of
customers. Charges to AT&T Broadband Group for such programming are generally
based upon customary rates and
VII-9
often provide for payments to AT&T Broadband Group by Liberty Media's
subsidiaries and business affiliates for marketing support.
In July 1997, TCI, whose successor is a member entity of AT&T Broadband
Group, and AT&T Broadband Group's subsidiary, Satellite Services, Inc., entered
into a 25 year affiliation term sheet with Starz Encore Group, formerly Encore
Media Group, pursuant to which AT&T Broadband may be obligated to make fixed
monthly payments in exchange for unlimited access to Encore and Starz!
programming. The commitment increases annually from $306 million in 2002 to $315
million in 2003, and will increase annually through 2022 with inflation. The
affiliation term sheet further provides that to the extent Starz Encore Group's
programming costs increase above certain levels, AT&T Broadband Group's payments
under the term sheet will be increased in proportion to the excess. Excess
programming costs that may be payable by AT&T Broadband in future years are not
presently estimable, and could be significant. By letter dated May 29, 2001,
AT&T Broadband Group disputed the enforceability of the excess programming pass
through provisions of the term sheet and questioned the validity of the term
sheet as a whole. AT&T Broadband Group also raised certain issues concerning the
uncertainty of the provisions of the term sheet and the contractual
interpretation and application of certain of its provisions to, among other
things, the acquisition and disposition of cable systems. In July 2001, Starz
Encore Group filed suit seeking payment of the 2001 excess programming costs and
a declaration that the term sheet is a binding and enforceable contract. In
October 2001, AT&T Broadband Group and Starz Encore Group agreed to stay the
litigation until August 31, 2002 to allow the parties time to continue
negotiations toward a potential business resolution of this dispute. The Court
granted the stay on October 30, 2001. The terms of the stay order allow either
party to petition the Court to lift the stay after April 30, 2002 and to proceed
with the litigation.
OTHER ASSETS
Joint Ventures. AT&T Broadband Group possesses a number of investments in
companies, joint ventures and partnerships, the most significant of which are
Time Warner Entertainment, Insight Midwest and Texas Cable Partners.
Time Warner Entertainment. Time Warner Entertainment is a Delaware limited
partnership that was formed in 1992 to own and/or operate substantially all of
the business of Warner Bros., HBO and the cable television businesses owned and
operated by Time Warner at that time. AT&T Broadband Group's current interest in
Time Warner Entertainment was acquired by AT&T Broadband Group in connection
with the MediaOne acquisition. Currently, AT&T Broadband Group, through its
wholly owned subsidiaries, owns limited partnership interests representing
25.51% of the pro rata senior priority (Series A) capital and residual equity
capital of Time Warner Entertainment. The remaining 74.49% limited partnership
interests in the Series A capital and residual capital of Time Warner
Entertainment, as well as 100% of the junior priority (Series B) capital of Time
Warner Entertainment, are held by subsidiaries of AOL Time Warner. Subsidiaries
of AOL Time Warner act as the general partners of Time Warner Entertainment, and
AT&T is not involved in the management or operation of the partnership or its
business but has certain protective governance rights pertaining to certain
limited significant matters relating to Time Warner Entertainment, such as the
dissolution or merger or voluntary bankruptcy of Time Warner Entertainment.
On February 28, 2001, AT&T submitted a request to Time Warner
Entertainment, pursuant to the Time Warner Entertainment partnership agreement,
that Time Warner Entertainment reconstitute itself as a corporation and register
for sale in an initial public offering an amount of partnership interests held
by AT&T Broadband Group (up to the full amount held by AT&T Broadband Group)
determined by an independent investment banking firm so as to provide sufficient
trading liquidity and minimize any initial public offering discount. Under the
Time Warner Entertainment partnership agreement, upon this request, AT&T
Broadband Group and Time Warner are to cause an independent investment banker to
determine both such registrable amount of partnership interests and the price at
which the registrable amount could be sold in a public offering. The partnership
agreement provides that, upon determination of the registrable amount and the
appraised value of the registrable amount, Time Warner Entertainment may elect
not to
VII-10
register these interests, but instead to allow AT&T Broadband Group the option
to require that Time Warner Entertainment purchase the registrable amount at the
appraised value, subject to certain adjustments. If AT&T Broadband Group does
put the registrable amount to Time Warner Entertainment under such
circumstances, Time Warner Entertainment may call the remainder of AT&T
Broadband Group's interest in Time Warner Entertainment at a price described in
the Time Warner Entertainment partnership agreement. If Time Warner
Entertainment elects to register the interests, then Time Warner Entertainment
must promptly use its best efforts to cause the partnership to be in a position
to be reconstituted as a corporation and to effect an initial public offering.
However, Time Warner Entertainment may have an option to purchase these
interests immediately prior to the time the public offering would otherwise have
been declared effective by the SEC at the proposed public offering price less
underwriting fees and discounts if the proposed public offering price (as
determined by the managing underwriter) is less than 92.5% of the appraised
value. If, at the conclusion of this process, AT&T Broadband Group has any
remaining interests in Time Warner Entertainment, AT&T Broadband Group will have
the right to request registration of those interests for public sale after July
1, 2002 (if no public offering of Time Warner Entertainment shall have taken
place), or 18 months after a public offering pursuant to AT&T Broadband's
request.
Since February 28, 2001, AT&T Broadband Group and AOL Time Warner have been
engaged in discussions regarding the retention of a mutually satisfactory
investment banker to perform the appraisals of Time Warner Entertainment under
the Time Warner Entertainment partnership agreement.
If the procedures described above do not result in the disposition by AT&T
Broadband Group of its entire interest in Time Warner Entertainment, then under
the terms of the Time Warner Entertainment partnership agreement, AT&T may be
required, before the AT&T Comcast transaction may be completed in its current
form, to offer Time Warner Entertainment the opportunity to repurchase the
remaining interest in the partnership.
AT&T has an option to increase its Series A priority capital and residual
capital interests in Time Warner Entertainment by an amount determined by
reference to a formula in the option agreement following an appraisal by an
independent appraiser. On March 25, 2002, the appraisal of Time Warner
Entertainment under the option agreement was completed by an independent
appraiser jointly engaged by AT&T Broadband Group and AOL Time Warner and on
April 19, 2002, AT&T Broadband Group provided the requisite notice to AOL Time
Warner to exercise the option in full on a cashless basis. Based on this
appraisal and the exercise of the option on a cashless basis, AT&T Broadband
Group's interest in Time Warner Entertainment will increase at the end of May
2002 by 2.07 percentage points to 27.58% of the Series A priority capital and
residual equity capital.
Insight Midwest, L.P. Insight Midwest is a Delaware limited partnership
formed in 1999, which currently owns and operates certain cable systems in
Indiana, Kentucky, Illinois, Georgia and Ohio. AT&T Broadband Group holds a 50%
limited partnership interest and Insight Communications holds a 50% general
partnership interest in Insight Midwest. The business of the partnership is
managed by Insight Communications, as the general partner, although certain
matters also require the approval of AT&T Broadband Group. Insight Midwest
currently has approximately 1.2 million cable video subscribers.
Texas Cable Partners, L.P. Texas Cable Partners is a Delaware limited
partnership formed in December 1998 to own and operate certain cable systems in
Texas. The partnership is owned 50% by AT&T Broadband Group and 50% by the Time
Warner Entertainment-Advance/Newhouse Partnership, approximately two-thirds of
which is owned by Time Warner Entertainment. The general manager of Texas Cable
Partners is Time Warner Cable, a division of Time Warner Entertainment, although
certain governance matters require the approval of the management committee on
which the Time Warner Entertainment-Advance/Newhouse Partnership and AT&T
Broadband Group have equal representation. Texas Cable Partners currently has
approximately 1.1 million cable video subscribers.
Other Investments. AT&T Broadband Group has interests in a number of
different joint ventures and companies.
VII-11
COMPETITION
Cable television competes for customers in local markets with other
providers of entertainment, news and information. The competitors in these
markets include direct broadcast satellite service, broadcast television and
radio, satellite master antenna television systems, wireless cable providers,
newspapers, magazines and other printed material, motion picture theatres, video
cassettes, DVDs and other sources of information and entertainment, including
directly competitive cable television operations and ISPs. The Cable Television
Consumer Protection and Competition Act of 1992, or the 1992 Cable Act, and the
Telecommunications Act are designed to increase competition in the cable
television industry.
Additionally, AT&T Broadband Group faces significant competition from both
local telephone companies and new providers of services such as Internet service
and telephone services. Providers of competitive high-speed data offerings
include fixed wireless companies, direct broadcast satellite companies and DSL
providers.
There are alternative methods of distributing the same or similar services
offered by cable television systems. Further, these technologies have been
encouraged by the U.S. Congress and the FCC to offer services in direct
competition with existing cable systems.
Direct Broadcast Satellite. Direct broadcast satellite has emerged as
significant competition to cable systems. The direct broadcast satellite
industry has grown rapidly over the last several years, far exceeding the growth
rate of the cable television industry, and now serves approximately 17.6 million
subscribers nationwide. Direct broadcast satellite service allows a subscriber
to receive video (as well as non-video) services directly via satellite using a
relatively small dish antenna. Moreover, video compression technology allows
direct broadcast satellite providers to offer more than 400 digital channels,
thereby surpassing the typical analog or hybrid analog-digital cable system.
Direct broadcast satellite companies historically were prohibited from
retransmitting popular local broadcast programming, but a change to the existing
copyright laws in November 1999 eliminated this legal impediment. Direct
broadcast satellite companies now need to secure retransmission consent from the
popular broadcast stations they wish to carry, and now face mandatory carriage
obligations of less popular broadcast stations as of January 2002. These new
"must carry" rules require satellite companies to carry all local broadcast
stations in a local market where they carry any such station pursuant to a new
compulsory copyright license. In response to the legislation, DirecTV, Inc. and
EchoStar Communications Corporation already have begun carrying the major
network stations in the nation's top television markets. The direct broadcast
satellite industry initiated a judicial challenge to the statutory requirement
mandating carriage of less popular broadcast stations. This lawsuit alleges that
the must-carry requirement (similar to the requirement already applicable to
cable systems, and discussed under "-- Cable Regulation and Legislation -- Must
Carry/Retransmission Consent") is unconstitutional. The Court of Appeals for the
Fourth Circuit recently upheld the constitutionality of these rules, but
EchoStar and the Satellite Broadcasting and Communications Association have
sought review in the U.S. Supreme Court. Direct broadcast satellite companies
also have begun offering high-speed Internet services. EchoStar began providing
high-speed Internet service in late 2000, and DirecTV, which has partnered with
AOL Time Warner, reports that it will begin providing its own version of
high-speed Internet service shortly. Further, in October 2001 EchoStar entered
into an agreement to acquire DirecTV. EchoStar's applications for approval of
the proposed acquisition are still pending before various governmental bodies.
These developments will provide significant new competition to AT&T Broadband
Group's offering of video programming and high-speed cable Internet service.
Broadcast Television. Cable television has long competed with broadcast
television, which consists of television signals that the viewer is able to
receive without charge using an "off-air" antenna. The extent of this
competition, which is for both the acquisition and delivery of programming, as
well as for advertising, is dependent upon the quality and quantity of broadcast
signals available through off-air reception compared to the services provided by
the local cable system. The recent licensing of digital spectrum by the FCC will
provide incumbent television licensees with the ability to deliver high
definition television pictures and multiple digital-quality program streams, as
well as advanced digital services, such as subscription video.
VII-12
DSL. The deployment of DSL technology allows the provision of Internet
services to subscribers at data transmission speeds greater than available over
conventional telephone lines. In addition, DSL providers offer voice services,
including offerings that divide up a phone line into several voice channels and
an always-on data line. All significant local telephone companies and certain
other telecommunications companies have launched DSL service. The FCC has a
policy of encouraging the deployment of DSL and similar technologies, both by
incumbent telephone companies and new, competing telephone companies. The FCC's
regulations in this area are subject to change. The development and deployment
of DSL technology by local telephone companies provides substantial competition
to AT&T Broadband Group's high-speed cable Internet services and cable telephone
services.
Private Cable. AT&T Broadband Group also competes with Satellite Master
Antenna Television systems, which provide multichannel program services and
high-speed Internet services directly to hotel, motel, apartment, condominium
and similar multi-unit complexes within a cable television system's franchise
area, generally free of any regulation by federal, state and local government
authorities and sometimes on an exclusive basis. FCC rules restrict the ability
of cable operators to maintain ownership of cable wiring inside multi-unit
buildings, thereby making it less expensive for Satellite Master Antenna
Television competitors, as well as other competitors that are increasingly
targeting multi-unit building subscribers, such as direct broadcast satellite,
to reach those customers. The FCC also has ruled that private cable operators
can lease video distribution capacity from local telephone companies and,
thereby, distribute cable programming services over the public rights-of-way
without obtaining a franchise. In 1999, both the Fifth and Seventh Circuit
Courts of Appeal upheld this FCC policy. This could provide a significant
regulatory advantage for private cable operators in the future. The 1992 Cable
Act ensures that Satellite Master Antenna Television Systems, as well as other
providers of multichannel video programming to end users, will have access to
most of the significant cable television programming services at
nondiscriminatory rates.
Cable System Overbuilds. Cable operators may compete with other cable
operators or new entities seeking franchises for competing cable television
systems at any time during the terms of existing franchises. The 1992 Cable Act
promotes the granting of competitive franchises, and AT&T Broadband Group
systems operate under nonexclusive franchises. Several years ago, there was a
significant increase in the number of cities that constructed their own cable
television systems in a manner similar to city-provided utility services. These
systems typically compete directly with the existing cable operator without the
burdens of franchise fees or other local regulation. The total number of
municipal overbuild cable systems remains relatively small. Additionally,
several years ago there was a significant increase in investments in private
company overbuilders of cable systems. If this trend were to resume, AT&T
Broadband Group cable systems could face an increasing number of markets in
which a second cable system will be competing directly with an AT&T Broadband
Group system, providing video, audio, interactive television, high-speed
Internet and telephone services. To date, overbuilds have not had a material
impact on AT&T Broadband Group's results.
Telephone Company Entry. The Telecommunications Act eliminated the
statutory and regulatory restrictions that prevented local telephone companies
from competing with cable operators in the provision of video services. The
Telecommunications Act allows local telephone companies, including regional
phone companies, to compete with cable television operators both inside and
outside their telephone service areas. AT&T Broadband Group expects that it
could face competition from telephone companies for the provision of video
services, whether it is through wireless cable or through upgraded telephone
networks. AT&T Broadband Group assumes that all major telephone companies
already have entered or may enter the business of providing video services.
Although enthusiasm on the part of local exchange carriers is not clear, AT&T
Broadband Group is aware that telephone companies have already built, or are in
the process of building, competing cable system facilities in a number of AT&T
Broadband Group's franchise areas. As AT&T Broadband Group continues to expand
its offerings to include Internet and telecommunications services, it will be
subject to competition from the local telephone companies and telecommunications
providers. The telecommunications industry is highly competitive, and includes
competitors with
VII-13
substantial financial and personnel resources, brand name recognition and
long-standing relationships with regulatory authorities.
Utility Company Entry. The Telecommunications Act eliminated certain U.S.
federal restrictions on utility holding companies and thus frees all utility
companies to provide cable television services. AT&T Broadband Group expects
this could result in another source of competition in the delivery of video,
telephone and high-speed Internet services.
MMDS. Another alternative method of distribution is multichannel,
multi-point distribution systems, or MMDS, which deliver programming services
over microwave channels to customers equipped with special antennas. MMDSs are
less capital intensive, are not required to obtain local franchises or pay
franchise fees, and are subject to fewer regulatory requirements than cable
television systems.
Local Voice. AT&T Broadband Group's cable telephone service competes
against incumbent local exchange carriers and competitive local exchange
carriers in the provision of local voice services. Moreover, many of these
carriers are expanding their offerings to include high-speed Internet service.
The incumbent local exchange carriers have very substantial capital and other
resources, longstanding customer relationships and extensive existing facilities
and network rights-of-way. A few competitive local exchange carriers also have
existing local networks and significant financial resources.
Fixed Wireless. Fixed wireless technologies compete with AT&T Broadband
Group in the provision of Internet and voice services. Fixed wireless providers
serve the same functions as a wireline provider, by interconnecting private
networks, bypassing a local exchange carrier or connecting to the Internet. The
technology involved in point-to-point microwave connections has advanced,
allowing the use of higher frequencies, and thus smaller antennas, resulting in
lower costs and easier-to-deploy systems for private use and encouraging the use
of such technology by carriers. Fixed wireless systems are designed to emulate
cable connections, and they use the same interfaces and protocols, such as T1,
frame relay, Ethernet and ATM. Fixed wireless systems also match the service
parameters of cable systems, and consequently any application that operates over
a cable should be able to operate over a fixed wireless system.
Resellers. Among AT&T Broadband Group's competitors in the areas of voice
and Internet services are resellers. Resellers typically are low-cost
aggregators that serve price-conscious market segments and value-added resellers
that target customers with special needs.
IP Telephone. IP telephone providers compete directly against AT&T
Broadband Group's cable telephone service. IP telephone providers derive most of
their revenues from per-minute charges, but they also offer other services
including voicemail and IP telephone equipment. Although the offerings of IP
telephone providers are limited mostly to voice services, these companies seek
to expand to other areas of the telecommunications industry, and may succeed in
doing so in the future.
General. In addition to competition for customers, the cable television
industry competes with broadcast television, radio, print media and other
sources of information and entertainment for advertising revenue. As the cable
television industry has developed additional programming, its advertising
revenue has increased. Cable operators sell advertising spots primarily to local
and regional advertisers.
AT&T Broadband Group has no basis upon which to estimate the number of
cable television companies and other entities with which it competes or may
potentially compete. The full extent to which other media or home delivery
services will compete with cable television systems may not be known for some
time, and there can be no assurance that existing, proposed or as yet
undeveloped technologies will not become dominant in the future.
EMPLOYEES
At December 31, 2001, AT&T Broadband Group employed approximately 40,150
individuals in its operations, virtually all of whom are located in the United
States. Approximately 2,900 of these employees are represented by the
Communications Workers of America or the International Brotherhood of Electrical
Workers, both of which are affiliated with the AFL-CIO.
VII-14
LEGAL PROCEEDINGS
In the normal course of business, AT&T Broadband Group is subject to
proceedings, lawsuits and other claims, including proceedings under government
laws and regulations related to environmental and other matters. Such matters
are subject to many uncertainties and outcomes are not predictable with
assurance. Consequently, AT&T Broadband Group is unable to ascertain the
ultimate aggregate amount of monetary liability or financial impact with respect
to these matters at December 31, 2001. While these matters could affect
operating results of any one quarter when resolved in future periods, it is
management's opinion that after final disposition, any monetary liability or
financial impact to AT&T Broadband Group beyond that provided for at year-end
would not be material to AT&T Broadband Group's annual consolidated financial
position or results of operations.
Through a subsidiary, AT&T owns approximately 23% of the outstanding common
stock and 74% of the voting power of the outstanding common stock of At Home
Corporation, which filed for bankruptcy protection on September 28, 2001. Until
October 1, 2001, AT&T appointed a majority of At Home's directors and it now
appoints none.
Since September 28, 2001 some creditors of At Home have threatened to
commence litigation against AT&T relating to the conduct of AT&T or its
designees on the At Home Board in connection with At Home's declaration of
bankruptcy and At Home's subsequent aborted efforts to dispose of some of its
businesses or assets in a bankruptcy court-supervised auction, as well as in
connection with other aspects of AT&T's relationship with At Home. The liability
for any such lawsuits would be shared equally between AT&T and AT&T Broadband.
No such lawsuits have been filed to date. However, on April 26, 2002, At Home
and its creditor committees filed a motion seeking to appoint At Home's
bondholders as representatives of At Home to pursue its claims against AT&T. On
May 1, 2002, At Home filed a draft proposed plan of liquidation pursuant to
Chapter 11 of the U.S. Bankruptcy Code, which, among other things, implements
the creditor's settlement and provides that all claims and causes of action of
the bankrupt estate of At Home against AT&T and other shareholders will be
transferred to a liquidating trust owned ratably by the bondholders of At Home
and funded with at least $12 million, and as much as $17 million, to finance the
litigation of those claims. The creditor settlement calls for confirmation of
the plan by July 31, 2002, and for the plan to be effective by August 30, 2002.
In addition, purported class action lawsuits have been filed in California
state court on behalf of At Home shareholders against AT&T, At Home, Comcast and
former directors of At Home. The lawsuits claim that the defendants breached
fiduciary obligations of care, candor and loyalty in connection with a
transaction announced in March 2000 in which, among other things, AT&T, Cox and
Comcast agreed to extend existing distribution agreements, the At Home Board was
reorganized, and AT&T agreed to give Cox and Comcast rights to sell their At
Home shares to AT&T. These actions have been consolidated by the court and are
subject to a stay, which the plaintiffs are seeking to have lifted. The
liability for any such lawsuits would be shared equally between AT&T and AT&T
Broadband.
In March 2002 a purported class action was filed in the United States
District Court for the Southern District of New York against, among others, AT&T
and certain of its senior officers alleging violations of the federal securities
laws in connection with the disclosures made by At Home in the period from April
17, 2001 through August 28, 2001. Any liabilities resulting from this lawsuit
would be shared equally between AT&T and AT&T Broadband.
In 1997, TCI, whose successor is a member entity of AT&T Broadband Group,
and AT&T Broadband Group's subsidiary, Satellite Services, Inc., entered into a
25 year affiliation term sheet with Starz Encore Group (formerly Encore Media
Group) pursuant to which AT&T Broadband Group may be obligated to make fixed
monthly payments in exchange for unlimited access to Encore and STARZ!
programming. The commitment increases annually from $306 million in 2002 to $315
million in 2003, and will increase annually through 2022 with inflation. The
affiliation term sheet further provides that to the extent Starz Encore Group's
programming costs increase above certain levels, AT&T Broadband Group's payments
under the term sheet will be increased in proportion to the excess. Excess
programming costs that may be payable by AT&T Broadband Group in future years
are not presently estimable, and could be
VII-15
significant. By letter dated May 29, 2001, AT&T Broadband Group disputed the
enforceability of the excess programming pass through provisions of the term
sheet and questioned the validity of the term sheet as a whole. AT&T Broadband
Group also raised certain issues concerning the uncertainty of the provisions of
the term sheet and contractual interpretation and application of certain of its
provisions to, among other things, the acquisition and disposition of cable
systems. In July 2001, Starz Encore Group filed suit seeking payment of the 2001
excess programming costs and a declaration that the term sheet is a binding and
enforceable contract. In October 2001, AT&T Broadband Group and Starz Encore
Group agreed to stay the litigation until August 31, 2002 to allow the parties
time to continue negotiations toward a potential business resolution of this
dispute. The Court granted the stay on October 30, 2001. The terms of the stay
order allow each party to petition the Court to lift the stay after April 30,
2002 and to proceed with the litigation.
On March 13, 2002, AT&T Broadband Group informed CSG Systems, Inc. that
AT&T Broadband Group was considering the initiation of an arbitration against
CSG relating to a Master Subscriber Management System Agreement that the two
companies entered into in 1997. Pursuant to the Master Agreement, CSG provides
billing support to AT&T Broadband Group. On May 10, 2002, AT&T Broadband Group
filed a demand for arbitration against CSG before the American Arbitration
Association. In the event that this process results in the termination of the
Master Agreement, AT&T Broadband Group may incur significant costs in connection
with its replacement of these billing services and may experience temporary
disruptions to its operations.
CABLE REGULATION AND LEGISLATION
The operation of cable television systems is extensively regulated by the
FCC, some state governments and most local governments. The Telecommunications
Act altered the regulatory structure governing the nation's telecommunications
providers. It removed barriers to competition in both the cable television
market and the local telephone market. Among other things, it reduced the scope
of cable rate regulation.
The Telecommunications Act required the FCC to implement numerous
rulemakings, some of which are still subject to court challenges. Moreover,
Congress and the FCC have frequently revisited the subject of cable television
regulation and may do so again. Future legislative and regulatory changes could
adversely affect AT&T Broadband Group's operations. This section briefly
summarizes key laws and regulations currently affecting the growth and operation
of AT&T Broadband Group's cable systems.
Cable Rate Regulation. The 1992 Cable Act imposed an extensive rate
regulation regime on the cable television industry, which regulation limited the
ability of cable companies to increase subscriber fees. Under that regime, all
cable systems were subjected to rate regulation, unless they faced effective
competition in their local franchise area. U.S. federal law now defines
"effective competition" on a community-specific basis as requiring satisfaction
of various conditions, such as the penetration of competitive video services to
15% of the households in a cable system's franchise area.
Although the FCC establishes all cable rate rules, local government units,
commonly referred to as local franchising authorities, are primarily responsible
for administering the regulation of the lowest level of cable service -- the
basic service tier, which typically contains local broadcast stations and PEG
access channels. Before a local franchising authority begins basic service tier
rate regulation, it must certify to the FCC that it will follow applicable U.S.
federal rules, and many local franchising authorities have voluntarily declined
to exercise this authority. Local franchising authorities also have primary
responsibility for regulating cable equipment rates. Under U.S. federal law,
charges for various types of cable equipment must be unbundled from each other
and from monthly charges for programming services, and priced no higher than the
operator's actual cost, plus an 11.25% rate of return.
The FCC historically administered rate regulation of any cable programming
service tiers (i.e., all tiers other than the basic service tier), which
typically contain satellite-delivered programming. Under the Telecommunications
Act, however, the FCC's authority to regulate cable programming service tier
rates ended on March 31, 1999.
VII-16
Cable Entry into Telecommunications. The Telecommunications Act provides
that no state or local laws or regulations may prohibit or have the effect of
prohibiting any entity from providing any interstate or intrastate
telecommunications service. States are authorized, however, to impose
"competitively neutral" requirements regarding universal service, public safety
and welfare, service quality and consumer protection. State and local
governments also retain their authority to manage the public rights-of-way. The
Telecommunications Act clarifies that traditional cable franchise fees may be
based only on revenues related to the provision of cable television services.
The Telecommunications Act prohibits local franchising authorities from
requiring cable operators to provide telecommunications service or facilities as
a condition of a franchise grant, renewal or transfer, except that local
franchising authorities argue they can seek "institutional networks" as part of
these franchise negotiations.
In particular, cable operators that provide telecommunications services and
cannot reach agreement with local utilities over pole attachment rates in states
that do not regulate pole attachment rates will be subject to a methodology
prescribed by the FCC for determining the rates. These rates may be higher than
those paid by cable operators that do not provide telecommunications services.
The pole attachment rates afforded cable operators under U.S. federal law
can be increased by utility companies owning the poles during a five-year
phase-in period beginning in 2001 if the cable operator provides
telecommunications service as well as cable service over its plant. The FCC
clarified that a cable operator's provision of cable Internet service does not
affect the favorable pole rates, but a recent decision by the Eleventh Circuit
Court of Appeals disagreed. In January 2002, the U.S. Supreme Court overturned
the Eleventh Circuit decision and upheld the applicability of the more favorable
FCC -- prescribed pole rates regardless of the delivery of Internet services.
Cable entry into telecommunications will be affected by the regulatory
landscape now being fashioned by the FCC and state regulators, as well as the
courts. One critical component of the Telecommunications Act intended to
facilitate the entry of new telecommunications providers, including cable
operators, is the interconnection obligation imposed on all telecommunications
carriers. This requires, for example, that the incumbent local exchange carrier
must allow new competing telecommunications providers to connect to the local
telephone distribution system. A number of implementation details are subject to
ongoing regulatory and judicial review, but the basic requirement is now well
established. At the same time, incumbent local exchange carriers continue to
make it difficult for competitors to lease and use parts of their network in
order to provide competing services. Although local exchange carriers and cable
operators can now expand their offerings across traditional service boundaries,
the general prohibitions remain on local exchange carrier buyouts (i.e., any
ownership interest exceeding 10%) of co-located cable systems, cable operator
buyouts of co-located local exchange carrier systems, and joint ventures among
cable operators and local exchange carriers in the same market. The
Telecommunications Act provides a few limited exceptions to this buyout
prohibition.
Cable Systems Providing Internet Service. Although there is at present no
significant U.S. federal regulation of cable system delivery of Internet
services, and the FCC recently issued several reports and a declaratory ruling
finding no immediate need to impose this regulation, this situation may change
as cable systems expand their broadband delivery of Internet services. In
particular, proposals have been advanced at the FCC and in the Congress that
would require cable operators to provide "open access" to unaffiliated ISPs and
on-line service providers. The Federal Trade Commission and the FCC recently
imposed certain open access requirements on Time Warner and AOL in connection
with their merger, but those requirements are not applicable to other cable
operators. Some states and local franchising authorities may seek to impose
franchise conditions related to Internet access as part of cable franchise
renewals or transfers. AT&T Broadband Group has completed a technical and
operational trial to test how multiple ISPs can offer high-speed, always-on
cable Internet service over a hybrid fiber/coaxial network. In March 2002, AT&T
Broadband Group entered into an agreement with EarthLink pursuant to which
EarthLink will initially launch its high-speed Internet service in greater
Boston and the Seattle service areas.
On March 15, 2002, the FCC released a ruling declaring that cable Internet
services (called "cable modem services" in the FCC's decision) are properly
classified as an interstate "information service," not a
VII-17
"cable service," and that there is no separate offering of "telecommunications
service." The FCC simultaneously initiated a further rulemaking proceeding to
determine the scope of the FCC's jurisdiction to regulate cable modem service,
as well as the regulatory implications of the FCC's classification of cable
modem service as an interstate information service, including the extent to
which state and local authorities may regulate the service. The FCC's
classification of cable modem service as an interstate information service is
important. Most advocates of immediate regulation (such as those endorsing "open
access" for unaffiliated ISPs) had argued that cable modem service is, at least
in part, a "telecommunications service," and if the FCC had agreed with them, it
would have made it more likely that such burdensome regulations would have been
imposed on the service. At the same time, while the pending rulemaking
proceeding reiterates the FCC's view that broadband services should continue to
exist in a minimal regulatory environment, there are currently no assurances
that regulation of cable modem service will not arise at the federal and/or
state/local level. In addition, the FCC's classification of cable modem service
as an information service, but not a cable service, creates some new
uncertainties. For example, AT&T Broadband Group had been paying franchise fees
to local franchising authorities on its cable modem service revenues, based on
the good faith belief that cable modem service qualified as a cable service.
However, the FCC's classification decision now precludes the inclusion of cable
modem service revenues in the franchise fee calculation. While the FCC has asked
whether it should exercise its jurisdiction to resolve any uncertainty regarding
potential refund liability in connection with previously collected cable modem
service franchise fee payments from cable subscribers, there are currently no
assurances that AT&T Broadband Group will not face a litigation risk on this
issue.
Cable Television Ownership Restrictions. Pursuant to the 1992 Cable Act,
the FCC adopted regulations establishing a 30% limit on the number of
multichannel video subscribers (including cable, direct broadcast satellite,
Satellite Master Antenna Television, MMDS and other subscribers) that a cable
operator may reach nationwide through cable systems in which it holds an
attributable interest. The FCC stayed the effectiveness of its ownership limits
pending judicial review.
The FCC directly addressed the 30% ownership rule, and the applicable
ownership attribution standards, in its June 2000 ruling on the MediaOne
acquisition. The FCC allowed the MediaOne acquisition to go forward, but
required AT&T to elect one of three divestiture options to come into compliance
with the 30% ownership cap. Specifically, AT&T was required to either (1) divest
its interest in Time Warner Entertainment, (2) terminate its involvement in Time
Warner Entertainment's video programming activities, which would require
divestiture of substantially all of AT&T's video programming interests,
including its interest in Liberty Media, or (3) divest interests in cable
systems. Compliance, or arrangements for compliance, was required by May 2001.
The FCC order also established safeguards restricting AT&T Broadband Group's
communication with Time Warner Entertainment, as well as its communication with,
and participation in, Board meetings for iN DEMAND and certain other video
programming services.
The FCC previously adopted regulations limiting carriage by a cable
operator of national programming services in which that operator holds an
attributable interest to 40% of the activated channels on each of the cable
operator's systems. These "channel occupancy" rules provide for the use of two
additional channels or a 45% limit, whichever is greater, provided that the
additional channels carry minority controlled programming services. The
regulations also grandfather existing carriage arrangements that exceed the
channel limits, but require new channel capacity to be devoted to unaffiliated
programming services until the system achieves compliance with the regulations.
These channel occupancy limits apply only up to 75 activated channels on the
cable system, and the rules do not apply to local or regional programming
services.
In March 2001, the D.C. Circuit Court of Appeals struck down the rules
adopted by the FCC pertaining to ownership and channel occupancy and remanded
the issues back to the FCC for further review. Following this decision, the FCC
initiated a rulemaking proceeding to determine what cable ownership and channel
occupancy limits, if any, can and should be implemented in light of the court's
decision. The FCC also suspended the compliance deadlines initially provided in
its order related to the MediaOne acquisition pending the outcome of the FCC's
new rulemaking proceeding.
VII-18
The Telecommunications Act eliminated statutory restrictions on
broadcast/cable cross-ownership, including broadcast network/cable restrictions,
but left in place existing FCC regulations prohibiting local cross-ownership
between television stations and cable systems. In February 2002, the D.C.
Circuit Court of Appeals vacated the FCC's regulations so this ban is no longer
in effect. The Telecommunications Act leaves in place existing restrictions on
cable cross-ownership with Satellite Master Antenna Television and MMDS
facilities, but lifts those restrictions where the cable operator is subject to
effective competition. In January 1995, however, the FCC adopted regulations
that permit cable operators to own and operate Satellite Master Antenna
Television systems within their franchise area, provided that this operation is
consistent with local cable franchise requirements.
Must Carry/Retransmission Consent. The 1992 Cable Act contains broadcast
signal carriage requirements that allow local commercial television broadcast
stations to elect once every three years between requiring a cable system to
carry the station, i.e., must carry, or negotiating for payments for granting
permission to the cable operator to carry the station, i.e., retransmission
consent. Less popular stations typically elect must carry, and more popular
stations typically elect retransmission consent. Must carry requests can dilute
the appeal of a cable system's programming offerings, and retransmission consent
demands may require substantial payments or other concessions (e.g., a
requirement that the cable system also carry the local broadcaster's affiliated
cable programming service). Either option has a potentially adverse effect on
AT&T Broadband Group's business. The burden associated with must carry
obligations could dramatically increase if television broadcast stations proceed
with planned conversions to digital transmissions and if the FCC determines that
cable systems must carry simultaneously all analog and digital services
transmitted by the television stations during the multi-year transition in which
a single broadcast licensee is authorized to transmit both an analog and a
digital signal, or if the FCC determines that, post-transition, a cable operator
is required to carry all of the multicast services in a broadcaster's digital
feed, as opposed to just the "primary video" service. The FCC tentatively
decided against imposition of dual digital and analog must carry in a January
2001 ruling, and also decided that only the broadcaster's primary video service
must be carried by the cable operator. At the same time, however, it initiated
further fact gathering, which, ultimately, could lead to a reconsideration of
these conclusions.
Access Channels. Local franchising authorities can include franchise
provisions requiring cable operators to set aside certain channels for
non-commercial PEG access programming. U.S. federal law also requires a cable
system with 36 or more channels to designate a portion of its activated channel
capacity, up to 15%, for commercial leased access by unaffiliated third parties.
The FCC has adopted rules regulating the terms, conditions and maximum rates a
cable operator may charge for use of this designated channel capacity, but use
of commercial leased access channels has been relatively limited.
"Anti-Buy Through" Provisions. U.S. federal law requires each cable system
to permit customers to purchase premium services or pay-per-view video
programming offered by the operator on a per-channel or a per-program basis
without the necessity of subscribing to any tier of service, other than the
basic service tier, unless the system's lack of addressable converter boxes or
other technological limitation does not permit it to do so. The statutory
exemption for cable systems that do not have the technological capability to
comply expires in October 2002, but the FCC may extend that period on a
case-by-case basis if deemed necessary pursuant to a specific waiver petition.
Access to Programming. To spur the development of independent cable
programmers and competition to incumbent cable operators, the 1992 Cable Act
imposed restrictions on the dealings between cable operators and cable
programmers. Of special significance from a competitive business posture, the
1992 Cable Act precludes satellite video programmers affiliated with cable
operators from favoring cable operators over competing multichannel video
programming distributors, such as direct broadcast satellite and MMDS
distributors. This provision limits the ability of vertically integrated
satellite cable programmers to offer exclusive programming arrangements, or
preferred pricing or non-price terms, to AT&T Broadband Group. Both Congress and
the FCC have considered proposals that would expand the program access rights of
cable's competitors, including the possibility of subjecting both terrestrially
delivered video programming and video programmers that are not affiliated with
cable operators to all program access requirements. The FCC is currently
considering whether the exclusivity restrictions of the
VII-19
program access rules should be allowed to sunset, on October 5, 2002, or whether
an extension of these restrictions is required to continue to assist cable's
competitors. Pursuant to the Satellite Home Viewer Improvement Act, the FCC has
adopted regulations governing retransmission consent negotiations between
broadcasters and all multichannel video programming distributors, including
cable and direct broadcast satellite.
Inside Wiring; Subscriber Access. FCC rules require an incumbent cable
operator, upon expiration of a multiple dwelling unit service contract, to sell,
abandon or remove "home run" wiring that was installed by the cable operator in
the multiple dwelling unit building. These inside wiring rules are expected to
assist building owners in their attempts to replace existing cable operators
with new programming providers that are willing to pay the building owner a
higher fee, where a higher fee is permissible. The FCC also has proposed
abrogating or severely restricting all existing and future exclusive multiple
dwelling unit service agreements held by incumbent cable operators, but allowing
these contracts when held by new entrants. In another proceeding, the FCC has
preempted restrictions on the deployment of private antennae on rental property
within the exclusive use of a tenant, such as balconies and patios. This FCC
ruling may limit the extent to which multiple dwelling unit owners may enforce
certain aspects of multiple dwelling unit agreements that otherwise prohibit,
for example, placement of digital broadcast satellite receiver antennas in
multiple dwelling unit areas under the exclusive occupancy of a renter. These
developments may make it more difficult for AT&T Broadband Group to provide
service in multiple dwelling unit complexes.
Customer Equipment Regulation. Cable customer equipment is subject to rate
regulation unless the cable system is deemed by the FCC to face effective
competition. In addition, the FCC ruled that cable customers must be allowed to
purchase cable converters and other such navigation device equipment from third
parties, such as retailers, and established a multi-year phase-in during which
security functions, which would remain in the operator's exclusive control,
would be unbundled from non-security functions, which then could be supplied by
third-party vendors. The first phase implementation date was July 1, 2000.
Compliance was technically and operationally difficult in some locations, so
AT&T Broadband Group and several other cable operators filed a request at the
FCC that the requirement be waived in those systems. The request resulted in a
temporary deferral of the compliance deadline for those systems.
The separate security module requirement applies to all digital and
"hybrid" devices (i.e., devices that access both analog and digital services),
but not to analog-only devices. So long as multichannel video providers subject
to the rules comply with the separate security module requirement, they may
continue to provide "integrated devices" (i.e., navigation devices containing
both embedded security and non-security functions) to their customers until
January 1, 2005, at which time they will be barred from placing these devices in
service. AT&T Broadband Group has advocated the elimination of this "integrated
box ban."
Other Regulations of the FCC. In addition to the FCC regulations noted
above, there are other regulations of the FCC covering such areas as:
- equal employment opportunity (currently suspended as a result of a
judicial ruling, although the FCC recently has proposed reimposing a
subset of these rules);
- subscriber privacy;
- programming practices, including, among other things,
-- syndicated program exclusivity, which requires a cable system to delete
particular programming offered by a distant broadcast signal carried on
the system that duplicates the programming for which a local broadcast
station has secured exclusive distribution rights,
-- network program nonduplication,
-- local sports blackouts,
-- indecent programming,
-- lottery programming,
VII-20
-- political programming,
-- sponsorship identification,
-- children's programming advertisements,
-- closed captioning, and
-- video description;
- registration of cable systems and facilities licensing;
- maintenance of various records and public inspection files;
- aeronautical frequency usage;
- lockbox availability;
- antenna structure notification;
- tower marking and lighting;
- consumer protection and customer service standards;
- technical standards;
- consumer electronics equipment compatibility; and
- emergency alert systems.
The FCC recently initiated an inquiry to determine whether the cable
industry's future provision of interactive services should be subject to
regulations ensuring equal access and competition among service vendors. The
inquiry, which grew out of the FCC's review of the AOL/Time Warner merger, is in
its earliest stages.
The FCC has the authority to enforce its regulations through the imposition
of substantial fines, the issuance of cease and desist orders and/or the
imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate certain transmission facilities used in connection
with cable operations.
Copyright. Cable television systems are subject to U.S. federal copyright
licensing covering carriage of television and radio broadcast signals. In
exchange for filing certain reports and contributing a percentage of their
revenue to a U.S. federal copyright royalty pool (this percentage varies
depending on the size of the system and the number of distant broadcast
television signals carried), cable operators can obtain blanket permission to
retransmit copyrighted material on broadcast signals. The possible modification
or elimination of this compulsory copyright license is subject to continuing
review and could adversely affect AT&T Broadband Group's ability to obtain
desired broadcast programming. In addition, the cable industry pays music
licensing fees to Broadcast Music, Inc. and the American Society of Composers,
Authors and Publishers. Copyright clearances for nonbroadcast programming
services are arranged through private negotiations.
State and Local Regulation. Cable television systems generally are
operated pursuant to nonexclusive franchises granted by a municipality or other
state or local government entity. The Telecommunications Act clarified that the
need for an entity providing cable services to obtain a local franchise depends
solely on whether the entity crosses public rights-of-way. U.S. federal law now
prohibits franchise authorities from granting exclusive franchises or from
unreasonably refusing to award additional franchises covering an existing cable
system's service area. Cable franchises generally are granted for fixed terms,
and in many cases are terminable if the franchisee fails to comply with material
provisions. Noncompliance by the cable operator with franchise provisions also
may result in monetary penalties.
The terms and conditions of franchises vary materially from jurisdiction to
jurisdiction. Each franchise generally contains provisions governing cable
operations, service rates, franchise fees, system construction
VII-21
and maintenance obligations, system channel capacity, design and technical
performance, customer service standards, and indemnification protections. A
number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies. Although local franchising authorities
have considerable discretion in establishing franchise terms, there are certain
U.S. federal limitations. For example, local franchising authorities cannot
insist on franchise fees exceeding 5% of the system's gross revenues from the
provision of cable services, cannot dictate the particular technology used by
the system, and cannot specify video programming other than identifying broad
categories of programming.
U.S. federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the franchise authority may seek to impose new and more onerous
requirements, such as significant upgrades in facilities and services or
increased franchise fees and funding for PEG access channels as a condition of
renewal. Similarly, if a franchise authority's consent is required for the
purchase or sale of a cable system or franchise, this authority may attempt to
impose more burdensome or onerous franchise requirements in connection with a
request for consent. Historically, franchises have been renewed for cable
operators that have provided satisfactory services and have complied with the
terms of their franchises. Since the 1992 adoption of the Cable Act, AT&T
Broadband Group has never had a final determination of denial of one of its
franchises.
Subscriber Privacy Regulation. Customer and subscriber privacy for cable
and telecommunications companies are now specifically regulated under the Cable
Communications Policy Act of 1984 and the Communications Act of 1934. Various
federal and state regulatory and enforcement agencies including the FCC, FTC,
and state attorneys general, are examining business practices in the
communications sector, as well as other sectors, with regard to privacy of
personal or proprietary customer information, data protection and information
security. Numerous media reports indicate that these subjects are of increasing
concern to businesses and the public, and may result in additional legislation,
regulation, enforcement, and litigation concerning the data practices of
communications companies. It is not possible to predict with certainty the
direction of any such legislative, regulatory or enforcement initiatives, or
future litigation, or how and whether they will occur, or what impact they will
have on AT&T Comcast.
Proposed Changes in Regulation. The regulation of cable television systems
at the U.S. federal, state and local levels is subject to the political process
and has been in constant flux over the past decade. Material changes in the law
and regulatory requirements must be anticipated, and there can be no assurance
that AT&T Broadband Group's business will not be affected adversely by future
legislation, new regulations or by deregulation of AT&T Broadband Group's
competitors.
VII-22
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
To understand and place in context AT&T Broadband Group Management's
Discussion and Analysis, we urge you to read the AT&T Corp. Management's
Discussion and Analysis beginning on page VI-1.
OVERVIEW
Currently, AT&T Broadband Group is an integrated business of AT&T Corp. and
not a stand-alone entity. AT&T Broadband Group consists primarily of the assets,
liabilities and business of AT&T Broadband, LLC (formerly TCI), acquired by AT&T
on March 9, 1999 in the TCI merger and MediaOne Group, Inc. ("MediaOne")
acquired by AT&T on June 15, 2000 in the MediaOne acquisition. AT&T Broadband
Group is one of the nation's largest broadband communications providers,
providing cable television, high-speed cable Internet and broadband telephone
services. AT&T intends to assign and transfer substantially all of the assets,
liabilities and business of AT&T Broadband Group to AT&T Broadband Corp., a
newly formed holding company for AT&T's broadband business, which will be
subsequently merged with Comcast as discussed below.
Comcast and AT&T have agreed to a combination of Comcast and AT&T Broadband
Corp. (the "AT&T Comcast Transaction"). The AT&T Comcast Transaction is pursuant
to, and subject to the terms and conditions set forth in the Agreement and Plan
of Merger, dated as of December 19, 2001. The AT&T Comcast Transaction will
occur in several steps, which are expected to occur on the closing date of the
AT&T Comcast Transaction. First, AT&T will assign and transfer to AT&T Broadband
Corp., substantially all of the assets and liabilities of AT&T's broadband
business. Following the transfer, AT&T will spin off AT&T Broadband Corp. to
AT&T shareholders by distributing one share of AT&T Broadband Corp. common stock
for each share of AT&T common stock, NYSE symbol "T," as of the close of
business on the record date for the AT&T Broadband spin-off. Immediately
following the AT&T Broadband spin-off, AT&T Broadband Corp. will merge with AT&T
Broadband Acquisition Corp., a newly formed, wholly owned shell subsidiary of
AT&T Comcast, with AT&T Broadband Corp. continuing as the surviving corporation.
At approximately the same time, Comcast will merge with Comcast Acquisition
Corp., a newly formed, wholly owned shell subsidiary of AT&T Comcast, with
Comcast continuing as the surviving entity. As a result of these mergers, AT&T
Comcast will become the parent company of both AT&T Broadband Corp. and Comcast.
AT&T Comcast will issue shares of AT&T Comcast common stock to the AT&T
shareholders who received shares of AT&T Broadband Corp. common stock in the
AT&T Broadband spin-off. As of the date of execution of the merger agreement, it
was estimated that each holder of AT&T Broadband Corp. common stock would have
received approximately 0.34 of a share of AT&T Comcast common stock for each of
such holder's shares of AT&T Broadband Corp. common stock. Assuming Comcast
retains its AT&T shares and converts them into exchangeable preferred stock of
AT&T as contemplated by the merger agreement, the exchange ratio would be
approximately 0.35. The exchange ratio is dependent on a number of factors that
may change between the date of execution of the merger agreement and the date of
completion of the AT&T Comcast Transaction, including the number of outstanding
shares of AT&T common stock, the value of options and stock appreciation rights
and the price of Comcast Class A common stock.
AT&T will pay Comcast a termination fee in the amount of $1.5 billion in
cash if the merger agreement is terminated because (i) the AT&T Board withdraws
or modifies, in a manner adverse to Comcast, its recommendation of the AT&T
Comcast Transaction, (ii) AT&T willfully and materially breaches certain terms
of the merger agreement and (iii) if the AT&T shareholders fail to approve the
AT&T Comcast Transaction because a competing acquisition proposal made by a
third party is pending at the time of the AT&T shareholder meeting and within
one year of the AT&T meeting, AT&T enters into an agreement relating to an
alternative material transaction. Comcast will pay to AT&T $1.5 billion
VII-23
termination fee in cash if the merger agreement is terminated because the
Comcast shareholders fail to approve the AT&T Comcast Transaction.
Consummation of the AT&T Comcast Transaction is subject to the satisfaction
or waiver of several conditions, including but not limited to, approval by the
shareholders of AT&T and Comcast and receipt of all necessary governmental
consents and approvals. As a result, there can be no assurance that the AT&T
Comcast Transaction will be consummated, or if the AT&T Comcast Transaction is
consummated, as to the date of such consummation.
AT&T Broadband Group's revenue is derived primarily from the provision of
analog and digital video services, high-speed cable Internet services and
broadband telephone services. AT&T Broadband Group also charges customers for
installation of equipment into their homes. Additionally, AT&T Broadband Group
derives revenue from the sale of advertising time via ad avails on certain cable
networks. AT&T Broadband Group sells its services on an individual basis as well
as through packages or on a bundled basis. AT&T Broadband Group expects revenue
will continue to increase in the future as a result of increases in the number
of customers for its various services as well as rate increases. AT&T Broadband
Group anticipates that the mix of its customers will change over time as the
number of customers receiving advanced services increases. Accordingly, AT&T
Broadband Group expects revenue from advanced services to increase as a
percentage of total revenue over time.
AT&T Broadband Group's operating expenses consist of service costs and
selling, general and administrative expenses attributable to the management of
its customer base. Service costs include fees paid to programming suppliers,
expenses related to copyright fees, wages and salaries of technical personnel,
franchise fees, plant operating costs, high-speed data network transport and
Internet service costs, access and interconnection costs and local and
long-distance wholesale costs. Programming fees have historically increased at
rates in excess of inflation. AT&T Broadband Group expects video programming
costs will continue to increase. Competitive factors may limit AT&T Broadband
Group's ability to recover increases in programming costs through rate increases
to video customers. Selling, general and administrative expenses directly
attributable to AT&T Broadband Group's cable television systems include wages
and salaries for customer service and administrative personnel, and expenses
related to billing, marketing, advertising sales and office administration.
AT&T Broadband Group (including its predecessor entities, TCI and MediaOne)
has had a history of net losses and expects to continue to report net losses for
the next few years. AT&T Broadband Group reported net losses of $3.9 billion,
$5.4 billion and $2.2 billion for the years ended December 31, 2001 and 2000,
and the ten month period ended December 31, 1999, respectively. The ability of
AT&T Broadband Group to report net income in the future is largely dependent
upon AT&T Broadband Group's ability to increase future revenue and operating
margins. AT&T Broadband Group plans to grow revenue by offering advanced
services to more customers. In addition, AT&T Broadband Group plans to increase
operating margins through cost cutting efforts and operating efficiencies. AT&T
Broadband Group's strategy and business plan requires substantial capital
spending in the next few years to upgrade its broadband systems to expand
bandwidth capacity and add two-way capability so that it may offer advanced
services to more customers. The failure to obtain necessary capital would have a
material adverse effect on AT&T Broadband Group's strategy and business plan for
future growth.
AT&T Broadband Group's operations have been dependent on cash infusions
from AT&T in order for AT&T Broadband Group to operate and execute on its
business and growth strategies. If, for any reason, AT&T is unwilling or cannot
provide the level of financing necessary to fund future operations, AT&T
Broadband Group will need to seek additional financing from third parties.
Debt attributed to AT&T Broadband Group includes the third party
obligations of AT&T Broadband, LLC and MediaOne and monetization debt backed by
assets held by AT&T Broadband Group. Additional intercompany debt has been
allocated to AT&T Broadband Group to achieve a total debt level based on several
factors, including prospective financing requirements, desired stand-alone
credit profile, working capital and capital expenditure requirements, expected
sources of future deleveraging, and comparable company profiles. Changes in
historical intercompany debt are based on historical cash flows. Such cash
VII-24
flows include capital expenditures, operating activities, and investments in
cable companies. The historical interest expense on the allocated intercompany
debt was calculated based on a rate intended to be equivalent to the rate AT&T
Broadband Group would receive if it were a stand-alone entity. AT&T's expected
deleveraging activities that relate to AT&T Broadband Group include, but may not
be limited to, the following: proceeds that may result from the exercise of
AT&T's registration rights in Time Warner Entertainment ("TWE") and continued
evaluation and sale of non-strategic cable systems.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
AT&T Broadband Group's financial statements are prepared in accordance with
accounting principles that are generally accepted in the United States. The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenue
and expenses as well as the disclosure of contingent assets and liabilities.
Management continually evaluates its estimates and judgments including those
related to revenue recognition, allowances for doubtful accounts, useful lives
of property, plant and equipment, internal-use software and intangible assets,
investments, derivative contracts, pension and other post-retirement benefits
and income taxes. Management bases its estimates and judgments on historical
experience and other factors that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. AT&T Broadband Group believes that of its significant
accounting policies, the following may involve a higher degree of judgment or
complexity:
Revenue recognition -- AT&T Broadband Group only records revenue for
transactions which are considered to be part of its central, ongoing
operations. AT&T Broadband Group recognizes video, voice and data services
revenue based upon monthly service fees, fees per event or minutes of
traffic processed. Revenue for customer fees, equipment rental, advertising
and pay-per-view programming is recognized in the period the services are
provided. Video and nonvideo installation revenue is recognized in the
period the installation services are provided to the extent of direct
selling costs. Any remaining amount is deferred and recognized over the
estimated average period that customers are expected to remain connected to
the cable distribution systems. For contracts where AT&T Broadband Group
provides customers with an indefeasible right to use network capacity, AT&T
Broadband Group recognizes revenue ratably over the stated life of the
agreement or if the agreement has an indefinite life, over the useful life
of the assets being used.
Allowances for doubtful accounts -- AT&T Broadband Group maintains
allowances for doubtful accounts for estimated losses which result from the
inability of its customers to make required payments. AT&T Broadband Group
bases its allowances on the likelihood of recoverability of accounts
receivable based on past experience and taking into account current
collection trends that are expected to continue. If economic or specific
industry trends worsen beyond AT&T Broadband Group's estimates, AT&T
Broadband Group would increase its allowances for doubtful accounts by
recording additional expense. AT&T Broadband Group's accounts receivable
are fully reserved for when past due 90 days or more.
Estimated useful lives of property, plant and equipment, internal-use
software and intangible assets -- AT&T Broadband Group estimates the useful
lives of property, plant and equipment, internal-use software and
intangible assets in order to determine the amount of depreciation and
amortization expense to be recorded during any reporting period. The useful
lives are estimated at the time the asset is acquired and are based on
historical experience with similar assets as well as taking into account
anticipated technological or other changes. If technological changes were
to occur more rapidly than anticipated or in a different form than
anticipated, the useful lives assigned to these assets may need to be
shortened, resulting in the recognition of increased depreciation and
amortization expense in future periods. Alternatively, these types of
technological changes could result in the recognition of an impairment
charge to reflect the write-down in value of the asset. AT&T Broadband
Group reviews these types of assets for impairment annually, or when events
or circumstances indicate that the carrying amount may be not be
recoverable over the remaining lives of the assets. In assessing
impairments, AT&T Broadband Group uses cash flows which take into
VII-25
account management's estimates of future operations. Beginning January 1,
2002, in accordance with the provisions of Statement of Financial
Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"), AT&T Broadband Group will no longer amortize
goodwill, excess basis related to equity-method investments and franchise
costs associated with a business combination, but will test these assets at
least annually for impairment.
Investments -- AT&T Broadband Group holds investments in other
companies which it accounts for under either the cost method or equity
method of accounting. Many of these companies are publicly traded and have
volatile share prices however, some of these companies are not publicly
traded and therefore the value may be difficult to determine. For
investments that are not publicly traded AT&T Broadband Group estimates
fair value using market-based (comparable sales) and income-based
(discounted cash flow) methods. In addition, AT&T Broadband Group has
monetized some of its investments by issuing debt that is tied to the
trading price of the security, and which can be settled in shares or cash.
Some of the cost-method investments are classified as "trading" securities
under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and are marked-to-market through the statement of operations.
However, other cost method investments are classified as
"available-for-sale" under SFAS No. 115 and are marked-to-market through
other comprehensive income, as a component of combined attributed net
assets, on the balance sheet. AT&T Broadband Group records an investment
impairment charge on its "available-for-sale" and equity-method investments
when it believes the decline in the investment value is other than
temporary. When determining an other than temporary decline, AT&T Broadband
Group considers, among other items, the length of time the trading price
has been below the carrying value, the financial condition of the investee
company, including the industry in which it operates, and AT&T Broadband
Group's ability or intent to retain the investment. If the financial
condition of the investee company or the industry in which it operates were
to be materially different than AT&T Broadband Group's expectation, AT&T
Broadband Group would record an expense to reflect the other than temporary
decline in value of the investment. At December 31, 2001, unrealized losses
on "available-for-sale" securities included in other comprehensive income
as a component of combined attributed net assets were approximately $169
million (pretax).
Derivative contracts -- AT&T Broadband Group enters into derivative
contracts to mitigate market risk from changes in interest rates and equity
prices. Certain exchangeable debt instruments (debt exchangeable into or
tied to the value of securities AT&T Broadband Group owns) contain embedded
derivatives that require accounting separate from the debt instrument,
while other exchangeable debt instruments have derivatives issued in
conjunction with net purchased options. The fair value of option based
derivatives is determined using the Black-Scholes option pricing model,
which is based on a set of inputs, including the price of the underlying
stock, volatility of the underlying stock and interest rates. These inputs
are based on prevailing market indications that are either directly
observable in the market, received from qualified investment banking firms
or are internally calculated. Changes in these inputs would result in a
change in the fair value of the option contracts. Changes in the fair value
of option contracts accounted for as cash flow hedges are recorded, net of
income taxes, within other comprehensive income, as a component of combined
attributed net assets, on the balance sheet. Changes in the fair value of
option contracts undesignated for accounting purposes are recorded within
other (expense) income in the statement of operations. Generally, fair
value calculations of other derivative contracts (e.g., interest rate
swaps) require less judgment and are valued based on market interest rates.
Pension and postretirement benefits -- The amounts recognized in the
financial statements related to pension and postretirement benefits are
determined on an actuarial basis, which utilizes many assumptions in the
calculation of such amounts. A significant assumption used in determining
the net pension and postretirement expense is the expected long-term rate
of return on plan assets. In 2001, AT&T Broadband Group assumed an expected
long-term rate of return on plan assets of 9.5%. On average, the actual
return on plan assets over the long-term has substantially exceeded 9.5%;
however, in the past two years, the plan's assets have experienced rates of
return substantially lower than 9.5%.
VII-26
For 2002, AT&T Broadband Group will lower its expected long-term rate of
return assumption from 9.50% to 9.0%, reflecting the generally expected
moderation of long-term rates of return in the financial markets. AT&T
Broadband Group does not expect this decrease in the expected long-term
rate of return to have a material impact on AT&T Broadband Group's results
of operations.
Another estimate that affects the net pension credit and
postretirement expense is the discount rate used in the annual actuarial
valuations of pension and postretirement benefit plan obligations. At the
end of each year, AT&T Broadband Group determines the appropriate discount
rate, which represents the interest rate that should be used to determine
the present value of future cash flows currently expected to be required to
settle the pension and postretirement benefit obligations. The discount
rate is generally based on the yield on high-quality corporate fixed-income
investments. At December 31, 2001, AT&T Broadband Group lowered the
discount rate to 7.25% from 7.5% at December 31, 2000. Changes in the
discount rate do not have a material impact on AT&T Broadband Group's
results of operations.
Income taxes -- Consolidated income tax provisions or benefits related
to tax payments or refunds and deferred tax balances of AT&T have been
allocated to AT&T Broadband Group based principally on the taxable income
and tax credits directly attributable to AT&T Broadband Group, resulting in
essentially a stand-alone presentation. AT&T Broadband Group records
deferred tax assets and liabilities using enacted tax rates for the effect
of temporary differences between the book and tax bases of assets and
liabilities. If enacted tax rates changed, AT&T Broadband Group would
adjust the deferred tax assets and liabilities, through the provision for
income taxes in the period of change, to reflect the enacted tax rate
expected to be in effect when the deferred tax items reverse. A one
percentage point change in the enacted tax rates would increase or decrease
net loss by approximately $700 million. AT&T Broadband Group records a
valuation allowance on deferred tax assets to reflect the expected future
tax benefits to be realized. In determining the appropriate valuation
allowance, AT&T Broadband Group takes into account the level of expected
future taxable income and available tax planning strategies. If future
taxable income was lower than expected or if expected tax planning
strategies were not available as anticipated, AT&T Broadband Group may
record an additional valuation allowance through income tax expense in the
period such determination was made. At December 31, 2001, AT&T Broadband
Group had long-term deferred tax assets (included within long-term deferred
tax liabilities) of $2.1 billion, which included a valuation allowance of
$23 million.
OPERATING RESULTS
The results of operations for AT&T Broadband Group begin on March 1, 1999,
the effective date of the TCI merger for accounting purposes. Accordingly, AT&T
Broadband Group's results of operations for 1999 include 10 months of operations
compared to 12 months of operations in 2000 and 2001.
Year-over-year comparisons were significantly impacted by events, such as
acquisitions and dispositions, that occurred during 2000 and 2001. Effective
June 15, 2000, AT&T completed the acquisition of MediaOne. In addition AT&T
Broadband Group completed dispositions and exchanges that in the aggregate
affect the comparability of financial results between periods.
Year-over-year comparisons were also impacted by At Home Corporation
("Excite@Home"). For the period January 1, 2000 through August 31, 2000,
Excite@Home was accounted for as an equity method investment. On September 1,
2000, Excite@Home was consolidated due to corporate-governance changes, which
gave AT&T the right to designate six of the 11 Excite@Home board members, and
therefore, a controlling interest. On September 28, 2001, Excite@Home filed for
bankruptcy under Chapter 11 in the U.S. Bankruptcy Court, for the Northern
District of California. As a result of the bankruptcy filing and the removal by
AT&T of four of its six members from Excite@Home's board of directors, AT&T
Broadband Group no longer consolidated Excite@Home as of September 30, 2001. The
consolidation of Excite@Home resulted in the inclusion of 100% of its results in
each line item of AT&T Broadband Group's combined statement of operations from
September 1, 2000 to September 30, 2001 at which time Excite@Home was
deconsolidated. Losses attributable to the other shareholders of
VII-27
Excite@Home have been reflected within minority interest income (expense) in the
combined statement of operations and minority interest in the combined balance
sheet from September 1, 2000 to September 30, 2001. As a result of the
significant losses incurred by Excite@Home, the minority interest balance was
fully utilized during 2001, therefore, in September 2001 AT&T Broadband Group
recognized more than its 23% of the losses of Excite@Home. Under the equity
method of accounting, any earnings or losses are included as a component of net
losses from equity investments in the combined statement of operations.
Beginning October 1, 2001, AT&T Broadband Group no longer recorded equity
earnings or losses related to Excite@Home since AT&T Broadband Group recorded
losses in excess of its investment in Excite@Home.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000 AND
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE TEN MONTHS ENDED DECEMBER 31,
1999
Revenue
Revenue increased $1,687 million, or 20%, in 2001 compared to 2000.
Approximately $1,500 million of this increase was due to the impact of the
MediaOne acquisition. Also contributing to the revenue increase was higher
revenue from advanced services (broadband telephone service and high-speed cable
Internet service) of $550 million, an increase in basic-cable and digital video
revenue of $291 million, an increase in other cable related revenue of $115
million and the impact from the consolidation of Excite@Home of $110 million.
Basic-cable and digital video revenue increased due to an increase in digital
video customers and rate increases. Such increases were partially offset by a
decrease in revenue of $883 million due to net dispositions. AT&T Broadband
Group expects 2002 revenue to increase as demand for advanced services continues
to grow.
Revenue increased $3,365 million, or 66%, in 2000 compared to 1999.
Approximately $2,765 million of this increase was due to the impacts of the
MediaOne acquisition and the TCI merger. The remaining increase was primarily a
result of an increase in basic cable and digital video revenue of approximately
$268 million, the impact from the consolidation of Excite@Home of $248 million
and an increase in revenue from advanced services of $169 million. Cable revenue
increased primarily as a result of an increase in digital video customers and
rate increases. Such increases were partially offset by a decrease in revenue of
$104 million due to the Cox disposition.
Customers of AT&T Broadband Group consisted of the following (in millions):
DECEMBER 31,
------------------
2001 2000 1999
---- ---- ----
Basic cable service......................................... 13.6 16.0 11.4
Homes passed................................................ 24.6 28.3 19.7
Digital video service....................................... 3.5 2.8 1.8
High-speed cable Internet service........................... 1.5 1.1 0.2
Broadband telephone service................................. 1.0 0.5 0.0
The decrease in the number of homes and basic cable customers passed
primarily reflects the net disposition of cable systems in 2001. In addition,
the number of basic cable customers declined due to the impacts of competition.
Competition may continue to have a detrimental impact on basic subscriber
growth. AT&T Broadband Group acquired systems passing approximately 8.7 million
homes with approximately 5.0 million basic cable customers in the MediaOne
acquisition. The MediaOne acquisition added 0.2 million digital video service
customers, 0.3 million high-speed cable Internet customers and 0.1 million
broadband telephone customers.
Cost of Services
Cost of services increased $859 million, or 19%, in 2001 compared with
2000. Approximately $782 million of this increase was due to the impact of the
MediaOne acquisition. The remaining increase
VII-28
was primarily a result of an increase of $184 million in costs associated with
growth in broadband telephone and high-speed cable Internet services, an
increase of $146 million in programming costs associated with basic cable and
digital video services and a $140 million impact from the consolidation of
Excite@Home. Such increases were partially offset by a decrease in costs of $428
million due to net dispositions.
Cost of services increased $1,914 million, or 71%, in 2000 compared with
1999. Approximately $1,409 million of this increase was primarily due to the
impact of the MediaOne acquisition and the TCI merger. The remaining increase
primarily was a result of a $195 million impact from the consolidation of
Excite@Home, an increase of $180 million in programming costs, an increase of
$142 million associated with high-speed cable Internet and broadband telephone
services and an increase in salary expense and other basic cable costs of $138
million due to growth in the business. Such increases were offset by a decrease
in costs of $48 million due to the Cox disposition.
Selling, General and Administrative
Selling, general and administrative expenses increased $402 million, or
18%, in 2001 compared with 2000. Approximately $264 million of this increase was
due to the impact of the MediaOne acquisition. The remaining increase was
primarily due to growth in high-speed cable Internet and broadband telephone
services of $173 million and an increase in video costs for advertising and
customer care of $62 million. Such increases were partially offset by the impact
of net dispositions of $112 million and cost control efforts.
Selling, general and administrative expenses increased $927 million, or
74%, in 2000 compared to 1999. Approximately $668 million of this increase was
due to the impact of the MediaOne acquisition and the TCI merger. The remaining
increase primarily was a result of an increase in expenses related to high-
speed cable Internet and broadband telephone service of $232 million and the
impact from the consolidation of Excite@Home of $56 million.
Depreciation and Other Amortization
Depreciation and other amortization expense increased $952 million, or 57%,
in 2001 compared with 2000. Approximately $417 million of this increase was due
to the MediaOne acquisition and $113 million was due to the consolidation of
Excite@Home. The remaining increase was primarily due to a higher asset base
resulting from continued infrastructure investment. This increase was partially
offset by $91 million due to net dispositions.
Depreciation and other amortization expense increased $869 million, or
108%, in 2000 compared to 1999. Approximately $630 million of this increase was
due to the MediaOne acquisition and the TCI merger. The remaining increase was
due to a higher asset base resulting from continued infrastructure investment
and the impact from the consolidation of Excite@Home of $80 million.
Total capital expenditures for 2001, 2000 and 1999 were $3,413 million,
$4,426 million and $3,161 million, respectively.
Amortization of Goodwill, Franchise Costs and Other Purchased Intangibles
Amortization expense decreased $223 million, or 9%, in 2001 compared with
2000. Such decrease was primarily due to $700 million from lower goodwill
associated with Excite@Home resulting from an impairment of goodwill recorded in
late 2000 and early 2001. Such decrease was partially offset by the impact of
the MediaOne acquisition of $470 million.
Amortization expense increased $1,508 million, or 174%, in 2000 compared to
1999. Approximately $911 million of this increase was due to the consolidation
of Excite@Home. The remaining increase was due to the MediaOne acquisition and
the TCI merger.
VII-29
Beginning in 2002, AT&T Broadband Group will no longer amortize goodwill or
franchise costs in accordance with the provisions of SFAS 142. A further
discussion of the impacts of SFAS 142 is included in "Recent Accounting
Pronouncements" included herein.
Asset Impairment, Restructuring and Other Charges
Asset impairment, restructuring and other charges decreased $4,776 to
$1,494 million in 2001. The 2001 charge included $1,171 million of asset
impairment charges related to Excite@Home and $323 million for restructuring and
exit costs, which consisted of $151 million for severance costs, $156 million
for facilities closing and $16 million related to termination costs of
contractual obligations.
The $1,171 million of asset impairment charges recorded during 2001
consisted of $1,032 million related to Excite@Home associated with the
write-down of goodwill and other intangible assets, warrants granted in
connection with distributing the @Home service, and fixed assets. These charges
were due to continued deterioration in the business climate of, and reduced
levels of venture capital funding activity for, Internet advertising and other
Internet-related companies, continued significant declines in the market values
of Excite@Home's competitors in the Internet advertising industry, and changes
in their operating and cash flow forecasts for the remainder of 2001. These
charges were also impacted by Excite@Home's decision to sell or shut down
narrowband operations. As a result of the foregoing, and other factors,
Excite@Home entered into bankruptcy proceedings in September 2001. In addition,
AT&T Broadband Group recorded a related goodwill impairment charge of $139
million associated with its acquisition goodwill of Excite@Home. Since AT&T
Broadband Group consolidated Excite@Home but only owned approximately 23% of
Excite@Home, a portion of the charges recorded by Excite@Home has been
eliminated in the statement of operations as minority interest income (expense).
The severance costs of $151 million, for the involuntary separation of
approximately 7,700 employees, resulted from cost reduction efforts by AT&T
Broadband and Excite@Home in addition to the synergies created by the MediaOne
acquisition. Approximately 36% of the affected employees are management
employees and 64% are non-management employees. Nearly all the affected
employees have left their positions as of December 31, 2001.
The restructuring initiative yielded cash savings of approximately $21
million in 2001 (net of severance payouts). In subsequent years the net cash
savings will continue to increase, due to the timing of actual separation and
associated payments, until the completion of the exit plan, at which time AT&T
Broadband Group expects to yield approximately $267 million of cash savings per
year. The restructuring initiative had no benefit to operating income (net of
the restructuring charges recorded) in 2001. In subsequent years, the operating
income benefit will continue to increase, due to timing of actual separations,
until the completion of the exit plan, at which time AT&T Broadband Group
expects a benefit to operating income of approximately $267 million. The cost
savings, primarily attributable to reduced personnel-related expenses, will be
realized in cost of services and selling, general and administrative expenses.
As a result of continuing realignment, AT&T Broadband Group expects to
record a restructuring charge in the first quarter of 2002 in the range of $50
million to $100 million.
Asset impairment, restructuring and other charges increased $5,626 million
in 2000 to $6,270 million. For the year ended 2000, the charge included $6,179
million of asset impairment charges related to Excite@Home and $91 million
related to restructuring and exit costs.
The impairments resulted from the deterioration of the market conditions
and market valuations of Internet-related companies during the fourth quarter of
2000, which caused Excite@Home to conclude that intangible assets related to
their acquisitions of Internet-related companies may not be recoverable. In
accordance with SFAS 121, Excite@Home conducted a detailed assessment of the
recoverability of the carrying amounts of acquired intangible assets. This
assessment resulted in a determination that certain acquired intangible assets,
including goodwill, related to these acquisitions were impaired as of December
31, 2000. As a result, Excite@Home recorded impairment charges of $4,609 million
in
VII-30
December 2000, representing the excess of the carrying amount of the impaired
assets over their fair value. The impairment was allocated to each asset group
based on a comparison of carrying values and fair values. The impairment
write-down within each asset group was allocated first to goodwill, and if
goodwill was reduced to zero, to identifiable intangible assets in proportion to
carrying values. Since AT&T Broadband Group, through AT&T Broadband, LLC, owned
approximately 23% of Excite@Home, 77% of the charge recorded by Excite@Home was
not included as an increase of net loss, but rather was eliminated through
minority interest income (expense) in the combined statements of operations.
As a result of the foregoing, AT&T Broadband Group recorded a goodwill and
acquisition-related impairment charge of $1,570 million associated with the
acquisition of its investment in Excite@Home. The write-down of AT&T Broadband
Group's investment to fair value was determined utilizing discounted expected
cash flows.
The $91 million charge for restructuring and exit plans was primarily due
to headcount reductions as part of the integration of MediaOne, the
centralization of certain functions, and the consolidation of call center
facilities. This charge included $61 million of cash termination benefits
associated with the involuntary separation of 1,060 employees. Approximately 25%
of the employees were management while 75% were non-management employees. The
$91 million charge also included a loss of $30 million recognized on the
disposition of facilities as a result of synergies created by the MediaOne
acquisition.
During 1999, AT&T Broadband Group recorded $644 million of asset
impairment, restructuring and other charges. This included an in-process
research and development charge of $594 million reflecting the estimated fair
value of research and development projects, as of the date of the TCI merger,
which had not yet reached technological feasibility or had no alternative future
use. The projects identified related to efforts to offer voice-over-IP, product
integration efforts for advanced set-top devices, cost-savings efforts for
broadband telephone implementation, and in-process research and development
related to Excite@Home.
Also in 1999, the asset impairment, restructuring and other charge included
a $50 million loss related to a contribution agreement TCI entered into with
Phoenixstar, Inc. This agreement requires AT&T Broadband Group to satisfy
certain liabilities owed by Phoenixstar, Inc. and its subsidiaries. The
remaining obligation under this contribution agreement and an agreement that
MediaOne has is $35 million, which was fully accrued for at December 31, 2001.
Investment (Expense) Income
Investment (expense) income was an expense of $1,947 million in 2001
compared with an expense of $84 million in 2000. The change was a result of the
net impacts of a $934 million unfavorable change in losses (gains) on sales of
businesses and investments, a $392 million mark-to-market loss on Vodafone ADRs
which were used to settle exchangeable notes that matured during the third
quarter of 2001, an increase of $301 million in the Excite@Home put obligation
settlement and mark-to-market charge, an increase in impairment of investments
of $299 million and a $63 million favorable change in interest and dividend
income.
Investment (expense) income was an expense of $84 million in 2000 compared
with income of $47 million in 1999. Such change resulted primarily from the net
impacts of a $537 million mark-to-market charge on the Excite@Home put
obligation, investment impairment charges of $240 million, an increase in gains
on sales of businesses and investments of $577 million and an increase of $69
million in interest and dividend income.
Other (Expense) Income
Other (expense) income in 2001 was an expense of $927 million compared to
income of $45 million in 2000. Effective January 1, 2001, in conjunction with
the adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," AT&T Broadband Group reclassified certain investment securities,
which support debt that is indexed to those securities, from
"available-for-sale" to "trading." As
VII-31
a result, AT&T Broadband Group recorded a pre-tax loss of $1,154 million
reflecting the initial reclassification impact of the adoption of SFAS 133. The
ongoing investment and derivative revaluations under SFAS 133 resulted in gains
of $195 million in 2001.
Other (expense) income remained relatively consistent in 2000 and 1999.
Interest Expense
Interest expense increased $412 million to $1,735 million for 2001 compared
with 2000. This increase was a result of an increase in debt due primarily to
the MediaOne acquisition and the monetization of investments in Cablevision,
Microsoft and Comcast.
Interest expense increased $618 million in 2000 to $1,323 million compared
to 1999. The increase was a result of an increase in debt of $13.5 billion due
primarily to the MediaOne acquisition and the monetization of investments in
Microsoft and Comcast. The remaining increase was due to two additional months
of interest in 2000 as a result of the TCI merger in March of 1999 and an
increase in the interest rate charged by AT&T for intercompany debt.
Benefit for Income Taxes
The benefit for income taxes in 2001 was $3,857 million, compared with a
benefit of $1,183 million in 2000. The effective income tax rate in 2001 was
43.9% compared to 11.8% in 2000. The 2001 effective tax rate was positively
impacted by a significant tax benefit related to Excite@Home, including a
benefit from deconsolidation and the put obligation settlement with Cox and
Comcast, partially offset by the prior consolidation of its operating losses
(which included asset impairment charges) for which the Company was unable to
record tax benefits. The effective tax rate was also positively impacted by the
net impact of a tax-free gain resulting from an exchange of AT&T stock for an
entity owning certain cable systems and other assets with Comcast and the
resulting reduction of a previously established deferred tax liability. Such
positive impacts were partially offset by the amortization of non tax-deductible
goodwill and non tax-deductible losses generated by Excite@Home. The 2000
effective tax rate was positively impacted by a tax-free gain resulting from an
exchange of AT&T stock for an entity owning certain cable systems and other
assets with Cox. The 2000 effective tax rate was negatively impacted by non
tax-deductible goodwill and non tax-deductible losses from Excite@Home.
The benefit for income taxes in 2000 was $1,183 million, compared with a
benefit of $465 million in 1999. The effective income tax rate for 2000 was
11.8%, compared to 25.3% for 1999. The effective income tax rate for 2000 was
impacted by the inclusion of Excite@Home as a consolidated entity, non
tax-deductible goodwill and the Cox disposition. The 1999 effective income tax
rate was impacted by the non tax-deductible write-off of in-process research and
development.
Net Losses from Equity Investments
Net losses from equity investments, which are recorded net of income taxes,
decreased from $597 in 2000 to $69 million in 2001. The improvement was due
primarily to equity losses recorded for Excite@Home in the first eight months of
2000 when the investment was recorded as an equity method investment.
Excite@Home was fully consolidated beginning in September 2000. Also
contributing to the improvement was lower losses related to Cablevision due to a
change in the accounting for the investment in Cablevision from an equity method
investment to a cost method investment in June 2001 due to AT&T no longer having
representation on the board of directors, as well as a gain associated with the
sale of cable properties by Cablevision in early 2001. The favorable variance
was also impacted by the change in the accounting for the investment in Time
Warner Entertainment Company, L.P. ("TWE") from an equity method investment to a
cost method investment in the fourth quarter of 2000 since AT&T Broadband Group
does not have the right to exercise significant influence.
Net losses from equity investments decreased $110 million compared to 1999.
The decrease was primarily due to $185 million as a result of an improvement in
Cablevision's results. Partially offsetting
VII-32
this improvement were losses from AT&T Broadband Group's stake in TWE, which was
acquired in the MediaOne acquisition, and greater equity losses in Excite@Home.
The improvement in Cablevision's results was primarily due to gains from cable
system sales.
The income tax benefit recorded on net losses from equity investments was
$37 million, $370 million and $438 million in 2001, 2000 and 1999, respectively.
Amortization of goodwill associated with non-consolidated investments totaled
$148 million, $485 million and $476 million in 2001, 2000 and 1999,
respectively. Effective January 1, 2002, in accordance with the provisions of
SFAS 142, AT&T Broadband Group will no longer amortize excess basis related to
non-consolidated investments.
Minority Interest Income (Expense)
Minority interest income (expense), which is recorded net of income taxes,
represents an adjustment to AT&T Broadband Group's net loss to reflect the less
than 100% ownership of entities attributed to AT&T Broadband Group as well as
dividends on preferred stock issued by subsidiaries of AT&T which have been
attributed to AT&T Broadband Group. AT&T Broadband Group recorded minority
interest income of $833 million in 2001 compared with $4,062 million in 2000.
The changes primarily resulted from lower losses generated by Excite@Home,
mainly as a result of lower goodwill impairment charges recorded by Excite@Home
in 2001 compared with 2000. As a result of significant losses incurred by
Excite@Home, AT&T Broadband Group fully utilized the minority interest balance
during the third quarter of 2001, therefore minority interest income related to
Excite@Home was no longer recorded.
The increase in minority interest income (expense) of $4,188 million in
2000 primarily resulted from the consolidation of Excite@Home effective
September 1, 2000. The minority interest income in 2000 primarily reflects the
losses generated by Excite@Home, including the goodwill impairment charge, that
were attributed to the approximate 77% of Excite@Home not owned by AT&T
Broadband Group.
The income tax benefit recorded on minority interest income (expense) was
$100 million for both 2001 and 2000 and $54 million for 1999.
Cumulative Effect of Accounting Change
Cumulative effect of accounting change, net of applicable income taxes, was
$229 million. Such amount represents fair value adjustments of equity derivative
instruments related to indexed debt and warrants.
LIQUIDITY AND CAPITAL RESOURCES
AT&T Broadband Group has funded its operations through internally generated
funds, asset sales, capital contributions from AT&T and intercompany borrowings
from AT&T. Capital contributions from AT&T have been treated as non-cash and
include acquisitions made by AT&T that have been attributed to AT&T Broadband
Group.
Currently, financing activities for AT&T Broadband Group are managed by
AT&T on a centralized basis. Sources for AT&T Broadband Group's future financing
requirements may include borrowing of funds, including additional debt from AT&T
and/or third party debt. Loans from AT&T to any member of the AT&T Broadband
Group have been made at interest rates and on other terms and conditions
intended to be substantially equivalent to the interest rates and other terms
and conditions that AT&T Broadband Group would be able to obtain from third
parties, including the public markets, as a non-affiliate of AT&T without the
benefit of any guarantee by AT&T.
AT&T performs cash management functions on behalf of AT&T Broadband Group.
Substantially all of AT&T Broadband Group's cash balances are swept to AT&T on a
daily basis, where they are managed and invested by AT&T. Transfers of cash to
and from AT&T, after giving effect to the debt allocation methodology, are
reflected as a component of combined attributed net assets.
VII-33
Net cash used in operating activities for the year ended December 31, 2001
was $103 million, compared with net cash provided by operating activities of
$802 million for the year ended December 31, 2000. Net cash used in operating
activities for the year ended December 31, 2001 was due to net income of $926
million, exclusive of non-cash items and adjustments for net losses on sales of
businesses and investments, offset by a change in other operating assets and
liabilities of $1,029 million. Net cash provided by operating activities for the
year ended December 31, 2000 was due to net income of $1,260 million, exclusive
of non-cash items and adjustments for net gains on sales of businesses and
investments less the change in other operating assets and liabilities of $458
million.
Net cash provided by investing activities for the year ended December 31,
2001 was $2,543 million compared with net cash used in investing activities of
$4,511 million for the year ended December 31, 2000. For the year ended December
31, 2001, AT&T Broadband Group's net cash provided by investing activities
resulted primarily from cash received from net acquisitions and dispositions of
businesses of $4,898 million and sales and distributions of investments and
marketable securities of $1,531 million partially offset by capital expended for
property and equipment, net of proceeds from disposals, of $3,413 million, and
contributions and purchases of investments and marketable securities of $294
million. For the year ended December 31, 2000, AT&T Broadband Group's cash used
in investing activities resulted from capital expended for property and
equipment, net of proceeds from disposals, of $4,426 million and an $85 million
net use in other investing activities. Capital expenditures in both periods were
primarily due to the continued expansion and upgrade of the network to provide
advanced services.
Net cash used in financing activities for the year ended December 31, 2001
was $2,501 million compared with net cash provided by financing activities of
$3,770 million for the year ended December 31, 2000. For the year ended December
31, 2001, AT&T Broadband Group used cash of $2,252 million to reduce short-term
debt to AT&T, $938 million to retire long-term debt and $336 million to pay
dividends on preferred securities. AT&T Broadband Group received proceeds of
$1,025 million from the issuance of long-term debt, primarily the monetization
of shares of Cablevision and Rainbow Media Group. For the year ended December
31, 2000, AT&T Broadband Group received proceeds from the issuance of long-term
debt, net of retirement of long-term debt and redeemable securities, of $2,281
million and net cash from AT&T through transfers and short-term debt borrowings
of $2,298 million. This was offset by $294 million of dividends paid on
redeemable securities and $515 million of other net financing activities.
The continued expansion and upgrade of AT&T Broadband Group's network to
provide advanced services will continue to require substantial capital. AT&T
Broadband Group anticipates that it will spend approximately $4.2 billion in
2002 primarily to expand and upgrade its networks for the provision of advanced
services and to add new customers. It is anticipated that AT&T Broadband Group's
operating cash flows will not be sufficient to provide for AT&T Broadband
Group's capital needs. In this regard, prior to the AT&T Comcast Transaction, it
is anticipated that AT&T will continue to provide funding to AT&T Broadband
Group in the form of short-term interest-bearing loans for capital expenditures
not covered by cash flows from operations and divestments. AT&T Comcast has
arranged additional AT&T Broadband financing to enable AT&T Broadband Group to
distribute to AT&T an amount equal to the short-term debt due to AT&T at the
time of the proposed AT&T Comcast Transaction. Following the proposed AT&T
Comcast Transaction, it is anticipated that AT&T Comcast will fund future
capital expenditures not covered by cash flows from operations from AT&T
Comcast's cash and cash equivalents, amounts available under existing and new
lines of credit, and through the sale of investments. A failure to obtain
necessary capital would have a material adverse effect on AT&T Broadband
Group's/AT&T Comcast's strategy and business plan for future growth.
At December 31, 2001, AT&T Broadband Group had current assets of $1,650
million and current liabilities of $9,630 million. A significant portion of the
current liabilities, $6,783 million, relates to short-term debt of which $3,959
million was due to AT&T and $715 million was monetized by an investment, where
such investment can be delivered in full satisfaction of the underlying debt.
AT&T Broadband Group expects to fund operations, including contractual
obligations, primarily with cash from operations and borrowings from AT&T. If
economic conditions worsen or do not improve
VII-34
and/or competition and product substitution accelerate beyond current
expectations, AT&T Broadband Group's cash flow from operations would decrease,
negatively impacting liquidity.
As of December 31, 2001, total debt was $23,285 million of which $7,260
million was monetized by investments, where such investments can be delivered in
full satisfaction of the underlying debt at the time of maturity. Subsequent to
December 31, 2001, AT&T announced that it will redeem $1,431 million of trust
preferred securities with a carrying value of $1,516 million in February, March
and April of 2002. These amounts are classified as short-term debt in the
combined balance sheet.
AT&T Broadband Group expects that it will retire a portion of the
third-party current debt with other financing arrangements, including the sales
of certain non-strategic assets and investments and funding from AT&T.
In addition, AT&T has exercised its registration rights in TWE and formally
requested TWE to begin the process of converting the limited partnership into a
corporation with registered equity securities. In May 2001, AT&T named Credit
Suisse First Boston as its investment banker for the registration process under
the TWE partnership agreement.
The following summarizes AT&T Broadband Group's contractual cash
obligations and commercial commitments at December 31, 2001, and the effect such
obligations are expected to have on liquidity and cash flow in future periods:
PAYMENTS DUE BY PERIOD
-------------------------------------------------
LESS THAN 1 2 - 3 4 - 5 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR YEARS YEARS YEARS
- ----------------------- ------- ----------- ------ ------ -------
(DOLLARS IN MILLIONS)
Long-term debt, including current
portion(a).......................... $11,254 $2,023 $2,034 $2,232 $ 4,965
Short-term debt due to AT&T........... 3,959 3,959 -- -- --
Operating leases(b)................... 823 135 246 172 270
Unconditional purchase obligations(c),
(d)................................. 8,441 810 894 910 5,827
------- ------ ------ ------ -------
Total Contractual Cash Obligations.... $24,477 $6,927 $3,174 $3,314 $11,062
======= ====== ====== ====== =======
- ---------------
(a) Long-term debt excludes debt that is exchangeable or collateralized by
securities (monetized debt) since AT&T Broadband Group has the option to
settle this debt in shares or cash. Amounts of monetized debt due less than
one year were $679 million; two to three years $4,918 million; and four to
five years $1,938 million at December 31, 2001. In addition, debt excludes
discounts and excess of fair value over the recorded value of debt in
connection with the TCI and MediaOne mergers.
(b) Under certain real estate operating leases, AT&T Broadband Group could be
required to make payments to the lessor of up to $155 million at the end of
the lease term (lease terms range from 2002 through 2006). The actual amount
paid, if any, would be reduced by amounts received by the lessor upon
remarketing of the property.
(c) In 1997, AT&T Broadband LLC's predecessor, TCI, and AT&T Broadband LLC's
subsidiary, Satellite Services, Inc., entered into a 25 year affiliation
term sheet with Starz Encore Group (formerly Encore Media Group) pursuant to
which AT&T Broadband Group may be obligated to make fixed monthly payments
in exchange for unlimited access to Encore and Starz! programming. The
future commitment, which is based on a fixed number of subscribers,
increases annually from $306 million in 2002 to $315 million in 2003, and
will increase annually through 2022 with inflation, subject to certain
adjustments, including increases in the number of subscribers. The amounts
in the above table do not take into account any increase in subscribers or
expected inflation. The affiliation term sheet further provides that to the
extent Starz Encore Group's programming costs increase above certain levels,
AT&T Broadband Group's payments under the term sheet will be increased in
proportion to the excess. Excess programming costs that may be payable by
AT&T Broadband Group
VII-35
in future years are not presently estimable, but could be significant. AT&T
Broadband Group has disputed the enforceability of the excess programming
pass through provisions of the term sheet and questioned the validity of the
term sheet as a whole. AT&T Broadband Group has also raised certain issues
concerning the uncertainty of the provisions of the term sheet and the
contractual interpretation and application of certain of its provisions to,
among other things, the acquisition and disposition of cable systems.
(d) AT&T Broadband Group is party to an agreement under which it purchases
certain billing services from CSG Systems, Inc. Unless terminated by either
party pursuant to terms of the agreement, the agreement expires on December
31, 2012. The agreement calls for monthly payments which are subject to
adjustments and conditions pursuant to the terms of the underlying
agreements.
COMMITMENTS BY PERIOD
-------------------------------------------------
TOTAL
AMOUNTS LESS THAN 2 - 3 4 - 5 AFTER 5
OTHER COMMERCIAL COMMITMENTS COMMITTED 1 YEAR YEARS YEARS YEARS
- ---------------------------- --------- ----------- ----- ----- -------
(DOLLARS IN MILLIONS)
Guarantees............................... $1,463 $2 $-- $-- $1,461
FINANCIAL CONDITION
Total assets were $103,187 million as of December 31, 2001, which
represented a decrease of $14,347 million compared to December 31, 2000. The
decrease primarily resulted from the net disposition of cable systems and
investments during 2001. Additional decreases resulted from the deconsolidation
of Excite@Home; the exchange of an investment in Vodafone Group plc for the
settlement of exchangeable notes; the transfer of investments to AT&T; the
unfavorable mark-to-market adjustments on investments and amortization of
franchise costs and goodwill. Such decrease was partially offset by capital
expenditures, net of depreciation.
Total liabilities were $53,001 million as of December 31, 2001,
representing a decrease of $12,085 million compared to December 31, 2000. The
decrease was primarily due to the settlement of the Excite@Home put options; the
deconsolidation of Excite@Home; the reductions of short-term debt due to AT&T;
the dispositions and exchanges of cable systems; the settlement of exchangeable
notes and other retirements of long-term debt. Such decreases were partially
offset by an increase in debt due to the monetization of shares of Cablevision
and Rainbow Media Group.
Minority interest decreased $1,119 million to $3,302 million at December
31, 2001 as compared to December 31, 2000. The decrease was primarily due to
Excite@Home. Due to the significant losses of Excite@Home, AT&T Broadband Group
fully utilized the minority interest balance during the third quarter of 2001,
and therefore no longer has a minority interest balance related to Excite@Home.
Combined attributed net assets were $42,164 million as of December 31,
2001, which represented a decrease of $1,153 million compared to December 31,
2000. The decrease was primarily due to the net loss of AT&T Broadband Group.
Such decrease was partially offset by contributions from AT&T and an increase in
accumulated other comprehensive income due to the adoption of SFAS 133.
AT&T, Comcast and AT&T Comcast have entered into an agreement with
Microsoft pursuant to which at the time of the AT&T Broadband spin-off,
Microsoft will exchange the $5 billion company-obligated convertible quarterly
income preferred securities for shares of AT&T Broadband Corp. common stock that
will be converted into, subject to adjustments, 115 million shares of AT&T
Comcast common stock in the AT&T Comcast Merger.
RISK MANAGEMENT
AT&T Broadband Group is exposed to market risk from changes in interest
rates, as well as changes in equity prices associated with previously affiliated
companies. In addition, AT&T Broadband Group is exposed to market risk from
fluctuations in the prices of securities, some of which have been monetized
through the issuance of debt. On a limited basis, certain derivative financial
instruments, including interest
VII-36
rate swaps, equity hedges and options are used to manage these risks. Financial
instruments are not used for trading or speculative purposes. All financial
instruments are used in accordance with AT&T board-approved policies.
Interest rate swaps are used to manage the impact of interest rate changes
on earnings and cash flows. Interest rate risk is monitored on the basis of
changes in fair value. The fair value of fixed rate long term debt is sensitive
to changes in interest rates. Interest rate changes would result in gains or
losses in the market value of debt due to differences between the market
interest rates and rates at the inception of the obligation. A sensitivity
analysis is performed on fixed-rate long term debt to assess the risk of changes
in fair value. The model to determine sensitivity assumes a hypothetical 10%
parallel shift in interest rates. Assuming a 10% downward shift in interest
rates, the fair value of interest rate swaps and the underlying hedged debt
would have increased by $9 million and $15 million at December 31, 2001 and
2000, respectively. Assuming a 10% downward shift in interest rates at December
31, 2001 and 2000, the fair value of unhedged debt would have increased by $401
million and $563 million, respectively.
AT&T Broadband Group has certain debt instruments which are indexed to the
market prices of equity securities it owns. Certain of these notes contain
embedded derivatives while other debt is issued in conjunction with net
purchased options. Changes in the market prices of these securities result in
changes in the fair value of the derivatives. Assuming a 10% downward change in
the market price of these securities, the fair value of the combined collars and
underlying debt would decrease by $557 million and $534 million at Decembers 31,
2001, and 2000 respectively. Because these collars hedge the underlying equity
securities monetized, AT&T Broadband Group believes that the increase in the
fair value of the collars would be largely offset by decreases in the fair value
of the underlying equity securities. The changes in fair values referenced above
do not represent the actual changes in fair value AT&T Broadband Group would
incur under normal market conditions because all variables other than the equity
prices were held constant in the calculations.
Equity hedges are used to manage exposure to changes in equity prices
associated with stock appreciation rights or SARs. Assuming a 10% decrease in
equity prices of affiliated companies, the fair value of equity hedges (net
liability) would have increased by $27 million and $29 million at December 31,
2001 and 2000, respectively. Because these contracts are entered into for
hedging purposes, it's believed that the decrease in fair value would be largely
offset by decreases in the underlying SAR liability.
In order to determine the changes in fair value of the various financial
instruments, including options, equity collars and SARs, AT&T Broadband Group
uses certain modeling techniques, including Black-Scholes. Rate sensitivity
changes are directly applied to interest rate swap transactions.
The changes in fair value, as discussed above, assume the occurrence of
certain adverse market conditions. They do not consider the potential effect of
favorable changes in market factors and do not represent projected losses in
fair value expected to be incurred. Future impacts would be based on actual
developments in global financial markets. There are no significant foreseen
changes in the strategies used to manage interest rate risk or equity price risk
in the near future.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 141, "Business Combinations
("SFAS 141")," which supercedes Accounting Principles Board ("APB") Opinion No.
16. SFAS 141 requires all business combinations initiated after June 30, 2001 be
accounted for under the purchase method. In addition, SFAS 141 establishes
criteria for the recognition of intangible assets separately from goodwill.
These requirements are effective for fiscal years beginning after December 15,
2001, which for AT&T Broadband Group means January 1, 2002. The adoption of SFAS
141 will not have a material effect on AT&T Broadband Group's results of
operations, financial position or cash flow.
VII-37
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets ("SFAS 142")," which supercedes APB Opinion No. 17. Under SFAS
142 goodwill and indefinite lived intangible assets will no longer be amortized,
but rather will be tested for impairment upon adoption and at least annually
thereafter. In addition, the amortization period of intangible assets with
finite lives will no longer be limited to 40 years. SFAS 142 is effective for
fiscal years beginning after December 15, 2001, which for AT&T Broadband Group
means the standard will be adopted on January 1, 2002. In connection with the
adoption of this standard, AT&T Broadband Group's unamortized goodwill balance
and excess basis related to goodwill of equity method investments will no longer
be amortized, but will continue to be tested for impairment. In addition, AT&T
Broadband Group has determined that franchise costs are indefinite lived assets
and therefore, as of January 1, 2002 will no longer be subject to amortization,
but will continue to be tested for impairment. The adoption of SFAS 142 will
have a significant impact on future operating results due to the cessation of
goodwill and franchise cost amortization. The goodwill balance as of December
31, 2001 was $19.3 billion with related amortization expense for the year ended
December 31, 2001 of $659 million. The excess basis related to AT&T Broadband
Group's equity method investments as of December 31, 2001 was $3.0 billion with
related amortization of $148 million. AT&T Broadband Group performed an
impairment test on the goodwill balance as of January 1, 2002. In accordance
with SFAS 142, the impairment test was performed by comparing the fair value of
the reporting unit to its carrying value. As of January 1, 2002, the fair value
of the reporting unit exceeded its carrying value, and therefore no impairment
loss will be recognized upon implementation. The franchise cost balance as of
December 31, 2001 was $42.8 billion with related amortization expense for the
year ended December 31, 2001 of $1,224 million. In accordance with SFAS 142,
franchise costs were tested for impairment as of January 1, 2002, by comparing
the fair values to the carrying values (at a market level). As a result of such
tests, an impairment loss of $856 million, net of taxes of $530 million, will be
recognized as a change in accounting principle in the first quarter of 2002.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations ("SFAS 143")." This standard requires that obligations
associated with the retirement of tangible long-lived assets be recorded as
liabilities when those obligations are incurred, with the amount of the
liability initially measured at fair value. Upon initially recognizing a
liability for an asset retirement obligation, an entity must capitalize the cost
by recognizing an increase in the carrying amount of the related long-lived
asset. Over time, this liability is accreted to its present value, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. SFAS 143 is effective
for financial statements issued for fiscal years beginning after June 15, 2002,
which for AT&T Broadband Group means the standard will be adopted on January 1,
2003. AT&T Broadband Group does not expect that the adoption of this statement
will have a material impact on AT&T Broadband Group's results of operations,
financial position or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144")," which supercedes SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of ("SFAS 121")." SFAS 144 applies to all long-lived
assets, including discontinued operations, and consequently amends APB Opinion
No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." Based on SFAS 121, SFAS 144 develops one
accounting model for long-lived assets that are to be disposed of by sale, as
well as addresses the principal implementation issues. SFAS 144 requires that
long-lived assets that are to be disposed of by sale be measured at the lower of
book value or fair value less cost to sell. Additionally, SFAS 144 expands the
scope of discontinued operations to include all components of an entity with
operations that (i) can be distinguished from the rest of the entity and (ii)
will be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS 144 also amends ARB No. 51, "Consolidating Financial
Statements" to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. SFAS 144 is effective for AT&T
Broadband Group as of January 1, 2002. The adoption of SFAS 144 will not have a
material impact on AT&T Broadband Group's results of operations, financial
position or cash flows.
VII-38
CHAPTER EIGHT
DESCRIPTION OF GOVERNANCE ARRANGEMENTS FOLLOWING
THE AT&T COMCAST TRANSACTION
AT&T COMCAST BOARD OF DIRECTORS
Upon completion of the AT&T Comcast transaction, the initial AT&T Comcast
Board will have twelve members, five of whom will be designated by Comcast from
the then-existing Comcast Board, five of whom will be designated by AT&T from
the then-existing AT&T Board and two of whom will be jointly designated by
Comcast and AT&T and will be independent persons. At all times, the AT&T Comcast
Board will consist of a majority of independent persons. Except for pre-approved
designees, the individuals designated by each of Comcast and AT&T will be
mutually agreed upon by Comcast and AT&T. Ralph J. Roberts, Brian L. Roberts,
Sheldon M. Bonovitz, Julian A. Brodsky and Decker Anstrom are pre-approved
Comcast director designees and C. Michael Armstrong is a pre-approved AT&T
director designee. All of the initial director designees will hold office until
the 2004 annual meeting of AT&T Comcast shareholders, or the "Initial Term,"
which will be held in April 2004. After the Initial Term, the entire AT&T
Comcast Board will be elected annually. The AT&T Board and the Comcast Board are
elected annually.
From the completion of the AT&T Comcast transaction until the 2005 annual
meeting of AT&T Comcast shareholders, vacancies on the AT&T Comcast Board left
by a Comcast director designee will be filled by a majority of the remaining
Comcast director designees (provided that, at all times, one of the Comcast
director designees must be an independent person), vacancies on the AT&T Comcast
Board left by an AT&T director designee will be filled by a majority of the
remaining AT&T director designees and, subject to the prior approval of the AT&T
Comcast Board, vacancies on the AT&T Comcast Board left by a Comcast/AT&T joint
director designee will be filled by the remaining Comcast/AT&T joint director
designee; provided that any such replacement joint director designee must be an
independent person. After the 2005 annual meeting of shareholders, the AT&T
Comcast Board will fill any vacancies on the AT&T Comcast Board that may arise.
For information concerning each of the pre-approved Comcast director
designees and the other Comcast directors, see Comcast's proxy statement for its
2002 annual meeting of shareholders. For information concerning the pre-approved
AT&T director designee and the other AT&T directors, see "Information about the
AT&T Annual Meeting and Voting -- Election of Directors."
DIRECTORS NOMINATING COMMITTEE
Upon completion of the AT&T Comcast transaction, AT&T Comcast will have a
Directors Nominating Committee that will have the power to nominate individuals
for election as AT&T Comcast directors at the 2004 annual meeting of
shareholders and thereafter. The composition of the Directors Nominating
Committee will depend on whether Brian L. Roberts is the Chairman of the Board
or CEO of AT&T Comcast.
During the Initial Term, if Brian L. Roberts is the Chairman of the Board
or the CEO, the Directors Nominating Committee will consist of Brian L. Roberts,
one Comcast director designee who is an independent person selected by the
Comcast director designees and two independent persons who are selected from the
AT&T director designees by the AT&T director designees who are independent
persons and the Comcast/AT&T joint director designees after consultation with
Brian L. Roberts. During the Initial Term, if Brian L. Roberts is not the
Chairman of the Board or the CEO, the Directors Nominating Committee will
consist of two Comcast director designees, one of whom shall be an independent
person, who are selected by the Comcast director designees and two independent
persons who are selected from the AT&T director designees by the AT&T director
designees who are independent persons and the Comcast/AT&T joint director
designees after consultation with a Comcast director designee selected by the
two Comcast director designees selected to serve on the Directors Nominating
Committee. If the Directors Nominating Committee is able to reach agreement on a
full slate of nominations for the 2004
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annual meeting of AT&T Comcast shareholders, each of the individuals selected as
a nominee who is an AT&T Comcast director then in office will maintain the
status of a "Comcast director designee," "AT&T director designee" or
"Comcast/AT&T joint director designee," as the case may be, and each of the
other individuals, if any, selected as a nominee will have the status determined
by the Directors Nominating Committee; provided that five (5) of the nominees
have the status of a "Comcast director designee", five (5) of the nominees have
the status of a "AT&T director designee" and two (2) of the nominees have the
status of a "Comcast/AT&T joint director designee". If the Directors Nominating
Committee is unable to reach agreement on a full slate of nominations for the
2004 annual meeting of AT&T Comcast shareholders, each of the AT&T Comcast
directors then in office will be nominated for election as a director at the
2004 annual meeting of AT&T Comcast shareholders and will maintain the status of
a "Comcast director designee," "AT&T director designee" or "Comcast/AT&T joint
director designee," as the case may be. In the event that any of such directors
declines to stand for election as a director at the 2004 annual meeting of AT&T
Comcast shareholders, a replacement nominee will be selected by (i) if the
director declining to stand for election is a Comcast director designee, a
majority of the Comcast director designees then in office (other than the
Comcast director designee declining to stand for election), (ii) if the director
declining to stand for election is an AT&T director designee, a majority of the
AT&T director designees then in office (other than the AT&T director designee
declining to stand for election) and (iii) if the director declining to stand
for election is a Comcast/AT&T joint director designee, the other Comcast/AT&T
joint director designee then in office, subject to the prior approval of the
AT&T Comcast Board (other than the Comcast/AT&T joint director designee
declining to stand for election); provided that if each of the Comcast/AT&T
joint director designees declines to stand for election as a director at the
2004 annual meeting of AT&T Comcast shareholders, replacement nominees will be
selected by the AT&T Comcast Board (other than the Comcast/AT&T joint director
designees). If a replacement nominee is selected to replace a declining director
pursuant to the preceding sentence, such replacement nominee shall be deemed to
have the status of the declining director as a "Comcast director designee,"
"AT&T director designee" or "Comcast/AT&T joint director designee," as the case
may be. If a person is elected as a director at the 2004 annual meeting of AT&T
Comcast shareholders who was not nominated pursuant to the above provisions,
such person will be deemed to have the status of the former director he or she
was elected in lieu of. If multiple persons are elected as directors at the 2004
annual meeting of AT&T Comcast shareholders who were not nominated pursuant to
the above provisions and it is not possible to determine whom they were elected
in lieu of, their status as "Comcast director designees," "AT&T director
designees," or "Comcast/AT&T joint director designees" will be determined by the
entire AT&T Comcast Board; provided that there will be five (5) Comcast director
designees, five (5) AT&T director designees and two (2) Comcast/AT&T joint
director designees and the status of the other directors will not be affected as
a result of such determination.
Sural has agreed to vote its shares of AT&T Comcast Class B common stock in
favor of the nominees selected by the Directors Nominating Committee or
otherwise nominated by AT&T Comcast for election as directors at the 2004 annual
meeting of AT&T Comcast shareholders; provided that if a shareholder (other than
Brian L. Roberts or a shareholder associated with or otherwise acting on behalf
of or in concert with Brian L. Roberts) nominates individuals who are
independent persons for election as directors at such annual meeting, Sural may
instead elect to vote its shares of AT&T Comcast Class B common stock in such
election of directors in the same proportion as holders of shares of AT&T
Comcast common stock, other than AT&T Comcast Class B common stock and any other
voting shares of AT&T Comcast owned by Brian L. Roberts or Sural or any
permitted transferee, vote in such election of directors.
During the period beginning at the 2004 annual meeting of AT&T Comcast
shareholders and ending at the 2005 annual meeting of AT&T Comcast shareholders,
or the "2004 Term," which will be held in April 2005, if Brian L. Roberts is the
Chairman of the Board or the CEO, the Directors Nominating Committee will
consist of Brian L. Roberts, one Comcast director designee who is an independent
person selected by the Comcast director designees and three independent persons
who are selected by the Comcast director designees from the AT&T director
designees and the Comcast/AT&T joint director designees. During the 2004 Term,
if Brian L. Roberts is not the Chairman of the Board or the CEO, the
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Directors Nominating Committee will consist of two Comcast director designees,
one of whom shall be an independent person, who are selected by the Comcast
director designees and three independent persons who are selected by the Comcast
director designees from the AT&T director designees and the Comcast/AT&T joint
director designees.
After the 2004 Term, if Brian L. Roberts is the Chairman of the Board or
the CEO, the Directors Nominating Committee will consist of Brian L. Roberts and
four other directors who are independent persons selected by Brian L. Roberts;
provided that no more than one Comcast director designee may be selected by
Brian L. Roberts as a member of the Directors Nominating Committee prior to the
seventh anniversary of the date that such director was initially elected to the
AT&T Comcast Board. After the 2004 Term, if Brian L. Roberts is not the Chairman
of the Board or the CEO, the AT&T Comcast Board will determine the composition
of the Directors Nominating Committee. At any time that Brian L. Roberts is a
member of the Directors Nominating Committee, he will be the chairman of that
committee. Nominations of the Directors Nominating Committee will be submitted
directly to the AT&T Comcast shareholders without any requirement of AT&T
Comcast Board approval or ratification.
MANAGEMENT
Chairman of the Board. Upon the completion of the AT&T Comcast
transaction, C. Michael Armstrong, AT&T's Chairman of the Board, will be
Chairman of the Board of AT&T Comcast. C. Michael Armstrong will serve as
Chairman of the Board until the 2005 annual meeting of AT&T Comcast
shareholders, but he will serve as non-executive Chairman of the Board after
April 1, 2004 and until the 2005 annual meeting of AT&T Comcast shareholders.
After the 2005 annual meeting of AT&T Comcast shareholders, or if C. Michael
Armstrong ceases to serve as Chairman of the Board prior to that date, Brian L.
Roberts will be the Chairman of the Board.
The Chairman of the Board will preside at all meetings of the AT&T Comcast
shareholders and of the AT&T Comcast Board and will have the authority to call
special meetings of the AT&T Comcast Board. Removal of the Chairman of the Board
will require the vote of at least 75% of the entire AT&T Comcast Board until the
earlier to occur of (1) the date on which neither C. Michael Armstrong nor Brian
L. Roberts is Chairman of the Board and (2) the sixth anniversary of the 2004
annual meeting of AT&T Comcast shareholders.
Chief Executive Officer and President. Upon completion of the AT&T Comcast
transaction, Brian L. Roberts, Comcast's President, will be the CEO of AT&T
Comcast. Brian L. Roberts will also be President for as long as he is the CEO.
The powers and responsibilities of the CEO and President will include:
- the supervision and management of AT&T Comcast's business and operations,
- all matters related to officers and employees, including hiring and
termination,
- all rights and powers typically exercised by a corporation's chief
executive officer and president, and
- the authority to call special meetings of the AT&T Comcast Board.
Removal of the CEO will require the vote of at least 75% of the entire AT&T
Comcast Board until the earlier to occur of (1) the date on which Brian L.
Roberts ceases to be the CEO and (2) the sixth anniversary of the 2004 annual
meeting of AT&T Comcast shareholders.
Senior Management. The CEO will select the initial senior management of
AT&T Comcast in consultation with the Chairman of the Board.
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OFFICE OF THE CHAIRMAN
Upon completion of the AT&T Comcast transaction, AT&T Comcast will have an
Office of the Chairman comprised of the Chairman of the Board and the CEO from
the completion of the AT&T Comcast transaction until the earlier to occur of (1)
the 2005 annual meeting of AT&T Comcast shareholders and (2) the date on which
C. Michael Armstrong ceases to be the Chairman of the Board. The Office of the
Chairman will be AT&T Comcast's principal executive deliberative body with
responsibility for corporate strategy, policy and direction, governmental
affairs and other significant matters. While the Office of the Chairman is in
effect, the Chairman of the Board and the CEO will advise and consult with each
other with respect to those matters.
AMENDMENT AND TERMINATION
The AT&T Comcast charter provisions that implement the foregoing governance
arrangements may not be amended or changed except with the approval of at least
75% of the entire AT&T Comcast Board until the earlier to occur of (1) the date
on which Brian L. Roberts is no longer serving as Chairman of the Board or CEO
and (2) the sixth anniversary of the 2004 annual meeting of AT&T Comcast
shareholders. If Brian L. Roberts is no longer serving as either Chairman of the
Board or CEO, with the exception of the provisions regarding the Directors
Nominating Committee and the requirement that the AT&T Comcast Board be
comprised of a majority of independent persons, the governance arrangements
described above will automatically terminate. Notwithstanding the foregoing, if
Brian L. Roberts ceases to serve as Chairman of the Board or CEO prior to the
2005 annual meeting of AT&T Comcast shareholders, the provisions relating to the
AT&T Comcast Board, the Office of the Chairman, the Chairman of the Board, other
than the requirement that a removal of the Chairman of the Board occur only with
the approval of at least 75% of the entire AT&T Comcast Board, and the Directors
Nominating Committee will survive through the close of that meeting.
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CHAPTER NINE
EMPLOYEE BENEFITS MATTERS
INTERESTS OF DIRECTORS AND OFFICERS IN THE AT&T COMCAST TRANSACTION
GENERAL
In considering the respective recommendations of the Comcast Board and the
AT&T Board with regard to the AT&T Comcast transaction, you should be aware
that, as described below, several members of the respective managements and
boards of directors of Comcast and AT&T may have interests in the AT&T Comcast
transaction that are different from, or in addition to, your interests. The
Comcast Board and the AT&T Board were each aware of such interests and
considered them, among other matters, when voting to approve the AT&T Comcast
transaction.
COMCAST
Governance Structure and Management Positions. Pursuant to the terms of
the merger agreement, upon completion of the AT&T Comcast transaction:
- The AT&T Comcast Board will initially be comprised of twelve individuals,
five of whom will be existing Comcast directors designated by Comcast,
five of whom will be existing AT&T directors designated by AT&T and two
of whom will be independent persons jointly designated by Comcast and
AT&T. Except for the pre-approved designees identified under "Description
of Governance Arrangements Following the AT&T Comcast Transaction -- AT&T
Comcast Board of Directors," the director designees will be mutually
agreed upon by Comcast and AT&T;
- Brian L. Roberts, President of Comcast, will serve as CEO and President
of AT&T Comcast. Removal of the CEO will require the vote of at least 75%
of the entire AT&T Comcast Board until the earlier of the date when Brian
L. Roberts is not the CEO and the sixth anniversary of the 2004 annual
meeting of shareholders;
- The initial senior officers of AT&T Comcast will be designated by Brian
L. Roberts in consultation with C. Michael Armstrong; and
- Sural LLC will hold shares of AT&T Comcast Class B common stock
constituting 33 1/3% of the combined voting power of AT&T Comcast common
stock. Brian L. Roberts has sole voting power over membership interests
representing a majority of the voting power of all Sural LLC equity.
Employment Agreements. Pursuant to the terms of the merger agreement, AT&T
Comcast will offer to enter into employment agreements, effective as of the
completion of the AT&T Comcast transaction, with Brian L. Roberts (pursuant to
which he will serve as CEO and President of AT&T Comcast) and with Ralph J.
Roberts. Each of these employment agreements will have terms ending no earlier
than the date of the 2005 annual meeting of AT&T Comcast shareholders. Each of
these employment agreements will be on substantially the same terms as the
existing applicable employment agreement with Comcast. If the AT&T Comcast Board
establishes an Executive Committee, Ralph J. Roberts, Chairman of the Board of
Comcast, will serve as the Chairman of this committee.
Brian L. Roberts's existing employment agreement with Comcast provides for
the payment of base salary and an annual bonus of up to 150% of base salary for
the applicable year. Upon termination of his employment, Brian L. Roberts is
entitled to certain benefits as described in his agreement. Certain benefits
resulting from the occurrence of a change in control are described below. Under
his current agreement, he has agreed not to compete with Comcast during his
employment and for two years after any termination of his employment other than
a termination following a change in control.
Ralph J. Roberts's existing employment agreement with Comcast provides for
the payment of base salary and an annual bonus of up to 50% of base salary for
the applicable year. It also provides for maintenance of split-dollar life
insurance and the payment of a supplemental death benefit to the personal
representatives of Ralph J. Roberts within six months of his death. Upon
termination of his employment, Ralph J. Roberts is entitled to certain benefits
as described in his agreement. Certain benefits resulting from the occurrence of
a change in control are described below. Under his current agreement, he has
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agreed not to compete with Comcast during his employment and for five years
after termination of his employment. The employment agreement also provides that
Ralph J. Roberts may at any time, upon 30 days' notice to Comcast, elect to
change his position from that of an executive to that of a consultant. In such
event, he will continue to receive all of the compensation provided under his
employment agreement, other than his annual bonus. If he elects to become a
consultant, his entitlement to retirement benefits under Comcast's supplemental
executive retirement plan will be adjusted annually to reflect 150% of his base
salary as consultant, but his benefits under such plan will not in any event
exceed the bonus he could have received under his employment agreement had he
continued to work as an executive. If you are interested in further information
about either of these agreements, see Comcast's proxy statement used in
connection with its 2002 annual meeting of shareholders.
Under each of the existing employment agreements with Brian L. Roberts and
Ralph J. Roberts, Comcast must establish and fund a grantor trust for each
individual prior to a change in control, as defined in such agreements. It is
anticipated that the AT&T Comcast transaction will constitute a change in
control under these agreements. With respect to Brian L. Roberts, the trust will
be established and funded for purposes of paying all deferred compensation,
retirement benefits and term life insurance premiums and bonuses then applicable
for Brian L. Roberts. With respect to Ralph J. Roberts, the trust will be
established and funded for purposes of paying all deferred compensation,
nonqualified retirement benefits and split-dollar term life insurance premiums
and bonuses then applicable for Ralph J. Roberts. The initial amount required to
fund such trusts is not expected to exceed $150 million. Upon a change in
control, each trust must become irrevocable and Comcast must continue to make
payments into each trust to maintain sufficient amounts in the trusts to fund
all benefits subject to the trusts.
Equity Awards. None of the stock-based awards granted under any of the
equity-based plans maintained by Comcast will vest as a result of the AT&T
Comcast transaction. For the treatment of Comcast stock options and equity
awards in the AT&T Comcast transaction, see "Description of the AT&T Comcast
Transaction Agreements -- The Merger Agreement -- Treatment of Stock Options and
Equity-Based Awards."
Security Ownership of Officers and Directors. For information concerning
security ownership of directors and certain officers of Comcast, see Comcast's
proxy statement used in connection with its 2002 annual meeting of shareholders,
the relevant portions of which are incorporated by reference in this joint
document from Comcast's annual report on Form 10-K for the fiscal year ended
December 31, 2001.
AT&T
Governance Structure and Management Positions. Pursuant to the terms of
the merger agreement, upon completion of the AT&T Comcast transaction:
- The AT&T Comcast Board will initially be comprised of twelve individuals,
five of whom will be existing AT&T directors designated by AT&T, five of
whom will be existing Comcast directors designated by Comcast and two of
whom will be independent persons jointly designated by Comcast and AT&T;
and
- C. Michael Armstrong, Chairman of the Board and Chief Executive Officer
of AT&T, will serve as the Chairman of the Board of AT&T Comcast. C.
Michael Armstrong will serve as Chairman of the Board until the 2005
annual meeting of AT&T Comcast shareholders, but he will serve as non-
executive Chairman of the Board after April 1, 2004 and until the 2005
annual meeting of AT&T Comcast shareholders. Removal of the Chairman of
the Board will require the approval of at least 75% of the entire AT&T
Comcast Board until the earlier of the date that neither C. Michael
Armstrong nor Brian L. Roberts is Chairman of the Board and the sixth
anniversary of the 2004 annual meeting of shareholders.
Employment Agreements. Pursuant to the employee benefits agreement and in
connection with the AT&T Broadband spin-off, AT&T Broadband will assume C.
Michael Armstrong's current employment agreement with AT&T and William T.
Schleyer's current employment agreement with AT&T.
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Pursuant to the terms of the merger agreement, AT&T Comcast will offer to
enter into an employment agreement, effective as of the completion of the AT&T
Comcast transaction, with C. Michael Armstrong to serve as Chairman of the Board
of AT&T Comcast. The term of this employment agreement will end no earlier than
the date of the 2005 annual meeting of AT&T Comcast shareholders. This
employment agreement will be on substantially the same terms as C. Michael
Armstrong's existing employment agreement with AT&T. Upon execution of the new
employment agreement, Mr. Armstrong intends to waive the accelerated vesting of
equity awards that would otherwise be accelerated by consummation of the AT&T
Comcast transaction.
See "Information About the AT&T Annual Meeting and Voting" for a
description of C. Michael Armstrong's current employment agreement with AT&T as
well as a description of Charles H. Noski's current employment agreement with
AT&T (which has been amended in connection with the AT&T Comcast transaction).
William Schleyer's existing employment agreement with AT&T, dated October
25, 2001, provides for an initial base salary of $925,000 per year and a
guaranteed annual incentive award for the 2002 performance year of no less than
100% of his then base salary. William Schleyer is entitled to participate in the
benefit programs that are generally made available to other AT&T executives.
Under his current agreement, if AT&T separates itself from AT&T Broadband, he
will cease to participate in AT&T's benefit plans, will become a participant in
the applicable benefit plans of AT&T Broadband, and will have his equity awards
treated in accordance with the AT&T Broadband incentive plan approved by the
AT&T Board. Upon termination of his employment for cause or without good reason,
he will forfeit all unvested stock options and restricted shares as to which
restrictions have not lapsed. Upon termination without cause or with good
reason, including after a change in control, he will be provided severance
benefits under the applicable AT&T Broadband severance plan. In addition,
unvested AT&T contributions to its savings and pension plans made on William
Schleyer's behalf will be paid to him after termination without cause or with
good reason.
Severance Plan. Each AT&T executive officer who becomes employed by AT&T
Broadband prior to the completion of the AT&T Comcast transaction will be
entitled to receive the greater of the severance under his employment agreement,
if any, or the severance benefits under the terms of the applicable AT&T
Broadband severance plan if terminated as described below. Upon termination of
employment by AT&T Broadband without cause or for good reason within two years
following a change in control of AT&T Broadband (as such terms are defined in
the applicable plan), members of senior management will be eligible to receive,
in a lump sum payment, three times the sum of (1) annual base salary, (2) short-
term incentive (payable at 100% of target for the year in which the AT&T Comcast
transaction occurs), and (3) in the case of senior officers, the performance
share target for the year in which the AT&T Comcast transaction occurs, minus
ninety percent of a special pension enhancement payment, plus the amount
necessary to compensate for any excise tax due on any amounts payable under the
plan. Upon a termination of employment without cause or for good reason within
the two years following a change in control of AT&T Broadband, other
participants in the plan are eligible to receive benefits ranging from 12 weeks
of base salary to 2 years of base salary and 2 years of short term incentives
(payable at 100% of target for the year in which the AT&T Comcast transaction
occurs), depending on job level and years of service, minus ninety percent of a
special pension enhancement payment, plus the amount necessary to compensate for
any excise tax due on any amounts payable under the plan. In addition,
individuals who terminate employment under the terms of the applicable plan will
be entitled to certain other post-termination benefits, including payment of the
cost of COBRA benefits for 12 months, subsidized health care coverage for six
months, and continuation of life insurance for 12 months post-termination. The
AT&T Comcast transaction will constitute a change in control under the
applicable AT&T Broadband severance plans.
Based on currently available information, if all executive officers of AT&T
expected to become employees of AT&T Broadband prior to completion of the AT&T
Comcast transaction were terminated without cause immediately following
completion of the AT&T Comcast transaction, such executive officers would
receive under their employment agreements, the applicable AT&T Broadband
severance plan or
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pursuant to pension enhancements, as applicable, severance payments
approximately equal in the aggregate to $44,700,000.
Equity Awards. Immediately prior to the AT&T Comcast transaction, as a
part of the AT&T Broadband spin-off, AT&T stock options, restricted stock and
other equity-based awards will be converted as described below. In connection
with the conversions, adjustments will be made to maintain the intrinsic value
of the original AT&T stock options and the fair market value of the original
AT&T restricted stock or other equity-based award immediately before and after
the AT&T Broadband spin-off.
- AT&T stock options held by current employees of AT&T (other than current
employees of AT&T Broadband and current employees of AT&T who become
employees of AT&T Broadband in connection with the AT&T Broadband
spin-off) will be converted into adjusted AT&T stock options;
- AT&T restricted shares held by current employees of AT&T (other than
current employees of AT&T Broadband and current employees of AT&T who
become employees of AT&T Broadband in connection with the AT&T Broadband
spin-off) will be converted into (1) adjusted AT&T restricted shares and
(2) equity-based awards based on AT&T Broadband common stock;
- AT&T stock options held by current employees of AT&T Broadband and
current employees of AT&T who become employees of AT&T Broadband in
connection with the AT&T Broadband spin-off will be converted into AT&T
Broadband stock options;
- AT&T restricted shares held by current employees of AT&T Broadband and
current employees of AT&T who become employees of AT&T Broadband in
connection with the AT&T Broadband spin-off will be converted into (1)
adjusted AT&T restricted shares and (2) AT&T Broadband restricted shares;
- AT&T stock options held by non-employee directors of AT&T and former
employees of AT&T and AT&T Broadband will be converted into (1) adjusted
AT&T stock options and (2) AT&T Broadband stock options (an employee's
status as a current or former employee will be determined as of a
specific time on the date of the AT&T Broadband spin-off); and
- Other equity-based awards based on AT&T common stock, regardless of by
whom held, will be converted into (1) adjusted equity-based awards based
on AT&T common stock and (2) equity-based awards based on AT&T Broadband
common stock.
As of the completion of the AT&T Comcast transaction, all outstanding AT&T
Broadband stock options held by current AT&T Broadband employees and current
executive officers of AT&T who become employees of AT&T Broadband in connection
with the AT&T Broadband spin-off will, by their terms, have vested and become
fully exercisable through the remainder of the original option period (except
for options granted after the date the merger agreement was signed) and will be
converted into AT&T Comcast stock options pursuant to the merger agreement. In
addition, all restricted shares and other equity-based awards based on either
AT&T or AT&T Broadband common stock held by current and former employees of AT&T
Broadband and current executive officers of AT&T who become employees of AT&T
Broadband in connection with the AT&T Broadband spin-off will, by their terms,
have fully vested (except for awards granted after the date the merger agreement
was signed). AT&T Broadband stock options, AT&T Broadband restricted shares and
other equity-based awards based on AT&T Broadband stock will be converted into
AT&T Comcast stock options, AT&T Comcast restricted shares and other
equity-based awards based on AT&T Comcast stock pursuant to the merger
agreement. For the treatment of AT&T Broadband stock options and equity awards
in the AT&T Comcast transaction, see "Description of the AT&T Comcast
Transaction Agreements -- The Merger Agreement -- Treatment of Stock Options and
Equity-Based Awards."
As of March 31, 2002, the number of shares underlying unvested AT&T stock
options and shares of restricted AT&T common stock held by directors and
executive officers of AT&T currently expected to become employees of AT&T
Broadband in the AT&T Broadband spin-off totaled 4,722,620. AT&T directors and
executive officers currently expected to become employees of AT&T Broadband are
expected to hold, based on certain assumptions and currently available
information, (a) unvested AT&T Broadband
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stock options that will have vested as of the completion of the AT&T Comcast
transaction with an aggregate in-the-money value of $0, (b) shares of AT&T and
AT&T Broadband restricted stock that will have become unrestricted as a result
of the AT&T Comcast transaction with an aggregate value of $2,679,205, and (c)
other equity-based awards (based on AT&T or AT&T Broadband stock) that will have
vested as a result of the AT&T Comcast transaction with an aggregate value of
$17,453,416, in each case, based on an AT&T common stock price of $15.70 (the
closing price of a share of AT&T common stock on March 29, 2002).
In addition, after conversion of their original AT&T equity awards in the
AT&T Broadband spin-off, directors and executive officers of AT&T who do not
become employed by AT&T Broadband in the AT&T Broadband spin-off will hold in
the aggregate equity-based awards denominated with respect to 1,504,168 shares
of AT&T Broadband common stock. These awards will not vest as a result of the
AT&T Comcast transaction, but will vest according to their original terms.
Security Ownership of Officers and Directors. For information concerning
security ownership of directors and certain officers of AT&T, see "Information
About the AT&T Annual Meeting and Voting."
Other Executive Benefit Plans. Each executive officer of AT&T who becomes
employed by AT&T Broadband prior to the completion of the AT&T Comcast
transaction, including C. Michael Armstrong and William T. Schleyer, will
participate in benefit plans maintained by AT&T Broadband. These plans contain
provisions relating to a change in control, as summarized below:
- AT&T Broadband Pension Plan. Upon completion of the AT&T Comcast
transaction, the plan cannot be amended to reduce benefits applicable
upon a change in control for two years. If a participant's employment is
terminated either without cause by AT&T Broadband or for good reason by
the participant within two years after completion of the AT&T Comcast
transaction, such participant will be fully vested in his or her account,
will have his or her service bridged, and will be entitled to a special
pension enhancement payment. This service-based special pension
enhancement will not exceed the prior year's pension eligible earnings.
- AT&T Broadband Nonqualified Pension Plan. Upon completion of the AT&T
Comcast transaction, the plan cannot be amended to reduce benefits
applicable upon a change in control for two years, plan participants will
become fully vested in their account balances and the present value of
the benefits under the plan will be funded in trust.
- AT&T Broadband Deferred Compensation Plan. Upon completion of the AT&T
Comcast transaction, the plan cannot be amended to reduce benefits
applicable upon a change in control for two years, the present value of
the benefits of the plan will be funded in trust, participants in the
plan will be completely vested in their accounts, and the interest rate
methodology applied to participants' accounts cannot be changed to a
methodology that yields a lower interest rate than the methodology in
effect immediately prior to the AT&T Comcast transaction.
- AT&T Broadband Long Term Savings Plan. Upon completion of the AT&T
Comcast transaction, participants in the plan will be fully vested in
their company matching contribution accounts and the plan cannot be
amended to reduce benefits applicable upon a change in control for two
years.
INDEMNIFICATION AND INSURANCE
- AT&T Comcast has agreed to indemnify the present and former officers and
directors of AT&T, the AT&T subsidiaries, AT&T Broadband, the AT&T
Broadband subsidiaries, Comcast and the Comcast subsidiaries, and each
individual who prior to the completion of the AT&T Comcast transaction
becomes such an officer or director, from their acts or omissions in
those capacities occurring at or prior to the completion of the AT&T
Comcast transaction to the maximum extent permitted by law; provided that
no such indemnification will be required for officers or directors acting
in a capacity for AT&T and its subsidiaries other than in connection with
either AT&T's broadband business or the merger agreement and the
transactions contemplated by the merger agreement.
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- AT&T, and not AT&T Broadband, will indemnify and hold harmless AT&T
Comcast for 50% of any losses described in the preceding paragraph
arising out of acts or omissions of the AT&T officers and directors in
connection with the merger agreement and the transactions contemplated by
the merger agreement.
- For six years after completion of the AT&T Comcast transaction, AT&T
Comcast will provide, or cause to be provided, officers' and directors'
liability insurance in respect of acts or omissions occurring prior to
completion of the AT&T Comcast transaction, covering each officer and
director identified in the first bullet point above (for officers and
directors of AT&T and its subsidiaries, only for acts or omissions of
such person acting in connection with AT&T's broadband business or the
merger agreement and the transactions contemplated by the merger
agreement) currently covered by the officers' and directors' liability
insurance policy of AT&T or Comcast, as the case may be, on terms no less
favorable than those of such policy in effect on December 19, 2001,
except that AT&T Comcast will only be obligated to pay up to 300% of the
annual premium paid for such insurance by either AT&T or Comcast as of
December 19, 2001.
COMPENSATION OF DIRECTORS
In accordance with the existing practice of Comcast and AT&T, it is
expected that directors of AT&T Comcast who are not employees of AT&T Comcast
will receive compensation for service on the AT&T Comcast Board.
COMPENSATION OF EXECUTIVE OFFICERS
AT&T Comcast has not yet paid any compensation to any other person expected
to become an executive officer of AT&T Comcast. The form and amount of
compensation to be paid to each of AT&T Comcast's executive officers in any
future period will be determined by the Chief Executive Officer in consultation
with the Chairman of the Board, the AT&T Comcast Board or a committee of the
AT&T Comcast Board.
For information concerning the compensation paid to, and the employment
agreements with, the President of Comcast and the four most highly compensated
executive officers of Comcast (other than the President) for the 2001 fiscal
year, see Comcast's proxy statement used in connection with its 2002 annual
meeting of shareholders, the relevant portions of which are incorporated by
reference in this document from Comcast's annual report on Form 10-K for the
fiscal year ended December 31, 2001.
For information concerning the compensation paid to, and the employment
agreements with, the CEO of AT&T and the four most highly compensated executive
officers of AT&T (other than the CEO) for the 2001 fiscal year, see "Information
About the AT&T Annual Meeting and Voting."
OTHER BENEFITS MATTERS
Maintenance of Benefits for AT&T Broadband Employees. In the merger
agreement, AT&T Comcast has agreed to honor the terms of all AT&T Broadband
employee benefit plans and arrangements and to pay and provide the benefits
required thereunder, recognizing that the AT&T Comcast transaction is a change
in control under the plans, and to provide, until December 31, 2003, to
employees (other than those subject to collective bargaining obligations or
agreements) of AT&T Broadband and its subsidiaries aggregate employee benefits
and compensation that are substantially comparable in the aggregate to those
provided by AT&T Broadband and its subsidiaries as of the completion of the AT&T
Comcast transaction, other than benefits provided under severance or separation
plans of AT&T Broadband or its subsidiaries. Until December 31, 2003, AT&T
Comcast has agreed to continue certain severance plans of AT&T Broadband and its
subsidiaries without adverse change. If employees of AT&T Broadband or its
subsidiaries are included in any employee benefit plan sponsored by AT&T
Comcast, they will receive credit for past service and for deductible,
co-insurance and out-of-pocket expenses incurred prior to the AT&T Comcast
transaction, and shall waive all pre-existing condition, limitations or other
requirements. As soon as practicable after December 31, 2003, eligible AT&T
Broadband employees will be allowed to participate in any retirement medical or
life insurance benefit plan sponsored by AT&T Comcast or one of
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its subsidiaries. With respect to AT&T Broadband employees who are subject to
collective bargaining obligations or agreements, their benefits will be governed
by the terms of such obligations or agreements.
One-Time Stock Option Grant. In the merger agreement, AT&T Comcast has
agreed to offer to each of its or any of its subsidiaries' full-time employees
(other than any employees of non-wholly owned subsidiaries of Comcast if the
applicable subsidiary was a non-wholly owned Comcast subsidiary prior to the
completion of the AT&T Comcast transaction) a one-time grant of options to
purchase a number of shares of AT&T Comcast common stock equal to 300 multiplied
by the AT&T Broadband exchange ratio. This grant will be made as soon as
practicable after the completion of the AT&T Comcast transaction.
AT&T Stock Options. In the merger agreement, AT&T has agreed that, with
respect to AT&T stock options or other equity awards based on AT&T common stock
granted in the period beginning on the date the merger agreement was signed and
ending at the completion of the AT&T Comcast transaction, the AT&T Comcast
transaction will not constitute a "change in control" for purposes of
accelerating the vesting of such awards; provided that upon certain terminations
of employment following the completion of the AT&T Comcast transaction awards
will become fully vested and will remain exercisable for the full extent of the
original term of the award.
Employee Benefits Agreement. In connection with the AT&T Broadband
spin-off, AT&T and AT&T Broadband entered into an employee benefits agreement.
The following summary of the employee benefits agreement is qualified in its
entirety by reference to the complete text of the employee benefits agreement,
which is attached as an exhibit to the registration statement in which this
document is included and is incorporated by reference in this section. The
employee benefits agreement covers a wide range of compensation and benefits
issues. In general, after the AT&T Broadband spin-off, AT&T Broadband will be
responsible for all obligations and liabilities relating to current and former
employees of AT&T Broadband and its subsidiaries and their dependents and
beneficiaries and AT&T will be responsible for all obligations and liabilities
relating to current and former employees of AT&T and its subsidiaries (other
than AT&T Broadband and its subsidiaries) and their dependents and
beneficiaries. Employees of AT&T Broadband or any of its subsidiaries are
referred to in this section as "AT&T Broadband employees." Employees of AT&T who
are transferred to AT&T Broadband prior to the AT&T Broadband spin-off are
referred to in this section as "AT&T Broadband transferees." Employees of AT&T
or any of its subsidiaries (other than AT&T Broadband employees or AT&T
Broadband transferees) are referred to in this section as "AT&T employees."
As of the date of the AT&T Broadband spin-off, all AT&T Broadband employees
and AT&T Broadband transferees will continue to be or be, as the case may be,
employed by AT&T Broadband or its subsidiaries. If any AT&T Broadband transferee
is on an approved leave of absence on the date of the AT&T Broadband spin-off,
this employee will become an employee of AT&T Broadband or one of its
subsidiaries upon return to active service.
As of the date of the AT&T Broadband spin-off, AT&T Broadband and its
subsidiaries will cease to participate in any benefit plan or trust under any
such plan sponsored or maintained by AT&T or its subsidiaries (other than AT&T
Broadband and its subsidiaries) and AT&T will cease to participate in any
benefit plan or trust under any such plan sponsored or maintained by AT&T
Broadband or its subsidiaries. With respect to employees who are transferred to
or from AT&T or AT&T Broadband, AT&T and AT&T Broadband will mutually recognize
and credit service with the other employer, except for purposes of benefit
accruals under defined benefit pension plans. Account balances of AT&T employees
(excluding AT&T Broadband transferees) in the 401(k) plan maintained by AT&T
Broadband will vest as of the date of the AT&T Broadband spin-off and account
balances of AT&T Broadband employees and AT&T Broadband transferees in the
401(k) plans maintained by AT&T will vest as of the date of the AT&T Broadband
spin-off. Each AT&T Broadband employee and AT&T Broadband transferee will be
allowed to make an election to transfer his or her account to the 401(k) plan
maintained by AT&T Broadband and each AT&T employee will be allowed to make an
election to transfer his or her account to the 401(k) plans maintained by AT&T.
AT&T shall provide AT&T Broadband transferees with lost matching contributions
for the year of the AT&T Comcast transaction. Each AT&T Broadband employee and
AT&T Broadband transferee will vest in his or her accrued benefit under the AT&T
pension plans as of
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the date of the AT&T Broadband spin-off and each AT&T employee will vest in his
or her accrued benefit under the AT&T Broadband pension plans as of the date of
the AT&T Broadband spin-off, and will respectively be entitled to commence
pension under such plans. AT&T Broadband employees and AT&T Broadband
transferees will also be entitled to a distribution of their accounts under the
AT&T Employee Stock Purchase Plan.
If terminated during the one-year period after the AT&T Broadband spin-off,
AT&T Broadband transferees will be entitled to receive the greater of severance
under the applicable AT&T severance plan or the applicable AT&T Broadband
severance plan. An AT&T Broadband transferee, however, may be entitled to
greater severance under the terms of his or her applicable employment agreement.
As a part of the AT&T Broadband spin-off, AT&T stock options, restricted
stock and other equity-based awards will be converted as described below. In
connection with the conversions, adjustments will be made to maintain the
intrinsic value of the original AT&T stock options and the fair market value of
the original AT&T restricted stock or other equity-based award immediately
before and after the AT&T Broadband spin-off.
- AT&T stock options held by AT&T employees will be converted into adjusted
AT&T stock options;
- AT&T restricted shares held by AT&T employees will be converted into (1)
adjusted AT&T restricted shares and (2) equity-based awards based on AT&T
Broadband common stock;
- AT&T stock options held by AT&T Broadband employees and AT&T Broadband
transferees will be converted into AT&T Broadband stock options;
- AT&T restricted shares held by AT&T Broadband employees and AT&T
Broadband transferees will be converted into (1) adjusted AT&T restricted
shares and (2) AT&T Broadband restricted shares;
- AT&T stock options held by non-employee directors of AT&T and former AT&T
employees and former AT&T Broadband employees will be converted into (1)
adjusted AT&T stock options and (2) AT&T Broadband stock options (an
employee's status as a current or former employee will be determined as
of a specific time on the date of the AT&T Broadband spin-off); and
- Other equity-based awards based on AT&T common stock, regardless of by
whom held, will be converted into (1) adjusted equity-based awards based
on AT&T common stock and (2) equity-based awards based on AT&T Broadband
common stock.
Each adjusted AT&T stock option and AT&T Broadband stock option will
generally be subject to the same terms and conditions as set forth in the
original AT&T stock options; provided that AT&T Broadband stock options held by
AT&T Broadband employees and AT&T Broadband transferees will have vested as of
the completion of the AT&T Comcast transaction and will remain exercisable
through the remainder of their original terms (except for options granted after
the date the merger agreement was signed). As of completion of the AT&T Comcast
transaction, all restricted shares and other equity-based awards based on either
AT&T or AT&T Broadband common stock held by current and former AT&T Broadband
employees and AT&T Broadband transferees will have vested (except for awards
granted after the date the merger agreement was signed).
Other. AT&T made an offer to certain active and former employees, as well
as active and former non-employee directors, to relinquish certain deferred
compensation benefits in exchange for a single payment to be made in shares of
AT&T common stock with a value equal to 90% of the present value of such
individual's future benefits. The election period has expired. As a result of
this offer, AT&T is required to issue AT&T common stock with a value of
approximately $220 million, although the payment is contingent on AT&T's
issuance of a written notification to holders of certain bonds confirming that
AT&T has satisfied specified conditions relative to the AT&T Broadband spin-off
(including the receipt of preliminary ratings on such bonds). The actual number
of shares of AT&T common stock, if any, to be issued will depend on the trading
prices of AT&T common stock over a specified trading period. Virtually all
shares issued in connection with this offer will be freely tradeable. Sales of a
substantial number of these shares over a short period could have an adverse
impact on the price of AT&T common stock.
IX-8
CHAPTER TEN
AT&T CONSUMER SERVICES GROUP TRACKING STOCK
THE CONSUMER SERVICES CHARTER AMENDMENT PROPOSAL
AT&T urges all AT&T shareholders to read the form of proposed charter
amendment, a copy of which we have attached as Annex L to this document.
GENERAL
AT&T is proposing the following amendment to its charter, which we refer to
as the Consumer Services charter amendment proposal:
Consumer Services Group tracking stock amendment -- an
amendment to create a new class of common stock called
Consumer Services Group common stock, par value $1.00 per
share, intended to reflect the financial performance and
economic value of AT&T's Consumer Services business. We refer
to this stock as "AT&T Consumer Services Group tracking
stock."
Approval of the Consumer Services charter amendment proposal requires a
majority of the voting power of all outstanding shares of AT&T common stock to
vote in its favor. THE AT&T BOARD RECOMMENDS THAT AT&T SHAREHOLDERS VOTE FOR
APPROVAL. Any shares of AT&T common stock not voted, whether by abstention,
broker non-vote or otherwise, have the effect of a vote against the Consumer
Services charter amendment proposal.
If the AT&T Consumer Services Group tracking stock proposal is approved,
AT&T plans to distribute these shares as a dividend to holders of AT&T common
stock at such time as AT&T determines that there is sufficient market
receptivity and support for such a distribution. AT&T has not yet determined the
timing of the distribution, which may be made within a year of shareholder
approval or may be made thereafter, depending on market conditions. AT&T expects
that, when it distributes AT&T Consumer Services Group tracking stock, it will
distribute shares intended to reflect all of the financial performance and
economic value of AT&T Consumer Services Group.
Notwithstanding AT&T's current plans, the AT&T Board could decide not to
proceed with the proposal, could issue shares representing less than all of the
financial performance and economic value of AT&T Consumer Services Group, or
could proceed at a time or in a manner different from its current intentions.
AT&T's plans may change, for example, if the AT&T Board decides that market
conditions and receptivity warrant such a change or do not support a
distribution of shares of AT&T Consumer Services Group tracking stock. If the
AT&T Consumer Services Group tracking stock proposal is approved, the AT&T Board
will have the ability to issue shares of AT&T Consumer Services Group tracking
stock at such time, in such amount and in such manner as it determines
appropriate.
CONSUMER SERVICES GROUP TRACKING STOCK AMENDMENT
The Consumer Services Group tracking stock amendment would, among other
things:
- Define "AT&T Consumer Services Group," the financial performance and
economic value of which is intended to be reflected in AT&T Consumer
Services Group tracking stock. AT&T Consumer Services Group will consist
of the assets and liabilities shown in the combined balance sheets of
AT&T Consumer Services Group and will include:
- all Consumer Services long distance customers;
- all Consumer Services non-network support infrastructure, including
ordering, provisioning, billing and care; and
- all Consumer Services marketing operations.
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- Establish the terms of AT&T Consumer Services Group tracking stock,
consisting of 500 million authorized shares. Each share of AT&T Consumer
Services Group tracking stock will initially have one vote per share. If
AT&T completes the AT&T Broadband spin-off or otherwise distributes one
or more entities holding all or substantially all of the assets of its
Broadband business to its securityholders, each share of AT&T Consumer
Services Group tracking stock will initially have 2.5 votes per share. If
the reverse stock split proposal is approved and implemented, the AT&T
Consumer Services Group tracking stock would have .2 of a vote per share
if the Broadband separation is not completed or .5 of a vote per share if
the Broadband separation is completed. Holders of AT&T Consumer Services
Group tracking stock will vote as one class with all other classes and
series of common stock and preferred stock of AT&T with respect to all
matters to be voted upon by AT&T shareholders, except as otherwise
required by the New York Business Corporation Law or by the terms of any
other class or series of AT&T's capital stock.
A more complete description of AT&T Consumer Services Group tracking stock
is included under "-- Terms of the Consumer Services Group Tracking Stock
Amendment."
Although the AT&T Board of Directors has not yet determined the number of
shares of AT&T Consumer Services Group tracking stock that would be distributed
to holders of AT&T Common Stock, it is likely that only a small fraction of a
share of AT&T Consumer Services Group tracking stock would be distributed with
respect to each share of AT&T Common Stock. Accordingly, holders of small odd
lots are not likely to receive any shares of AT&T Consumer Services Group
tracking stock although they will instead receive cash payments in lieu of such
fractional shares. Participants in AT&T's dividend reinvestment plan may receive
credits of fractional shares for their interest in such plan in lieu of cash.
RECOMMENDATION OF THE AT&T BOARD
THE AT&T BOARD HAS APPROVED THE CONSUMER SERVICES CHARTER AMENDMENT
PROPOSAL AND RECOMMENDS THAT AT&T SHAREHOLDERS VOTE FOR THE CONSUMER SERVICES
CHARTER AMENDMENT PROPOSAL.
TERMS OF THE CONSUMER SERVICES GROUP TRACKING STOCK AMENDMENT
GENERAL
If the Consumer Services Group tracking stock amendment is adopted, AT&T
will amend its charter to authorize 500 million shares of AT&T Consumer Services
Group tracking stock. Approval of the Consumer Services charter amendment
proposal will also allow the AT&T Board to amend AT&T's charter to eliminate all
references to AT&T Wireless Group tracking stock, Class A Liberty Media Group
common stock, Class B Liberty Media Group common stock, AT&T Wireless Group
preferred tracking stock and AT&T Series E convertible preferred stock and to
redesignate such series as shares of common stock or preferred stock, as
applicable, which would be available for issuance. Currently, 16.5 billion
shares of AT&T capital stock are authorized, consisting of 100 million shares of
preferred stock and 16.4 billion shares of common stock. If the Consumer
Services charter amendment proposal is approved, without giving effect to the
reverse stock split proposal, the total number of authorized shares of AT&T
common stock will be 6.5 billion, of which 500 million will be designated AT&T
Consumer Services Group tracking stock. As of March 31, 2002, AT&T had
outstanding 3,566,330,934 shares of AT&T common stock. As of March 31, 2002,
100,000,000 shares of Subsidiary Preferred Stock of AT&T were held by
subsidiaries of AT&T.
AT&T CONSUMER SERVICES GROUP
AT&T intends AT&T Consumer Services Group tracking stock to reflect the
financial performance and economic value of AT&T Consumer Services Group. The
Consumer Services Group tracking stock amendment defines "AT&T Consumer Services
Group" generally as the interest of AT&T or any of its subsidiaries in all of
the businesses, assets and liabilities reflected in the unaudited combined
financial
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statements of AT&T Consumer Services Group, dated December 31, 2001, as included
in this document, including any successor to AT&T Consumer Services Group by
merger, consolidation or sale of all or substantially all of its assets. The
Consumer Services Group tracking stock amendment contains adjustments to the
definition of "AT&T Consumer Services Group" to reflect, among other things,
related assets and liabilities (including contingent liabilities), net income
and net losses arising after the date of these financial statements,
contributions and allocations of assets, liabilities and businesses between the
AT&T groups and acquisitions and dispositions. In addition, a percentage of
AT&T's contingent liabilities that do not primarily relate to the business,
assets and liabilities of either AT&T Consumer Services Group or AT&T's other
businesses will be allocated to AT&T Consumer Services Group. The AT&T Board
will establish that percentage in its sole discretion prior to the initial
issuance of any shares of AT&T Consumer Services Group tracking stock. This
percentage may differ in the case of different categories of contingent
liabilities.
AT&T Consumer Services Group is not a stand-alone entity, and in
considering the Consumer Services charter amendment proposal, AT&T shareholders
should keep in mind:
- the AT&T Board will govern AT&T Consumer Services Group and could make
operational and financial decisions or implement policies that
disproportionately affect the businesses of AT&T Consumer Services Group;
- the AT&T Board may transfer funds or reallocate assets, liabilities,
revenue, expenses and cash flows to or from AT&T Consumer Services Group
without the consent of shareholders;
- the Consumer Services Group tracking stock amendment provides that AT&T
Consumer Services Group allocation fraction may be adjusted by the AT&T
Board as it deems appropriate to reflect contributions or allocations
from AT&T Consumer Services Group to AT&T Business Services Group, or
vice versa;
- all actions by the AT&T Board are subject to the board members' fiduciary
duties under New York law to all AT&T shareholders as a whole, not to
holders of AT&T Consumer Services Group tracking stock in particular, and
to AT&T's charter, policy statements, bylaws and inter-company
agreements; and
- the AT&T Board may redeem AT&T Consumer Services Group tracking stock
without the consent of any holder.
Any retained portion of the value of AT&T Consumer Services Group
represented by AT&T common stock will be included in AT&T Business Services
Group. See "-- AT&T Consumer Services Group Allocation Fraction."
AT&T CONSUMER SERVICES GROUP ALLOCATION FRACTION
Operation of the Allocation Fraction. If AT&T distributes to the public
shares of AT&T Consumer Services Group tracking stock intended to represent all
of AT&T Consumer Services Group, AT&T will not initially have any retained
portion of that group and the fraction discussed in this section will initially
equal one.
AT&T Consumer Services Group tracking stock issued to the public may not
represent all of the interest in the financial performance and economic value of
AT&T Consumer Services Group. The Consumer Services Group tracking stock
amendment defines the "AT&T Consumer Services Group allocation fraction" to
represent the interest in the financial performance and economic value of AT&T
Consumer Services Group reflected by AT&T Consumer Services Group tracking stock
distributed to the public.
To the extent that AT&T Consumer Services Group tracking stock issued to
the public does not represent all of the interest in the financial performance
and economic value of AT&T Consumer Services Group, the remaining interest in
the financial performance and economic value of AT&T Consumer Services Group
will be allocated to AT&T. If AT&T is allocated an interest in the financial
performance
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and economic value of AT&T Consumer Services Group, AT&T will have the right to
participate in any dividend, distribution or liquidation made to holders of AT&T
Consumer Services Group tracking stock. This right to participate is AT&T's
retained portion of value of AT&T Consumer Services Group. If all of the
interest in the financial performance and economic value of AT&T Consumer
Services Group is intended to be fully reflected by AT&T Consumer Services Group
tracking stock held by the public, none will be allocated to AT&T and this
fraction will equal one.
Adjustments. Because the AT&T Consumer Services Group allocation fraction
determines the relative percentage interest in AT&T Consumer Services Group of
public holders of AT&T Consumer Services Group tracking stock, on the one hand,
and AT&T, on the other hand, the AT&T Consumer Services Group allocation
fraction may be adjusted from time to time as the AT&T Board deems appropriate
for a number of reasons, including:
- to reflect the fair market value of contributions or allocations by AT&T
of cash, property or other assets or liabilities from AT&T or AT&T
Business Services Group to AT&T Consumer Services Group (or vice versa);
- to reflect the fair market value of contributions or allocations by AT&T
of cash, property or other assets or liabilities of AT&T or AT&T Business
Services Group to, or for the benefit of, employees of AT&T Consumer
Services Group in connection with employee benefit plans or arrangements
of AT&T or any of its subsidiaries (or vice versa);
- to reflect the number of shares of AT&T capital stock contributed to, or
for the benefit of, employees of AT&T Consumer Services Group in
connection with benefit plans or arrangements of AT&T or any of its
subsidiaries;
- to reflect repurchases by AT&T of shares of AT&T Consumer Services Group
tracking stock for the account of AT&T Consumer Services Group;
- to reflect issuances of AT&T Consumer Services Group tracking stock for
the account of AT&T Consumer Services Group;
- to reflect dividends or other distributions to holders of AT&T Consumer
Services Group tracking stock, to the extent no required payment is made
to AT&T;
- to reflect subdivisions and combinations of AT&T Consumer Services Group
tracking stock and stock dividends payable in shares of AT&T Consumer
Services Group tracking stock; and
- under other circumstances as the AT&T Board determines appropriate to
reflect the economic substance of any other event or circumstance.
In addition, in determining the percentage interest of holders of AT&T
Consumer Services Group tracking stock in any particular dividend or other
distribution, AT&T will reduce the economic interest of holders of AT&T Consumer
Services Group tracking stock to reflect dilution arising from shares of AT&T
Consumer Services Group tracking stock reserved for issuance upon conversion,
exercise or exchange of other securities that are entitled to participate in
this dividend or other distribution.
The Consumer Services Group tracking stock amendment provides that any
adjustment of this kind must be made in a manner that the AT&T Board determines
to be fair and equitable to holders of AT&T common stock and AT&T Consumer
Services Group tracking stock. In the event that any assets or other property
are acquired by AT&T or AT&T Business Services Group and allocated or
contributed to AT&T Consumer Services Group, the consideration paid by AT&T or
AT&T Business Services Group to acquire these assets or other property will be
presumed to be its "fair market value" as of its acquisition. Any adjustment to
the AT&T Consumer Services Group allocation fraction made by the AT&T Board in
good faith in accordance with these principles will be at the sole discretion of
the AT&T Board, without any required consent from AT&T shareholders or holders
of AT&T Consumer Services Group tracking stock, and this good faith
determination of the AT&T Board will be final and binding on all AT&T
shareholders.
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VOTING RIGHTS
Currently, holders of AT&T common stock have one vote per share. Each share
of AT&T Consumer Services Group tracking stock will initially have one vote per
share. If AT&T completes the AT&T Broadband spin-off or otherwise distributes
one or more entities holding all or substantially all of the assets of its
Broadband business to its securityholders, each share of AT&T Consumer Services
Group tracking stock will initially have 2.5 votes per share. If the reverse
stock split proposal is approved and implemented, the AT&T Consumer Services
Group tracking stock would have .2 of a vote per share if the Broadband
separation is not completed or .5 of a vote per share if the Broadband
separation is completed. The voting rights of AT&T Consumer Services Group
tracking stock will be subject to adjustments to reflect other stock splits,
reverse stock splits, stock dividends or certain stock distributions with
respect to AT&T common stock, AT&T Consumer Services Group tracking stock or any
other class of AT&T common shares.
Except as otherwise required by New York law or any special voting rights
of any class or series of AT&T preferred stock or any other class of AT&T common
shares, holders of shares of AT&T common stock, AT&T Consumer Services Group
tracking stock, each other class of AT&T common shares, if any, that is entitled
to vote, and holders of shares of each class or series of AT&T preferred stock,
if any, that is entitled to vote, will vote as one class with respect to all
matters to be voted on by AT&T shareholders. No separate class vote of AT&T
Consumer Services Group tracking stock will be required, except as required by
the New York Business Corporation Law.
DIVIDENDS
General. Following any issuance of AT&T Consumer Services Group tracking
stock, it is currently expected that one-third of the current dividend payable
on AT&T common stock will be allocated to AT&T common stock and that two-thirds
of the dividend will be allocated to AT&T Consumer Services Group tracking
stock. In that event, the aggregate dividend payable to holders of AT&T common
stock and holders of AT&T Consumer Services Group tracking stock would be the
same as that payable to holders of AT&T common stock before the issuance of AT&T
Consumer Services Group tracking stock. The declaration of dividends by AT&T and
the amount thereof will, however, be in the discretion of the AT&T Board and
will depend upon each AT&T group's financial performance, the dividend policies
and capital structures of comparable companies, each AT&T group's ongoing
capital needs, and AT&T's results of operations, financial condition, cash
requirements and future prospects and other factors deemed relevant by the AT&T
Board. Payment of dividends also may be restricted by loan agreements,
indentures and other transactions that AT&T enters into from time to time.
Provided that AT&T has sufficient assets to pay a dividend under applicable
law, the Consumer Services Group tracking stock amendment provides that
dividends on AT&T Consumer Services Group tracking stock are limited to an
available dividend amount that is designed to be equivalent to an allocable
portion of the amount that would legally be available for dividends on that
stock, plus an amount equal to the net income available to common shareowners of
AT&T Consumer Services Group for the year in which the dividend is declared
and/or the prior year, determined in each case as if AT&T Consumer Services
Group were a stand-alone entity. Dividends on AT&T common stock are limited to
the amount of legally available funds for all of AT&T less the sum of the
available dividend amount for AT&T Consumer Services Group tracking stock
(excluding the net income available to common shareowners amount referred to in
the prior sentence except to the extent a dividend is paid in reliance on such
clause, thereby reducing legally available funds).
Discrimination among classes of common shares. The Consumer Services Group
tracking stock amendment does not provide for mandatory dividends. The AT&T
Board will have the sole authority and discretion to declare and pay dividends
(or to refrain from declaring or paying dividends), in equal or unequal amounts,
on AT&T common stock, AT&T Consumer Services Group tracking stock, any other
class of AT&T common shares or any two or more of these classes. Subject to not
exceeding the
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applicable available dividend amount, the AT&T Board has this power regardless
of the relative available dividend amounts, prior dividend amounts declared,
liquidation rights or any other factor.
SHARE DISTRIBUTIONS
AT&T may declare and pay a distribution consisting of shares of AT&T common
stock, AT&T Consumer Services Group tracking stock or any other securities of
AT&T, any subsidiary of AT&T or any other person to holders of AT&T common stock
or AT&T Consumer Services Group tracking stock in accordance with the provisions
described below. We refer to this type of distribution as a "share
distribution."
Distributions on AT&T common stock or AT&T Consumer Services Group tracking
stock. AT&T may declare and pay a share distribution to holders of AT&T common
stock, AT&T Consumer Services Group tracking stock or any other class of AT&T
common shares consisting of any securities of AT&T, any subsidiary of AT&T, or
any other person. However, securities attributable to an AT&T group may be
distributed to holders of another AT&T group only for consideration. In the case
of shares of AT&T Consumer Services Group tracking stock distributed to holders
of AT&T common stock, the consideration may consist, in whole or in part, of a
decrease in the retained portion of the value, if any, held by AT&T in AT&T
Consumer Services Group.
Discrimination among classes of AT&T common shares. The Consumer Services
Group tracking stock amendment does not provide for mandatory share
distributions. The AT&T Board will have the sole authority and discretion to
declare and pay share distributions (or to refrain from declaring or paying
share distributions), in equal or unequal amounts, on AT&T common stock, AT&T
Consumer Services Group tracking stock, any other class of AT&T common shares or
any two or more of these classes. Subject to not exceeding the applicable
available dividend amounts, the AT&T Board has this power regardless of the
relative available dividend amounts, prior share distributions amounts declared,
liquidation rights or any other factor.
REDEMPTION
As described in this section, there are a number of different redemption
alternatives, more than one of which may be available at a given time or in
connection with a particular transaction. Holders could receive very different
treatment depending on which alternative the AT&T Board selects. The AT&T Board
is under no obligation to select the alternative that will treat holders of AT&T
Consumer Services Group tracking stock most favorably. The AT&T Board may elect
to undertake these redemption options, to the extent permitted by AT&T's
charter, as amended by the Consumer Services Group tracking stock amendment, and
applicable law, without any required consent from AT&T shareholders or holders
of AT&T Consumer Service Group tracking stock.
Redemption in exchange for shares of a new tracking stock of another
company. At any time, the AT&T Board may redeem all outstanding shares of AT&T
Consumer Services Group tracking stock for a new tracking stock of another
entity that owns, holds or is subject to, directly or indirectly, all or
substantially all of the assets and liabilities of AT&T Consumer Services Group
as of immediately prior to the time of the redemption. In order to effect a
redemption of this type, the new tracking stock must have substantially the same
terms as those governing AT&T Consumer Services Group tracking stock, except as
may result due to different law governing the other entity or as a result of
provisions of the other entity's governing documents that are generally
applicable to all classes of common stock, including with regard to the
definition of "AT&T Consumer Services Group." Also, the number of shares of the
new tracking stock issued per share of AT&T Consumer Services Group tracking
stock must be intended to represent the same proportionate interest in AT&T
Consumer Services Group as a share of AT&T Consumer Services Group tracking
stock. In the event of a redemption of this type, the voting rights of the new
tracking stock will be set based on the ratio, over a fixed measurement period,
of the initial trading prices of the new tracking stock to trading prices of the
other common stock of the entity issuing the new tracking stock.
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Redemption in exchange for shares of AT&T common stock. At any time, the
AT&T Board, in its sole discretion, may redeem all outstanding shares of AT&T
Consumer Services Group tracking stock for shares of AT&T common stock. In this
event, each share of AT&T Consumer Services Group tracking stock will be
redeemed in exchange for that number of shares of AT&T common stock, calculated
to the nearest 1/10,000, equal to 110% of the ratio of the average market price
per share of AT&T Consumer Services Group tracking stock to the average market
price per share of AT&T common stock. The average market price for this purpose
will generally be the average of the trading prices over a 40-trading day period
ending 15 trading days prior to the announcement of the intention to redeem.
However, if the redemption is conditioned on the occurrence of any other
transaction or event and the AT&T Board determines that the other transaction or
event is not likely to occur within 90 days, then the AT&T Board may determine,
at the time of announcement of the intention to redeem, that the average market
price will be the average of the trading prices over a 40-trading day period
ending 15 trading days prior to mailing the notice of redemption. If the AT&T
Board makes this determination, AT&T will announce it at the same time as it
announces the intention to redeem.
In general, AT&T will mail the notice of redemption at or shortly after
announcement of the intention to redeem, except that, if the redemption is
conditioned on the occurrence of any other transaction or event, the company may
delay sending the redemption notice until the AT&T Board determines that the
condition is likely to be satisfied within the time period set for redemption in
the notice.
Redemption in exchange for stock of subsidiaries in connection with a
split-off of AT&T Consumer Services Group. The Consumer Services Group tracking
stock amendment also provides that AT&T may, at any time, redeem all outstanding
shares of AT&T Consumer Services Group tracking stock in exchange for a
specified number of outstanding shares of common stock of a subsidiary of AT&T
that satisfies certain requirements under the Code and that holds all of the
assets and liabilities of AT&T Consumer Services Group. We refer to a subsidiary
that satisfies these requirements as a "qualifying subsidiary." This type of
redemption only may be made on a pro rata basis, and must be tax free to the
holders of AT&T Consumer Services Group tracking stock, except with respect to
any cash that holders receive in lieu of fractional shares.
In this case, AT&T would exchange each share of AT&T Consumer Services
Group tracking stock, on a pro rata basis, for an aggregate number of shares of
common stock of the qualifying subsidiary equal to the number of outstanding
shares of common stock of the qualifying subsidiary held by AT&T, or the number
of shares of such qualifying subsidiary as is proportionate to the portion of
the financial performance and economic value of AT&T Consumer Services Group
intended to be represented by AT&T Consumer Services Group tracking stock if the
AT&T Consumer Services Group allocation fraction is less than one. This
redemption feature differs from a traditional spin-off, in which a shareholder
retains its interest in the parent corporation and receives shares of the
spun-off subsidiary via a pro rata distribution of the subsidiary's shares to
the parent shareholders. By comparison, if the AT&T Consumer Services Group
tracking stock is redeemed in exchange for stock in a qualifying subsidiary, the
holder of AT&T Consumer Services Group tracking stock will no longer have an
interest in AT&T.
Redemption in connection with significant dispositions. In the event of a
sale, transfer, assignment or other disposition by AT&T in a transaction or
series of related transactions, of all or substantially all of the properties
and assets of AT&T Consumer Services Group, AT&T generally is required to take
one of the following actions, which action will be selected in the sole
discretion of the AT&T Board:
- AT&T may redeem each outstanding share of AT&T Consumer Services Group
tracking stock in exchange for a number of shares of AT&T common stock
(calculated to the nearest 1/10,000) equal to 110% of the ratio of the
average market price per share of AT&T Consumer Services Group tracking
stock to the average market price per share of AT&T common stock.
- Subject to limitations, AT&T may declare and pay a dividend in cash
and/or in securities (other than AT&T common stock) or other property to
holders of the outstanding shares of AT&T Consumer Services Group
tracking stock equally on a share-for-share basis in an aggregate amount
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equal to the after-tax net proceeds of the disposition allocable to AT&T
Consumer Services Group tracking stock.
- Subject to limitations, if the disposition involves the disposition of
all, not merely substantially all, of the properties and assets of AT&T
Consumer Services Group, AT&T may redeem all outstanding shares of AT&T
Consumer Services Group tracking stock in exchange for cash and/or
securities or other property in an aggregate amount equal to the net
proceeds of the disposition allocable to AT&T Consumer Services Group
tracking stock.
- Subject to limitations, if the disposition involves substantially all,
but not all, of the properties and assets of AT&T Consumer Services
Group, AT&T may redeem a number of outstanding shares of AT&T Consumer
Services Group tracking stock in exchange for a redemption price equal to
the net proceeds of that disposition. The number of shares of AT&T
Consumer Services Group tracking stock to be redeemed would be equal to
the lesser of (1) a number determined by dividing the aggregate amount
allocated to the redemption of these shares by the average market value
of one share of AT&T Consumer Services Group tracking stock during the
ten trading-day period beginning on the 15th trading day following the
completion of that disposition and (2) the total number of outstanding
shares of AT&T Consumer Services Group tracking stock.
- Subject to limitations, AT&T may take a combination of the actions
described in the preceding bullets whereby AT&T may redeem some shares of
AT&T Consumer Services Group tracking stock in exchange for shares of
AT&T common stock at the exchange rate described in the first bullet
above, and use an amount equal to a portion of the net proceeds of the
disposition allocable to AT&T Consumer Services Group tracking stock to
either (1) declare and pay a dividend as described in the second bullet
above, or (2) redeem part or all of the remaining shares of AT&T Consumer
Services Group tracking stock as described in the third or fourth bullet
above.
For purposes of these provisions, "substantially all of the properties and
assets" of AT&T Consumer Services Group as of any date means a portion of these
properties and assets that represents at least 80% of the fair value of the
properties and assets attributed to AT&T Consumer Services Group as of that
date.
Exceptions. The provisions described under "-- Redemption in connection
with significant dispositions" will not apply, and AT&T will not be required to
redeem any securities or make any dividend or other distribution it would
otherwise be required to make, in some circumstances, including the following:
- if, in connection with the underlying transaction, the AT&T Board redeems
all outstanding shares of AT&T Consumer Services Group tracking stock for
a new tracking stock of another entity that owns all of the material
assets and liabilities of AT&T Consumer Services Group pursuant to
"-- Redemption in exchange for shares of new tracking stock of new
company;"
- if the underlying disposition is conditioned upon the affirmative vote of
a majority of holders of AT&T Consumer Services Group tracking stock,
voting as a separate class;
- if the disposition is in connection with a liquidation of AT&T;
- if the disposition is to a person or group of which AT&T is the majority
owner and AT&T Consumer Services Group receives in exchange primarily
equity securities of that person or group as consideration;
- if the disposition results in AT&T or its successor continuing to hold
directly or indirectly all or substantially all of the properties and
assets of AT&T Consumer Services Group;
- in connection with a spin-off or similar distribution of AT&T's entire
interest in AT&T Consumer Services Group to the holders of AT&T Consumer
Services Group tracking stock, including a distribution that is made in
connection with a mandatory redemption as described under
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"-- Redemption in exchange for stock of subsidiaries in connection with a
split-off of AT&T Consumer Services Group"; and
- in connection with a "related business transaction," which generally
means a disposition of all or substantially all of the assets attributed
to AT&T Consumer Services Group in which AT&T receives equity securities
of an entity that engages or proposes to engage primarily in one or more
businesses similar or complementary to the businesses conducted by AT&T
Consumer Services Group prior to that transaction.
Additionally, the provisions described under "-- Redemption in connection
with significant dispositions" will not apply with respect to any merger,
consolidation, sale of assets or stock, recapitalization or any other
transaction or series of transactions in which all or substantially all of the
properties and assets of AT&T are transferred to an entity not directly
controlled by AT&T or AT&T shareholders, if in such transaction or series of
transactions, each share of AT&T Consumer Services Group tracking stock is
entitled to receive the same consideration, both in type and amount, as such
share of AT&T Consumer Services Group tracking stock would have been entitled to
receive had it been redeemed.
GENERAL PROCEDURES
Conditions. With regard to any redemption at the discretion of the AT&T
Board, the AT&T Board may, in its discretion, condition such redemption on the
occurrence or failure to occur of any events set forth in the applicable notice
of redemption. The AT&T Board will have the right to waive any of these
conditions in its sole discretion.
Public announcements; notices. The Consumer Services Group tracking stock
amendment provides that, in the case of specified dispositions or a redemption,
AT&T will publicly announce or otherwise provide specified information to
holders of AT&T Consumer Services Group tracking stock and, in the case of
redemption at the discretion of the AT&T Board, give the notice of redemption no
less than 15 days nor more than 90 days prior to the date of redemption. The
redemption date may be a specified date or a date determined by reference to the
occurrence of events.
Fractional shares. The AT&T Board will not have to issue or deliver any
fractional shares to any holder of AT&T Consumer Services Group tracking stock
upon any redemption, dividend or other distribution under the provisions
described under "-- Redemption." Instead of issuing fractional shares, AT&T will
pay cash for the fractional share in an amount equal to the fair market value of
the fractional share, without interest.
No adjustments for dividends or other distributions. No adjustments for
dividends will be made upon the exchange of any shares of AT&T Consumer Services
Group tracking stock; except that, if a redemption date with respect to AT&T
Consumer Services Group tracking stock comes after the record date for the
payment of a dividend or other distribution to be paid on AT&T Consumer Services
Group tracking stock but before the payment or distribution, the registered
holders of those shares of AT&T Consumer Services Group tracking stock at the
close of business on that record date will be entitled to receive the dividend
or other distribution on the payment date, notwithstanding the redemption of
those shares of stock or AT&T's default in payment of the dividend or
distribution.
Payment of taxes. If any person exchanging a certificate representing
shares of AT&T Consumer Services Group tracking stock wants AT&T to issue a
certificate in a different name than the registered name on the old certificate,
that person must pay any transfer or other taxes required by reason of the
issuance of the certificate in another name, or establish, to the satisfaction
of AT&T or its agent, that the tax has been paid or is not applicable.
LIQUIDATION RIGHTS
In the event of a liquidation, dissolution or winding up of AT&T, whether
voluntary or involuntary, AT&T will first pay or provide for payment of debts
and other liabilities of AT&T, including the
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liquidation preferences of any class or series of AT&T preferred stock.
Thereafter, holders of the shares of AT&T common stock, AT&T Consumer Services
Group tracking stock and any other class of AT&T common shares will share in the
funds of AT&T remaining for distribution to its common shareholders in
proportion to the aggregate market capitalization of the outstanding shares of
each class of stock, as applicable, to the aggregate market capitalization of
all the classes of AT&T common shares. AT&T will calculate the market
capitalizations based on the 20 trading-day period ending on the trading day
prior to the date of the public announcement of the liquidation, dissolution or
winding up of AT&T.
None of the following, by itself, will constitute a liquidation,
dissolution or winding up of AT&T:
- the consolidation or merger of AT&T with or into any other corporation or
corporations or the sale, transfer or lease of all or substantially all
of the assets of AT&T; or
- any transaction or series of related transactions that results in all of
the assets and liabilities included in AT&T Consumer Services Group being
held by one or more AT&T Consumer Services Group subsidiaries and the
distribution of AT&T Consumer Services Group subsidiaries, and no other
material assets or liabilities, to holders of the outstanding AT&T
Consumer Services Group tracking stock.
DETERMINATIONS BY THE AT&T BOARD
Any determinations made by the AT&T Board under any provision described in
this section "-- Terms of the Consumer Services Group Tracking Stock Amendment"
will be final and binding on all AT&T shareholders, except as may otherwise be
required by law. AT&T will prepare a statement of any determination by the AT&T
Board respecting the fair market value of any properties, assets or securities,
and will file the statement with AT&T's Corporate Secretary. To the maximum
extent permitted by law:
- the terms of AT&T Consumer Services Group tracking stock grant to the
AT&T Board discretion to select among different exchange, redemption or
other options, more than one of which may be available at a particular
time or in connection with a particular transaction,
- the selection of an alternative, if any, will be a matter solely within
the discretion of the AT&T Board and that the AT&T Board has no duty to
select the alternative that will result in the best economic treatment
for holders of either AT&T Consumer Services Group tracking stock or the
AT&T common stock, and
- no holder of any shares of AT&T Consumer Services Group tracking stock or
AT&T common stock will have any claim based on which alternative the AT&T
Board may elect, even if holders of the classes of stock are not treated
equally.
NO PREEMPTIVE RIGHTS
Holders of AT&T common stock or AT&T Consumer Services Group tracking stock
do not have any preemptive rights to subscribe for any additional shares of
capital stock or other obligations convertible into or exercisable for shares of
capital stock that may hereafter be issued by AT&T.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Subject to the discussion under this section, neither the adoption of the
Consumer Services Group tracking stock amendment nor the distribution of AT&T
Consumer Services Group tracking stock to holders of AT&T common stock will be
taxable to AT&T or holders of AT&T common stock.
Holders of AT&T common stock who receive AT&T Consumer Services tracking
stock in a pro rata distribution will allocate their tax basis in AT&T common
stock between AT&T common stock and AT&T Consumer Services Group tracking stock
in accordance with the relative fair market values of such stocks on the date on
which AT&T Consumer Services Group tracking stock is distributed. A holder's
holding period for AT&T Consumer Services Group tracking stock will include such
holder's holding
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period of AT&T common stock with respect to which AT&T Consumer Services Group
tracking stock is distributed.
The conclusions in the two preceding paragraphs are not free from doubt.
These conclusions assume that AT&T Consumer Services Group tracking stock is
treated as a class of common stock of AT&T. The filing of consolidated income
tax returns by AT&T together with AT&T Consumer Services Group also assumes that
AT&T Consumer Services Group tracking stock is treated as a class of common
stock of AT&T. While AT&T believes that, under current law, AT&T Consumer
Services Group tracking stock will be treated as common stock of AT&T, there are
no authorities directly on point nor will AT&T receive an advance ruling from
the Internal Revenue Service. There is a risk that the Internal Revenue Service
could assert that AT&T Consumer Services Group tracking stock is property other
than common stock of AT&T. AT&T believes it is unlikely the Internal Revenue
Service would prevail on that view, but no assurance can be given that the views
expressed in the two preceding paragraphs, if contested, would be sustained by a
court.
The foregoing discussion under this section "-- Material Federal Income Tax
Consequences" is only a general summary of the material U.S. federal income tax
consequences of the issuance and distribution of AT&T Consumer Services Group
tracking stock. It is not a complete analysis of all potential tax effects
relevant to the issuance or distribution of AT&T Consumer Services Group
tracking stock. The discussion does not address consequences that may be
relevant to a particular AT&T common stock holder in light of this particular
circumstances or to holders subject to special treatment under U.S. federal
income tax laws, such as dealers in securities, banks, insurance companies,
tax-exempt organizations, non-U.S. persons, holders that acquired their AT&T
common stock pursuant to the exercise of options or otherwise as compensation
and holders that do not hold such shares as capital assets, nor any consequences
arising under the laws of any state, local or foreign jurisdiction. The
discussion is based on the Code, Treasury Regulations promulgated thereunder,
judicial opinions, published positions of the Internal Revenue Service, and all
other applicable authorities as of the date of this document, all of which are
subject to change, possibly with retroactive effect.
AT&T URGES AT&T SHAREHOLDERS TO CONSULT THEIR OWN TAX ADVISORS CONCERNING
THE U.S. FEDERAL, STATE AND LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE ISSUANCE
AND DISTRIBUTION OF AT&T CONSUMER SERVICES GROUP TRACKING STOCK TO THEM.
REASONS FOR AT&T CONSUMER SERVICES GROUP TRACKING STOCK
The AT&T Board recommends the Consumer Services charter amendment proposal
based on its view that the Consumer Services charter amendment proposal will
promote greater market recognition of the value of the various AT&T businesses.
The AT&T Board considered the following factors among others in approving and
recommending that AT&T shareholders approve the Consumer Services charter
amendment proposal.
GREATER MARKET RECOGNITION OF VALUE
AT&T believes that issuing securities intended to reflect the separate
performance of AT&T Consumer Services Group will result in greater market
recognition and realization of the value of AT&T and the distinct lines of
business represented by each of AT&T Consumer Services Group and AT&T Business
Services Group and allow the market to evaluate each of AT&T Consumer Services
Group's and AT&T Business Services Group's results against those of its
competitors.
GREATER FINANCIAL AND STRATEGIC FLEXIBILITY
AT&T believes that the creation of AT&T Consumer Services Group tracking
stock will provide AT&T with greater financial flexibility. AT&T expects that
AT&T Consumer Services Group tracking stock may assist AT&T in meeting its
capital needs by creating an additional publicly traded equity
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security that it can use to raise capital. In addition, the creation of AT&T
Consumer Services Group tracking stock prior to the AT&T Comcast transaction
will allow AT&T to issue AT&T Consumer Services Group tracking stock in
potential group-specific acquisitions and investments. This would allow
shareholders of an entity that AT&T Consumer Services Group acquires the
opportunity to participate more directly in the success of the business in which
that entity engages, rather than participating in the larger and more
diversified AT&T enterprise.
INCREASED SHAREHOLDER CHOICE
A corporation typically uses tracking stocks in situations where the
corporation has two or more businesses that have different investor profiles. In
this case, AT&T Consumer Services Group offers a particular set of services and
targets a particular type of customer, distinct from AT&T Business Services
Group. AT&T believes that the creation and issuance of AT&T Consumer Services
Group tracking stock will provide investors with greater choice among the
different types of investment currently embedded in AT&T.
MORE FOCUSED AND FLEXIBLE MANAGEMENT TEAMS
AT&T believes that if the Consumer Services charter amendment proposal is
approved and implemented, management of each of AT&T Consumer Services Group and
AT&T Business Services Group would have a greater ability to focus on the
execution of strategic objectives in its particular business and on reacting to
changes in its competitive environment. AT&T believes that each of the AT&T
groups would be a smaller, but more focused and flexible, business unit, in a
better position to implement its respective business strategy and serve its
customers more effectively through quicker decision making, more efficient
deployment of resources, increased operational agility, and enhanced
responsiveness to customers and markets and technological changes.
MANAGEMENT INCENTIVES
AT&T believes the existence of AT&T Consumer Services Group tracking stock
will permit the creation of more effective management incentive and retention
programs. In particular, AT&T will be able to grant stock options and other
incentive awards to employees of each of AT&T Consumer Services Group and AT&T
Business Services Group that are tied more directly to the performance of each
respective AT&T group. AT&T will seek to develop compensation plans to incent
the delivery of services to benefit both groups.
TAX CONSIDERATIONS
In addition, the AT&T Board considered that AT&T expects that
implementation of the Consumer Services charter amendment will not be taxable
for U.S. federal income tax purposes to AT&T or to AT&T shareholders.
ALTERNATIVE STRUCTURE
The AT&T Board determined that the benefits to the AT&T Consumer Services
Group from association with AT&T and the AT&T brand, the substantial overlaps
between the AT&T Consumer Services Group and the AT&T Business Services Group,
including shared use of AT&T Business Services Group's network, and the relative
size of the AT&T Consumer Services Group as a stand-alone entity, among other
factors, made a spin-off a less desirable alternative than creation of a
tracking stock for the AT&T Consumer Services Group.
OTHER CONSIDERATIONS
The AT&T Board noted the trading performance of other tracking stocks
particularly those in the telecommunications industry. However, as no company is
identical to AT&T and no business is identical
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to the AT&T Consumer Services Group, the AT&T Board considered the experiences
of other companies to be not determinative.
POTENTIAL NEGATIVE CONSEQUENCES OF THE PROPOSALS
The AT&T Board also considered the following potential adverse consequences
of the creation of AT&T Consumer Services Group tracking stock, including the
following:
- the market price of AT&T Consumer Services Group tracking stock may not
reflect the separate performance of AT&T Consumer Services Group,
- holders of AT&T common stock and of AT&T Consumer Services Group tracking
stock will continue to bear the risks associated with an investment in a
single corporation and all of AT&T's businesses, assets and liabilities,
and
- managing relationships between the groups may be more difficult than has
historically been the case as a result of potential conflicts between the
groups.
The AT&T Board also considered the risk factors related to the creation of
AT&T Consumer Services Group tracking stock, described under "Summary and
Overview of the Transactions -- Risk Factors Relating to AT&T Consumer Services
Group Tracking Stock."
The AT&T Board believes, however, that, on balance, the positive aspects of
AT&T Consumer Services Group tracking stock outweigh any potentially adverse
consequences.
RECOMMENDATION OF THE AT&T BOARD
The AT&T Board has approved the Consumer Services charter amendment
proposal and recommends that AT&T shareholders vote FOR the Consumer Services
charter amendment proposal.
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DESCRIPTION OF AT&T CONSUMER SERVICES GROUP
OVERVIEW
AT&T Consumer Services Group is the leading provider of domestic and
international long distance and transaction based services to residential
consumers in the United States with approximately 60 million customer
relationships. AT&T Consumer Services Group provides interstate and intrastate
long distance communications services throughout the continental United States,
and provides, or joins in providing with other carriers, communications services
to and from Alaska, Hawaii, Puerto Rico and the Virgin Islands and international
communications services to and from virtually all nations and territories around
the world.
AT&T Consumer Services Group provides a broad range of communications
services to consumers individually and in combination with other services,
including:
- inbound and outbound domestic and international long distance;
- transaction-based long distance services, such as operator-assisted
calling services and prepaid phone cards;
- local calling offers; and
- dial-up Internet service through AT&T WorldNet Service.
In addition, AT&T Consumer Services Group offers combined long distance and
local services in selected locations and is developing a multi-service platform,
the AT&T Worldnet High Speed Service, based upon DSL technology for combined
voice, data and other broadband services.
For the year ended December 31, 2001, AT&T Consumer Services Group had
combined revenue of approximately $15.1 billion and combined EBITDA of
approximately $5.0 billion.
AT&T CONSUMER SERVICES GROUP
AT&T Consumer Services Group tracking stock is intended to reflect,
although there is no guarantee that it will do so, the economic performance of
AT&T Consumer Services Group, which includes the assets and liabilities shown in
the combined balance sheets of AT&T Consumer Services Group. If AT&T acquires
interests in other businesses, AT&T intends to attribute those assets and any
related liabilities to AT&T Consumer Services Group or to AT&T Business Services
Group in accordance with the AT&T Groups policy statement. All net income and
cash flows generated by the assets attributed to AT&T Consumer Services Group
will be attributed to AT&T Consumer Services Group and all net proceeds from any
disposition of these assets also will be attributed to AT&T Consumer Services
Group. In addition, a percentage of AT&T's contingent liabilities that do not
primarily relate to the business, assets and liabilities of either AT&T Consumer
Services Group or AT&T's other businesses will be allocated to AT&T Consumer
Services Group. The AT&T Board will establish that percentage in its sole
discretion prior to the initial issuance of any shares of AT&T Consumer Services
Group tracking stock. This percentage may differ in the case of different
categories of contingent liabilities.
Except as described elsewhere in this document AT&T attributes all of
AT&T's current Consumer Services operations to AT&T Consumer Services Group,
including:
- all Consumer Services wireline long distance and local customers and AT&T
WorldNet Service consumer customers;
- all Consumer Services support non-network infrastructure, including
ordering, provisioning, billing and care; and
- all Consumer Services marketing operations.
AT&T Consumer Services Group does not include any network plant, nodes,
routing, switching or other transport infrastructure.
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AGREEMENTS BETWEEN AT&T GROUPS
The AT&T Groups policy statement provides that AT&T will seek to manage the
AT&T Groups in a manner designed to give due consideration to the operations of
both of the AT&T Groups. Following the issuance of AT&T Consumer Services Group
tracking stock, AT&T Consumer Services Group will be able to:
- use the AT&T brand name in accordance with a brand agreement with AT&T,
- use AT&T's extensive network assets including its DSL assets in
accordance with a master carrier agreement,
- use AT&T's intellectual property and technology in accordance with an
intellectual property agreement, and
- participate in AT&T's purchasing contracts with major suppliers.
The relationship between AT&T Business Services Group and AT&T Consumer
Services Group will be governed by the AT&T Groups policy statement, including
the process of fair dealing described under "-- Relationship Between the AT&T
Groups -- The AT&T Groups Policy Statement -- General Policy." Although the AT&T
Board has no present intention to do so, it may modify, suspend or rescind the
policies set forth in the AT&T Groups policy statement, adopt additional
policies or make exceptions to existing polices, at any time, without the
approval of AT&T shareholders, subject to limitations we describe under
"Relationship Between the AT&T Groups -- The AT&T Groups Policy Statement" the
AT&T Board's fiduciary duties.
If AT&T Consumer Services Group tracking stock is issued prior to the AT&T
Broadband spin-off or if the spin-off does not occur, AT&T will include the
business and operations of AT&T Broadband Group.
STRATEGY
AT&T Consumer Services Group's goal is to maintain a leadership position in
the long distance market and develop complementary products and services to
maximize cash flow. Key strategic elements include:
Attract and retain high value customers. AT&T Consumer Services Group
focuses on acquiring and maintaining high value long distance customers with
targeted offers and solicitations. AT&T Consumer Services Group believes that
high value customers use AT&T's services more frequently and are more likely to
use multiple service offerings such as local toll, calling card, international
plans, AT&T WorldNet Service, local services and the AT&T Worldnet High Speed
Service. Through the greater utilization of services, high value customers
generate greater margins and hasten recuperation of marketing, sales and
provisioning expenses.
Increase operating efficiencies and reduce operating costs. AT&T Consumer
Services Group seeks to maximize the utilization of its assets and reduce
operating costs. In the three year period ended December 31, 2001, aggregate
selling, general and administrative expenses have been reduced by over $1
billion and overall costs and expenses have decreased by nearly $6 billion. AT&T
Consumer Services Group expects it will continue to reduce operating costs
associated with AT&T's infrastructure through implementation of various business
initiatives and by co-sourcing, outsourcing or other types of arrangements with
third parties.
Broaden its service lines. AT&T Consumer Services Group believes it can
generate additional revenue by bundling AT&T long distance with other
communications services including local services, AT&T WorldNet Services and
high-speed data services. By bundling value-added services, AT&T Consumer
Services Group believes it will substantially enhance its customers' reliance on
its services, improve customer satisfaction and retention levels and increase
sales of more profitable services.
In addition, AT&T Consumer Services Group continues to evaluate new growth
businesses that would provide additional services complementary to its current
suite of product offerings. AT&T Consumer
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Services Group believes additional high value product offerings better enable it
to attract new customers, migrate existing customers to more profitable product
offerings and better satisfy the overall needs of its customers. New product and
service offerings are evaluated and implemented in a manner designed to be
consistent with AT&T Consumer Services Group's overall goal of maximizing cash
flow.
Leverage the AT&T brand to attract new customers. AT&T Consumer Services
Group believes that the AT&T brand is very influential in consumers' purchasing
decisions and positively impacts consumer awareness of, and confidence in, AT&T
Consumer Services Group's products and services, as well as providing for an
enhanced ability to cross-sell consumer services with other AT&T services. In
addition, AT&T Consumer Services Group believes that its efforts to bundle
products and services will help to further strengthen the AT&T brand by
providing consumers with exposure to a broader range of AT&T Consumer Services
Group's services and an improved overall consumer experience.
Enhance customer satisfaction and loyalty. AT&T Consumer Services Group
believes that achieving a high level of customer satisfaction is critical to
successfully acquiring new customers and increasing retention of its existing
customer base. AT&T Consumer Services Group has historically strived to maintain
a high level of customer satisfaction through a portfolio of loyalty programs
such as its spot loyalty bonus program, its Continental Airlines rewards program
and its UPromise college education savings plan. AT&T Consumer Services Group
will continue to focus on improving the customer care experience through various
service enhancement initiatives including the introduction of convenience
features such as e-payment of bills as well as increasing its portfolio of
loyalty plans.
INDUSTRY OVERVIEW
The communications services industry continues to change competitively and
technologically both domestically and internationally, providing significant
complexity and risks to the participants in these markets, particularly those
not associated with an incumbent local exchange carrier. In the United States,
the Telecommunications Act has had a significant impact on AT&T Consumer
Services Group's business by establishing a statutory framework for opening the
local service markets to competition and by allowing regional phone companies to
provide in-region long distance services bundled with their existing local
franchise. In addition, prices for long distance minutes and other basic
communications services have declined as a result of competitive pressures,
excess capacity as a result of substantial network build-out, the introduction
of more efficient networks and advanced technologies, product substitution, and
deregulation. In particular, consumer long distance voice usage is declining as
a result of substitution of wireless services, Internet access and
e-mail/instant messaging services. Competition in the provision of basic
communications services to consumers is based more on price and less on other
differentiating factors that appeal to the larger business market customers,
such as the range of services offered, bundling of products, customer service,
and communication quality, reliability and availability.
The consumer long distance market is characterized by rapid deregulation
and intense competition among long distance providers, and, more recently,
incumbent local exchange carriers. Under the Telecommunications Act, a regional
phone company may offer long distance services in a state within its region if
the FCC finds, first, that the regional phone company's service territory within
the state has been sufficiently opened to local competition, and second, that
allowing the regional phone company to provide these services is in the public
interest. As of April 1, 2002, regional phone companies have received approval
to offer long distance in ten states and AT&T expects that regional phone
companies will be successful in obtaining approval to offer long distance in the
majority of the remaining states by the end of 2002. The incumbent local
exchange carriers presently have numerous advantages as a result of their
historic monopoly control over local exchanges. While these dynamics are
creating downward pressure on stand-alone long distance, new opportunities are
being created in the consumer industry, including local, data and bundled
offers.
The local voice market is currently dominated by the incumbent local
exchange carriers. The Telecommunications Act has established a statutory
framework for opening the local service markets to
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competition. AT&T Consumer Services Group has already entered the local voice
business in selected markets and expects to expand its presence in this area.
The data services market in the consumer segment is comprised primarily of
Internet access, utilizing either dial-up or high speed access technologies,
such as DSL and cable modems. Currently, AT&T Consumer Services Group offers
products in the narrowband data segment and is conducting trials for products in
the broadband data segment. Management believes both narrowband and broadband
data services represent substantial revenue growth opportunities for AT&T
Consumer Services Group.
SERVICES AND PRODUCTS
LONG DISTANCE
AT&T Consumer Services Group provides interstate and intrastate long
distance telecommunications services throughout the continental United States
and provides, or joins in providing with other carriers, telecommunications
services to and from Alaska, Hawaii, Puerto Rico and the Virgin Islands and
international telecommunications services to and from virtually all nations and
territories around the world. Consumers can use AT&T Consumer Services Group's
domestic and international long distance services through traditional "one plus"
dialing of the desired call destination, through dial-up access or through use
of AT&T calling cards.
In the continental United States, AT&T Consumer Services Group provides
long distance telecommunications services over AT&T Business Services' backbone
network.
CALLING CARD
AT&T Consumer Services Group provides a vehicle for placing all "away from
home" calls. The AT&T calling card can be used to place domestic and
international calls in the U.S. and Canada by accessing 1-800CALLATT, 10-10-288
or 0+ the number dialed. Features include purchase limits, geographic
restrictions, native language preference, voice messaging and sequence dialing.
Customers can place calls over the AT&T network by using any of the following
options: AT&T calling cards, local exchange carrier cards and commercial credit
cards.
TRANSACTION-BASED SERVICES
AT&T Consumer Services Group offers a variety of transaction-based services
that are designed to provide customers with an alternative to access long
distance services as well as to provide assistance in completing long distance
communications.
Operator Services. Operator-assisted calling services include traditional
collect calls, third party billing, person to person and long distance pay phone
service.
Directory Assistance. Directory Assistance is provided to customers both
domestically and internationally, with an option to complete the call for a
nominal extra charge.
AT&T Direct Services. AT&T Consumer Services Group provides customers with
the ability to reach the AT&T network from outside the U.S. By dialing the
access code associated with the country of origin, customers can receive all the
benefits of AT&T Consumer Services Group's calling card and operator-assisted
calling services.
AT&T True Messages. AT&T True Messages is a voice store and forward
service. Using this service, callers can record a message in their own voice and
have it delivered to a telephone number that they called or they can access AT&T
True Messages directly and send a message.
Accessible Communication Service. AT&T Consumer Services Group provides
Telecommunications Relay Service for the deaf and hearing-impaired and
speech-impaired customers to help them communicate with anyone in the world on
the phone.
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